01—Abstract
Summary
Summary of the 10-K filed February 26, 2014. Cited figures are marked; the original filing is the authoritative source.
HCA Holdings, Inc. ended 2013 with 165 hospitals and 115 freestanding surgery centers in 20 states and England, and reported revenues of $34.182 billiona (up 3.5% from $33.013 billion in 2012).
Net income attributable to HCA Holdings was $1.556 billionb, or $3.37 per diluted share, down from $1.605 billion ($3.49) in 2012, as growth in revenue was offset by a rising provision for doubtful accounts, higher salaries and supplies costs, and a lower year-over-year EHR incentive income figure ($216 million versus $336 million). Revenue growth was driven primarily by a 3.1% increase in revenue per equivalent admission, with admissions roughly flat (up 0.2%). Same-facility revenue rose 3.1%, and same-facility admissions grew only 0.1%.
The key credit and cash-flow concerns for investors are leverage and uncompensated care. Total debt was $28.376 billionc at year-end, and interest expense was $1.848 billion. Operating cash flow fell to $3.680 billion from $4.175 billion, mainly because of a $521 million negative working-capital swing.
Combined uncompensated care (charity care, uninsured discounts and the provision for doubtful accounts) rose to $15.565 billiond, or 31.3% of the sum of revenues and those deductions, up from 29.5% in 2012. Uninsured discounts increased $1.232 billion year over year. Management expects the Affordable Care Act to reduce uninsured volume over time, but the filing states that the net effect remains highly uncertain.
The filing also points to significant structural exposure. Medicare and Medicaid made up 42% of 2013 revenues, and Florida and Texas together generated about 46% of revenues from 78 hospitals.
The company faces ongoing Medicare reimbursement pressure (the sequestration cuts, market basket reductions, value-based purchasing, and readmission penalties), a Missouri judgment of at least $162 million (Health Midwest litigation), DOJ reviews of implantable cardio-defibrillator and interventional cardiology billing, and securities class action litigation tied to the 2011 IPO. The company repurchased $500 million of stock in 2013 and reinstated no dividends during the year.
02—Key points
Key Highlights
- Revenue rose 3.5% to $34.182 billion, driven mainly by a 3.1% increase in revenue per equivalent admission; admissions grew only 0.2%.
- Net income attributable to HCA Holdings fell 3.1% to $1.556 billion ($3.37 diluted EPS), versus $1.605 billion ($3.49) in 2012.
- Total debt was $28.376 billion, with $1.848 billion of interest expense, and the company is described as highly leveraged.
- Operating cash flow declined 11.9% to $3.680 billion, primarily due to a $521 million negative working-capital change.
- Uncompensated care (charity care, uninsured discounts and provision for doubtful accounts) reached $15.565 billion, or 31.3% of the relevant revenue base, up from 29.5% in 2012.
- Medicare and Medicaid represented 42% of revenues, and Florida and Texas (78 hospitals) generated about 46% of revenues, creating concentration risk.
- Legal exposure includes a Missouri judgment of at least $162 million, DOJ reviews of ICD and cardiology billing, and securities class action suits tied to the 2011 IPO.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 26, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $34.18B$33.01B | +3.5% |
| Interest Expense | $1.85B$1.80B | +2.8% |
| Net Income | $1.56B$1.60B | −3.1% |
| EPS (Basic) | $3.50$3.65 | −4.1% |
| EPS (Diluted) | $3.37$3.49 | −3.4% |
| Shares Outstanding (Basic) | 445.07M440.18M | +1.1% |
| Shares Outstanding (Diluted) | 461.91M459.40M | +0.5% |
05—Questions
Frequently Asked Questions
Why did net income decline in 2013 despite revenue growth?
Revenue grew 3.5%, but costs grew faster in several areas. Salaries and benefits rose to 45.8% of revenue from 45.7%, and share-based compensation more than doubled to $113 million. Electronic health record incentive income also fell to $216 million from $336 million. Interest expense increased to $1.848 billion because average debt rose. Net income attributable to HCA Holdings fell 3.1%, to $1.556 billion.
How significant is the rising uninsured and bad debt burden?
It is a major pressure point. Uninsured discounts increased $1.232 billion and charity care rose $404 million in 2013. The combined uncompensated care figure reached $15.565 billion. Management expects continued challenges collecting patient-due accounts, which were $5.927 billion at year-end, with an allowance covering about 93% of that balance. The Affordable Care Act is intended to reduce uninsured volume, but management says its net effect is uncertain.
What are the main risks from government reimbursement changes?
Medicare and Medicaid together represent 42% of revenues. The filing describes several scheduled reductions: Medicare market basket and productivity adjustments, a value-based purchasing reduction that rises to 2% by 2017, readmission penalties capped at 3% from 2015, Medicaid DSH cuts totaling billions through 2023, and sequestration cuts extended through 2024. Hospitals that fail to report quality data also face a 2% reduction. Each of these reduces the rate of revenue growth the company can expect.
How leveraged is HCA and what does that mean for investors?
Total long-term debt was $28.376 billion at December 31, 2013, against stockholders' deficit of $6.928 billion. About $3.54 billion of debt is variable-rate, so a 1% rate increase would reduce annual pretax earnings by roughly $35 million. The company had $1.942 billion of revolver availability. Debt maturities and refinancing are important considerations, and the filing warns that refinancing terms may be less favorable.
What capital allocation actions did management take in 2013?
Management repurchased 10,656,436 shares at $46.92 for $500 million in November 2013. No distributions were declared in 2013, versus $6.50 per share ($3.142 billion) in 2012. Capital expenditures were $1.943 billion, and management planned about $2.2 billion for 2014. Acquisitions totaled $481 million, including three hospitals and The Outsource Group. The company also redeemed $201 million of second lien notes in March 2013.
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