Business context and reporting period
HCA Healthcare, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. Its affiliates operated 179 hospitals and 122 freestanding surgery centers across 20 states and England. Unless stated otherwise, financial amounts are in U.S. dollars; figures below are in millions or billions as indicated.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $11,451 | $10,696 | $34,403 | $32,052 |
| Income before taxes | $1,069 | $778 | $3,846 | $3,004 |
| Net income attributable to HCA | $759 | $426 | $2,723 | $1,742 |
| Diluted EPS | $2.15 | $1.15 | $7.65 | $4.64 |
| Adjusted segment EBITDA | $2,096 | $1,776 | $6,441 | $5,871 |
Revenue grew 7.1% in Q3 and 7.3% year to date. Q3 same-facility revenue rose 7.4%; equivalent admissions increased 4.4% consolidated and 3.4% same-facility, while revenue per equivalent admission rose 2.5% and 3.9%, respectively. Q3 admissions grew 3.2%; surgeries increased 3.5% consolidated. Emergency department visits rose 0.4% consolidated but declined 0.4% same-facility.
Q3 income before taxes was 9.3% of revenue versus 7.3% a year earlier; HCA-attributable net income was 6.6% versus 4.0%. For the first nine months, those ratios were 11.2% versus 9.4% and 7.9% versus 5.4%, respectively. Salaries and benefits were 46.9% of Q3 revenue (47.5% in 2017); supplies were 16.5% (16.6%) and other operating expenses 18.4% (19.4%). Interest expense was $442 in Q3 and $1,309 year to date.
Operating cash flow for the first nine months was $4,586, up from $3,692. Investing activities used $2,615, including $2,420 of capital expenditures and $1,056 for acquisitions; financing activities used $2,114. Cash ended the period at $578, compared with $732 at year-end 2017. Working capital was $3,779 versus $3,819 at year-end.
At September 30, total debt was $33,107, including $191 due within one year; cash was $578. Debt averaged 5.4% interest, with an average life of 6.6 years. Available capacity under secured credit facilities was $2,382 at quarter-end ($2,562 at October 31). Total assets were $38,044 and stockholders’ deficit was $3,730.
Material changes versus prior comparable periods
- Q3 HCA-attributable net income rose 78.3%; nine-month income rose 56.4%. The comparisons include materially different tax effects and unusual items described below.
- Nine-month 2018 results included $420 of facility-sale gains, versus $10 in 2017. The 2018 amount included a $372 pretax gain on selling two Oklahoma hospitals; sale proceeds were $758. HCA also recorded $48 of gains from real estate and other investment sales.
- HCA issued $2,000 of senior notes in August 2018—$1,000 at 5.375% due 2026 and $1,000 at 5.625% due 2028—and redeemed $1,500 of 3.750% secured notes due 2019, recording a $9 pretax debt-retirement loss. Debt was $33,107 versus $33,058 at December 31, 2017.
- HCA repurchased 11.558 million shares in the first nine months for $1,195 of cash; 345.086 million shares were outstanding at September 30, versus 350.092 million at year-end 2017. Cash dividends paid were $366; a $0.35-per-share quarterly dividend was declared for payment in December.
- Revenue-recognition guidance was adopted January 1, 2018 retrospectively. It changed presentation by including estimated implicit price concessions as deductions from revenue and eliminating the separate doubtful-accounts line; management said it did not change previously reported net revenue.
Outlook, management commentary, risks and unusual items
- Capital expenditures excluding acquisitions were $2,420 through September; HCA expected approximately $3.5 billion for full-year 2018. Projects under construction were estimated to require a further $3.9 billion over five years. Management expected operating cash flow, credit facilities and debt-market access to meet liquidity needs for the next 12 months. The filing does not provide full-year earnings or revenue guidance.
- The Tax Act reduced the federal corporate tax rate to 21%. Tax benefits related to the estimated Tax Act impact were $132 in Q3 and $377 for nine months; the filing also reports a $28 Q3 tax reduction for credits on certain 2017 hurricane expenses. HCA said its accounting for the Tax Act remained provisional and further changes could materially affect tax expense and the effective tax rate.
- Q3 2017 included approximately $140 of hurricane-related expenses and lost revenue before insurance recoveries, and a $50 negative impact from Texas Medicaid waiver settlements. Q3 2018 included a $70 reduction in professional-liability provisions following updated actuarial information. These items affect period comparisons.
- Uncompensated care’s estimated cost was $862 in Q3 and $2,460 year to date, versus $816 and $2,245, respectively, in 2017. Same-facility uninsured admissions rose 8.8% in Q3. Management identified patient collections and uninsured patient responsibility as collection risks.
- Texas Medicaid supplemental payments were $101 in Q3 and $296 year to date. CMS plans to phase out some federal matching funds under the Texas waiver; possible changes to supplemental-payment programs could reduce or eliminate payments, but HCA said the financial impact could not yet be estimated.
- Risks include substantial indebtedness and refinancing needs, reimbursement and regulatory changes, labor costs and staffing, payer mix and collections, competition, litigation and government investigations, tax disputes, cybersecurity incidents, and natural disasters. HCA disclosed ongoing general legal and regulatory exposure but no quantified resolution amount for these matters.
- HCA held $4,676 of variable-rate debt. A hypothetical 1% increase in rates was estimated to reduce annual pretax earnings by approximately $47. Net professional-liability reserves for retained self-insured risks were $1,459; expected net claim payments over the next 12 months were approximately $449.
Most important facts for investors to verify
- How much reported earnings growth reflects underlying operations versus Tax Act benefits, Oklahoma disposal gains, the professional-liability reserve adjustment, and prior-year hurricane and Medicaid impacts.
- Whether admission growth, revenue per equivalent admission, payer mix, and uninsured admissions sustain their trends—and how these affect collections and uncompensated-care costs.
- Progress on the $3.5 billion 2018 capital-spending expectation, the $3.9 billion project pipeline, acquisitions, and cash generation.
- Debt maturities, refinancing costs, variable-rate exposure, and continued availability of credit facilities and debt markets.
- Potential changes to Medicaid supplemental-payment programs, Tax Act provisional estimates, tax examinations, legal claims, and government investigations.