HCA Healthcare, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. HCA operates hospitals and related healthcare entities. At June 30, 2022, affiliates operated 182 hospitals, 126 freestanding surgery centers and 21 freestanding endoscopy centers in 20 states and England. This unaudited filing covers the quarter and six months ended June 30, 2022, compared with the same 2021 periods.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $14.820 billion | $14.435 billion | $29.765 billion | $28.412 billion |
| Income before taxes | $1.760 billion | $2.117 billion | $3.574 billion | $4.090 billion |
| Net income attributable to HCA | $1.155 billion | $1.450 billion | $2.428 billion | $2.873 billion |
| Diluted EPS | $3.90 | $4.36 | $8.05 | $8.50 |
| Adjusted segment EBITDA | $3.042 billion | $3.219 billion | $5.986 billion | $6.271 billion |
Q2 salaries and benefits were 45.8% of revenue (44.2% in 2021); other operating expenses were 18.3% (17.2%); and supplies were 15.5% (16.5%). Six-month net income attributable to HCA was 8.2% of revenue, compared with 10.1% in 2021. Interest expense was $434 million in Q2 and $842 million for the first half, versus $386 million and $770 million, respectively.
Operating cash flow was $2.975 billion for the first six months, down from $4.239 billion. Investing cash outflow was $2.050 billion, including $1.941 billion of property and equipment purchases; financing cash outflow was $1.501 billion. Cash fell to $858 million from $1.451 billion at year-end 2021. Working capital was $4.938 billion at June 30, 2022, versus $3.960 billion at December 31, 2021.
Total debt was $38.903 billion, including $246 million due within one year. Long-term debt carrying value was $38.657 billion; reported debt at June 30 included $5.130 billion at variable rates and $33.773 billion at fixed rates. Management said cash from operations, credit-facility availability and expected debt-market access should meet liquidity needs over the next 12 months. Credit facilities had $2.725 billion available at June 30. Shareholders’ deficit attributable to HCA was $3.680 billion.
Material changes versus the prior comparable period
- Q2 revenue rose 2.7%, while income attributable to HCA fell 20.3%. Six-month revenue increased 4.8%, while income attributable to HCA declined 15.5%.
- Q2 consolidated revenue per equivalent admission increased 4.2%, but equivalent admissions fell 1.5%; same-facility revenue increased 4.0%, with equivalent admissions up 0.5%. Consolidated admissions fell 3.2%; emergency visits rose 4.5%.
- Higher labor costs weighed on margins: Q2 salaries and benefits per equivalent admission increased 8.0%; management cited inflation and continued use of contract, overtime and other premium-rate labor. Other operating expenses also rose as a share of revenue.
- Q2 operating cash flow declined $621 million year over year, primarily due to negative working-capital changes. For the first half, operating cash flow declined $1.264 billion, including a $344 million payment of deferred 2020 payroll taxes.
- HCA repurchased 20.605 million shares for $4.783 billion in the first half. Weighted-average diluted shares fell to 296.061 million in Q2 from 332.613 million, but lower earnings more than offset the share-count reduction in diluted EPS.
Outlook, management commentary, risks and unusual items
- Planned 2022 capital expenditures were expected to approximate $4.2 billion. Projects under construction had an estimated $4.3 billion of additional costs to complete and equip over the next five years.
- Management expected inflationary pressures to continue affecting operating expenses. It intended to reduce premium-rate labor use and rates, but said the pace depended on labor-market conditions and other factors.
- HCA stated it could not estimate the duration or extent of COVID-19’s future impact. Its disclosed risks include patient volumes and payer mix, labor and supply costs, regulation and reimbursement, substantial indebtedness, interest rates, litigation, tax disputes and cybersecurity incidents.
- In March, HCA issued $6.0 billion of senior secured notes, used part of the proceeds to reduce revolving borrowings, and redeemed $1.25 billion of 2023 notes in April and another $1.25 billion in May. The redemptions generated a $78 million pretax debt-retirement loss. Following an investment-grade rating event, guarantees and collateral for senior secured notes were released; credit-facility guarantees and collateral were unaffected.
- Texas Medicaid waiver supplemental revenue was $144 million in Q2 2022 and $247 million for the first half. HCA said state reviews or restructuring of supplemental-payment programs could reduce or eliminate payments, but it could not estimate the impact.
- Disclosed contingencies include a relator-led False Claims Act and Texas Medicaid Fraud Prevention Act lawsuit concerning the Harris County Texas waiver program; HCA is vigorously defending the matter. The filing says outcomes of legal and regulatory proceedings could materially affect results, financial position or liquidity.
- The IRS was examining HCA’s 2016–2018 federal returns and a 2019 return for an affiliated partnership. Unrecognized tax benefits were $663 million, including accrued interest; HCA could not estimate the range of possible changes within the next 12 months.
- A 1% increase in interest rates was estimated to reduce future pretax earnings by approximately $51 million annually. The filing reported no material change in previously disclosed risk factors and stated disclosure controls were effective.
Important facts for investors to verify
- Whether revenue growth and patient-volume trends persist, particularly the Q2 decline in consolidated admissions and equivalent admissions.
- Whether labor and other inflationary costs ease, and whether management achieves its planned reduction in premium-rate labor.
- How operating cash flow and working capital develop, given the first-half decline and ongoing capital spending, dividends and share repurchases.
- Debt balances, refinancing costs, variable-rate exposure and available credit-facility capacity following the 2022 debt transactions.
- Potential changes to Medicaid supplemental-payment programs, including the Texas waiver, and outcomes of the Harris County lawsuit, tax examinations and other proceedings.
- Execution of the approximately $4.2 billion 2022 capital-spending plan and funding of construction commitments.