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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

Or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     

Commission file number 1-11239

 

 

HCA Healthcare, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   27-3865930

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One Park Plaza

Nashville, Tennessee

  37203
(Address of principal executive offices)   (Zip Code)

(615) 344-9551

(Registrant’s telephone number, including area code)

HCA Holdings, Inc.

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

☐  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

Emerging growth company

 

    

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

 

Class of Common Stock

  

Outstanding at April 30, 2017

Voting common stock, $.01 par value

   366,904,600 shares

 

 

 


Table of Contents

HCA HEALTHCARE, INC.

Form 10-Q

March 31, 2017

 

         Page of
Form 10-Q
 

Part I.

  Financial Information   

Item 1.

  Financial Statements (Unaudited):   
 

Condensed Consolidated Income Statements — for the quarters ended March 31, 2017 and 2016

     2  
 

Condensed Consolidated Comprehensive Income Statements — for the quarters ended March 31, 2017 and 2016

     3  
 

Condensed Consolidated Balance Sheets — March 31, 2017 and December 31, 2016

     4  
 

Condensed Consolidated Statements of Cash Flows — for the quarters ended March 31, 2017 and 2016

     5  
 

Notes to Condensed Consolidated Financial Statements

     6  

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     24  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     37  

Item 4.

 

Controls and Procedures

     37  

Part II.

  Other Information   

Item 1.

 

Legal Proceedings

     37  

Item 1A.

 

Risk Factors

     37  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     38  

Item 6.

 

Exhibits

     39  

Signatures

     40  

 

1


Table of Contents

HCA HEALTHCARE, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS

FOR THE QUARTERS ENDED MARCH 31, 2017 AND 2016

Unaudited

(Dollars in millions, except per share amounts)

 

     2017     2016  

Revenues before provision for doubtful accounts

   $ 11,383     $ 11,050  

Provision for doubtful accounts

     760       790  
  

 

 

   

 

 

 

Revenues

     10,623       10,260  

Salaries and benefits

     4,901       4,702  

Supplies

     1,797       1,714  

Other operating expenses

     1,930       1,853  

Equity in earnings of affiliates

     (10     (12

Depreciation and amortization

     521       479  

Interest expense

     419       416  

Losses (gains) on sales of facilities

     (1     1  

Legal claim costs

           12  
  

 

 

   

 

 

 
     9,557       9,165  
  

 

 

   

 

 

 

Income before income taxes

     1,066       1,095  

Provision for income taxes

     289       284  
  

 

 

   

 

 

 

Net income

     777       811  

Net income attributable to noncontrolling interests

     118       117  
  

 

 

   

 

 

 

Net income attributable to HCA Healthcare, Inc.

   $ 659     $ 694  
  

 

 

   

 

 

 

Per share data:

    

Basic earnings per share

   $ 1.78     $ 1.75  

Diluted earnings per share

   $ 1.74     $ 1.69  

Shares used in earnings per share calculations (in millions):

    

Basic

     370.289       396.397  

Diluted

     379.980       410.575  

 

 

See accompanying notes.

 

2


Table of Contents

HCA HEALTHCARE, INC.

CONDENSED CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS

FOR THE QUARTERS ENDED MARCH 31, 2017 AND 2016

Unaudited

(Dollars in millions)

 

     2017      2016  

Net income

   $ 777      $ 811  

Other comprehensive income (loss) before taxes:

     

Foreign currency translation

     10        (43

Unrealized gains on available-for-sale securities

     3        2  

Defined benefit plans

             

Pension costs included in salaries and benefits

     5        4  
  

 

 

    

 

 

 
     5        4  

Change in fair value of derivative financial instruments

     3        (38

Interest costs included in interest expense

     7        28  
  

 

 

    

 

 

 
     10        (10
  

 

 

    

 

 

 

Other comprehensive income (loss) before taxes

     28        (47

Income taxes (benefits) related to other comprehensive income items

     10        (18
  

 

 

    

 

 

 

Other comprehensive income (loss)

     18        (29
  

 

 

    

 

 

 

Comprehensive income

     795        782  

Comprehensive income attributable to noncontrolling interests

     118        117  
  

 

 

    

 

 

 

Comprehensive income attributable to HCA Healthcare, Inc.

   $ 677      $ 665  
  

 

 

    

 

 

 

 

 

 

See accompanying notes.

 

3


Table of Contents

HCA HEALTHCARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

(Dollars in millions)

 

     March 31,
2017
    December 31,
2016
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 753     $ 646  

Accounts receivable, less allowance for doubtful accounts of $4,880 and $4,988

     5,664       5,826  

Inventories

     1,501       1,503  

Other

     1,119       1,111  
  

 

 

   

 

 

 
     9,037       9,086  

Property and equipment, at cost

     37,588       37,055  

Accumulated depreciation

     (21,126     (20,703
  

 

 

   

 

 

 
     16,462       16,352  

Investments of insurance subsidiaries

     349       336  

Investments in and advances to affiliates

     194       206  

Goodwill and other intangible assets

     6,754       6,704  

Other

     999       1,074  
  

 

 

   

 

 

 
   $ 33,795     $ 33,758  
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ DEFICIT     

Current liabilities:

    

Accounts payable

   $ 2,233     $ 2,318  

Accrued salaries

     1,150       1,265  

Other accrued expenses

     1,868       2,035  

Long-term debt due within one year

     212       216  
  

 

 

   

 

 

 
     5,463       5,834  

Long-term debt, less net debt issuance costs of $165 and $170

     31,302       31,160  

Professional liability risks

     1,134       1,148  

Income taxes and other liabilities

     1,253       1,249  

Stockholders’ deficit:

    

Common stock $0.01 par; authorized 1,800,000,000 shares; outstanding 368,694,700 shares in 2017 and 370,535,900 shares in 2016

     4       4  

Accumulated other comprehensive loss

     (320     (338

Retained deficit

     (6,701     (6,968
  

 

 

   

 

 

 

Stockholders’ deficit attributable to HCA Healthcare, Inc.

     (7,017     (7,302

Noncontrolling interests

     1,660       1,669  
  

 

 

   

 

 

 
     (5,357     (5,633
  

 

 

   

 

 

 
   $ 33,795     $ 33,758  
  

 

 

   

 

 

 

 

See accompanying notes.

 

4


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HCA HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE QUARTERS ENDED MARCH 31, 2017 AND 2016

Unaudited

(Dollars in millions)

 

     2017     2016  

Cash flows from operating activities:

    

Net income

   $ 777     $ 811  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Increase (decrease) in cash from operating assets and liabilities:

    

Accounts receivable

     (592     (789

Provision for doubtful accounts

     760       790  
  

 

 

   

 

 

 

Accounts receivable, net

     168       1  

Inventories and other assets

     3       14  

Accounts payable and accrued expenses

     (591     (371

Depreciation and amortization

     521       479  

Income taxes

     292       360  

Losses (gains) on sales of facilities

     (1     1  

Legal claim costs

           12  

Amortization of debt issuance costs

     8       10  

Share-based compensation

     73       65  

Other

     30       17  
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,280       1,399  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of property and equipment

     (571     (509

Acquisition of hospitals and health care entities

     (90     (9

Disposal of hospitals and health care entities

     4       4  

Change in investments

     (19     11  

Other

     7       7  
  

 

 

   

 

 

 

Net cash used in investing activities

     (669     (496
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Issuances of long-term debt

           3,000  

Net change in revolving bank credit facilities

     160       (930

Repayment of long-term debt

     (43     (2,011

Distributions to noncontrolling interests

     (145     (111

Payment of debt issuance costs

     (2     (22

Repurchases of common stock

     (424     (621

Other

     (50     (97
  

 

 

   

 

 

 

Net cash used in financing activities

     (504     (792
  

 

 

   

 

 

 

Change in cash and cash equivalents

     107       111  

Cash and cash equivalents at beginning of period

     646       741  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 753     $ 852  
  

 

 

   

 

 

 

Interest payments

   $ 540     $ 490  

Income tax refunds, net

   $ (3   $ (76

See accompanying notes.

 

5


Table of Contents

HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Reporting Entity

HCA Healthcare, Inc. (formerly known as HCA Holdings, Inc.) is a holding company whose affiliates own and operate hospitals and related health care entities. The term “affiliates” includes direct and indirect subsidiaries of HCA Healthcare, Inc. and partnerships and joint ventures in which such subsidiaries are partners. At March 31, 2017, these affiliates owned and operated 171 hospitals, 118 freestanding surgery centers and provided extensive outpatient and ancillary services. HCA Healthcare, Inc.’s facilities are located in 20 states and England. The terms “Company,” “HCA,” “we,” “our” or “us,” as used herein and unless otherwise stated or indicated by context, refer to HCA Healthcare, Inc. and its affiliates. The terms “facilities” or “hospitals” refer to entities owned and operated by affiliates of HCA and the term “employees” refers to employees of affiliates of HCA.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal and recurring nature.

The majority of our expenses are “costs of revenues” items. Costs that could be classified as general and administrative would include our corporate office costs, which were $90 million and $85 million for the quarters ended March 31, 2017 and 2016, respectively. Operating results for the quarter ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. For further information, refer to the consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2016.

 

6


Table of Contents

HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Revenues

Revenues are recorded during the period the health care services are provided, based upon the estimated amounts due from the patients and third-party payers. Third-party payers include federal and state agencies (under the Medicare and Medicaid programs), managed care health plans and commercial insurance companies (including plans offered through the health insurance exchanges), and employers. Estimates of contractual allowances under managed care health plans are based upon the payment terms specified in the related contractual agreements. Revenues related to uninsured patients and uninsured copayment and deductible amounts for patients who have health care coverage may have discounts applied (uninsured discounts and contractual discounts). We also record a provision for doubtful accounts (based primarily on historical collection experience) related to uninsured accounts to record net self pay revenues at the estimated amounts we expect to collect. Our revenues from third party payers, the uninsured and other for the quarters ended March 31, 2017 and 2016 are summarized in the following table (dollars in millions):

 

     2017      Ratio     2016      Ratio  

Medicare

   $ 2,405        22.6   $ 2,266        22.1

Managed Medicare

     1,203        11.3       1,104        10.8  

Medicaid

     373        3.5       427        4.2  

Managed Medicaid

     641        6.0       597        5.8  

Managed care and other insurers

     5,926        55.8       5,702        55.6  

International (managed care and other insurers)

     269        2.5       317        3.1  
  

 

 

    

 

 

   

 

 

    

 

 

 
     10,817        101.7       10,413        101.6  

Uninsured

     225        2.1       189        1.8  

Other

     341        3.2       448        4.4  
  

 

 

    

 

 

   

 

 

    

 

 

 

Revenues before provision for doubtful accounts

     11,383        107.0       11,050        107.8  

Provision for doubtful accounts

     (760      (7.0     (790      (7.8
  

 

 

    

 

 

   

 

 

    

 

 

 

Revenues

   $ 10,623        100.0   $ 10,260        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Recent Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board issued a final, converged, principles-based standard on revenue recognition. Companies across all industries will use a five-step model to recognize revenue from customer contracts. The new standard, which replaces nearly all existing revenue recognition guidance, will require significant management judgments and change the way many companies recognize revenue in their financial statements. In July 2015, the FASB decided to defer the effective date of the new revenue standard by one year to annual and interim periods beginning after December 15, 2017 for public entities and permit entities to adopt one year earlier if they choose. The FASB decided, based on its outreach to various stakeholders and continuing amendments to the new revenue standard, that a deferral was necessary to provide adequate time to effectively implement the new standard. We are continuing to evaluate the effects the adoption of this standard will have on our financial statements and financial disclosures. We believe the most significant impact will be to the presentation of our income statement where the provision for doubtful accounts will be recorded as a direct reduction to revenues and will not be presented as a separate line item. We expect to adopt the new standard using the full retrospective application, and we do not believe the adoption will have a significant impact on our recognition of net revenues for any period.

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (“ASU 2016-02”), which requires lessees to recognize assets and liabilities for most leases. ASU 2016-02 is effective for public business

 

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Table of Contents

HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Pronouncements (continued)

 

entities for annual and interim periods beginning after December 15, 2018 (calendar year 2019). Early adoption is permitted. ASU 2016-02’s transition provisions will be applied using a modified retrospective approach at the beginning of the earliest comparative period presented in the financial statements. We are currently evaluating the provisions of ASU 2016-02 to determine how our financial statements will be affected, and we believe the primary effect of adopting the new standard will be to record right-of-use assets and obligations for current operating leases.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). The new guidance eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on the current Step 1). ASU 2017-04 is effective for annual and any interim impairment tests for periods beginning after December 15, 2019. We elected to early adopt ASU 2017-04 effective January 1, 2017. The adoption of ASU 2017-04 will only impact our financial statements in situations where an impairment of a reporting unit’s assets is determined.

In March 2017, the FASB issued ASU 2017-07, Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). The new guidance requires employers that sponsor defined benefit plans to present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. The guidance is effective for annual periods beginning after December 15, 2017. We elected to early adopt ASU 2017-07 effective January 1, 2017, and the adoption did not have a significant impact on our financial statements.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

NOTE 2 — ACQUISITIONS AND DISPOSITIONS

During the quarters ended March 31, 2017 and 2016, we paid $90 million and $9 million, respectively, to acquire other nonhospital health care entities. During the quarter ended March 31, 2017, we received proceeds of $4 million and recognized a net pretax gain of $1 million related to sales of real estate and other investments. During the quarter ended March 31, 2016, we received proceeds of $4 million and recognized a net pretax loss of $1 million related to sales of real estate and other investments.

During the April 1, 2017 through May 9, 2017 period, we entered into agreements to purchase six hospitals for an aggregate purchase price of approximately $950 million. Subject to regulatory reviews, the transactions are currently expected to close during the second and third quarters of 2017. We intend to fund the purchases through amounts available under our revolving credit facility or anticipated access to debt markets.

NOTE 3 — INCOME TAXES

Our liability for unrecognized tax benefits was $405 million, including accrued interest of $42 million, as of March 31, 2017 ($418 million and $45 million, respectively, as of December 31, 2016). Unrecognized tax benefits of $134 million ($137 million as of December 31, 2016) would affect the effective rate, if recognized.

Our provision for income taxes for the quarters ended March 31, 2017 and 2016 included tax benefits of $67 million and $74 million, respectively, related to the settlement of employee equity awards resulting in the

 

8


Table of Contents

HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3 — INCOME TAXES (continued)

 

recognition of excess tax benefits (when the deductible amount related to the settlement of employee equity awards for tax purposes exceeds the cumulative compensation cost recognized for financial reporting purposes).

We are subject to examination by federal, state and foreign taxing authorities. Depending on the resolution of any federal, state and foreign tax disputes, the completion of examinations by federal, state or foreign taxing authorities, or the expiration of statutes of limitation for specific taxing jurisdictions, we believe it is reasonably possible that our liability for unrecognized tax benefits may significantly increase or decrease within the next 12 months. However, we are currently unable to estimate the range of any possible change.

NOTE 4 — EARNINGS PER SHARE

We compute basic earnings per share using the weighted average number of common shares outstanding. We compute diluted earnings per share using the weighted average number of common shares outstanding, plus the dilutive effect of outstanding equity awards and potential shares, computed using the treasury stock method.

The following table sets forth the computation of basic and diluted earnings per share for the quarters ended March 31, 2017 and 2016 (dollars and shares in millions, except per share amounts):

 

     2017      2016  

Net income attributable to HCA Healthcare, Inc.

   $ 659      $ 694  

Weighted average common shares outstanding

     370.289        396.397  

Effect of dilutive incremental shares

     9.691        14.178  
  

 

 

    

 

 

 

Shares used for diluted earnings per share

     379.980        410.575  
  

 

 

    

 

 

 

Earnings per share:

     

Basic earnings per share

   $ 1.78      $ 1.75  

Diluted earnings per share

   $ 1.74      $ 1.69  

NOTE 5 — INVESTMENTS OF INSURANCE SUBSIDIARIES

A summary of our insurance subsidiaries’ investments at March 31, 2017 and December 31, 2016 follows (dollars in millions):

 

     March 31, 2017  
     Amortized
Cost
     Unrealized
Amounts
     Fair
Value
 
        Gains      Losses     

Debt securities:

           

States and municipalities

   $ 355        $11        $—      $ 366  

Money market funds

     29                      29  
  

 

 

    

 

 

    

 

 

    

 

 

 
     384        11               395  

Equity securities

     1        3               4  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 385        $14        $—        399  
  

 

 

    

 

 

    

 

 

    

Amounts classified as current assets

              (50
           

 

 

 

Investment carrying value

            $ 349  
           

 

 

 

 

9


Table of Contents

HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 5 — INVESTMENTS OF INSURANCE SUBSIDIARIES (continued)

 

     December 31, 2016  
     Amortized
Cost
     Unrealized
Amounts
     Fair
Value
 
        Gains      Losses     

Debt securities:

           

States and municipalities

   $ 345        $9        $(1    $ 353  

Money market funds

     28                      28  
  

 

 

    

 

 

    

 

 

    

 

 

 
     373        9        (1      381  

Equity securities

     1        3               4  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 374        $12        $(1      385  
  

 

 

    

 

 

    

 

 

    

Amounts classified as current assets

              (49
           

 

 

 

Investment carrying value

            $ 336  
           

 

 

 

At March 31, 2017 and December 31, 2016, the investments of our insurance subsidiaries were classified as “available-for-sale.” Changes in temporary unrealized gains and losses are recorded as adjustments to other comprehensive income (loss).

Scheduled maturities of investments in debt securities at March 31, 2017 were as follows (dollars in millions):

 

     Amortized
Cost
     Fair
Value
 

Due in one year or less

   $ 98      $ 98  

Due after one year through five years

     78        81  

Due after five years through ten years

     164        172  

Due after ten years

     44        44  
  

 

 

    

 

 

 
   $ 384      $ 395  
  

 

 

    

 

 

 

The average expected maturity of the investments in debt securities at March 31, 2017 was 3.9 years, compared to the average scheduled maturity of 5.6 years. Expected and scheduled maturities may differ because the issuers of certain securities have the right to call, prepay or otherwise redeem such obligations prior to their scheduled maturity date.

NOTE 6 — FINANCIAL INSTRUMENTS

Interest Rate Swap Agreements

We have entered into interest rate swap agreements to manage our exposure to fluctuations in interest rates. These swap agreements involve the exchange of fixed and variable rate interest payments between two parties based on common notional principal amounts and maturity dates. Pay-fixed interest rate swaps effectively convert LIBOR indexed variable rate obligations to fixed interest rate obligations. The interest payments under these agreements are settled on a net basis. The net interest payments, based on the notional amounts in these agreements, generally match the timing of the related liabilities for the interest rate swap agreements which have been designated as cash flow hedges. The notional amounts of the swap agreements represent amounts used to calculate the exchange of cash flows and are not our assets or liabilities. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions.

 

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HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6 — FINANCIAL INSTRUMENTS (continued)

Interest Rate Swap Agreements (continued)

 

The following table sets forth our interest rate swap agreements, which have been designated as cash flow hedges, at March 31, 2017 (dollars in millions):

 

     Notional
Amount
     Maturity Date      Fair
Value
 

Pay-fixed interest rate swaps

   $ 1,000        December 2017      $ (8

Pay-fixed interest rate swaps

     2,000        December 2021        37  

During the next 12 months, we estimate $13 million will be reclassified from other comprehensive income (“OCI”) to interest expense.

Derivatives — Results of Operations

The following table presents the effect of our interest rate swaps on our results of operations for the quarter ended March 31, 2017 (dollars in millions):

 

Derivatives in Cash Flow Hedging Relationships

   Amount of Gain
Recognized in OCI on
Derivatives, Net of  Tax
     Location of Loss
Reclassified from
Accumulated OCI
into Operations
     Amount of Loss
Reclassified from
Accumulated OCI
into Operations
 

Interest rate swaps

   $ 2        Interest expense      $ 7  

NOTE 7 — ASSETS AND LIABILITIES MEASURED AT FAIR VALUE

Accounting Standards Codification 820, Fair Value Measurements and Disclosures (“ASC 820”) emphasizes fair value is a market-based measurement, and fair value measurements should be determined based on the assumptions market participants would use in pricing assets or liabilities. ASC 820 utilizes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment.

 

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HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7 — ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (continued)

 

Cash Traded Investments

Our cash traded investments are generally classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Certain types of cash traded instruments are classified within Level 3 of the fair value hierarchy because they trade infrequently and therefore have little or no price transparency. The valuation of these securities involves the consideration of market factors and management’s judgment.

Derivative Financial Instruments

We have entered into interest rate swap agreements to manage our exposure to fluctuations in interest rates. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. We incorporate credit valuation adjustments to reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements of these instruments.

Although we determined the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. We assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions, and at March 31, 2017 and December 31, 2016, we determined the credit valuation adjustments were not significant to the overall valuation of our derivatives.

 

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HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7 — ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (continued)

Derivative Financial Instruments (continued)

 

The following tables summarize our assets and liabilities measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016, aggregated by the level in the fair value hierarchy within which those measurements fall (dollars in millions):

 

     March 31, 2017  
           Fair Value Measurements Using  
     Fair Value     Quoted Prices in
Active Markets for
Identical Assets
and Liabilities
(Level 1)
    Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable Inputs
(Level 3)
 

Assets:

        

Investments of insurance subsidiaries:

        

Debt securities:

        

States and municipalities

   $ 366     $     $ 360     $ 6  

Money market funds

     29       29              
  

 

 

   

 

 

   

 

 

   

 

 

 
     395       29       360       6  

Equity securities

     4       4              
  

 

 

   

 

 

   

 

 

   

 

 

 

Investments of insurance subsidiaries

     399       33       360       6  

Less amounts classified as current assets

     (50     (29     (21      
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 349     $ 4     $ 339     $ 6  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest rate swaps (Other)

   $ 37     $     $ 37     $  

Liabilities:

        

Interest rate swaps (Income taxes and other liabilities)

   $ 8     $     $ 8     $  
     December 31, 2016  
           Fair Value Measurements Using  
     Fair Value     Quoted Prices in
Active Markets for
Identical Assets
and Liabilities
(Level 1)
    Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable Inputs
(Level 3)
 

Assets:

        

Investments of insurance subsidiaries:

        

Debt securities:

        

States and municipalities

   $ 353     $     $ 347     $ 6  

Money market funds

     28       28              
  

 

 

   

 

 

   

 

 

   

 

 

 
     381       28       347       6  

Equity securities

     4       4              
  

 

 

   

 

 

   

 

 

   

 

 

 

Investments of insurance subsidiaries

     385       32       347       6  

Less amounts classified as current assets

     (49     (28     (21      
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 336     $ 4     $ 326     $ 6  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest rate swaps (Other)

   $ 31     $     $ 31     $  

Liabilities:

        

Interest rate swaps (Income taxes and other liabilities)

   $ 12     $     $ 12     $  —  

 

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HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7 — ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (continued)

Derivative Financial Instruments (continued)

 

The estimated fair value of our long-term debt was $33.267 billion and $32.833 billion at March 31, 2017 and December 31, 2016, respectively, compared to carrying amounts, excluding net debt issuance costs, aggregating $31.679 billion and $31.546 billion, respectively. The estimates of fair value are generally based upon the quoted market prices or quoted market prices for similar issues of long-term debt with the same maturities.

NOTE 8 — LONG-TERM DEBT

A summary of long-term debt at March 31, 2017 and December 31, 2016, including related interest rates at March 31, 2017, follows (dollars in millions):

 

     March 31,
2017
    December 31,
2016
 

Senior secured asset-based revolving credit facility (effective interest rate of 2.4%)

   $ 3,080     $ 2,920  

Senior secured revolving credit facility

            

Senior secured term loan facilities (effective interest rate of 3.5%)

     3,963       3,981  

Senior secured notes (effective interest rate of 5.4%)

     13,800       13,800  

Other senior secured debt (effective interest rate of 5.8%)

     584       593  
  

 

 

   

 

 

 

Senior secured debt

     21,427       21,294  

Senior unsecured notes (effective interest rate of 6.5%)

     10,252       10,252  

Net debt issuance costs

     (165     (170
  

 

 

   

 

 

 

Total debt (average life of 6.1 years, rates averaging 5.2%)

     31,514       31,376  

Less amounts due within one year

     212       216  
  

 

 

   

 

 

 
   $ 31,302     $ 31,160  
  

 

 

   

 

 

 

2016 Activity

During August 2016, we issued $1.200 billion aggregate principal amount of 4.500% senior secured notes due 2027. We used the net proceeds for general corporate purposes and to retire a portion of one of our senior secured term loans. We also entered into a joinder agreement to retire the remaining portion of this senior secured term loan using proceeds from a new $1.200 billion senior secured term loan facility maturing in February 2024.

During March 2016, we issued $1.500 billion aggregate principal amount of 5.250% senior secured notes due 2026. We used the net proceeds for general corporate purposes and to retire a portion of one of our senior secured term loans. We also entered into a joinder agreement to retire the remaining portion of this senior secured term loan using proceeds from a new $1.500 billion senior secured term loan facility maturing in March 2023.

NOTE 9 — CONTINGENCIES

We operate in a highly regulated and litigious industry. As a result, various lawsuits, claims and legal and regulatory proceedings have been and can be expected to be instituted or asserted against us. We are also subject to claims and suits arising in the ordinary course of business, including claims for personal injuries or wrongful restriction of, or interference with, physicians’ staff privileges. In certain of these actions the claimants may seek

 

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HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9 — CONTINGENCIES (continued)

 

punitive damages against us which may not be covered by insurance. We are also subject to claims by various taxing authorities for additional taxes and related interest and penalties. The resolution of any such lawsuits, claims or legal and regulatory proceedings could have a material, adverse effect on our results of operations, financial position or liquidity.

Health care companies are subject to numerous investigations by various governmental agencies. Under the federal False Claims Act (“FCA”), private parties have the right to bring qui tam, or “whistleblower,” suits against companies that submit false claims for payments to, or improperly retain overpayments from, the government. Some states have adopted similar state whistleblower and false claims provisions. Certain of our individual facilities have received, and from time to time, other facilities may receive, government inquiries from, and may be subject to investigation by, federal and state agencies. Depending on whether the underlying conduct in these or future inquiries or investigations could be considered systemic, their resolution could have a material, adverse effect on our results of operations, financial position or liquidity.

NOTE 10 — CAPITAL STRUCTURE

The changes in stockholders’ deficit, including changes in stockholders’ deficit attributable to HCA Healthcare, Inc. and changes in equity attributable to noncontrolling interests, are as follows (dollars and shares in millions):

 

    Equity (Deficit) Attributable to HCA Healthcare, Inc.     Equity
Attributable to
Noncontrolling
Interests
    Total  
    Common Stock     Capital in
Excess of
Par
Value
    Accumulated
Other
Comprehensive
Loss
    Retained
Deficit
     
    Shares     Par Value            

Balances at December 31, 2016

    370.536     $ 4     $     $ (338   $ (6,968   $ 1,669     $ (5,633

Comprehensive income

                      18       659       118       795  

Repurchase of common stock

    (5.121           (32           (392           (424

Distributions

                                  (145     (145

Share-based benefit plans

    3.280             35                         35  

Other

                (3                 18       15  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at March 31, 2017

    368.695     $ 4     $     $ (320   $ (6,701   $ 1,660     $ (5,357
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the quarter ended March 31, 2017, we repurchased 5.121 million shares of our common stock at an average price of $82.83 per share through market purchases pursuant to the $2.0 billion share repurchase program authorized during November 2016. At March 31, 2017, we had $1.429 billion of repurchase authorization available under the November 2016 authorization.

 

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HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 10 — CAPITAL STRUCTURE (continued)

 

The components of accumulated other comprehensive loss are as follows (dollars in millions):

 

     Unrealized
Gains on
Available-
for-Sale
Securities
     Foreign
Currency
Translation
Adjustments
    Defined
Benefit
Plans
    Change
in Fair
Value of
Derivative
Instruments
     Total  

Balances at December 31, 2016

   $ 7      $ (211   $ (146   $ 12      $ (338

Unrealized gains on available-for-sale securities, net of $1 of income taxes

     2                           2  

Foreign currency translation adjustments, net of $4 of income taxes

            6                    6  

Change in fair value of derivative instruments, net of $1 of income taxes

                        2        2  

Expense reclassified into operations from other comprehensive income, net of $2 and $2, respectively, income tax benefits

                  3       5        8  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balances at March 31, 2017

   $ 9      $ (205   $ (143   $ 19      $ (320
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

NOTE 11 — SEGMENT AND GEOGRAPHIC INFORMATION

We operate in one line of business, which is operating hospitals and related health care entities. We operate in two geographically organized groups: the National and American Groups. The National Group includes 85 hospitals located in Alaska, California, Florida, southern Georgia, Idaho, Indiana, northern Kentucky, Nevada, New Hampshire, South Carolina, Utah and Virginia, and the American Group includes 80 hospitals located in Colorado, northern Georgia, Kansas, southern Kentucky, Louisiana, Mississippi, Missouri, Oklahoma, Tennessee and Texas. We also operate six hospitals in England, and these facilities are included in the Corporate and other group.

Adjusted segment EBITDA is defined as income before depreciation and amortization, interest expense, losses (gains) on sales of facilities, legal claim costs, income taxes and net income attributable to noncontrolling interests. We use adjusted segment EBITDA as an analytical indicator for purposes of allocating resources to geographic areas and assessing their performance. Adjusted segment EBITDA is commonly used as an analytical indicator within the health care industry, and also serves as a measure of leverage capacity and debt service ability. Adjusted segment EBITDA should not be considered as a measure of financial performance under generally accepted accounting principles, and the items excluded from adjusted segment EBITDA are significant components in understanding and assessing financial performance. Because adjusted segment EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, adjusted segment EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. The geographic distributions of our revenues, equity in earnings of affiliates,

 

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HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 11 — SEGMENT AND GEOGRAPHIC INFORMATION (continued)

 

adjusted segment EBITDA and depreciation and amortization for the quarters ended March 31, 2017 and 2016 are summarized in the following table (dollars in millions):

 

     2017      2016  

Revenues:

     

National Group

   $ 5,148      $ 4,967  

American Group

     4,995        4,786  

Corporate and other

     480        507  
  

 

 

    

 

 

 
   $ 10,623      $ 10,260  
  

 

 

    

 

 

 

Equity in earnings of affiliates:

     

National Group

   $ (5    $ (2

American Group

     (8      (9

Corporate and other

     3        (1
  

 

 

    

 

 

 
   $ (10    $ (12
  

 

 

    

 

 

 

Adjusted segment EBITDA:

     

National Group

   $ 1,131      $ 1,138  

American Group

     1,007        982  

Corporate and other

     (133      (117
  

 

 

    

 

 

 
   $ 2,005      $ 2,003  
  

 

 

    

 

 

 

Depreciation and amortization:

     

National Group

   $ 214      $ 197  

American Group

     238        219  

Corporate and other

     69        63  
  

 

 

    

 

 

 
   $ 521      $ 479  
  

 

 

    

 

 

 

Adjusted segment EBITDA

   $ 2,005      $ 2,003  

Depreciation and amortization

     521        479  

Interest expense

     419        416  

Losses (gains) on sales of facilities

     (1      1  

Legal claim costs

            12  
  

 

 

    

 

 

 

Income before income taxes

   $ 1,066      $ 1,095  
  

 

 

    

 

 

 

NOTE 12 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

During December 2012, HCA Healthcare, Inc. issued $1.000 billion aggregate principal amount of 6.250% senior unsecured notes due 2021. These notes are senior unsecured obligations and are not guaranteed by any of our subsidiaries.

HCA Inc., a direct wholly-owned subsidiary of HCA Healthcare, Inc., is the obligor under a significant portion of our other indebtedness, including our senior secured credit facilities, senior secured notes and senior unsecured notes (other than the senior unsecured notes issued by HCA Healthcare, Inc.). The senior secured notes and senior unsecured notes issued by HCA Inc. are fully and unconditionally guaranteed by HCA Healthcare, Inc. The senior secured credit facilities and senior secured notes are fully and unconditionally guaranteed by substantially all existing and future, direct and indirect, 100% owned material

 

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HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

 

domestic subsidiaries that are “Unrestricted Subsidiaries” under our Indenture dated December 16, 1993 (except for certain special purpose subsidiaries that only guarantee and pledge their assets under our senior secured asset-based revolving credit facility).

Our summarized condensed consolidating comprehensive income statements for the quarters ended March 31, 2017 and 2016, condensed consolidating balance sheets at March 31, 2017 and December 31, 2016 and condensed consolidating statements of cash flows for the quarters ended March 31, 2017 and 2016, segregating HCA Healthcare, Inc. issuer, HCA Inc. issuer, the subsidiary guarantors, the subsidiary non-guarantors and eliminations, follow:

HCA HEALTHCARE, INC.

CONDENSED CONSOLIDATING COMPREHENSIVE INCOME STATEMENT

FOR THE QUARTER ENDED MARCH 31, 2017

(Dollars in millions)

 

    HCA
Healthcare, Inc.
Issuer
    HCA Inc.
Issuer
    Subsidiary
Guarantors
    Subsidiary
Non-
Guarantors
    Eliminations     Condensed
Consolidated
 

Revenues before provision for doubtful accounts

  $     $     $ 5,853     $ 5,530     $     $ 11,383  

Provision for doubtful accounts

                419       341             760  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenues

                5,434       5,189             10,623  

Salaries and benefits

                2,466       2,435             4,901  

Supplies

                951       846             1,797  

Other operating expenses

    1             927       1,002             1,930  

Equity in earnings of affiliates

    (608           (1     (9     608       (10

Depreciation and amortization

                251       270             521  

Interest expense

    16       733       (269     (61           419  

Gains on sales of facilities

                      (1           (1

Management fees

                (210     210              
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (591     733       4,115       4,692       608       9,557  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    591       (733     1,319       497       (608     1,066  

Provision (benefit) for income taxes

    (68     (270     478       149             289  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    659       (463     841       348       (608     777  

Net income attributable to noncontrolling interests

                23       95             118  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to HCA Healthcare, Inc.

  $ 659     $ (463   $ 818     $ 253     $ (608   $ 659  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to HCA Healthcare, Inc.

  $ 677     $ (456   $ 821     $ 261     $ (626   $ 677  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

 

HCA HEALTHCARE, INC.

CONDENSED CONSOLIDATING COMPREHENSIVE INCOME STATEMENT

FOR THE QUARTER ENDED MARCH 31, 2016

(Dollars in millions)

 

     HCA
Healthcare, Inc.
Issuer
    HCA Inc.
Issuer
    Subsidiary
Guarantors
    Subsidiary
Non-
Guarantors
    Eliminations     Condensed
Consolidated
 

Revenues before provision for doubtful accounts

   $     $     $ 5,673     $ 5,377     $     $ 11,050  

Provision for doubtful accounts

                 494       296             790  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenues

                 5,179       5,081             10,260  

Salaries and benefits

                 2,354       2,348             4,702  

Supplies

                 898       816             1,714  

Other operating expenses

     2             857       994             1,853  

Equity in earnings of affiliates

     (629           (2     (10     629       (12

Depreciation and amortization

                 227       252             479  

Interest expense

     16       650       (207     (43           416  

Losses (gains) on sales of facilities

                 2       (1           1  

Legal claim costs

           12                         12  

Management fees

                 (160     160              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (611     662       3,969       4,516       629       9,165  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     611       (662     1,210       565       (629     1,095  

Provision (benefit) for income taxes

     (83     (244     438       173             284  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     694       (418     772       392       (629     811  

Net income attributable to noncontrolling interests

                 22       95             117  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to HCA Healthcare, Inc.

   $ 694     $ (418   $ 750     $ 297     $ (629   $ 694  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to HCA Healthcare, Inc.

   $ 665     $ (425   $ 752     $ 273     $ (600   $ 665  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

 

HCA HEALTHCARE, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

MARCH 31, 2017

(Dollars in millions)

 

     HCA
Healthcare, Inc.
Issuer
    HCA Inc.
Issuer
    Subsidiary
Guarantors
    Subsidiary
Non-
Guarantors
     Eliminations     Condensed
Consolidated
 
ASSETS              

Current assets:

             

Cash and cash equivalents

   $     $     $ 182     $ 571      $     $ 753  

Accounts receivable, net

                 3,009       2,655              5,664  

Inventories

                 890       611              1,501  

Other

                 432       687              1,119  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
                 4,513       4,524              9,037  

Property and equipment, net

                 8,446       8,016              16,462  

Investments of insurance subsidiaries

                       349              349  

Investments in and advances to affiliates

     27,671             16       178        (27,671     194  

Goodwill and other intangible assets

                 1,728       5,026              6,754  

Other

     756       37       33       173              999  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
   $ 28,427     $ 37     $ 14,736     $ 18,266      $ (27,671   $ 33,795  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

LIABILITIES AND

STOCKHOLDERS’ (DEFICIT)

EQUITY

             

Current liabilities:

             

Accounts payable

   $     $     $ 1,304     $ 929      $     $ 2,233  

Accrued salaries

                 644       506              1,150  

Other accrued expenses

     239       277       432       920              1,868  

Long-term debt due within one year

           97       58       57              212  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     239       374       2,438       2,412              5,463  

Long-term debt, net

     993       29,841       188       280              31,302  

Intercompany balances

     33,807       (9,633     (26,980     2,806               

Professional liability risks

                       1,134              1,134  

Income taxes and other liabilities

     405       8       395       445              1,253  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     35,444       20,590       (23,959)       7,077              39,152  

Stockholders’ (deficit) equity attributable to HCA Healthcare, Inc.

     (7,017     (20,553     38,573       9,651        (27,671     (7,017

Noncontrolling interests

                 122       1,538              1,660  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     (7,017     (20,553     38,695       11,189        (27,671     (5,357
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
   $ 28,427     $ 37     $ 14,736     $ 18,266      $ (27,671   $ 33,795  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

20


Table of Contents

HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

 

HCA HEALTHCARE, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2016

(Dollars in millions)

 

     HCA
Healthcare, Inc.
Issuer
    HCA Inc.
Issuer
    Subsidiary
Guarantors
    Subsidiary
Non-
Guarantors
     Eliminations     Condensed
Consolidated
 
ASSETS              

Current assets:

             

Cash and cash equivalents

   $     $     $ 110     $ 536      $     $ 646  

Accounts receivable, net

                 3,028       2,798              5,826  

Inventories

                 890       613              1,503  

Other

                 445       666              1,111  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
                 4,473       4,613              9,086  

Property and equipment, net

                 8,463       7,889              16,352  

Investments of insurance subsidiaries

                       336              336  

Investments in and advances to affiliates

     27,045             16       190        (27,045     206  

Goodwill and other intangible assets

                 1,728       4,976              6,704  

Other

     877             34       163              1,074  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
   $ 27,922     $     $ 14,714     $ 18,167      $ (27,045   $ 33,758  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

LIABILITIES AND

STOCKHOLDERS’ (DEFICIT)

EQUITY

             

Current liabilities:

             

Accounts payable

   $     $     $ 1,439     $ 879      $     $ 2,318  

Accrued salaries

                 704       561              1,265  

Other accrued expenses

     29       572       464       970              2,035  

Long-term debt due within one year

           97       60       59              216  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     29       669       2,667       2,469              5,834  

Long-term debt, net

     993       29,693       199       275              31,160  

Intercompany balances

     33,784       (10,277     (26,447     2,940               

Professional liability risks

                       1,148              1,148  

Income taxes and other liabilities

     418       12       387       432              1,249  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     35,224       20,097       (23,194     7,264              39,391  

Stockholders’ (deficit) equity attributable to HCA Healthcare, Inc.

     (7,302     (20,097     37,752       9,390        (27,045     (7,302

Noncontrolling interests

                 156       1,513              1,669  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     (7,302     (20,097     37,908       10,903        (27,045     (5,633
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
   $ 27,922     $     $ 14,714     $ 18,167      $ (27,045   $ 33,758  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

21


Table of Contents

HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

 

HCA HEALTHCARE, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE QUARTER ENDED MARCH 31, 2017

(Dollars in millions)

 

    HCA
Healthcare, Inc.
Issuer
    HCA Inc.
Issuer
    Subsidiary
Guarantors
    Subsidiary
Non-
Guarantors
    Eliminations     Condensed
Consolidated
 

Cash flows from operating activities:

           

Net income (loss)

  $ 659     $ (463   $ 841     $ 348     $ (608   $ 777  

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

           

Changes in operating assets and liabilities

    (15     (295     (601     (269           (1,180

Provision for doubtful accounts

                419       341             760  

Depreciation and amortization

                251       270             521  

Income taxes

    292                               292  

Gains on sales of facilities

                      (1           (1

Amortization of debt issuance costs

          8                         8  

Share-based compensation

                73                   73  

Equity in earnings of affiliates

    (608                       608        

Other

    19                   11             30  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

    347       (750     983       700             1,280  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

           

Purchase of property and equipment

                (229     (342           (571

Acquisition of hospitals and health care entities

                (5     (85           (90

Disposition of hospitals and health care entities

                4                   4  

Change in investments

                      (19           (19

Other

                      7             7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

                (230     (439           (669
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

           

Net change in revolving credit facilities

          160                         160  

Repayment of long-term debt

          (18     (16     (9           (43

Distributions to noncontrolling interests

                (57     (88           (145

Payment of debt issuance costs

          (2                       (2

Repurchases of common stock

    (424                             (424

Changes in intercompany balances with affiliates, net

    134       610       (608     (136            

Other

    (57                 7             (50
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

    (347     750       (681     (226           (504
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents

                72       35             107  

Cash and cash equivalents at beginning of period

                110       536             646  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $     $     $ 182     $ 571     $     $ 753  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

HCA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

 

HCA HEALTHCARE, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE QUARTER ENDED MARCH 31, 2016

(Dollars in millions)

 

    HCA
Healthcare, Inc.
Issuer
    HCA Inc.
Issuer
    Subsidiary
Guarantors
    Subsidiary
Non-
Guarantors
    Eliminations     Condensed
Consolidated
 

Cash flows from operating activities:

           

Net income (loss)

  $ 694     $ (418   $ 772     $ 392     $ (629   $ 811  

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

           

Changes in operating assets and liabilities

    (36     (67     (740     (303           (1,146

Provision for doubtful accounts

                494       296             790  

Depreciation and amortization

                227       252             479  

Income taxes

    360                               360  

Losses (gains) on sales of facilities

                2       (1           1  

Legal claim costs

          12                         12  

Amortization of debt issuance costs

          10                         10  

Share-based compensation

                65                   65  

Equity in earnings of affiliates

    (629                       629        

Other

    19             (4     2             17  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

    408       (463     816       638             1,399  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

           

Purchase of property and equipment

                (161     (348           (509

Acquisition of hospitals and health care entities

                      (9           (9

Disposition of hospitals and health care entities

                      4             4  

Change in investments

                      11             11  

Other

                      7             7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

                (161     (335           (496
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

           

Issuance of long-term debt

          3,000                         3,000  

Net change in revolving credit facilities

          (930                       (930

Repayment of long-term debt

          (1,980     (17     (14           (2,011

Distributions to noncontrolling interests

                (16     (95           (111

Payment of debt issuance costs

          (22                       (22

Repurchases of common stock

    (621                             (621

Changes in intercompany balances with affiliates, net

    311       395       (556     (150            

Other

    (97                             (97
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

    (407     463       (589     (259           (792
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents

    1             66       44             111  

Cash and cash equivalents at beginning of period

                155       586             741  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 1     $     $ 221     $ 630     $     $ 852  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This quarterly report on Form 10-Q includes certain disclosures which contain “forward-looking statements.” Forward-looking statements include statements regarding expected share-based compensation expense, expected capital expenditures and expected net claim payments and all other statements that do not relate solely to historical or current facts, and can be identified by the use of words like “may,” “believe,” “will,” “expect,” “project,” “estimate,” “anticipate,” “plan,” “initiative” or “continue.” These forward-looking statements are based on our current plans and expectations and are subject to a number of known and unknown uncertainties and risks, many of which are beyond our control, which could significantly affect current plans and expectations and our future financial position and results of operations. These factors include, but are not limited to, (1) the impact of our substantial indebtedness and the ability to refinance such indebtedness on acceptable terms, (2) the impact of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Reform Law”), including the effects of any repeal of, or changes to, the Health Reform Law, the possible enactment of additional federal or state health care reforms and possible changes to other federal, state or local laws or regulations affecting the health care industry, (3) the effects related to the continued implementation of the sequestration spending reductions required under the Budget Control Act of 2011, and related legislation extending these reductions, and the potential for future deficit reduction legislation that may alter these spending reductions, which include cuts to Medicare payments, or create additional spending reductions, (4) increases in the amount and risk of collectability of uninsured accounts and deductibles and copayment amounts for insured accounts, (5) the ability to achieve operating and financial targets, and attain expected levels of patient volumes and control the costs of providing services, (6) possible changes in Medicare, Medicaid and other state programs, including Medicaid upper payment limit programs or Waiver Programs, that may impact reimbursements to health care providers and insurers, (7) the highly competitive nature of the health care business, (8) changes in service mix, revenue mix and surgical volumes, including potential declines in the population covered under managed care agreements, the ability to enter into and renew managed care provider agreements on acceptable terms and the impact of consumer-driven health plans and physician utilization trends and practices, (9) the efforts of insurers, health care providers and others to contain health care costs, (10) the outcome of our continuing efforts to monitor, maintain and comply with appropriate laws, regulations, policies and procedures, (11) increases in wages and the ability to attract and retain qualified management and personnel, including affiliated physicians, nurses and medical and technical support personnel, (12) the availability and terms of capital to fund the expansion of our business and improvements to our existing facilities, (13) changes in accounting practices, (14) changes in general economic conditions nationally and regionally in our markets, (15) the emergence and effects related to infectious diseases, (16) future divestitures which may result in charges and possible impairments of long-lived assets, (17) changes in business strategy or development plans, (18) delays in receiving payments for services provided, (19) the outcome of pending and any future tax audits, disputes and litigation associated with our tax positions, (20) potential adverse impact of known and unknown government investigations, litigation and other claims that may be made against us, (21) the impact of potential cybersecurity incidents or security breaches, (22) our ongoing ability to demonstrate meaningful use of certified electronic health record (“EHR”) technology, and (23) other risk factors described in our annual report on Form 10-K for the year ended December 31, 2016 and our other filings with the Securities and Exchange Commission. As a consequence, current plans, anticipated actions and future financial position and results of operations may differ from those expressed in any forward-looking statements made by or on behalf of HCA. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report, which forward-looking statements reflect management’s views only as of the date of this report. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

24


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

First Quarter 2017 Operations Summary

Revenues increased to $10.623 billion in the first quarter of 2017 from $10.260 billion in the first quarter of 2016. Net income attributable to HCA Healthcare, Inc. totaled $659 million, or $1.74 per diluted share, for the quarter ended March 31, 2017, compared to $694 million, or $1.69 per diluted share, for the quarter ended March 31, 2016. First quarter 2017 results include gains on sales of facilities of $1 million. First quarter 2016 results include legal claim costs of $12 million, or $0.02 per diluted share, and net losses on sales of facilities of $1 million. All “per diluted share” disclosures are based upon amounts net of the applicable income taxes. Shares used for diluted earnings per share were 379.980 million shares for the quarter ended March 31, 2017 and 410.575 million shares for the quarter ended March 31, 2016. During 2016 and the first quarter of 2017, we repurchased 36.325 million and 5.121 million shares of our common stock, respectively.

Revenues increased 3.5% on a consolidated basis and increased 3.3% on a same facility basis for the quarter ended March 31, 2017, compared to the quarter ended March 31, 2016. The increase in consolidated revenues can be attributed to the combined impact of a 1.7% increase in revenue per equivalent admission and a 1.8% increase in equivalent admissions. The same facility revenues increase resulted from the combined impact of a 1.7% increase in same facility revenue per equivalent admission and a 1.6% increase in same facility equivalent admissions.

During the quarters ended March 31, 2017 and 2016, consolidated admissions and same facility admissions increased 1.3% and 1.2%, respectively. Surgeries increased 0.3% on a consolidated basis and were flat on a same facility basis during the quarter ended March 31, 2017, compared to the quarter ended March 31, 2016. Emergency department visits increased 1.4% on a consolidated basis and increased 1.1% on a same facility basis during the quarter ended March 31, 2017, compared to the quarter ended March 31, 2016.

For the quarter ended March 31, 2017, the provision for doubtful accounts declined $30 million, compared to the quarter ended March 31, 2016. The self-pay revenue deductions for charity care and uninsured discounts increased $131 million and $384 million, respectively, during the first quarter of 2017, compared to the first quarter of 2016. The sum of the provision for doubtful accounts, uninsured discounts and charity care, as a percentage of the sum of revenues, provision for doubtful accounts, uninsured discounts and charity care, was 33.4% for the first quarter of 2017, compared to 32.1% for the first quarter of 2016. Same facility uninsured admissions increased 3.2% for the quarter ended March 31, 2017, compared to the quarter ended March 31, 2016.

Cash flows from operating activities declined $119 million from $1.399 billion for the first quarter of 2016 to $1.280 billion for the first quarter of 2017. The decline relates primarily to the combined impact of net negative changes in working capital items of $64 million and a $68 million decline related to income taxes.

Results of Operations

Revenue/Volume Trends

Our revenues depend upon inpatient occupancy levels, the ancillary services and therapy programs ordered by physicians and provided to patients, the volume of outpatient procedures and the charge and negotiated payment rates for such services. Gross charges typically do not reflect what our facilities are actually paid. Our facilities have entered into agreements with third-party payers, including government programs and managed care health plans, under which the facilities are paid based upon the cost of providing services, predetermined rates per diagnosis, fixed per diem rates or discounts from gross charges. We do not pursue collection of amounts related to patients who meet our guidelines to qualify for charity care; therefore, they are not reported in revenues. We provide discounts to uninsured patients who do not qualify for Medicaid or charity care. After the

 

25


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Results of Operations (continued)

Revenue/Volume Trends (continued)

 

discounts are applied, we are still unable to collect a significant portion of uninsured patients’ accounts, and we record provisions for doubtful accounts (based upon our historical collection experience) related to uninsured patients in the period the services are provided to record the net self-pay revenues at the estimated amounts we expect to collect.

Revenues increased 3.5% from $10.260 billion in the first quarter of 2016 to $10.623 billion in the first quarter of 2017. Revenues are recorded during the period the health care services are provided, based upon the estimated amounts due from the patients and third-party payers. Third-party payers include federal and state agencies (under the Medicare and Medicaid programs), managed care health plans and commercial insurance companies (including plans offered through the health insurance exchanges), and employers. Estimates of contractual allowances under managed care health plans are based upon the payment terms specified in the related contractual agreements. Revenues related to uninsured patients and uninsured copayment and deductible amounts for patients who have health care coverage may have discounts applied (uninsured discounts and contractual discounts). Our revenues from our third-party payers, the uninsured and other payers for the quarters ended March 31, 2017 and 2016 are summarized in the following table (dollars in millions):

 

     2017      Ratio     2016      Ratio  

Medicare

   $ 2,405        22.6   $ 2,266        22.1

Managed Medicare

     1,203        11.3       1,104        10.8  

Medicaid

     373        3.5       427        4.2  

Managed Medicaid

     641        6.0       597        5.8  

Managed care and other insurers

     5,926        55.8       5,702        55.6  

International (managed care and other insurers)

     269        2.5       317        3.1  
  

 

 

    

 

 

   

 

 

    

 

 

 
     10,817        101.7       10,413        101.6  

Uninsured

     225        2.1       189        1.8  

Other

     341        3.2       448        4.4  
  

 

 

    

 

 

   

 

 

    

 

 

 

Revenues before provision for doubtful accounts

     11,383        107.0       11,050        107.8  

Provision for doubtful accounts

     (760      (7.0     (790      (7.8
  

 

 

    

 

 

   

 

 

    

 

 

 

Revenues

   $ 10,623        100.0   $ 10,260        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Consolidated and same facility revenue per equivalent admission each increased 1.7% in the first quarter of 2017, compared to the first quarter of 2016. Consolidated and same facility equivalent admissions increased 1.8% and 1.6%, respectively, in the first quarter of 2017, compared to the first quarter of 2016. Consolidated and same facility outpatient surgeries declined 0.3% and 0.5%, respectively, in the first quarter of 2017, compared to the first quarter of 2016. Consolidated and same facility inpatient surgeries increased 1.1% and 0.9%, respectively, in the first quarter of 2017, compared to the first quarter of 2016. Consolidated and same facility emergency department visits increased 1.4% and 1.1%, respectively, in the first quarter of 2017, compared to the first quarter of 2016.

To quantify the total impact of and trends related to uninsured accounts, we believe it is beneficial to view the direct uninsured revenue deductions (charity care and uninsured discounts) and provision for doubtful accounts in combination, rather than each separately. At March 31, 2017, our allowance for doubtful accounts represented 99.0% of the $4.929 billion total patient due accounts receivable balance. The patient due accounts receivable balance represents the estimated uninsured portion of our accounts receivable. A summary of these

 

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Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Results of Operations (continued)

Revenue/Volume Trends (continued)

 

adjustments to revenues amounts, related to uninsured accounts, for the quarters ended March 31, 2017 and 2016 follows (dollars in millions):

 

     2017      Ratio     2016      Ratio  

Charity care

   $ 1,086        21   $ 955        20

Uninsured discounts

     3,481        65       3,097        64  

Provision for doubtful accounts

     760        14       790        16  
  

 

 

    

 

 

   

 

 

    

 

 

 

Totals

   $ 5,327        100   $ 4,842        100
  

 

 

    

 

 

   

 

 

    

 

 

 

Same facility uninsured admissions increased by 1,045 admissions, or 3.2%, in the first quarter of 2017, compared to the first quarter of 2016. Same facility uninsured admissions in 2016, compared to 2015, declined 0.3% in the fourth quarter of 2016, increased 0.7% in the third quarter of 2016, increased 5.7% in the second quarter of 2016 and increased 10.6% in the first quarter of 2016.

The approximate percentages of our admissions related to Medicare, managed Medicare, Medicaid, managed Medicaid, managed care and other insurers and the uninsured for the quarters ended March 31, 2017 and 2016 are set forth in the following table.

 

     2017     2016  

Medicare

     32     32

Managed Medicare

     16       15  

Medicaid

     5       6  

Managed Medicaid

     12       11  

Managed care and other insurers

     28       29  

Uninsured

     7       7  
  

 

 

   

 

 

 
     100     100
  

 

 

   

 

 

 

The approximate percentages of our inpatient revenues, before provision for doubtful accounts, related to Medicare, managed Medicare, Medicaid, managed Medicaid, managed care and other insurers and the uninsured for the quarters ended March 31, 2017 and 2016 are set forth in the following table.

 

     2017     2016  

Medicare

     29     28

Managed Medicare

     13       12  

Medicaid

     5       6  

Managed Medicaid

     6       6  

Managed care and other insurers

     47       48  

Uninsured

            
  

 

 

   

 

 

 
     100     100
  

 

 

   

 

 

 

At March 31, 2017, we had 84 hospitals in the states of Texas and Florida. During the first quarter of 2017, 56% of our admissions and 48% of our revenues were generated by these hospitals. Uninsured admissions in Texas and Florida represented 71% of our uninsured admissions during the first quarter of 2017.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Results of Operations (continued)

Revenue/Volume Trends (continued)

 

We receive a significant portion of our revenues from government health programs, principally Medicare and Medicaid, which are highly regulated and subject to frequent and substantial changes. In 2011, the Centers for Medicare & Medicaid Services (“CMS”) approved a Medicaid waiver that allows Texas to continue receiving supplemental Medicaid reimbursement while expanding its Medicaid managed care program. Texas currently operates its Medicaid Waiver Program pursuant to this waiver, which CMS has agreed to extend through December 2017. We cannot predict whether the Texas Medicaid Waiver Program will be further extended, be revised or that revenues recognized from the program will not decline.

The Texas Medicaid Waiver Program includes two primary components: an indigent care component and a Delivery System Reform Incentive Payment (“DSRIP”) component. Initiatives under the DSRIP program are designed to provide incentive payments to hospitals and other providers for their investments in delivery system reforms that increase access to health care, improve the quality of care and enhance the health of patients and families they serve. We provide indigent care services in several communities in the state of Texas, in affiliation with other hospitals. The state of Texas has been involved in efforts to increase the indigent care provided by private hospitals. As a result of additional indigent care being provided by private hospitals, public hospital districts or counties in Texas have available funds that were previously devoted to indigent care. The public hospital districts or counties are under no contractual or legal obligation to provide such indigent care. The public hospital districts or counties have elected to transfer some portion of these available funds to the state’s Medicaid program. Such action is at the sole discretion of the public hospital districts or counties. It is anticipated that these contributions to the state will be matched with federal Medicaid funds. The state then may make supplemental payments to hospitals in the state for Medicaid services rendered. Hospitals receiving Medicaid supplemental payments may include those that are providing additional indigent care services. Our Texas Medicaid revenues included Medicaid supplemental payments of $106 million ($30 million DSRIP related and $76 million indigent care related) and $102 million ($28 million DSRIP related and $74 million indigent care related) during the first quarters of 2017 and 2016, respectively.

In addition, we receive supplemental payments in several other states. We are aware these supplemental payment programs are currently being reviewed by certain state agencies and CMS, and some states have made waiver requests to CMS to replace their existing supplemental payment programs. It is possible these reviews and waiver requests will result in the restructuring of such supplemental payment programs and could result in the payment programs being reduced or eliminated. Because deliberations about these programs are ongoing, we are unable to estimate the financial impact the program structure modifications, if any, may have on our results of operations.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Results of Operations (continued)

Revenue/Volume Trends (continued)

 

The following is a comparative summary of results from operations for the quarters ended March 31, 2017 and 2016 (dollars in millions):

 

     2017     2016  
     Amount     Ratio     Amount     Ratio  

Revenues before provision for doubtful accounts

   $ 11,383       $ 11,050    

Provision for doubtful accounts

     760         790    
  

 

 

     

 

 

   

Revenues

     10,623       100.0       10,260       100.0  

Salaries and benefits

     4,901       46.1       4,702       45.8  

Supplies

     1,797       16.9       1,714       16.7  

Other operating expenses

     1,930       18.2       1,853       18.1  

Equity in earnings of affiliates

     (10     (0.1     (12     (0.1

Depreciation and amortization

     521       5.0       479       4.6  

Interest expense

     419       3.9       416       4.1  

Losses (gains) on sales of facilities

     (1           1        

Legal claim costs

                 12       0.1  
  

 

 

   

 

 

   

 

 

   

 

 

 
     9,557       90.0       9,165       89.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     1,066       10.0       1,095       10.7  

Provision for income taxes

     289       2.7       284       2.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     777       7.3       811       7.9  

Net income attributable to noncontrolling interests

     118       1.1       117       1.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to HCA Healthcare, Inc.

   $ 659       6.2     $ 694       6.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

% changes from prior year:

        

Revenues

     3.5       6.0  

Income before income taxes

     (2.7       1.6    

Net income attributable to HCA Healthcare, Inc.

     (5.0       17.3    

Admissions(a)

     1.3         1.8    

Equivalent admissions(b)

     1.8         3.7    

Revenue per equivalent admission

     1.7         2.2    

Same facility % changes from prior year(c):

        

Revenues

     3.3         5.4    

Admissions(a)

     1.2         1.6    

Equivalent admissions(b)

     1.6         3.1    

Revenue per equivalent admission

     1.7         2.2    

 

(a) Represents the total number of patients admitted to our hospitals and is used by management and certain investors as a general measure of inpatient volume.
(b) Equivalent admissions are used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenues and gross outpatient revenues and then dividing the resulting amount by gross inpatient revenues. The equivalent admissions computation “equates” outpatient revenues to the volume measure (admissions) used to measure inpatient volume, resulting in a general measure of combined inpatient and outpatient volume.
(c) Same facility information excludes the operations of hospitals and their related facilities which were either acquired or divested during the current and prior period.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Results of Operations (continued)

 

Quarters Ended March 31, 2017 and 2016

Net income attributable to HCA Healthcare, Inc. totaled $659 million, or $1.74 per diluted share, for the first quarter of 2017 compared to $694 million, or $1.69 per diluted share, for the first quarter of 2016. First quarter 2017 results include net gains on sales of facilities of $1 million. First quarter 2016 results include legal claim costs of $12 million, or $0.02 per diluted share, and net losses on sales of facilities of $1 million. All “per diluted share” disclosures are based upon amounts net of the applicable income taxes. Shares used for diluted earnings per share were 379.980 million shares for the quarter ended March 31, 2017 and 410.575 million shares for the quarter ended March 31, 2016. During 2016 and the first quarter of 2017, we repurchased 36.325 million and 5.121 million shares of our common stock, respectively.

Revenues before provision for doubtful accounts increased 3.0% for the first quarter of 2017 compared to the first quarter of 2016. The provision for doubtful accounts declined $30 million from $790 million in the first quarter of 2016 to $760 million in the first quarter of 2017. The provision for doubtful accounts relates primarily to uninsured amounts due directly from patients, including copayment and deductible amounts for patients who have health care coverage. The self-pay revenue deductions for charity care and uninsured discounts increased $131 million and $384 million, respectively, during the first quarter of 2017, compared to the first quarter of 2016. The sum of the provision for doubtful accounts, uninsured discounts and charity care, as a percentage of the sum of revenues, the provision for doubtful accounts, uninsured discounts and charity care, was 33.4% for the first quarter of 2017, compared to 32.1% for the first quarter of 2016. At March 31, 2017, our allowance for doubtful accounts represented 99.0% of the $4.929 billion total patient due accounts receivable balance, including accounts, net of estimated contractual discounts, related to patients for which eligibility for Medicaid coverage or uninsured discounts was being evaluated.

Revenues increased 3.5% due to the combined impact of revenue per equivalent admission growth of 1.7% and a 1.8% increase in equivalent admissions for the first quarter of 2017 compared to the first quarter of 2016. Same facility revenues increased 3.3% due to the combined impact of a 1.7% increase in same facility revenue per equivalent admission and a 1.6% increase in same facility equivalent admissions for the first quarter of 2017 compared to the first quarter of 2016.

Salaries and benefits, as a percentage of revenues, were 46.1% in the first quarter of 2017 and 45.8% in the first quarter of 2016. Salaries and benefits per equivalent admission increased 2.4% in the first quarter of 2017 compared to the first quarter of 2016. Same facility labor rate increases averaged 2.3% for the first quarter of 2017 compared to the first quarter of 2016.

Supplies, as a percentage of revenues, were 16.9% in the first quarter of 2017 and 16.7% in the first quarter of 2016. Supply costs per equivalent admission increased 3.1% in the first quarter of 2017 compared to the first quarter of 2016. Supply costs per equivalent admission increased 7.6% for medical devices and 1.6% for general medical and surgical items and declined 1.2% for pharmacy supplies in the first quarter of 2017 compared to the first quarter of 2016.

Other operating expenses, as a percentage of revenues, were 18.2% in the first quarter of 2017 and 18.1% in the first quarter of 2016. Other operating expenses is primarily comprised of contract services, professional fees, repairs and maintenance, rents and leases, utilities, insurance (including professional liability insurance) and nonincome taxes. Provisions for losses related to professional liability risks were $119 million and $112 million for the first quarters of 2017 and 2016, respectively.

 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Results of Operations (continued)

Quarters Ended March 31, 2017 and 2016 (continued)

 

Equity in earnings of affiliates was $10 million and $12 million in the first quarters of 2017 and 2016, respectively.

Depreciation and amortization increased $42 million, from $479 million in the first quarter of 2016 to $521 million in the first quarter of 2017. The increase in depreciation relates to increased routine capital expenditures, the purchase or completion of construction of five hospitals during 2016 and the completion of construction of a corporate office building during 2016.

Interest expense was $419 million in the first quarter of 2017 and $416 million in the first quarter of 2016. Our average debt balance was $31.387 billion for the first quarter of 2017 compared to $30.532 billion for the first quarter of 2016. The average effective interest rate for our long-term debt was 5.4% and 5.5% for the quarters ended March 31, 2017 and 2016.

During the first quarter of 2017, we recorded net gains on sales of facilities of $1 million, and during the first quarter of 2016, we recorded net losses on sales of facilities of $1 million.

We recorded $12 million of legal claim costs during the first quarter of 2016 related to the Health Midwest litigation.

The effective tax rates were 30.4% and 29.1% for the first quarters of 2017 and 2016, respectively. The effective tax rate computations exclude net income attributable to noncontrolling interests as it relates to consolidated partnerships. Our provisions for income taxes for the first quarters of 2017 and 2016 included tax benefits of $67 million and $74 million, respectively, related to excess tax benefits from employee equity award settlements being recorded as a component of the provision for income taxes. Excluding the effect of these adjustments, the effective tax rate for the first quarters of 2017 and 2016 would have been 37.5% and 36.7%, respectively.

Net income attributable to noncontrolling interests increased from $117 million for the first quarter of 2016 to $118 million for the first quarter of 2017.

Liquidity and Capital Resources

Cash provided by operating activities totaled $1.280 billion in the first quarter of 2017 compared to $1.399 billion in the first quarter of 2016. The $119 million decline in cash provided by operating activities in the first quarter of 2017 compared to the first quarter of 2016 related primarily to the combined impact of net negative changes in working capital items of $64 million and a $68 million decline related to income taxes. The combined interest payments and net tax refunds in the first quarter of 2017 and 2016 were $537 million and $414 million, respectively. Working capital totaled $3.574 billion at March 31, 2017 and $3.252 billion at December 31, 2016.

Cash used in investing activities was $669 million in the first quarter of 2017 compared to $496 million in the first quarter of 2016. Acquisitions of hospitals and health care entities increased from $9 million in the first quarter of 2016 to $90 million in the first quarter of 2017. Excluding acquisitions, capital expenditures were $571 million in the first quarter of 2017 and $509 million in the first quarter of 2016. Capital expenditures, excluding acquisitions, are expected to approximate $2.9 billion in 2017. At March 31, 2017, there were projects under construction which had estimated additional costs to complete and equip over the next five years of approximately $3.2 billion. We expect to finance capital expenditures with internally generated and borrowed funds.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (continued)

 

Cash used in financing activities totaled $504 million in the first quarter of 2017 compared to $792 million in the first quarter of 2016. During the first quarter of 2017, net cash flows used in financing activities included a net increase of $117 million in our indebtedness, repurchases of common stock of $424 million and distributions to noncontrolling interests of $145 million. During the first quarter of 2016, net cash flows used in financing activities included a net increase of $59 million in our indebtedness, repurchases of common stock of $621 million and distributions to noncontrolling interests of $111 million.

We are a highly leveraged company with significant debt service requirements. Our debt totaled $31.514 billion at March 31, 2017. Our interest expense was $419 million for the first quarter of 2017 and $416 million for the first quarter of 2016.

In addition to cash flows from operations, available sources of capital include amounts available under our senior secured credit facilities ($2.139 billion and $1.689 billion available as of March 31, 2017 and April 30, 2017, respectively) and anticipated access to public and private debt markets.

During March 2016, we issued $1.500 billion aggregate principal amount of 5.250% senior secured notes due 2026. We used the net proceeds for general corporate purposes and to retire a portion of one of our senior secured term loans. We also entered into a joinder agreement to retire the remaining portion of this senior secured term loan using proceeds from a new $1.500 billion senior secured term loan facility maturing in March 2023.

Investments of our professional liability insurance subsidiaries, to maintain statutory equity and pay claims, totaled $399 million and $385 million at March 31, 2017 and December 31, 2016, respectively. An insurance subsidiary maintained net reserves for professional liability risks of $215 million at both March 31, 2017 and December 31, 2016. Our facilities are insured by a 100% owned insurance subsidiary for losses up to $50 million per occurrence; however, this coverage is subject to a $15 million per occurrence self-insured retention. Net reserves for the self-insured professional liability risks retained were $1.292 billion and $1.279 billion at March 31, 2017 and December 31, 2016, respectively. Claims payments, net of reinsurance recoveries, during the next 12 months are expected to approximate $409 million. We estimate that approximately $359 million of the expected net claim payments during the next 12 months will relate to claims subject to the self-insured retention.

Management believes that cash flows from operations, amounts available under our senior secured credit facilities and our anticipated access to public and private debt markets will be sufficient to meet expected liquidity needs during the next 12 months.

Market Risk

We are exposed to market risk related to changes in market values of securities. The investments in debt and equity securities of our 100% owned insurance subsidiaries were $395 million and $4 million, respectively, at March 31, 2017. These investments are carried at fair value, with changes in unrealized gains and losses being recorded as adjustments to other comprehensive income. At March 31, 2017, we had a net unrealized gain of $14 million on the insurance subsidiaries’ investment securities.

We are exposed to market risk related to market illiquidity. Investments in debt and equity securities of our 100% owned insurance subsidiaries could be impaired by the inability to access the capital markets. Should the 100% owned insurance subsidiaries require significant amounts of cash in excess of normal cash requirements to pay claims and other expenses on short notice, we may have difficulty selling these investments in a timely

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (continued)

Market Risk (continued)

 

manner or be forced to sell them at a price less than what we might otherwise have been able to in a normal market environment. We may be required to recognize other-than-temporary impairments on our investment securities in future periods should issuers default on interest payments or should the fair market valuations of the securities deteriorate due to ratings downgrades or other issue-specific factors.

We are also exposed to market risk related to changes in interest rates, and we periodically enter into interest rate swap agreements to manage our exposure to these fluctuations. Our interest rate swap agreements involve the exchange of fixed and variable rate interest payments between two parties, based on common notional principal amounts and maturity dates. The notional amounts of the swap agreements represent balances used to calculate the exchange of cash flows and are not our assets or liabilities. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions. The interest payments under these agreements are settled on a net basis. These derivatives have been recognized in the financial statements at their respective fair values. Changes in the fair value of these derivatives, which are designated as cash flow hedges, are included in other comprehensive income, and changes in the fair value of derivatives which have not been designated as hedges are recorded in operations.

With respect to our interest-bearing liabilities, approximately $4.044 billion of long-term debt at March 31, 2017 was subject to variable rates of interest, while the remaining balance in long-term debt of $27.470 billion at March 31, 2017 was subject to fixed rates of interest. Both the general level of interest rates and, for the senior secured credit facilities, our leverage affect our variable interest rates. Our variable debt is comprised primarily of amounts outstanding under the senior secured credit facilities. Borrowings under the senior secured credit facilities bear interest at a rate equal to an applicable margin plus, at our option, either (a) a base rate determined by reference to the higher of (1) the federal funds rate plus 0.50% and (2) the prime rate of Bank of America or (b) a LIBOR rate for the currency of such borrowing for the relevant interest period. The applicable margin for borrowings under the senior secured credit facilities may fluctuate according to a leverage ratio. The average effective interest rate for our long-term debt declined from 5.5% for the quarter ended March 31, 2016 to 5.4% for the quarter ended March 31, 2017.

The estimated fair value of our total long-term debt was $33.267 billion at March 31, 2017. The estimates of fair value are based upon the quoted market prices for the same or similar issues of long-term debt with the same maturities. Based on a hypothetical 1% increase in interest rates, the potential annualized reduction to future pretax earnings would be approximately $40 million. To mitigate the impact of fluctuations in interest rates, we generally target a portion of our debt portfolio to be maintained at fixed rates.

Our international operations and the related market risks associated with foreign currencies are currently insignificant to our results of operations and financial position.

Tax Examinations

We are subject to examination by federal, state and foreign taxing authorities. Management believes HCA Healthcare, Inc. and its predecessors, subsidiaries and affiliates properly reported taxable income and paid taxes in accordance with applicable laws and agreements established with IRS, state and foreign taxing authorities and final resolution of any disputes will not have a material, adverse effect on our results of operations or financial position. However, if payments due upon final resolution of any issues exceed our recorded estimates, such resolutions could have a material, adverse effect on our results of operations or financial position.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Operating Data

 

     2017      2016  

Number of hospitals in operation at:

     

March 31

     171        168  

June 30

        169  

September 30

        169  

December 31

        170  

Number of freestanding outpatient surgical centers in operation at:

     

March 31

     118        116  

June 30

        116  

September 30

        117  

December 31

        118  

Licensed hospital beds at(a):

     

March 31

     44,374        43,817  

June 30

        44,127  

September 30

        44,226  

December 31

        44,290  

Weighted average licensed beds(b):

     

Quarter:

     

First

     44,362        43,780  

Second

        44,064  

Third

        44,188  

Fourth

        44,274  

Year

        44,077  

Average daily census(c):

     

Quarter:

     

First

     26,699        26,325  

Second

        25,199  

Third

        24,748  

Fourth

        25,096  

Year

        25,340