Business context and reporting period
HCA Healthcare, Inc.’s Form 10-K covers the fiscal year ended December 31, 2017. Although the request references 2017 Q4, this is an annual filing; selected fourth-quarter results are also included below. HCA operates hospitals and related outpatient services in 20 U.S. states and England. At year-end it reported 179 hospitals and 120 freestanding surgery centers.
Financial and operating performance
Amounts are in U.S. dollars; financial figures are in billions unless otherwise stated.
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue, net of doubtful accounts | $43.614 | $41.490 | +5.1% |
| Income before income taxes | $4.381 | $4.810 | -8.9% |
| Net income attributable to HCA | $2.216 | $2.890 | -23.3% |
| Diluted EPS | $5.95 | $7.30 | -18.5% |
| Cash from operating activities | $5.426 | $5.653 | -$0.227 |
| Capital expenditures | $3.015 | $2.760 | +$0.255 |
| Total debt | $33.058 | $31.376 | +$1.682 |
Adjusted segment EBITDA, a non-GAAP measure, was $8.233 billion versus $8.218 billion. Its margin on reported revenue was approximately 18.9%, compared with 19.8% in 2016. Net income attributable to HCA as a share of revenue was 5.1%, versus 7.0%. Interest expense was $1.690 billion, down $17 million; average long-term debt interest rate declined to 5.3% from 5.5%.
Operating volume grew: equivalent admissions rose 3.0% consolidated and 1.5% same-facility; same-facility revenue increased 3.8%. Occupancy was 57%, down from 58%. The company reported $732 million cash, $3.819 billion working capital and $2.047 billion available under senior secured credit facilities at year-end. Approximately $5.072 billion of long-term debt bore variable rates; management estimated a 1-percentage-point rate increase could reduce annual pretax earnings by about $51 million. Operating cash flow less capital expenditures was approximately $2.411 billion, a simple derived measure, not a company-defined metric.
Fourth-quarter 2017 revenue was $11.562 billion, compared with $10.641 billion in Q4 2016. Net income attributable to HCA was $474 million versus $920 million, and diluted EPS was $1.30 versus $2.39.
Material changes and unusual items
- Revenue growth reflected a 2.1% increase in revenue per equivalent admission and a 3.0% increase in equivalent admissions. However, doubtful-account provision rose to $4.039 billion from $3.257 billion, and combined charity care, uninsured discounts and doubtful-account provision increased to $23.420 billion from $20.455 billion.
- Uncompensated-care deductions were 34.9% of revenue plus those deductions, versus 33.0% in 2016. The allowance covered 100% of $5.488 billion in patient-due receivables at year-end.
- Hurricanes Harvey and Irma caused an estimated $140 million of additional expenses and lost revenue before potential insurance recoveries.
- The Tax Act caused a $301 million increase in tax expense from remeasurement of deferred tax balances; the company recorded provisional estimates and said the accounting was incomplete. The reported effective tax rate was 42.5%; excluding specified tax adjustments, management calculated 37.2%.
- 2016 earnings included a $246 million legal-claim benefit related to the Health Midwest litigation and tax benefits that did not recur on the same basis in 2017.
- HCA acquired eight hospitals and other healthcare entities in 2017, spending $1.212 billion in total. Share repurchases totaled $2.051 billion; 25.092 million shares were repurchased during the year.
Outlook, risks and contingencies
Management expected 2018 capital expenditures of approximately $3.5 billion and reported about $3.1 billion of remaining costs for projects under construction over the following five years. It stated that operating cash flows, credit-facility availability and anticipated debt-market access should meet expected liquidity needs for the next 12 months. The filing provides no specific numerical 2018 revenue or earnings guidance. HCA initiated a quarterly dividend of $0.35 per share in January 2018, subject to board decisions, capital needs and debt-agreement restrictions.
Key risks include substantial leverage and debt covenants; exposure to variable interest rates; rising uninsured and patient-responsibility balances; payer reimbursement and regulatory changes; labor costs and staffing; competition and value-based payment programs; and legal, billing, compliance and professional-liability matters. Florida and Texas accounted for 48% of consolidated revenue, creating geographic and hurricane concentration. HCA reported that CMS would phase down Texas waiver-related DSRIP funding, with none expected beginning October 1, 2021; the longer-term effect on uncompensated-care payments was unclear. The filing describes government inquiries and potential investigations but does not identify a specific investigation as material. Professional-liability reserves were $1.627 billion gross and $1.603 billion net of reinsurance at year-end; actual claims may differ from estimates.
Most important facts for investors to verify
- Whether revenue growth can offset the rising burden of charity care, uninsured discounts and doubtful accounts, and whether patient collections improve.
- How much of the 2017 earnings decline reflects nonrecurring hurricane and Tax Act effects versus underlying operating costs and margins.
- Debt maturities, covenant headroom, revolving-credit availability and sensitivity to interest-rate increases as borrowings and planned investment continue.
- The eventual Texas Medicaid waiver funding and uncompensated-care impact, along with other state supplemental-payment changes.
- Actual 2018 capital spending, acquisition returns, dividend sustainability and insurance recoveries for hurricane losses.