HCA Healthcare, Inc. — Q1 2017 Form 10-Q
Reporting period: Quarter ended March 31, 2017. HCA operates hospitals and related healthcare businesses; at quarter-end its affiliates operated 171 hospitals and 118 freestanding surgery centers in 20 states and England. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue, net of doubtful accounts | $10,623 | $10,260 | +3.5% |
| Income before taxes | $1,066 | $1,095 | -2.7% |
| Net income attributable to HCA | $659 | $694 | -5.0% |
| Diluted EPS | $1.74 | $1.69 | +3.0% |
| Adjusted segment EBITDA | $2,005 | $2,003 | Approximately flat |
| Cash from operating activities | $1,280 | $1,399 | -$119 |
Net income attributable to HCA was 6.2% of revenue, versus 6.8% a year earlier; adjusted segment EBITDA was approximately 18.9% of revenue. Operating costs increased faster than revenue in several categories: salaries and benefits were 46.1% of revenue (45.8% in 2016), supplies 16.9% (16.7%), and other operating expenses 18.2% (18.1%). Depreciation and amortization rose to $521 from $479; interest expense was $419 versus $416.
Revenue growth reflected 1.8% higher equivalent admissions and 1.7% higher revenue per equivalent admission. Same-facility revenue grew 3.3%. Admissions rose 1.3%; emergency visits rose 1.4%; surgeries were nearly flat overall, with outpatient surgeries down 0.3% and inpatient surgeries up 1.1%.
Cash, debt and liquidity
- Cash and cash equivalents were $753 at March 31, up from $646 at year-end. Working capital was $3,574, compared with $3,252 at December 31, 2016.
- Total debt was $31,514, including $212 due within one year; long-term debt averaged 5.2% interest and had an average life of 6.1 years. Average debt during the quarter was $31,387. The filing reports $4,044 of long-term debt at variable rates.
- Operating cash flow declined to $1,280, primarily due to a $64 combined unfavorable effect from working-capital changes and a $68 decline related to income taxes. Investing used $669, including $571 of capital expenditures and $90 for acquisitions. Financing used $504, including $424 of share repurchases and $145 of distributions to noncontrolling interests.
- Available capacity under senior secured credit facilities was $2,139 at March 31, 2017. Management said operating cash flow, credit-facility availability and expected debt-market access should cover liquidity needs over the next 12 months.
Material changes and notable items
- Despite revenue growth, pretax income and attributable net income declined, while diluted EPS increased as weighted-average diluted shares fell to 380.0 million from 410.6 million. HCA repurchased 5.1 million shares for $424 at an average $82.83 per share in Q1; $1,429 remained under its $2 billion authorization.
- Combined charity care, uninsured discounts and doubtful-account provisions rose to $5,327 from $4,842. Their share of the associated revenue base increased to 33.4% from 32.1%. The doubtful-account allowance represented 99.0% of the $4,929 patient-due receivables balance.
- After quarter-end, HCA agreed to acquire six hospitals for approximately $950, subject to regulatory review, with closings expected in Q2 and Q3 2017. The company expected to fund the purchases with revolving-credit borrowings or debt-market access.
- Q1 2017 included a $1 gain on facility sales; Q1 2016 included $12 of legal claim costs related to Health Midwest litigation and a $1 facility-sale loss. The reported effective tax rate was 30.4%, including a $67 benefit from employee equity-award settlements; excluding that benefit, management reported a 37.5% effective rate.
Outlook, risks and contingencies
- HCA expected 2017 capital expenditures, excluding acquisitions, of approximately $2.9 billion. Projects under construction had an estimated $3.2 billion of remaining costs over five years. The filing gives no explicit full-year revenue or earnings guidance and cautions that quarterly results are not necessarily indicative of full-year results.
- Key exposures include substantial indebtedness and refinancing, changes to healthcare laws and government reimbursement, possible reductions or restructuring of supplemental Medicaid programs, uninsured-account collectability, labor costs and staffing, competition, patient volumes and payer mix, litigation and government investigations, tax disputes, and cybersecurity risks.
- The Texas Medicaid waiver was extended through December 2017; HCA could not predict further extension or the effects of changes. Texas supplemental Medicaid payments were $106 in Q1 2017. Reviews of supplemental-payment programs in several states could lead to reductions or elimination; the financial impact was not estimable.
- Professional-liability net reserves for self-insured risks were $1,292. Expected net claim payments over the next 12 months were approximately $409, including an estimated $359 relating to claims subject to the self-insured retention. Management warned that lawsuits, regulatory proceedings and investigations could materially affect results, financial position or liquidity.
- A hypothetical 1% increase in interest rates was estimated to reduce annualized pretax earnings by approximately $40. Management identified no material changes to previously disclosed risk factors. Disclosure controls were concluded effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether higher uninsured discounts and charity care, and the 99% allowance against patient-due receivables, affect collections and revenue quality.
- Whether operating-cost growth, especially labor and supplies, continues to outpace revenue and pressures margins.
- Progress, regulatory approvals, final consideration and financing for the six-hospital acquisition; also verify its effect on leverage and liquidity.
- Availability and terms of credit facilities and debt-market access, alongside the company’s substantial debt and planned capital spending.
- Changes in Medicaid supplemental-payment programs, Texas waiver status, government investigations, litigation and tax exposures.