HCA Holdings, Inc. (HCA Healthcare): 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone fourth-quarter report; quarterly figures are unaudited. Amounts are in U.S. dollars.
Business context
HCA operated 170 hospitals and 118 freestanding surgery centers in 20 states and England. Its services include acute, psychiatric and rehabilitation care, surgery, emergency services and outpatient care. Florida and Texas together accounted for approximately 47% of 2016 consolidated revenue.
Financial and operating performance
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue, net of doubtful-account provision | $41.490 billion | $39.678 billion |
| Income before income taxes | $4.810 billion | $3.957 billion |
| Net income | $3.432 billion | $2.696 billion |
| Net income attributable to HCA | $2.890 billion | $2.129 billion |
| Diluted EPS | $7.30 | $4.99 |
| Cash provided by operating activities | $5.653 billion | $4.734 billion |
| Capital expenditures | $2.760 billion | $2.375 billion |
| Total debt, including current maturities | $31.376 billion | $30.488 billion |
| Working capital | $3.252 billion | $3.716 billion |
- Revenue grew 4.6%; management attributed the increase to 2.3% higher revenue per equivalent admission and 2.2% more equivalent admissions. Same-facility revenue grew 4.1%.
- Admissions increased 1.2% and emergency-room visits 4.1%. Occupancy was 58%, unchanged from 2015.
- Net income attributable to HCA was 7.0% of revenue, versus 5.4% in 2015. Adjusted segment EBITDA, a non-GAAP measure, was $8.218 billion, or approximately 19.8% of revenue, compared with $7.915 billion.
- Interest expense increased to $1.707 billion from $1.665 billion, primarily because average debt rose; the average interest rate declined to 5.5% from 5.6%. Approximately $3.902 billion of debt was variable-rate at year-end.
- Cash and cash equivalents were $646 million at year-end. HCA reported $2.097 billion of availability under its secured credit facilities. Operating cash flow increased $919 million year over year.
- HCA repurchased 36.325 million shares for $2.751 billion during 2016. No dividends were declared in 2016 or 2015.
Changes versus prior period and fourth quarter
- Revenue growth slowed from 7.5% in 2015 to 4.6% in 2016; equivalent-admission growth slowed from 5.5% to 2.2%.
- Uncompensated-care deductions and doubtful-account provision totaled $20.455 billion, up from $18.287 billion. Uninsured discounts increased to $13.047 billion, while the doubtful-account provision declined to $3.257 billion from $3.913 billion. The combined amount was 33.0% of revenue plus these deductions, compared with 31.5%.
- Fourth-quarter 2016 revenue was $10.641 billion, versus $10.249 billion in fourth-quarter 2015. Net income attributable to HCA was $920 million versus $582 million; diluted EPS was $2.39 versus $1.40. Fourth-quarter 2016 included $176 million of legal-claim benefits, while fourth-quarter 2015 included $108 million of legal-claim costs.
- Annual earnings comparisons were affected by significant unusual items. 2016 included $246 million of net legal-claim benefits, $51 million of tax benefits from resolving 2011–2012 federal tax issues, and $162 million of tax benefits from adopting a share-based-payment accounting standard. 2015 included $249 million of legal-claim costs and $135 million of debt-retirement losses.
Outlook, risks and contingencies
- Management expected 2017 capital expenditures of approximately $2.9 billion and said operating cash flow, available credit facilities and anticipated debt-market access should meet liquidity needs over the next 12 months. Projects under construction were expected to require a further $2.5 billion over five years.
- HCA is highly leveraged. Debt agreements impose operating and financial covenants; management cautioned that covenant breaches could trigger acceleration and threaten liquidity. A hypothetical 1% interest-rate increase was estimated to reduce annual pretax earnings by approximately $39 million.
- Major uncertainties include Medicare and Medicaid reimbursement changes, possible repeal or replacement of the Health Reform Law, supplemental-payment programs (including the Texas Medicaid waiver), payer bargaining power, uninsured and patient-responsibility collections, labor costs, and value-based or bundled-payment models.
- HCA identified regulatory and litigation exposure, including claims under healthcare fraud-and-abuse laws, reimbursement audits, professional-liability claims, privacy and cybersecurity risks, and possible effects of hurricanes. It reported professional-liability reserves of $1.539 billion and estimated net claim payments of about $382 million over the next 12 months.
- The Health Midwest dispute was settled after year-end: HCA paid $188 million on February 1, 2017. The settlement reduced the recorded accrual by $290 million and produced the 2016 net legal-claim benefit.
- Management reported effective disclosure controls and internal control over financial reporting; Ernst & Young issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much of 2016 earnings growth reflects recurring operations versus legal-claim and tax benefits; the reported figures are not adjusted for these items.
- Whether rising uncompensated-care deductions and patient receivables affect future collections and operating cash flow.
- Debt maturity, covenant headroom, refinancing needs and exposure to variable interest rates.
- The continuation and terms of Texas and other state Medicaid supplemental-payment programs, and the effect of federal healthcare-policy changes.
- Whether planned capital investment and share repurchases remain supportable alongside debt service and the company’s liquidity needs.