HCA Healthcare, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; comparisons are to the same 2019 periods. HCA operates hospitals and related healthcare businesses; at quarter-end it had 186 hospitals and 122 freestanding surgery centers in 21 states and England. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $11.068B | $12.602B | $23.929B | $25.119B |
| Income before taxes | $1.560B | $1.198B | $2.370B | $2.658B |
| Net income attributable to HCA | $1.079B | $783M | $1.660B | $1.822B |
| Diluted EPS | $3.16 | $2.25 | $4.84 | $5.22 |
| Adjusted segment EBITDA | $2.666B | $2.293B | $4.866B | $4.834B |
| Operating cash flow | $8.723B | $1.997B | $10.098B | $2.971B |
Q2 revenue fell 12.2%; equivalent admissions declined 20.0%, partly offset by 9.7% higher revenue per equivalent admission. Same-facility revenue fell 12.1%. Surgeries declined 26.5% and emergency department visits 32.7% on a consolidated basis. For the first half, revenue was down 4.7% and equivalent admissions down 10.1%.
Q2 HCA-attributable net income and diluted EPS rose year over year despite lower revenue, primarily reflecting $822M of recognized CARES Act Provider Relief Fund income ($590M after tax, or $1.73 per diluted share) and $60M of employee-retention payroll tax credits ($0.13 per share). The quarter also included $27M of facility-sale losses; the prior-year quarter had $18M of gains. Reported Q2 adjusted segment EBITDA includes the stimulus income; excluding the $822M grant, it would be approximately $1.844B, a non-GAAP analytical subtraction rather than a reported measure.
Q2 salaries and benefits were 48.2% of revenue versus 46.3% a year earlier; salaries and benefits per equivalent admission increased 14.1%. Supplies were 15.8% of revenue versus 16.8%, while other operating expenses were 19.3% versus 18.8%. First-half diluted EPS and HCA-attributable net income declined, including a $295M pretax debt-retirement loss ($0.66 per diluted share).
Cash, debt and liquidity
- Cash and cash equivalents were $4.638B at June 30, up from $621M at year-end 2019. First-half operating cash flow was $10.098B, but included $4.999B of CARES Act-related receipts recorded as deferred revenue, as well as working-capital and tax-payment timing effects. Cash generation therefore includes substantial temporary funding and should not be read as recurring operating cash flow.
- Cash used in investing activities was $1.953B, including $1.598B of capital expenditures and $346M for acquisitions. Cash used in financing activities was $4.116B.
- Total debt was $30.942B, down from $33.722B at year-end; average debt was $32.766B for the first half. Interest expense was $816M, versus $938M. HCA reported $7.718B available under senior secured credit facilities and an undrawn $2B 364-day term facility.
- Current liabilities included $4.999B of deferred revenues. This included approximately $4.4B of accelerated Medicare payments, which are advances subject to recoupment or repayment, and unrecognized Provider Relief Fund distributions. The company had $1.175B of working capital at quarter-end, versus $3.439B at year-end.
- Management expected 2020 capital expenditures of approximately $2.8B–$3.0B; projects under construction had approximately $3.0B of estimated costs to complete over five years. Management believed available cash flows, credit facilities and debt-market access would meet liquidity needs for the next 12 months.
Material changes, outlook and risks
- COVID-19 restrictions and cancelled or deferred elective procedures significantly reduced volumes, especially in April. Volumes and revenue improved gradually from late April through quarter-end, but management could not forecast the pandemic’s duration or financial impact. Restrictions were being reimposed in some areas; Texas and Florida were identified as recent COVID-19 hotspots and together generated 49% of Q2 revenue.
- HCA suspended its share repurchase and quarterly dividend programs in March and reduced certain planned projects and capital expenditures. It repurchased no shares in Q2. No earnings guidance was provided; management said it would evaluate resuming distributions and buybacks later.
- Provider Relief Fund distributions are generally nonrepayable only if HCA satisfies applicable terms, including use for COVID-related expenses or lost revenue. HCA had recognized $822M of grant income and reported $4.999B in deferred CARES-related receipts. Accelerated Medicare payments begin to be recouped against claims after 120 days, with unapplied amounts due within one year for acute-care hospitals. HCA reported approximately $300M of additional targeted relief distributions received in July.
- Key uncertainties include pandemic-related patient demand, staffing and supply costs, payer mix and collections, potential liability exposure, substantial indebtedness and refinancing access, and changes to government reimbursement and Medicaid supplemental-payment programs. The filing identifies Texas and Florida as particularly important markets.
- HCA disclosed ongoing lawsuits, regulatory inquiries and tax examinations. A relator-led qui tam case alleges False Claims Act and Texas Medicaid Fraud Prevention Act violations concerning the Harris County Medicaid waiver program; the governments declined to intervene, and HCA is defending the case. The company said the effect, if any, could not be predicted.
Important facts for investors to verify
- How much of reported earnings and cash flow reflects Provider Relief Fund grants, payroll tax credits, Medicare advances, tax deferrals and other timing effects—and the conditions or repayment obligations attached to those funds.
- Whether patient volumes, elective procedures and revenue per equivalent admission recover, particularly in Texas and Florida, and how labor, PPE and other costs affect margins.
- Debt maturities, interest-rate exposure, access to credit and capital markets, and the company’s capacity to fund planned capital expenditures while maintaining liquidity.
- Developments in government reimbursement and supplemental-payment programs, the Texas Medicaid litigation, tax examinations and professional-liability claims.
- Any announcement on resuming dividends or share repurchases; both programs were suspended as of the filing.