HCA Healthcare, Inc. annual report, FY2014

HCA Healthcare, Inc. — 2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014; the filing also provides unaudited fourth-quarter results. The company operated 166 hospitals and 113 freestanding surgery centers across 20 states and England.

Financial performance and liquidity

Metric	2014	2013
Revenue, net of doubtful accounts	$36.918 billion	$34.182 billion
Revenue before doubtful-account provision	$40.087 billion	$38.040 billion
Income before taxes	$3.481 billion	$2.946 billion
Net income attributable to HCA	$1.875 billion	$1.556 billion
Diluted EPS	$4.16	$3.37
Cash from operations	$4.448 billion	$3.680 billion
Capital expenditures	$2.176 billion	$1.943 billion
Cash and cash equivalents at year-end	$566 million	$414 million
Working capital at year-end	$3.450 billion	$2.342 billion
Total debt at year-end	$29.645 billion	$28.376 billion

Revenue grew 8.0%; same-facility revenue rose 6.9%. Consolidated equivalent admissions increased 4.0%, and revenue per equivalent admission rose 3.8%.
Net income attributable to HCA increased 20.5%. Net margin was 5.1%, versus 4.6% in 2013; income before taxes was 9.4% of revenue, versus 8.6%.
Adjusted segment EBITDA, a non-GAAP measure, increased to $7.428 billion from $6.574 billion. Salaries and benefits declined to 45.1% of revenue from 45.8%; supplies declined to 17.0% from 17.5%.
Operating cash flow rose $768 million year over year. Operating cash flow less capital expenditures was approximately $2.272 billion, calculated from the reported figures. Investing activities used $2.918 billion, including $766 million for acquisitions.
HCA reported $2.112 billion of availability under its secured credit facilities at year-end. Of total debt, $4.399 billion was variable-rate; management estimated a 1 percentage-point rate increase could reduce annual pretax earnings by about $44 million.
Fourth-quarter 2014 revenue was $9.636 billion and net income attributable to HCA was $527 million, or $1.19 diluted EPS; fourth-quarter 2013 figures were $8.836 billion, $424 million and $0.92, respectively.

Material changes and unusual items

Revenue growth reflected higher volume and revenue per admission. Admissions increased 2.9%, emergency-room visits 6.9%, and inpatient surgeries 2.0% on a consolidated basis. Same-facility outpatient surgeries declined 0.1%.
The doubtful-account provision fell $689 million to $3.169 billion. However, charity care and uninsured discounts increased by $278 million and $789 million, respectively. Combined charity care, uninsured discounts and doubtful-account provision totaled $15.943 billion, or 30.2% of the related revenue base, versus 31.3% in 2013.
Management attributed lower same-facility uninsured admissions and emergency visits partly to patients gaining coverage through exchanges and Medicaid expansion. Uninsured revenue declined to 4.0% of revenue from 7.8%.
Interest expense declined $105 million to $1.743 billion, primarily due to a lower average interest rate. HCA refinanced debt during 2014 and recorded $335 million of pretax losses on debt retirement.
Other 2014 items included $78 million of legal claim costs and $29 million of net gains on facility sales. Results included $142 million of additional Texas Medicaid waiver revenue and $94 million from an administrative settlement of certain appealed Medicare claims.
HCA repurchased 28.583 million shares for $1.750 billion during 2014. No dividends were declared in 2014 or 2013.

Outlook, risks and contingencies

Management expected 2015 capital expenditures of approximately $2.4 billion; projects under construction carried an estimated $1.9 billion of remaining costs over five years. Management said operating cash flow, credit-facility availability and anticipated debt-market access should cover liquidity needs over the next 12 months.
For 2015, HCA estimated EHR incentive income of $40–$50 million and related operating expenses of $30–$40 million. It also expected share-based compensation expense to increase by approximately $60 million from 2014.
Key uncertainties include Medicare and Medicaid reimbursement reductions, quality-linked payment adjustments, Medicaid expansion and supplemental-payment changes, managed-care contract pricing, patient collections, labor costs, and implementation of ICD-10 coding in October 2015. Texas and Florida accounted for approximately 46% of 2014 revenue.
HCA remained highly leveraged, with debt covenants and substantial scheduled obligations. It also faced variable-rate exposure, potential refinancing risk and restrictions on certain transactions under its credit agreements.
Contingencies included DOJ review of implantable-defibrillator billing at 95 hospitals; a qui tam action and continuing government review concerning interventional cardiology medical necessity; and securities class and derivative litigation. The filing stated that the effects of the government matters could not be predicted.
In the Health Midwest matter, HCA recorded $78 million of additional legal costs in 2014. A $15 million settlement resolved the charity-care portion in February 2015; the capital-expenditure ruling remained subject to final judgment and HCA planned to appeal.
The UK competition authority’s proposed London hospital divestiture was sent back for further proceedings after the Competition Appeal Tribunal overturned certain findings. The ultimate outcome was not stated.
The IRS began an audit of HCA’s 2011 and 2012 federal returns. The filing reported $548 million of unrecognized tax benefits, including accrued interest, and said the potential change over the next year could not be estimated.
Management identified cyber and information-system security, professional-liability claims, and regulatory compliance as additional risks. The 2014 professional-liability reserve was $1.407 billion; the self-insured retention increased from $5 million to $15 million per occurrence effective January 1, 2015.

Important facts for investors to verify

Reconcile reported revenue and earnings growth for the $142 million Texas Medicaid item and $94 million Medicare claims settlement, and assess whether comparable revenue sources recur.
Track uninsured discounts, charity care, doubtful-account provisioning, patient receivable aging and collection trends; the allowance covered approximately 91.4% of patient-due receivables.
Review debt maturities, covenant headroom, revolver availability, refinancing activity and sensitivity to interest rates.
Monitor the Texas Medicaid waiver review and other state supplemental-payment programs, alongside Medicare payment and quality adjustments.
Follow material litigation and regulatory matters, particularly the Health Midwest capital claim, government billing reviews and London competition proceedings.
Confirm 2015 capital spending and EHR estimates against subsequent results. The filing reported an unqualified audit opinion and effective internal control over financial reporting as of December 31, 2014.