HCA Healthcare, Inc. — Q1 2019 Form 10-Q
Reporting period: Quarter ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. HCA operates hospitals and related healthcare entities. At quarter-end, affiliates operated 185 hospitals and 124 freestanding surgery centers in 21 states and England.
Financial performance
Dollar amounts are in millions, except per-share data and percentages.
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Revenue | $12,517 | $11,423 | Up 9.6%; same-facility revenue up 6.3% |
| Income before taxes | $1,460 | $1,539 | Down 5.2% |
| Net income attributable to HCA | $1,039 | $1,144 | Down 9.2%; net margin 8.3% vs. 10.0% |
| Diluted EPS | $2.97 | $3.18 | Down 6.6% |
| Adjusted segment EBITDA | $2,541 | $2,118 | Up about 20%; approximately 20.3% and 18.5% of revenue, respectively |
| Cash from operating activities | $974 | $1,283 | Down $309 |
| Capital expenditures, excluding acquisitions | $781 | $694 | Up $87 |
| Total debt | $34,815 | $32,821 | At March 31, 2019 and December 31, 2018, respectively |
| Cash and cash equivalents | $531 | $502 | At March 31, 2019 and December 31, 2018, respectively |
HCA’s adjusted segment EBITDA is a non-GAAP measure; the company cautions that it is not comparable necessarily to similarly titled measures at other companies. Operating cash flow less reported capital expenditures was approximately $193 million in Q1 2019, versus $589 million in Q1 2018.
Material changes and operating trends
- Revenue growth reflected a 4.8% increase in consolidated equivalent admissions and a 4.6% increase in revenue per equivalent admission. Same-facility equivalent admissions rose 1.8%, while same-facility revenue per equivalent admission rose 4.4%.
- Consolidated admissions increased 3.0%; same-facility admissions rose 0.9%. Same-facility emergency department visits declined 2.3%; same-facility surgeries increased 0.7%.
- Q1 2019 revenue included $86 million, or $0.19 per diluted share, from resolving prior-period out-of-network pricing differences. Q1 2018 included $405 million of gains on facility sales, or $0.85 per diluted share, primarily from selling two Oklahoma hospitals. These items affect year-over-year profit comparisons.
- Salary and benefit costs declined to 45.1% of revenue from 46.3%; supplies declined to 16.3% from 16.8%. Depreciation and amortization rose $66 million, and interest expense rose $30 million.
- Estimated cost of uncompensated care increased to $836 million from $775 million; uncompensated care equaled 36.1% of revenue plus uncompensated care, versus 35.4%.
Liquidity, debt and capital allocation
- Working capital was $577 million at March 31, 2019, down from $2.644 billion at year-end. The filing attributes most of the decline to a $3.008 billion increase in debt due within one year. Current assets were $11.108 billion and current liabilities $10.531 billion.
- Operating cash flow fell primarily because of unfavorable working-capital movements, including a $428 million payment funding the 2018 401(k) company match. Investing cash outflow was $2.165 billion, including $1.474 billion for acquisitions.
- HCA acquired a seven-hospital North Carolina system for $1.398 billion and other healthcare entities for $76 million. January’s $1.5 billion senior unsecured notes issuance helped fund the hospital acquisition. Total debt carried an average rate of 5.4% and average life of 6.3 years at quarter-end.
- Available capacity under senior secured credit facilities was $2.233 billion at March 31, 2019. Management said operating cash flow, available facilities and anticipated debt-market access should cover expected liquidity needs for the next 12 months. HCA identifies itself as highly leveraged.
- Expected 2019 capital expenditures, excluding acquisitions, were approximately $3.7 billion; projects under construction were estimated to require another $3.6 billion over five years. Expected net professional-liability claim payments over the next 12 months were approximately $459 million.
- HCA repurchased 2.106 million shares for $278 million during the quarter and had $1.995 billion remaining under its January 2019 $2 billion authorization. The board declared a $0.40 per-share dividend on April 30, payable June 28, 2019, subject to the stated terms.
Outlook, risks and unusual items
- The filing provides no full-year revenue or earnings guidance. Management’s stated capital-expenditure outlook is approximately $3.7 billion, excluding acquisitions.
- HCA adopted the new lease accounting standard on January 1, 2019. At March 31, it reported $1.812 billion of operating-lease right-of-use assets and $1.494 billion of operating-lease obligations; prior periods were not restated.
- Risks include substantial debt and refinancing needs; changes to Medicare, Medicaid and supplemental-payment programs; payer mix and uninsured-account collectability; wage and staffing pressures; competition; and legal, regulatory and tax matters. Supplemental Medicaid payments in Texas were $108 million in Q1 2019.
- The DOJ and U.S. Attorney’s Office for the Southern District of Texas requested information about provider-related donations associated with the Harris County Medicaid waiver program. HCA said it is cooperating, believes its participation has complied with program requirements, and cannot predict the outcome or effect.
- The IRS began examining HCA’s 2016 and 2017 federal returns. HCA reported $457 million of unrecognized tax benefits and said it could not estimate the range of possible changes within 12 months. The filing also describes ongoing litigation and government inquiries that could adversely affect results, financial position or liquidity.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether same-facility volume and pricing trends continue, particularly given lower emergency-department visits.
- How reported earnings compare after accounting for the $86 million prior-period revenue item in 2019 and $405 million facility-sale gain in 2018.
- Working-capital needs, near-term debt maturities, borrowing capacity and the effect of interest-rate changes.
- Integration and performance of the North Carolina acquisition, and delivery of the capital-spending plan.
- Developments in Texas Medicaid supplemental payments, the Harris County inquiry, tax examinations and other legal or regulatory contingencies.
- Uncompensated-care trends, professional-liability claims and the funding of dividends and repurchases alongside HCA’s leverage.