After strong 2018, HCA projects tail wind from Mission deal

HCA Healthcare breezed past most analysts' expectations in the fourth quarter of 2018, and the investor-owned hospital chain expects its likely acquisition of Mission Health at the end of the month will deliver an additional boost in 2019.

"This system will add to the already strong portfolio of markets that we have inside of HCA Healthcare," Sam Hazen, who recently took over as HCA's CEO, said on the company's Tuesday morning earnings call.

Nashville-based HCA posted $1 billion in net income in the quarter, which ended Dec. 31, 2018, beating expectations and exceeding its fourth quarter 2017 net income by 124.5%. The company generated $3.8 billion in net income in all of 2018, up considerably from $2.2 billion in 2017.

HCA's strong finish in 2018 didn't come as a surprise, and some analysts said they were more eager to learn about the company's 2019 guidance, which accounts for its pending acquisition of Asheville, N.C.-based Mission. HCA overcame a significant regulatory hurdle on Jan. 16, when North Carolina's attorney general OK'd its purchase of the six-hospital, not-for-profit system. The deal still needs approval from the Federal Trade Commission.

In 2019, HCA expects revenue of $50.5 billion to $51.5 billion, adjusted earnings before interest, taxes, depreciation and amortization of $9.35 billion to $9.75 billion and diluted earnings per share between $9.60 and $10.20.

HCA's CFO, Bill Rutherford, said on the company's earnings call that the company projects about 3 percentage points of its anticipated earnings growth in 2019 will come from acquisitions, with 2 percentage points coming from deals that closed in 2017 and 2018, and the rest from Mission. Another 5 percentage points are expected to come from same-facility growth, which is based on projected expected demand, capital investments and strategy execution, he said.

"We think all of that is reflected in our 2019 guidance," he said.

HCA hit or surpassed all of the metrics in its full-year 2018 guidance. The company's revenue totaled $46.7 billion in the year, up 7% from $43.6 billion in 2017 and in line with its guidance. The company's adjusted EBITDA was $8.95 billion, up nearly 9% from 2017 and just edging out the upper end of its estimate of $8.9 billion. HCA easily beat its diluted earnings per share guidance, which rounded out 2018 at $10.66. The upper end of its guidance was $9.45 per diluted share.

HCA's earnings per share in 2018 beat predictions from analysts with Zacks Investment Research, which pegged it at $9.35. HCA also beat Zacks' predictions on revenue.

HCA Healthcare drew $12.3 billion in revenue during the fourth quarter of 2018, up 6.2% from the same period in 2017, in which revenue totaled $11.6 billion. Adjusted EBITDA was $2.5 billion in the quarter, up 6.2% year-over-year.

Same-facility-equivalent admissions and same-facility admissions both increased 1.9% in the fourth quarter of 2018, which Hazen said marks HCA's 19th consecutive quarter of same-facility inpatient admissions growth. Same-facility revenue per equivalent admission increased 4.4%.

On the flipside, same-facility emergency room visits were down 2.1% in the quarter year-over-year. On the call, Rutherford added the caveat that all declines were among lower acuity visits, while higher acuity visits increased year over year.

Same-facility inpatient surgeries increased 0.1% during the quarter, while same-facility outpatient surgeries increased 0.8%.

HCA projects spending $3.7 billion on capital projects in 2019, which Hazen said is consistent with the prior two years. The main goals will be to add capacity in high-utilization facilities, such as critical-care beds and operating room suites, Hazen said. HCA finished 2018 with about 72% occupancy in its hospital beds, which Hazen said was "over and above" its 2017 rate.

HCA also plans to direct its capital spending toward adding outpatient capabilities, including surgery centers, clinics and diagnostic centers. Hazen added such projects are "small dollar" and don't consume a huge proportion of the budget. Finally, HCA plans to add clinical technology, Hazen said.

"We think the combination of all of those are helping us respond to the marketplace and drive market share growth," he said.

HCA recorded a $551 million tax benefit from the Tax Cuts and Jobs Act in 2018, including $484 million in savings from its lower corporate tax rate. That's compared with 2017, when HCA saw a $301 million increase in its income tax bill as a result of the new tax law.

HCA estimates it lost $31 million in the fourth quarter of 2018 as a result of the damage from Hurricane Michael in the Florida Panhandle, prior to insurance recoveries. That was offset by a $49 million insurance recovery HCA recorded during the quarter related to 2017's Hurricane Harvey.

As of Dec. 31, HCA operated 179 hospitals and 1,800 sites of care, including surgery centers and free-standing emergency rooms in 20 states and the United Kingdom.

Hazen told listeners on Tuesday's earnings call that HCA will likely see more acquisition activity in 2019, although it's an open question whether future deals will be the same "market makers" as Mission or HCA's acquisition of Memorial Health in Savannah, Ga.

"My sense is that there is a need to be a part of something bigger," he said. "There is a need to be able to leverage learning across an organization. There is a need to have diversification, and HCA brings all three of those to many different systems."