HCA Healthcare, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter ended March 31, 2018, compared with Q1 2017. HCA operates hospitals and related healthcare entities; at quarter-end, affiliates operated 178 hospitals and 120 freestanding surgery centers across 20 states and England.
Financial and operating highlights
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $11.423 billion | $10.623 billion |
| Income before income taxes | $1.539 billion | $1.066 billion |
| Net income attributable to HCA | $1.144 billion | $659 million |
| Diluted earnings per share | $3.18 | $1.74 |
| Adjusted segment EBITDA | $2.118 billion | $2.005 billion |
| Cash provided by operations | $1.300 billion | $1.280 billion |
Revenue grew 7.5% overall and 5.8% on a same-facility basis. Consolidated equivalent admissions increased 4.6%, while revenue per equivalent admission rose 2.9%. Same-facility equivalent admissions grew 1.8% and revenue per equivalent admission rose 3.9%. Admissions, emergency visits and surgeries increased 4.6%, 6.4% and 2.3%, respectively, on a consolidated basis; same-facility surgeries declined 0.2% overall.
Q1 2018 net income included $405 million of gains on facility sales, or $0.85 per diluted share, primarily from selling two Oklahoma hospitals. The effective tax rate was 18.4%, versus 30.4%; the reduction primarily reflected the Tax Act, including a reported $0.20 per diluted share benefit from estimated tax-rate changes. Both periods also included tax benefits from employee equity-award settlements: $92 million in 2018 and $67 million in 2017. Reported attributable net income margin was 10.0%, compared with 6.2%.
Cash, debt and liquidity
- Cash and cash equivalents were $1.086 billion at March 31, up from $732 million at year-end. Working capital was $2.913 billion, down $906 million, primarily reflecting a $1.497 billion increase in debt due within one year, partly offset by higher cash.
- Total debt was $33.291 billion, including $1.697 billion due within one year; average debt balance was $33.140 billion. Average effective debt interest rate was 5.3%, down from 5.4%. Debt carrying values and fair values are not identical; estimated fair value was $34.084 billion.
- Cash used in investing was $335 million, including $694 million of capital expenditures and $379 million of acquisitions, partly offset by $767 million of facility-sale proceeds. Financing used $611 million, including $423 million of share repurchases, $123 million of dividends and $92 million of distributions to noncontrolling interests.
- Available capacity under senior secured credit facilities was $1.777 billion at March 31. Management said operating cash flow, available facility capacity and anticipated debt-market access should meet expected liquidity needs for the next 12 months.
Changes, outlook and material risks
- Revenue growth was supported by increased volume and revenue per equivalent admission. However, salaries and benefits rose to 46.3% of revenue from 46.1%, and other operating expenses rose to 18.5% from 18.2%; supplies declined slightly as a share of revenue, to 16.8% from 16.9%.
- Uncompensated care costs were estimated at $775 million, up from $682 million. Same-facility uninsured admissions rose 10.1%. HCA expanded its charity-care eligibility in November 2017; reported charity care increased to $1.879 billion from $1.086 billion.
- Expected 2018 capital expenditures, excluding acquisitions, were approximately $3.5 billion. Projects under construction were expected to require about $3.6 billion more over five years.
- HCA refinanced portions of existing term loans through new facilities totaling approximately $2.666 billion, with maturities in 2025 and 2023 and lower stated applicable margins than the refinanced loans.
- Key exposures include substantial indebtedness and refinancing needs; changes to Medicare, Medicaid and other healthcare policy; payer mix and collection risk; labor costs and staffing; regulation, litigation and government investigations; and tax uncertainty. Texas Medicaid supplemental payments were $98 million, versus $106 million a year earlier; federal matching funds for certain state programs may be phased out, and the impact of potential program changes was not yet estimable.
- About $5.324 billion of debt was variable-rate. HCA estimated that a hypothetical 1% rate increase could reduce annual pretax earnings by approximately $53 million. Expected net professional-liability claim payments over the next 12 months were approximately $434 million, including about $394 million related to self-insured retentions.
- Tax Act accounting remained provisional; subsequent adjustments could materially affect tax expense and the effective tax rate. HCA disclosed ongoing legal, regulatory and tax matters that could adversely affect results, financial position or liquidity, but did not provide a clear quantified range for potential outcomes. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of Q1 earnings growth is sustainable after excluding the $405 million facility-sale gains and tax-related benefits.
- Progress on volume, same-facility revenue, labor and other operating costs, and the increase in uninsured admissions and uncompensated care.
- Debt maturities and refinancing plans, facility availability, variable-rate exposure, and the effect of planned capital spending on liquidity.
- Whether Texas and other state supplemental-payment programs are reduced or restructured, and the resulting reimbursement impact.
- Final Tax Act accounting and developments in legal, regulatory, tax and professional-liability matters.
- HCA adopted the new revenue-recognition standard on January 1, 2018 using the full retrospective method; the filing says adoption did not affect net revenue for periods before adoption but changed presentation.