HCA Healthcare, Inc. annual report, FY2018

HCA Healthcare, Inc. — 2018 Form 10-K

Reporting period: Fiscal year ended December 31, 2018; filed February 21, 2019. This is an annual filing, not a standalone fourth-quarter report. The filing also reports unaudited fourth-quarter results.

Business context

HCA operates hospitals and related healthcare businesses in the United States and England. At year-end it operated 179 hospitals (175 general acute care, three psychiatric and one rehabilitation) and 123 freestanding surgery centers, across 20 states and England. Its strategy emphasizes growth in existing markets, clinical quality, physician recruitment, outpatient services and selective acquisitions.

Financial and operating performance

Metric	2018	2017
Revenue	$46.677 billion	$43.614 billion
Income before income taxes	$5.335 billion	$4.381 billion
Net income attributable to HCA	$3.787 billion	$2.216 billion
Diluted earnings per share	$10.66	$5.95
Cash provided by operating activities	$6.761 billion	$5.426 billion
Capital expenditures	$3.573 billion	$3.015 billion
Total debt	$32.821 billion	$33.058 billion
Working capital	$2.644 billion	$3.819 billion

Revenue rose 7.0%; equivalent admissions grew 4.1% and revenue per equivalent admission rose 2.8%. Same-facility revenue increased 6.5%.
Adjusted segment EBITDA, a non-GAAP measure, increased to $8.949 billion from $8.233 billion. Salaries and benefits were 45.9% of revenue versus 46.0%; supplies were 16.5% versus 16.8%; and other operating expenses were 18.5% versus 18.4%.
HCA’s net income margin was 8.1% of revenue, compared with 5.1% in 2017; the increase reflects significant tax and facility-sale items described below. Income before taxes was 11.4% of revenue, compared with 10.0%.
Operating cash flow increased $1.335 billion year over year. Investing activities used $3.901 billion and financing activities used $3.075 billion. Year-end cash was $502 million.
Debt declined modestly, but HCA describes itself as highly leveraged. Interest expense rose to $1.755 billion from $1.690 billion; the average long-term debt interest rate was 5.3%. Stockholders’ deficit was $2.918 billion.
Year-end liquidity included $2.693 billion available under senior secured credit facilities, subject to facility terms and borrowing-base limitations. The company said operating cash flow, available facilities and expected market access should cover liquidity needs for the next 12 months.
Patient volumes increased: admissions 3.5%, inpatient surgeries 1.5% and outpatient surgeries 3.2% on a consolidated basis. Occupancy was 57%, unchanged from 2017.
Fourth-quarter 2018 revenue was $12.274 billion, net income was $1.245 billion, net income attributable to HCA was $1.064 billion, and diluted EPS was $3.01. Fourth-quarter 2017 comparatives were $11.562 billion, $641 million, $474 million and $1.30, respectively.

Material changes and unusual items

2018 attributable net income included a $428 million net gain on facility sales, primarily the sale of two Oklahoma hospitals; 2017 included $8 million of facility-sale gains. The Oklahoma sale generated $758 million of proceeds.
The 2018 tax provision included a $551 million reduction, or $1.55 per diluted share, related to the Tax Act; the 2017 provision included a $301 million tax expense from deferred-tax remeasurement. The reported effective tax rates were 20.0% in 2018 and 42.5% in 2017.
HCA recorded a $70 million reduction in its professional-liability provision in 2018 based on updated actuarial information. It also recorded approximately $31 million of hurricane Michael expenses and lost revenue, partly offset by a $49 million insurance recovery for 2017 hurricane Harvey business-interruption losses.
Uncompensated care increased to $26.757 billion from $23.420 billion; its estimated cost rose to $3.318 billion from $3.021 billion. Same-facility uninsured admissions increased 8.5%. Estimated implicit price concessions recorded against receivables were $6.280 billion, up from $5.488 billion.
HCA adopted the new revenue-recognition standard in 2018; it changed presentation of revenues and implicit price concessions but did not affect net revenue recognition for periods before adoption. HCA expected lease-standard adoption in 2019 to add about $1.6 billion of right-of-use assets and lease obligations.
In 2018 HCA issued $2.0 billion of senior notes and refinanced term loans; it used proceeds for general corporate purposes, including a hospital purchase, and to redeem $1.5 billion of notes. The year included $1.530 billion of share repurchases and $487 million of cash dividends.

Outlook, risks and contingencies

Management expected 2019 capital expenditures of approximately $3.7 billion; projects under construction were estimated to require a further $3.5 billion over five years. No quantified revenue or earnings guidance is provided in the filing.
HCA’s major exposures include substantial leverage and debt covenants, reimbursement and regulatory changes, payer negotiations, labor costs and staffing, competition and shifts to outpatient care, and collection risk on uninsured and patient-responsibility balances. Medicare and Medicaid accounted for 40.9% of 2018 revenue.
Geographic concentration is significant: 92 hospitals were in Florida and Texas, which together generated approximately 49% of consolidated revenue. Hurricanes and other local economic, regulatory or competitive changes could disproportionately affect results.
Health policy uncertainty includes the repeal of the federal individual-mandate penalty effective January 2019 and a December 2018 district-court ruling that the Affordable Care Act was unconstitutional; the law remained in effect pending appeal at filing.
The DOJ and U.S. Attorney’s Office for the Southern District of Texas requested information about whether the Texas Medicaid waiver program in Harris County complies with rules on provider-related donations. HCA said it was cooperating, believed its participation complied, and could not predict the outcome or its effect.
Other contingencies include routine litigation and government audits, professional-liability claims, and possible changes to supplemental Medicaid payments. The filing does not quantify a likely financial outcome for the Harris County inquiry.
Management reported effective disclosure controls and internal control over financial reporting; Ernst & Young issued unqualified opinions on the financial statements and internal controls.

Most important facts for investors to verify

How much of 2018 earnings growth was recurring, separating the Tax Act benefit, facility-sale gains and actuarial reserve adjustment from operating performance.
Whether volume growth and pricing can continue while labor, supply and other operating costs rise, and whether the increase in uncompensated care affects collections or margins.
Debt maturities, covenant headroom, borrowing-base availability and sensitivity to interest rates; also consider the planned capital program, acquisitions, dividends and buybacks together.
The status and potential financial implications of the Texas Medicaid waiver inquiry, Medicaid supplemental-payment reviews and healthcare-policy litigation.
Progress on 2019 capital spending and the six-hospital western North Carolina acquisition announced after year-end, including financing and integration effects.