01—Abstract
Summary
Summary of the 10-K filed February 24, 2012. Cited figures are marked; the original filing is the authoritative source.
HCA Holdings, Inc. (NYSE: HCA) reported a strong fiscal 2011, with net income attributable to HCA Holdings of $2.465 billiona, or $4.97 per diluted share, versus $1.207 billion ($2.76) in 2010.
Results were inflated by several non-recurring items: a $1.522 billionb pretax gain from remeasuring the company's prior equity stake in the HealthONE (Denver) joint venture after buying the remaining ~40% interest, $210 million of electronic health record incentive income, and $142 million of net gains on facility sales. These were partly offset by $481 million of losses on debt retirement and a $181 million termination fee paid to the Investors (the Bain/KKR/Frist sponsor group) when the management agreement ended with the March 2011 IPO. Revenues rose 5.9% to $29.682 billion, driven mainly by a 5.2% increase in equivalent admissions, while revenue per equivalent admission grew only 0.7% amid a shift toward less acute medical cases.
Same-facility revenue growth was 3.3%. The balance sheet remains highly leveraged. Total debt was $27.052 billionc at year-end 2011 versus $28.225 billion a year earlier, and the stockholders' deficit improved to $(7.014) billion from $(10.794) billion, reflecting the IPO proceeds, the repurchase of 80.8 million shares from Bank of America affiliates for $1.503 billion, and earnings.
Operating cash flow rose to $3.933 billiond, largely due to a $885 million improvement from lower income tax payments, so the headline cash generation is partly timing-related. Capital expenditures were $1.679 billion, with about $1.9 billion planned for 2012. The company also declared a $2.00 per share (about $975 million) distribution payable February 29, 2012.
Investors should weigh the headwinds in the filing. Medicare and Medicaid together account for 44.5% of revenue, and the Health Reform Law implies large cuts to Medicare market-basket updates, DSH payments and managed Medicare premiums, with the outcome tied to a pending Supreme Court ruling. The uninsured provision, uninsured discounts and charity care together rose to 27.4% of revenue-related charges in 2011 from 23.8% in 2009.
Florida and Texas generate about half of revenue, and a securities class action over the IPO disclosures has been filed. Roughly 80% of HCA's shares were held by sponsors and insiders after the IPO. The company's 2011 earnings quality therefore depends heavily on non-recurring gains, while its long-term value hinges on payer policy and its ability to manage uncompensated care.
02—Key points
Key Highlights
- Net income attributable to HCA Holdings rose to $2.465 billion ($4.97 diluted EPS) from $1.207 billion ($2.76) in 2010, but includes a $1.522 billion nontaxable remeasurement gain on the HealthONE joint venture (about $2.87 per diluted share).
- Revenues grew 5.9% to $29.682 billion, driven by a 5.2% increase in equivalent admissions; revenue per equivalent admission rose only 0.7% as service mix shifted toward less acute medical cases.
- Total debt declined to $27.052 billion from $28.225 billion, and the stockholders' deficit narrowed to $(7.014) billion from $(10.794) billion, aided by the $2.506 billion IPO proceeds in March 2011.
- The company repurchased 80.8 million shares from Bank of America affiliates at $18.61 per share for $1.503 billion, about 15.6% of shares outstanding at the time.
- Operating cash flow increased to $3.933 billion from $3.085 billion, though $885 million of the improvement came from lower income tax payments, which may not recur.
- Uncompensated care pressure is rising: provision for doubtful accounts plus uninsured discounts and charity care reached $11.214 billion (27.4% of the related base) versus 23.8% in 2009.
- Exposure is concentrated: Medicare and Medicaid make up 44.5% of revenue, Florida and Texas generate about half of revenue, and the Health Reform Law and SGR physician payment cuts create significant policy risk.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 24, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $29.68B$28.04B | +5.9% |
| Interest Expense | $2.04B$2.10B | −2.9% |
| Net Income | $2.46B$1.21B | +104.2% |
| EPS (Basic) | $5.17$2.83 | +82.7% |
| EPS (Diluted) | $4.97$2.76 | +80.1% |
| Shares Outstanding (Basic) | 476.61M426.42M | +11.8% |
| Shares Outstanding (Diluted) | 495.94M437.35M | +13.4% |
05—Questions
Frequently Asked Questions
How much of HCA's 2011 earnings growth was operating versus one-time?
A large share was non-recurring. The $1.522 billion HealthONE remeasurement gain (about $2.87 per diluted share) and $142 million of facility-sale gains boosted 2011 results, while $481 million of debt-retirement losses and the $181 million sponsor termination fee partly offset them. Excluding these items, earnings growth was materially lower than the headline 104% increase in net income attributable to HCA.
What is the impact of the Health Reform Law on HCA?
The filing describes expected reductions to Medicare inpatient and outpatient market-basket updates, Medicare and Medicaid DSH payments, and managed Medicare premiums, along with a value-based purchasing program and readmission penalties. Coverage expansion could add insured patients in Texas and Florida, but HCA states it cannot reliably predict the net effect, which depends on the Supreme Court's review and possible repeal efforts.
Why did operating cash flow improve so much in 2011?
Operating cash flow rose $848 million to $3.933 billion, primarily due to an $885 million improvement from lower income tax payments. Because this benefit is largely tax timing, it should not be assumed to recur at the same level.
How leveraged is HCA and what are its debt obligations?
HCA had $27.052 billion of total debt at year-end 2011, with about $5.1 billion at variable rates and $22.0 billion at fixed rates. Its average interest rate on long-term debt was 7.7%, and interest expense was $2.037 billion. The company also has $1.935 billion of availability under its senior secured revolver and $202 million under its asset-based facility, and it is subject to maintenance covenants.
What are the main legal and regulatory risks disclosed?
The company disclosed a Department of Justice review of implantable cardio-defibrillator billing at 95 hospitals that could lead to False Claims Act claims, an IRS dispute over 2005 and 2006 tax returns, a New Hampshire litigation matter, and securities class actions over IPO disclosures on accounting for the 2006 recapitalization and 2010 reorganization. HCA states it cannot predict the outcome of the DOJ review.
06—Continue