01—Abstract
Summary
Summary of the 10-K filed February 21, 2019. Cited figures are marked; the original filing is the authoritative source.
HCA Healthcare's 2018 10-K shows a company with strong earnings momentum and a heavily leveraged balance sheet.
Revenue rose 7.0% to $46.677 billiona, driven by a 2.8% increase in revenue per equivalent admission and a 4.1% increase in equivalent admissions. Net income attributable to HCA was $3.787 billion, or $10.66 per diluted share, up from $5.95 in 2017. That comparison is flattered by a $428 million gain on the sale of two Oklahoma hospitals (about $0.91 per share) and a $551 million tax benefit tied to the Tax Act (about $1.55 per share), so underlying growth is more modest than the headline suggests.
Cash generation was solid, with operating cash flow up 25% to $6.761 billionb. Capital expenditures rose to $3.573 billion, and the company spent $1.253 billion on acquisitions. Total debt was $32.821 billion at year-end, and the company reported a stockholders' deficit of $2.918 billion.
Management is returning cash to shareholders through a newly initiated quarterly dividend of $0.40c (declared January 2019), a $2 billion buyback authorization approved in January 2019, and $1.53 billion of share repurchases in 2018. Investors should weigh several risks. Uncompensated care rose to $26.757 billion, or 36.4% of revenue plus uncompensated care, and the Health Reform Law faces a court ruling that found the entire law unconstitutional, though it remains in place pending appeal.
About 49%d of revenue comes from Florida and Texas, and 40.9% comes from Medicare and Medicaid. A U.S. Department of Justice inquiry into Texas Medicaid supplemental programs is also pending. Against this, admissions grew 3.5%, same-facility revenue grew 6.5%, and the company's scale and payer contracting remain key strengths.
02—Key points
Key Highlights
- Revenue grew 7.0% to $46.677 billion in 2018, with a 2.8% rise in revenue per equivalent admission and a 4.1% rise in equivalent admissions.
- Net income attributable to HCA was $3.787 billion ($10.66 diluted EPS), versus $2.216 billion ($5.95) in 2017, but includes a $428 million gain on hospital sales (~$0.91/share) and a $551 million Tax Act-related tax benefit (~$1.55/share).
- Operating cash flow rose 25% to $6.761 billion; capital expenditures were $3.573 billion and 2019 planned capex is about $3.7 billion.
- Total debt was $32.821 billion at December 31, 2018, with a stockholders' deficit of $2.918 billion, reflecting a highly leveraged capital structure.
- Shareholder returns increased: a quarterly dividend of $0.40 was declared in January 2019 (first dividend program started in 2018), a new $2 billion buyback was authorized, and $1.53 billion was repurchased in 2018.
- Uncompensated care grew to $26.757 billion (36.4% of revenue plus uncompensated care), and a federal court in December 2018 found the Health Reform Law unconstitutional, though the law remains in effect pending appeal.
- Concentration risk: Florida and Texas account for about 49% of revenue, and Medicare and Medicaid together account for 40.9% of revenue.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 21, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $46.68B$43.61B | +7.0% |
| Operating Expenses | $41.34B$39.23B | +5.4% |
| Interest Expense | $1.75B$1.69B | +3.8% |
| Net Income | $3.79B$2.22B | +70.9% |
| EPS (Basic) | $10.90$6.12 | +78.1% |
| EPS (Diluted) | $10.66$5.95 | +79.2% |
| Shares Outstanding (Basic) | 347.30M362.31M | −4.1% |
| Shares Outstanding (Diluted) | 355.30M372.22M | −4.5% |
05—Questions
Frequently Asked Questions
How much of the 2018 earnings increase was driven by one-time items?
A substantial share. The $428 million gain on the sale of two Oklahoma hospitals contributed about $0.91 per diluted share, and a $551 million tax benefit related to the Tax Act contributed about $1.55 per share. Together these account for roughly $2.46 of the $4.71 year-over-year increase in diluted EPS. Excluding these items and the smaller hurricane and insurance adjustments, underlying earnings growth was considerably lower than the headline 79% increase.
Is HCA's balance sheet leverage a concern?
Yes, leverage is high. Total debt was $32.821 billion against EBITDA-type earnings that management defines as adjusted segment EBITDA of $8.949 billion, and the company has a stockholders' deficit of $2.918 billion. Interest expense was $1.755 billion, and the average interest rate on long-term debt was 5.3%. Management states it expects cash flows from operations and credit facilities to meet liquidity needs over the next twelve months, but the high debt load limits financial flexibility and increases sensitivity to adverse changes in reimbursement or economic conditions.
What regulatory and legal risks could affect future results?
Several. A December 2018 federal district court ruling declared the Health Reform Law unconstitutional, though it remains in effect pending appeal, which could affect the sizable share of revenue tied to Medicare, Medicaid, and the Exchanges. Medicaid supplemental payments in Texas are under federal scrutiny, with the DOJ and the U.S. Attorney's Office in the Southern District of Texas requesting information about the Harris County program. The company also faces ongoing risks from Medicare reimbursement reductions, site-neutral payment policies, value-based purchasing penalties, and the outcome of Medicare appeals backlogs.
How strong is the company's operating momentum excluding acquisitions and divestitures?
Same-facility metrics are solid. Same-facility revenue rose 6.5%, driven by a 3.9% increase in same-facility revenue per equivalent admission and a 2.5% increase in same-facility equivalent admissions. Same-facility admissions grew 2.5%, inpatient surgeries rose 0.8%, and outpatient surgeries rose 1.8%. Same-facility uninsured admissions increased 8.5%, which signals rising pressure on collections and uncompensated care even as volumes grow.
What is management's capital allocation plan?
Management is pursuing a balanced approach. Planned 2019 capital expenditures are about $3.7 billion, and the company completed $1.253 billion of acquisitions in 2018 and issued $1.5 billion of senior notes in January 2019 to fund the purchase of a six-hospital system in North Carolina. It returned capital through $1.53 billion of buybacks and $487 million of dividends paid in 2018, initiated a $0.40 quarterly dividend in 2019, and authorized a new $2 billion repurchase program. Future dividends and buybacks remain subject to board discretion and debt covenant restrictions.
06—Continue