Health Management's 2Q Mixed

Zacks

Health Management Associates (NYSE:HMA - News), a leading operator of general acute care hospitals, reported second-quarter fiscal 2011 earnings per share of 20 cents, edging past the Zacks Consensus Estimate by a penny and beating the year-ago earnings of 16 cents. Net income gained 22.6% year over year to reach $48.6 million.

Revenues

Revenues increased 13.4% year over year to $1,395.4 million, but fell short of the Zacks Consensus Estimate of $1,407 million. Sales were driven by higher hospital admissions (on a continuing operations basis). Net sales from same hospital (continuing operations), operated by the Florida-based company for at least a year, rose 4.2% to $1,281.6 million.

Operational Statistics

On a continuing operations basis, admissions inched up 2.2% while adjusted admissions increased 6.2% in the quarter. Average length of stay moved up marginally year over year to 4.2 days from 4.1 earlier. Surgeries grew 5.6%, patient days moved up 4.9%, while emergency room visits jumped 9.6%.

However, on a same hospital basis, occupancy dipped to 41.7% in the quarter from 43.9% a year ago. Same hospital admissions and adjusted admissions fell 6.4% and 2.9%, respectively, hit by lower uninsured admissions and weather-related disruptions.

Margins

Same hospital adjusted EBITDA margin edged up to 17.6% from 17.3% a year ago. Bad debt expense, as a percentage of sales, was up modestly to 12.2% from 12% in the prior-year quarter.

The total of uninsured discounts, indigent/charity write-offs and bad debt expense as a percentage of the sum of net sales, uninsured discounts and indigent/charity write-offs reached 25.8% in the reported quarter, up from 24.8% a year ago. This metric indicates the aggregate extent of patient care for which the company is not reimbursed.  

Balance Sheet and Cash Flow

Health Management finished the quarter with cash and cash equivalents of $90.3 million, down 19.8% year over year, with long-term debt of about $2.98 billion, relatively flat on a year-over-year basis. The company generated cash flow (from continuing operations) of $156.1 million during the quarter.

Outlook

Health Management has lifted its earnings guidance for fiscal 2011. The company now expects earnings between 76 cents and 80 cents a share versus its earlier forecast of 74 cents and 78 cents. The current Zacks Consensus Estimate for fiscal 2011 is 76 cents. Moreover, the company expects same hospital admissions to be flat to down 2% (versus a rise of 1% to a fall of 1% earlier) for 2011.

Health Management is engaged in the ownership and operation of general acute care hospitals in non-urban communities across the U.S. The company is an active acquirer of underperforming hospitals with a turnaround potential in high-growth markets. Health Management’s competitors, in niche markets, include Community Health Systems (NYSE:CYH - News) and LifepointHospitals (NasdaqGS:LPNT - News).

The company remains focused on acquisitions and collaborations as evident from its recently announced agreement to substantially take over all the assets of Mercy Health Partners, a subsidiary of Catholic Health Partners. As per the terms of the transaction, expected to be completed by October 1, 2011, Health Management will acquire, among other services, 1,323 licensed beds located in East Tennessee. Health Management and its subsidiaries will subsequently operate 66 hospitals with about 10,400 licensed beds. 

Health Management benefits from a gradual growth in admissions largely due to improvements in Emergency Room, sustained physician recruitment and service development. Moreover, it is well placed to expand margins from continuing operations and drive above-industry average earnings growth. While the debt burden remains sizeable, we are somewhat comforted that bad debt is no longer an area of looming concern. Currently we are Neutral on Health Management.

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