HCA Healthcare, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; comparisons are with the same 2017 periods. HCA operated 178 hospitals and 122 freestanding surgery centers in 20 states and England. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $11,529 | $10,733 | $22,952 | $21,356 |
| Income before taxes | $1,238 | $1,160 | $2,777 | $2,226 |
| Net income attributable to HCA | $820 | $657 | $1,964 | $1,316 |
| Diluted earnings per share | $2.31 | $1.75 | $5.50 | $3.48 |
| Adjusted segment EBITDA | $2,227 | $2,090 | $4,345 | $4,095 |
- Revenue grew 7.4% in Q2 and 7.5% in the first half. Same-facility revenue grew 6.5% and 6.2%, respectively.
- Q2 diluted EPS increased 32%; first-half diluted EPS increased 58%. These comparisons include lower tax expense in 2018 and, for the first half, a substantial facility-sale gain.
- Adjusted segment EBITDA, a non-GAAP measure, increased 6.6% in Q2 and 6.1% in the first half. Its margin was approximately 19.3% in Q2 versus 19.5% in 2017, and 18.9% for the first half versus 19.2%.
- Q2 income before taxes was 10.7% of revenue versus 10.8%; first-half income before taxes was 12.1% versus 10.4%, including the 2018 disposition gains.
- Operating cash flow was $2,865 for the first half, versus $2,684. Capital expenditures excluding acquisitions were $1,574, versus $1,304; operating cash flow less this capex was $1,291, versus $1,380.
Liquidity, debt and capital allocation
- Cash was $868 at June 30, 2018, up from $732 at year-end 2017. Working capital was $2,769, down from $3,819, mainly due to $1,492 more long-term debt classified as due within one year.
- Total debt was $33,192, including $1,692 due within one year; the year-end 2017 amounts were $33,058 and $200, respectively. Average debt cost was 5.3% in the first half. Approximately $5,240 of debt was variable-rate and $27,952 fixed-rate.
- Available capacity under senior secured credit facilities was $1,842 at June 30 and $2,172 at July 31. Management said operating cash flow, available credit and expected capital-market access should meet liquidity needs for the next 12 months.
- First-half investing activity included $1,574 in property and equipment purchases, $538 in acquisitions, and $799 in proceeds from hospital and health-care entity disposals. Financing uses included $893 in share repurchases, $245 in dividends and $185 in distributions to noncontrolling interests.
- HCA repurchased 9.040 million shares in the first half at an average $98.73 per share; $910 remained under the authorization at June 30. The board declared a $0.35-per-share dividend payable September 28, 2018.
Changes, outlook and material items
- Q2 consolidated equivalent admissions increased 5.1%, and revenue per equivalent admission increased 2.1%; same-facility equivalents grew 2.8% and revenue per equivalent admission 3.6%. Consolidated admissions rose 4.5%; same-facility admissions rose 2.7%.
- Salary and benefit expense was 45.8% of Q2 revenue versus 45.6%; same-facility labor rates rose 3.4%. Other operating expenses rose to 18.4% of revenue from 18.3%. Supply expense was 16.6% versus 16.7%.
- First-half results included $414 in net gains on facility sales, chiefly the sale of two Oklahoma hospitals ($372 gain); Q2 included $9 in net facility-sale gains. The first-half gain added $0.88 to diluted EPS, according to management.
- The 2017 Tax Act reduced the estimated effective tax rate. The filing reports a $122 Q2 and $245 first-half tax benefit related to its estimated impact; the first-half effective tax rate was 21.2%, versus 33.2%. Tax accounting remained provisional and could be adjusted.
- Estimated cost of uncompensated care was $817 in Q2 and $1,592 in the first half, up from $743 and $1,425. Uncompensated care as a share of revenue plus uncompensated care increased to 36.0% in Q2 and 35.7% in the first half. Same-facility uninsured admissions rose 7.8% in Q2.
- Management expected 2018 capital expenditures, excluding acquisitions, of approximately $3.5 billion; projects under construction had an estimated $3.3 billion of additional costs to complete and equip over five years. The filing provides no specific earnings or revenue guidance.
- Risks include substantial leverage and refinancing needs; reimbursement and policy changes, including possible reductions or restructuring of state Medicaid supplemental payment programs; uninsured-account collectability; labor costs and staffing; and litigation, government inquiries and tax disputes. A 1% interest-rate increase was estimated to reduce annualized pretax earnings by about $52 million.
- HCA adopted the new revenue-recognition standard using full retrospective application; management reported no effect on revenue recognition for periods before adoption, but presentation changed. The company also identified expected lease-balance-sheet recognition when the new lease standard takes effect.
Investor verification priorities
- Assess recurring earnings and cash generation excluding the $414 million first-half disposition gain and Tax Act-related tax benefits.
- Review whether patient volume and pricing growth can offset rising labor and other operating costs, and monitor uninsured admissions, uncompensated care and receivables collection.
- Check debt maturities, refinancing progress, variable-rate exposure, credit-facility availability and the effect of higher rates on interest expense.
- Track the $3.5 billion 2018 capex expectation, construction commitments, acquisition spending, and the sustainability of dividends and repurchases.
- Monitor changes to Texas and other state Medicaid supplemental payment programs, tax-accounting estimates, and material developments in legal or government investigations.