HCA Healthcare, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. HCA operates hospitals and related healthcare entities; at quarter-end, its affiliates operated 184 hospitals and 125 freestanding surgery centers in 21 states and England. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $12.602B | $11.529B | $25.119B | $22.952B |
| Income before taxes | $1.198B | $1.238B | $2.658B | $2.777B |
| Net income attributable to HCA | $783M | $820M | $1.822B | $1.964B |
| Diluted EPS | $2.25 | $2.31 | $5.22 | $5.50 |
| Adjusted segment EBITDA | $2.293B | $2.227B | $4.834B | $4.345B |
- Q2 revenue grew 9.3%; same-facility revenue rose 4.3%. Consolidated equivalent admissions increased 6.2% and revenue per equivalent admission rose 3.0%. On a same-facility basis, those measures increased 2.6% and 1.7%, respectively.
- Despite revenue growth, Q2 HCA-attributable net income fell 4.5%, and pretax margin declined to 9.5% from 10.7%. Salaries and benefits rose to 46.3% of revenue from 45.8%; supplies and other operating expenses also increased as a share of revenue. Interest expense increased to $477M from $436M.
- For the six months, revenue increased 9.4%, while HCA-attributable net income decreased 7.2%. Adjusted segment EBITDA rose about 11.3%; as a share of revenue, it was approximately 19.2%, versus 18.9% in 2018. Adjusted segment EBITDA is a non-GAAP measure defined by the company.
- Cash from operations was $2.971B for the first six months, versus $2.865B in 2018. Q2 operating cash flow was $1.997B versus $1.582B; the company attributed the quarterly increase primarily to a $468M favorable change in working-capital items.
- Capital expenditures were $1.745B and acquisitions were $1.504B in the first six months. Cash used in investing activities was $3.113B. Cash and equivalents ended the period at $2.430B, up from $502M at year-end 2018. Working capital was $3.908B.
- Total debt was $36.193B, including $2.073B due within one year; cash less reported total debt was approximately $33.763B. Long-term debt averaged 5.5% interest. Interest expense for the six months was $938M, up from $867M.
Changes, transactions, and unusual items
- HCA acquired a seven-hospital North Carolina health system and other healthcare entities for $1.504B in the first six months; the seven-hospital system accounted for $1.397B of the purchase price.
- HCA issued $1.5B of senior unsecured notes in January and $5.0B of senior secured notes in June. In July, it redeemed $4.95B of notes due 2019, 2020, and 2022. The company expects to recognize a $211M pretax loss on those redemptions in Q3 2019.
- Prior-year six-month results included $414M of facility-sale gains, chiefly from the sale of two Oklahoma hospitals; 2019 included $17M. This materially affects the year-over-year comparison of reported earnings.
- 2019 six-month revenue included an $86M favorable adjustment for prior-period out-of-network services. Tax benefits from employee equity-award settlements were $53M in 2019 and $96M in 2018.
- HCA adopted the new lease accounting standard on January 1, 2019. At June 30, it reported $1.787B of operating-lease right-of-use assets and $1.460B of related noncurrent obligations; prior-year balance-sheet figures were not restated.
- The company repurchased 4.034 million shares in the first six months for $520M. A $2B repurchase authorization had $1.753B remaining at June 30. The board declared a $0.40-per-share quarterly dividend payable in September, subject to the stated terms.
Outlook, risks, and contingencies
- Management estimated 2019 capital expenditures, excluding acquisitions, at approximately $3.7B; projects under construction were expected to require a further $3.4B over five years. Management said operating cash flow, credit facilities, and anticipated debt-market access should meet expected liquidity needs over the next 12 months.
- Credit-facility availability was reported as $5.732B at June 30 and $2.712B at July 31. HCA described itself as highly leveraged and identified refinancing, debt service, reimbursement changes, labor costs, volumes, payer mix, collections, regulation, competition, and cybersecurity among its risks.
- Uncompensated care’s estimated cost increased to $938M in Q2 from $817M; it was $1.774B for the first six months versus $1.592B. Uninsured admissions were 9% of Q2 admissions, compared with 8% a year earlier. The company highlighted possible changes to Medicaid supplemental-payment programs, including Texas’s waiver funding; the financial effect of potential program changes was not estimable.
- A Texas qui tam lawsuit alleging False Claims Act and state Medicaid fraud violations related to the Harris County Medicaid waiver program was unsealed in May 2019. Federal and state governments declined to intervene; HCA said it had not yet been served and could not predict the outcome. The filing also describes ongoing ordinary-course litigation, regulatory inquiries, and tax examinations.
- The IRS began examining HCA’s 2016 and 2017 federal returns. The company reported $510M of unrecognized tax benefits and said it could not estimate the range of possible changes over the next 12 months.
- HCA estimated that a hypothetical 1% increase in interest rates could reduce annualized pretax earnings by approximately $45M. Management reported disclosure controls were effective at June 30 and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Assess whether volume and pricing growth can continue to outpace labor, supply, depreciation, and interest costs, particularly given the decline in Q2 earnings and pretax margin.
- Reconcile earnings trends excluding the 2018 Oklahoma sale gain, the 2019 $86M prior-period revenue adjustment, and employee-award tax benefits.
- Review debt maturity, refinancing and post-quarter redemption effects, including the expected $211M Q3 retirement loss and the change in reported credit-facility availability.
- Monitor the North Carolina acquisition’s contribution, integration costs, and capital requirements against HCA’s capex outlook and cash generation.
- Track uninsured admissions, uncompensated-care costs, Texas and other Medicaid supplemental-payment programs, and the outcome of the Texas qui tam matter and tax examinations.