HCA Healthcare, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. HCA operated 187 hospitals and 121 freestanding surgery centers in 21 states and England.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $13.311 billion | $12.694 billion | $37.240 billion | $37.813 billion |
| Income before taxes | $988 million | $979 million | $3.358 billion | $3.637 billion |
| Net income attributable to HCA | $668 million | $612 million | $2.328 billion | $2.434 billion |
| Diluted EPS | $1.95 | $1.76 | $6.79 | $6.98 |
| Adjusted segment EBITDA | $2.053 billion | $2.285 billion | $6.919 billion | $7.119 billion |
Q3 pretax margin was 7.4% versus 7.7%; HCA-attributable net income margin was 5.0% versus 4.8%. For the nine months, those margins were 9.0% versus 9.6% and 6.3% versus 6.4%, respectively. Adjusted segment EBITDA is a non-GAAP measure.
- Q3 revenue and volumes: Revenue increased 4.9% consolidated and 4.5% same-facility. Equivalent admissions fell 9.1% consolidated (9.0% same-facility), while revenue per equivalent admission rose 15.3% (14.8% same-facility). Admissions declined 3.9%; emergency department visits fell 20.1%.
- Costs and interest: Q3 salaries and benefits were 45.8% of revenue versus 47.0%; supplies were 16.0% versus 16.5%; other operating expenses were 16.9% versus 18.5%. Interest expense was $385 million versus $448 million. Nine-month interest expense was $1.201 billion versus $1.386 billion.
- Cash flow: Nine-month operating cash flow was $12.815 billion versus $5.097 billion. The 2020 figure included $6.123 billion of CARES Act accelerated Medicare payments and Provider Relief Fund distributions that HCA subsequently said it would repay; excluding those receipts, operating cash flow was $6.815 billion. Investing cash outflow was $2.483 billion; capital expenditures were $2.087 billion.
- Balance sheet at September 30: Cash and equivalents were $6.588 billion, versus $621 million at year-end 2019. Total debt was $30.964 billion, versus $33.722 billion; debt due within one year was $172 million. Working capital was $1.887 billion, down from $3.439 billion at year-end, largely reflecting lower receivables and higher accounts payable. A $6.123 billion government stimulus refund liability was recorded.
- Liquidity and investment: $7.710 billion was available under senior secured credit facilities. Planned 2020 capital expenditures were approximately $3.0 billion; projects under construction had approximately $3.1 billion of estimated remaining costs over five years. Management said expected liquidity needs over the next 12 months could be met through operations, credit facilities and anticipated debt-market access.
Material changes, outlook and risks
- COVID-19-related restrictions and postponed elective procedures reduced patient volumes and revenue through the first three quarters. Management said COVID-19 cases increased patient acuity and average reimbursement per case in Q3, but future effects could vary or be adverse.
- HCA received approximately $4.449 billion in accelerated Medicare payments and $1.674 billion in Provider Relief Fund distributions during the first nine months. It reversed $822 million of previously recognized Provider Relief Fund income in Q3 after updated HHS guidance, and announced on October 8 that it would return or repay early approximately $1.6 billion of relief funds and $4.4 billion of Medicare advances, using cash and future operating cash flows.
- Q3 results included the $822 million stimulus-income reversal and $14 million of facility-sale gains; Q3 2019 included $211 million of debt-retirement losses. Nine-month 2020 results included $295 million of debt-retirement losses and $60 million of employee-retention payroll tax credits. These items affect period comparisons.
- HCA issued $2.7 billion of 3.50% senior notes due 2030 and used proceeds and available funds to redeem $3.0 billion of higher-coupon notes; the debt redemptions generated a $295 million pretax loss. Share repurchases and quarterly dividends were suspended during 2020, with resumption to be evaluated later.
- Management did not provide a revenue or earnings forecast in the supplied filing text. It identified pandemic duration, patient volumes, staffing and supply costs, payer mix and collection risk, government reimbursement and relief-program rules, substantial leverage, regulation, and litigation as key uncertainties.
- Contingencies include healthcare-related investigations and claims, tax examinations, and a False Claims Act and Texas Medicaid Fraud Prevention Act qui tam case concerning a Texas Medicaid program; HCA said it was vigorously defending the case and could not predict its effect. HCA also reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Timing and cash-flow effect of repayment of the approximately $6 billion in Medicare advances and Provider Relief Fund distributions.
- Whether patient volumes recover and whether higher reimbursement per case persists as COVID-19 conditions and elective-procedure patterns change.
- Underlying operating trends excluding the stimulus reversal, debt-retirement losses, facility-sale gains, tax credits and other unusual items.
- Liquidity after the announced repayments, and progress against capital spending plans and the company’s substantial debt obligations.
- Potential changes to government reimbursement and supplemental-payment programs, and developments in legal, regulatory and tax matters.