01—Abstract
Summary
Summary of the 10-K filed February 17, 2011. Cited figures are marked; the original filing is the authoritative source.
HCA Holdings, Inc. (the new parent of HCA Inc., formed in the November 22, 2010 Corporate Reorganization) reported a solid 2010 with revenue of $30.683 billiona (up 2.1% from $30.052 billion) and net income attributable to HCA Holdings of $1.207 billion (up 14.5%).
Growth was driven mainly by a 0.9% increase in revenue per equivalent admission and a 1.2% rise in equivalent admissions, while consolidated admissions were essentially flat (down 0.1%). Operating margins were pressured by a rising mix of uninsured patients: uninsured discounts jumped to $4.641 billionb from $2.935 billion, which cut reported revenue but drove the provision for doubtful accounts down 19% to $2.648 billion (8.6% of revenue from 10.9%). Cash flow from operations rose to $3.085 billion, and cash revenues grew 4.7%, which management presents as the better gauge of underlying performance.
The balance sheet is the central investor concern. Total debt stood at $28.225 billionc, and the company paid $4.257 billion in cash distributions to stockholders and option holders during 2010, funded largely by new debt. Stockholders' deficit widened to $(10.794) billion.
The Investors (Bain Capital, KKR, BAML Capital Partners, and affiliates) own about 96.8% of the stock, and the company is preparing an initial public offering, with proceeds intended to repay debt. Interest expense rose to $2.097 billiond, and the company remains exposed to significant Health Reform Law changes affecting Medicare and Medicaid, which together account for roughly 41% of revenue, as well as heavy Florida and Texas concentration (about 52% of revenue).
Key risks for investors include the uncertain financial impact of the Health Reform Law (subject to court challenges and possible repeal), scheduled Medicare DSH and market basket reductions, potential Medicaid DSH cuts beginning in 2014, the pending IRS disputes, a New Hampshire merger lawsuit, and a Department of Justice review of implantable cardio-defibrillator billing at 95 hospitals. Management expects 2011 EHR incentive payments of $275 million to $325 million.
02—Key points
Key Highlights
- Revenue rose 2.1% to $30.683 billion, driven by a 0.9% increase in revenue per equivalent admission and a 1.2% increase in equivalent admissions; same-facility revenue grew 2.1%.
- Net income attributable to HCA Holdings rose 14.5% to $1.207 billion; diluted EPS was $12.43 versus $10.99 in 2009.
- Uninsured discounts more than doubled, to $4.641 billion from $2.935 billion, while the provision for doubtful accounts fell to 8.6% of revenue from 10.9%.
- Total debt was $28.225 billion at year-end, and the company paid $4.257 billion in stockholder distributions in 2010, leaving a stockholders' deficit of $(10.794) billion.
- Operating cash flow rose to $3.085 billion, helped by a $547 million reduction in income tax payments; capital expenditures were $1.325 billion.
- The company operates 164 hospitals and 106 surgery centers, with about half of licensed beds in Texas and Florida; Medicare and Medicaid represent about 41% of revenue.
- The Investors own about 96.8% of common stock, and a planned IPO would use proceeds to repay debt; the stock is not publicly traded today.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 17, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $28.04B$26.78B | +4.7% |
| Interest Expense | $2.10B$1.99B | +5.5% |
| Net Income | $1.21B$1.05B | +14.5% |
| EPS (Basic) | $2.83$2.48 | +14.1% |
| EPS (Diluted) | $2.76$2.44 | +13.1% |
| Shares Outstanding (Basic) | 426.42M425.57M | +0.2% |
| Shares Outstanding (Diluted) | 437.35M432.23M | +1.2% |
05—Questions
Frequently Asked Questions
Why did reported revenue grow only 2.1% when cash revenues grew 4.7%?
Reported revenue is net of charity care and uninsured discounts, which rose sharply in 2010 as HCA increased discounts for uninsured patients. Cash revenue (reported revenue less the provision for doubtful accounts) strips out the bad-debt effect, so management views it as a clearer measure of underlying collections, though it is a non-GAAP metric.
How leveraged is HCA, and what are the main debt risks?
Total debt is $28.225 billion against about $5.9 billion of adjusted segment EBITDA, and interest expense was $2.097 billion in 2010. Roughly $25.2 billion of debt is fixed rate and $3.0 billion is variable, with the company having hedged $7.1 billion of variable exposure. Near-term refinancing and covenant compliance depend on continued cash generation and the IPO proceeds.
What are the biggest policy risks from the Health Reform Law?
Medicare market basket reductions, a productivity adjustment beginning in 2012, value-based purchasing cuts of up to 2% from 2017, Medicare DSH payments reduced to 25% of prior levels from 2014, and Medicaid DSH cuts of $500 million to $5.6 billion a year starting in 2014. Management says the net effect is hard to predict because coverage expansion could add patient volume, and the law faces more than 20 legal challenges.
What is the status of the IPO and what happens to the Sponsors?
HCA filed an S-1 for an IPO in May 2010 and again in December 2010 after the Corporate Reorganization, with proceeds planned to repay debt. The Sponsors would receive a termination fee based on the net present value of future management fees (paid $18 million in 2010). A stockholder written consent dated February 16, 2011 authorized a 4.505-for-one stock split and an increase in authorized shares to 1.8 billion, effective near the IPO.
What legal and regulatory matters could materially affect results?
The company is contesting IRS deficiencies for 2005 and 2006 and has pending audits of other periods, with management believing no material adverse effect. A New Hampshire court found a 1999 intra-corporate transfer breached a 1983 agreement, with a remedies trial set for May 2011 that could include monetary damages or rescission. The Department of Justice is also reviewing implantable cardio-defibrillator billing at 95 HCA hospitals, which could lead to False Claims Act claims.
06—Continue