HCA Holdings, Inc. — Form 10-Q Summary
Reporting period: Unaudited quarter ended March 31, 2011; comparisons are with the quarter ended March 31, 2010 unless otherwise noted. HCA operated 156 hospitals and 98 freestanding surgery centers across 20 states and England. The filing describes one business segment: hospitals and related healthcare entities.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Revenue | $8.055 billion | $7.544 billion; up 6.8% |
| Income before taxes | $517 million; 6.4% of revenue | $685 million; 9.1% of revenue |
| Net income attributable to HCA Holdings | $240 million; diluted EPS $0.52 | $388 million; diluted EPS $0.89 |
| Adjusted segment EBITDA | $1.590 billion | $1.574 billion; up about 1% |
| Cash from operations | $918 million | $859 million |
| Capital expenditures | $329 million | $214 million |
| Interest expense | $533 million | $516 million |
| Total debt at period end | $25.366 billion | $28.225 billion at December 31, 2010 |
| Cash at period end | $553 million | $411 million at December 31, 2010 |
| Working capital | $2.719 billion | $2.650 billion at December 31, 2010 |
Adjusted segment EBITDA is a company-defined non-GAAP measure. Its margin was approximately 19.7% of revenue, versus 20.9% a year earlier. HCA reported a 3.0% attributable net income margin, down from 5.2%. Total current assets were $6.986 billion and current liabilities $4.267 billion at March 31, 2011. Stockholders’ deficit was $7.788 billion, compared with $10.794 billion at year-end 2010.
Material changes and operating trends
- Revenue growth reflected a 2.9% increase in revenue per equivalent admission and a 3.7% increase in equivalent admissions. Same-facility revenue rose 6.0%.
- Admissions increased 2.0% overall and 1.6% same facility. Emergency department visits rose 11.7% overall; outpatient surgeries rose 1.2%. Inpatient surgeries declined 2.2%.
- Attributable net income fell 38.2%, primarily due to a $181 million pretax final fee paid upon termination of the investor management agreement following the IPO. Q1 2010 included $18 million in long-lived asset impairments; Q1 2011 had no such impairment.
- Provision for doubtful accounts rose to $649 million from $564 million and to 8.1% of revenue from 7.5%. Combined doubtful-account provision, uninsured discounts and charity care increased to $2.557 billion from $2.144 billion; the combined rate was 25.7% versus 23.5%.
- Salary and benefit costs increased to 40.9% of revenue from 40.7%; other operating expenses increased to 16.4% from 15.9%. Interest expense increased primarily because the average debt balance was higher.
- Operating cash flow improved despite lower net income, with working-capital movements and income tax refunds contributing. Investing cash use increased, principally because capital expenditures rose.
Financing, outlook, and risks
- The March IPO included 87.7 million newly issued company shares at $30 per share. HCA received $2.506 billion in net proceeds and used the proceeds to reduce revolving borrowings; selling shareholders sold additional shares but HCA received no proceeds from those sales.
- Management estimated 2011 capital expenditures of approximately $1.550 billion. Projects under construction were expected to require a further $1.690 billion over five years.
- HCA estimated 2011 Medicare and Medicaid electronic health record incentive revenue of $290–$340 million, alongside estimated related operating expenses of $115–$140 million. Recognition depended on meeting meaningful-use requirements and other program conditions.
- Management stated that operating cash flow, available credit facilities and anticipated debt-market access should meet expected liquidity needs for the next 12 months. Available secured credit capacity was reported as $3.917 billion at March 31.
- After quarter-end, HCA called for redemption of $1.000 billion of notes due 2014 and $108.5 million of notes due 2017; the anticipated pretax extinguishment charge was approximately $75 million. May 2011 credit amendments extended maturities on specified term loans.
- Key risks include substantial indebtedness and refinancing needs; changes to Medicare, Medicaid and health reform; uninsured patient collectibility and rising charity care; operating-cost pressures; and government investigations and litigation. A DOJ review of ICD billing and records at 87 hospitals covered October 2003 onward. The filing also describes pending IRS disputes and ongoing remedy proceedings in New Hampshire hospital litigation.
- HCA held $169 million of illiquid auction-rate securities at fair value and noted potential future impairment risk. It also disclosed that a hypothetical 1% increase in interest rates would reduce annualized pretax earnings by approximately $5 million.
Important facts for investors to verify
- Whether revenue growth and patient-volume trends persist, particularly given the decline in inpatient surgeries.
- Whether rising uninsured discounts, charity care and doubtful-account provisions continue to pressure collections and margins.
- HCA’s post-IPO debt reduction, subsequent redemptions and refinancing terms, and the continuing cost of debt service.
- Actual 2011 capital spending and EHR incentive revenue and expense versus management estimates.
- Developments in the IRS disputes, DOJ ICD review and New Hampshire litigation, including any material financial exposure.
- Whether the auction-rate securities retain their reported value and liquidity, and whether projected liquidity remains adequate.