HCA Healthcare, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results; amounts in dollars unless noted. HCA operated 184 hospitals and 125 freestanding surgery centers across 21 states and England.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $12.694B | $11.451B | $37.813B | $34.403B |
| Net income attributable to HCA | $612M | $759M | $2.434B | $2.723B |
| Diluted EPS | $1.76 | $2.15 | $6.98 | $7.65 |
| Adjusted segment EBITDA | $2.285B | $2.096B | $7.119B | $6.441B |
Q3 revenue increased 10.9% (6.3% same-facility); equivalent admissions rose 7.5% consolidated and 4.2% same-facility. Revenue per equivalent admission grew 3.1% and 2.0%, respectively. Q3 surgeries and emergency department visits also increased year over year. For the first nine months, revenue grew 9.9% and same-facility revenue 5.7%.
Profitability weakened despite revenue growth: Q3 income before taxes fell 8.4% to $979M, and HCA-attributable net income declined 19.3%. The reported Q3 net margin attributable to HCA was 4.8%, versus 6.6% a year earlier. Adjusted segment EBITDA, a non-GAAP measure, increased 9.0% in Q3; its revenue margin was approximately 18.0%, versus 18.3% (calculated from reported figures). Nine-month HCA-attributable net income declined 10.6%; results included a much smaller gain on facility sales than in 2018.
Q3 salaries and benefits were 47.0% of revenue versus 46.9%; supplies were 16.5% in both periods; other operating expenses were 18.5% versus 18.4%. Q3 salaries per equivalent admission rose 3.3%, and supply costs per equivalent admission rose 2.9%.
Cash flow, debt and liquidity
- Cash flow: Operating cash flow was $5.097B for the first nine months, up from $4.586B. Investing cash outflow was $4.375B, including $2.884B of capital expenditures and $1.592B for acquisitions. Financing cash outflow was $661M. Cash ended at $559M, up from $502M at year-end 2018. Q3 operating cash flow was $2.126B, versus $1.721B.
- Debt: Total debt was $34.245B at September 30, versus $32.821B at December 31, 2018; reported long-term debt net of issuance costs and discounts was $34.097B. Nine-month interest expense was $1.386B. In 2019 HCA issued $6.5B of notes, redeemed $4.95B of notes, and recorded a $211M pretax debt-retirement loss. The average debt interest rate was 5.4% for the first nine months.
- Liquidity: Working capital was $3.645B, compared with $2.644B at year-end 2018. The company reported $2.708B available under senior secured credit facilities at September 30 ($2.978B at October 31). Management said operating cash flow, credit availability and expected debt-market access would meet anticipated liquidity needs over the next 12 months.
- Capital spending: 2019 capital expenditures, excluding acquisitions, were expected to approximate $3.8B. Projects under construction had approximately $3.2B of estimated remaining costs over five years.
Material changes, outlook and risks
- HCA acquired a seven-hospital North Carolina health system for $1.399B, plus $193M for other healthcare entities, during the first nine months. Acquisition spending and capital expenditures increased year over year.
- Uncompensated care increased: estimated cost was $975M in Q3 versus $862M and $2.747B for nine months versus $2.460B. Uncompensated care was 38.4% of revenue plus uncompensated care in Q3, up from 37.2%. The filing reports rising uninsured admissions and identifies Texas and Florida as significant markets.
- Texas Medicaid supplemental payments were $103M in Q3 and $317M for nine months. State and federal reviews or changes to supplemental payment programs could reduce or eliminate payments; HCA said the financial impact could not yet be estimated.
- A qui tam lawsuit alleges violations concerning Texas Medicaid funding in Harris County. Federal and state governments declined to intervene; HCA said it is vigorously defending the case and cannot predict its effect. The filing also describes potential exposure from other litigation, government investigations, professional-liability claims and tax disputes.
- The IRS began examining HCA’s 2016 and 2017 federal tax returns. Unrecognized tax benefits totaled $540M at September 30; the company could not estimate the range of possible changes over the next 12 months.
- HCA cited substantial indebtedness, reimbursement and healthcare-policy changes, labor costs, payer mix and collectability, competition, litigation and regulatory matters, cybersecurity, and natural disasters among forward-looking risks. It gave no specific earnings or revenue guidance in the provided filing text. The board declared a $0.40-per-share dividend payable December 27, 2019, subject to stated conditions.
Important facts for investors to verify
- Whether volume growth and same-facility revenue gains continue to offset labor, supply and other cost pressures.
- The earnings impact of the $211M debt-retirement charge and the 2018 facility-sale gain when comparing periods.
- Progress on debt, refinancing capacity, interest exposure and planned capital expenditures.
- Trends in uninsured and uncompensated care, and any changes to Texas or other state Medicaid supplemental-payment programs.
- Developments in the Harris County qui tam case, other investigations and litigation, and IRS or other tax examinations.
- Management’s non-GAAP adjusted segment EBITDA reconciliation and the assumptions behind revenue estimates, contractual allowances and professional-liability reserves.