HCA Healthcare, Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2017; comparative figures are for 2016. HCA operates hospitals and related healthcare businesses. At quarter-end, affiliates operated 172 hospitals and 119 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 and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue, after provision for doubtful accounts | $10,733 | $10,319 | $21,356 | $20,579 |
| Provision for doubtful accounts | $1,073 | $762 | $1,833 | $1,552 |
| Net income attributable to HCA | $657 | $658 | $1,316 | $1,352 |
| Diluted EPS | $1.75 | $1.65 | $3.48 | $3.34 |
| Adjusted segment EBITDA (non-GAAP) | $2,090 | $2,052 | $4,095 | $4,055 |
- Q2 revenue rose 4.0% overall and 3.4% on a same-facility basis. Six-month revenue rose 3.8% overall and 3.3% same-facility.
- HCA-attributable net income margin was 6.1% in Q2 2017 versus 6.4% in Q2 2016, and 6.2% for the first six months versus 6.6% a year earlier.
- Operating cash flow was $2.684 billion for the first half, down from $2.748 billion. Investing activities used $1.591 billion; financing activities used $1.034 billion. Cash increased to $705 million from $646 million at year-end 2016.
- Capital expenditures, excluding acquisitions, were $1.304 billion in the first half. Management expected approximately $2.9 billion for 2017.
- At June 30, total debt was $31.661 billion, including $213 million due within one year; the reported average debt life was 7.3 years and average interest rate 5.4%. Interest expense was $411 million for Q2 and $830 million for the first half.
- Current assets were $9.337 billion and current liabilities $5.771 billion; management reported working capital of $3.566 billion. Credit-facility availability was $3.798 billion at June 30 and $2.567 billion at July 31.
Material changes versus the prior comparable period
- Q2 net income attributable to HCA was nearly flat year over year, while diluted EPS increased as diluted weighted-average shares fell to 375.3 million from 398.7 million, following substantial share repurchases.
- For the first half, HCA-attributable net income declined 2.7%, despite higher revenue; diluted EPS increased to $3.48 from $3.34.
- The doubtful-account provision rose $311 million in Q2 and $281 million in the first half. Combined charity care, uninsured discounts and doubtful-account provisions represented 34.8% of the relevant revenue base in Q2 (32.5% in 2016) and 34.1% for the half-year (32.3% in 2016). Management cited increased uninsured activity and related deductions.
- Q2 equivalent admissions increased 2.1% overall and 1.3% same-facility; revenue per equivalent admission rose 1.9% and 2.0%, respectively. Same-facility outpatient surgeries declined 1.2% in Q2.
- Q2 salaries and benefits rose to 45.6% of revenue from 45.5%; first-half ratio increased to 45.9% from 45.6%. Interest expense declined, reflecting a lower average effective rate, despite a higher average debt balance.
- First-half operating cash flow decreased by $64 million, which management attributed primarily to working-capital movements, partly offset by favorable income-tax changes.
Outlook, commentary and risks
- Management stated that operating cash flow, available credit facilities and anticipated debt-market access should meet expected liquidity needs over the next 12 months. No specific revenue or earnings guidance was provided in the filing.
- Projects under construction were estimated to require a further $3.3 billion to complete and equip over five years; management expected to fund capital spending with internally generated and borrowed funds.
- HCA issued $1.5 billion of 5.5% senior secured notes due 2047 in June 2017. Proceeds were for general corporate purposes, potentially including acquisitions and the planned third-quarter redemption of $500 million of 8.0% notes due 2018. Revolving-credit commitments were amended, including an increase in the asset-based facility to $3.75 billion and maturity extension to June 2022.
- Professional-liability net reserves for self-insured risks were $1.333 billion at June 30; expected net claim payments over the next 12 months were approximately $415 million. The filing notes litigation, regulatory and government-investigation exposure that could materially affect results, financial position or liquidity.
- Uninsured and patient-responsibility exposure is significant: the allowance for doubtful accounts was 99.3% of the $5.086 billion patient-due receivables balance. Eighty-four hospitals in Texas and Florida generated 55% of admissions and 47% of revenue in Q2; uninsured admissions in those states represented 69% of HCA’s uninsured admissions.
- Texas Medicaid supplemental payments included $95 million in Q2 and $201 million in the first half of 2017. The Texas waiver was extended through December 2017; the filing says extension, modification or reduction of this and other supplemental-payment programs remains uncertain.
- Other principal risks include substantial indebtedness and refinancing, changes to healthcare laws and government reimbursement, labor costs and staffing, payer mix and collections, competition, tax disputes, cybersecurity and foreign-currency movements. Management said the risk factors were not materially changed from the 2016 Form 10-K.
- Unusual items: 2017 included $2 million of Q2 facility-sale gains and $3 million for the first half; 2016 included $10 million of Q2 and $22 million of first-half legal claim costs related to Health Midwest litigation. Tax benefits from employee equity-award settlements were $9 million in Q2 and $76 million for the first half of 2017.
Important facts for investors to verify
- Whether the higher doubtful-account provision and uninsured deductions persist, and how they affect collections and net revenue.
- Changes in Texas and other states’ Medicaid supplemental-payment programs, including the Texas waiver after December 2017.
- Debt, refinancing and interest-rate exposure, including planned note redemption and actual credit availability.
- Execution and funding of the 2017 capital plan, acquisitions and projects under construction.
- Development of professional-liability claims, government investigations, litigation and tax examinations.
- Patient volumes and payer mix, particularly uninsured admissions and the performance of Texas, Florida and the U.K. operations.