HCA Healthcare, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. HCA operates hospitals and related health care businesses. At quarter-end, affiliates operated 186 hospitals and 123 freestanding surgery centers across 21 states and England.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $12.861 billion | $12.517 billion |
| Adjusted segment EBITDA | $2.200 billion | $2.541 billion |
| Net income attributable to HCA | $581 million | $1.039 billion |
| Diluted EPS | $1.69 | $2.97 |
| Operating cash flow | $1.375 billion | $974 million |
| Capital expenditures | $853 million | $781 million |
- Revenue rose 2.7%; same-facility revenue increased 1.2%. Consolidated equivalent admissions declined 0.1%, while revenue per equivalent admission increased 2.9%.
- Adjusted segment EBITDA, a non-GAAP measure, fell about 13%; its margin was approximately 17.1% of revenue versus 20.3% a year earlier. Salaries and benefits increased to 47.6% of revenue from 45.1%; supplies rose to 16.5% from 16.3%.
- Reported net income attributable to HCA fell about 44%. Q1 2020 included a $295 million pretax debt-retirement loss ($0.66 per diluted share) and a $7 million gain on facility sales. The effective tax rate was 16.2%, versus 21.2%; both periods included tax benefits from employee equity awards.
- Operating cash flow increased $401 million, primarily due to a $678 million net positive working-capital effect, mainly patient receivable collections. Cash and equivalents were $731 million at March 31, up from $621 million at year-end. Working capital was $3.997 billion.
- Total debt was $34.861 billion, including $162 million due within one year; long-term debt net of issuance costs was $34.699 billion. Debt increased from $33.722 billion at December 31, 2019. Interest expense was $428 million, down from $461 million.
- Senior secured credit facilities had $3.798 billion available at March 31; availability was reported at $7.718 billion at April 30, after repayments using CARES Act cash receipts. HCA also had an undrawn $2 billion 364-day term loan facility at March 31.
Material changes and management commentary
- COVID-19 materially affected patient volumes, particularly elective procedures, in the final two weeks of Q1. Surgeries fell 4.4% overall; outpatient surgeries declined 6.0%. Emergency department visits declined 1.0%. Management expected patient volumes and revenue to remain under pressure until the pandemic subsided and the economy stabilized, but could not estimate the duration or severity.
- HCA issued $2.7 billion of 3.50% senior notes due 2030 and used the proceeds, plus available funds, to redeem $3.0 billion of higher-coupon notes due 2021 and 2022. The refinancing resulted in the $295 million pretax loss.
- In April, HCA received approximately $4.3 billion in accelerated Medicare payments, which are advances subject to recoupment or repayment, and approximately $900 million from the CARES Act Provider Relief Fund. HCA expected the latter funds to be recognized in Q2, subject to compliance with funding terms. Further relief funding was uncertain.
- In response to the pandemic, HCA implemented cost reductions, reduced planned projects and capital expenditures, and suspended share repurchases and its quarterly dividend program. Q1 included $441 million of share repurchases and $152 million of dividends paid. HCA reported approximately $3.4 billion of remaining costs to complete and equip projects under construction over five years.
- Management stated cash from operations, available credit facilities, and anticipated debt-market access should meet expected liquidity needs for the next 12 months. HCA also described itself as highly leveraged and noted that this assessment depends on uncertain pandemic and financing conditions.
Risks, contingencies, and unusual items
- Key COVID-19 risks include prolonged volume declines, cancellations and delays in elective care, labor and PPE shortages or higher costs, rising uninsured and underinsured patient levels, collection risk, and possible changes in liability exposure. HCA cautioned that results, cash flows, and liquidity could be materially adversely affected.
- Texas Medicaid supplemental payments were $115 million in Q1 2020, versus $108 million a year earlier. Government review or restructuring of supplemental-payment programs could reduce or eliminate payments; the potential financial impact was not estimable.
- HCA faces ordinary-course litigation, regulatory inquiries, and tax examinations. A Texas qui tam action alleges violations involving Harris County’s Medicaid waiver program; federal and state governments declined to intervene, and HCA is defending the case. The filing states the outcome cannot be predicted.
- Unrecognized tax benefits were $525 million at March 31. The IRS was examining HCA’s 2016–2018 federal returns; HCA could not estimate the range of possible changes in its tax liability over the next 12 months.
- HCA cited substantial indebtedness, debt refinancing and market-access risks, as well as potential impairment of goodwill and long-lived assets if operating conditions deteriorate. A hypothetical 1% increase in interest rates was estimated to reduce annual pretax earnings by approximately $51 million.
Important facts for investors to verify
- How subsequent quarters’ patient volumes, elective procedures, payer mix, and revenue trends evolved as pandemic restrictions changed.
- How the $4.3 billion of Medicare advances were recouped or repaid, and whether provider-relief funds were retained and recognized under applicable terms.
- Cash flow, working capital, credit-facility availability, debt maturities, and compliance with debt agreements as conditions changed.
- Whether suspended dividends, repurchases, capital plans, and construction commitments were resumed, revised, or further reduced.
- Developments in the Texas Medicaid litigation, tax examinations, and state Medicaid supplemental-payment programs.