Business context and reporting period
HCA Holdings, Inc. filed this Form 10-K for the fiscal year ended December 31, 2015; the filing also provides unaudited fourth-quarter results. HCA operated 168 hospitals and 116 freestanding surgery centers across 20 states and England. Its business includes acute-care, psychiatric and rehabilitation hospitals, outpatient facilities and physician services.
Financial and operating performance
Unless otherwise noted, amounts are in U.S. dollars. Selected full-year figures:
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue, after doubtful-account provision | $39.678 billion | $36.918 billion |
| Revenue before doubtful-account provision | $43.591 billion | $40.087 billion |
| Net income attributable to HCA | $2.129 billion | $1.875 billion |
| Diluted earnings per share | $4.99 | $4.16 |
| Cash from operating activities | $4.734 billion | $4.448 billion |
| Capital expenditures | $2.375 billion | $2.176 billion |
| Total debt, including current maturities | $30.488 billion | $29.426 billion |
| Cash and cash equivalents at year-end | $741 million | $566 million |
| Working capital | $3.716 billion | $3.450 billion |
- Revenue rose 7.5%; HCA-attributable net income rose 13.6%. Net income attributable to HCA was 5.4% of revenue, versus 5.1% in 2014.
- Company-defined adjusted segment EBITDA was $7.915 billion, up from $7.428 billion. This is a non-GAAP measure.
- Operating cash flow less capital expenditures was approximately $2.359 billion. HCA used $2.583 billion in investing activities and $1.976 billion in financing activities.
- Operating volume increased: equivalent admissions rose 5.5%, admissions 4.1%, emergency-room visits 8.0%, inpatient surgeries 2.1% and outpatient surgeries 2.0%. Same-facility revenue increased 6.4%.
- Expense ratios as a share of revenue included salaries and benefits of 45.7%, supplies of 16.7%, other operating expenses of 17.9%, depreciation and amortization of 4.8%, and interest expense of 4.2%.
- Interest expense was $1.665 billion, down from $1.743 billion; HCA cited a lower average long-term debt rate, 5.6% versus 6.1%. About $4.671 billion of debt was variable-rate and $25.817 billion fixed-rate. A hypothetical 1 percentage-point rate increase was estimated to reduce annual pretax earnings by about $47 million.
- Fourth-quarter revenue was $10.249 billion, versus $9.636 billion in Q4 2014; net income attributable to HCA was $582 million versus $527 million, and diluted EPS was $1.40 versus $1.19.
Material changes versus the prior comparable period
- Revenue growth reflected a 5.5% increase in equivalent admissions and a 1.8% increase in revenue per equivalent admission. Same-facility equivalent admissions grew 4.6%.
- The provision for doubtful accounts increased $744 million to $3.913 billion. Uninsured discounts rose $1.693 billion to $10.692 billion; total charity care, uninsured discounts and doubtful-account provision reached $18.287 billion, or 31.5% of the related revenue measure, compared with $15.943 billion and 30.2% in 2014.
- Salaries and benefits rose to 45.7% of revenue from 45.1%. Supplies and other operating expenses declined as shares of revenue.
- HCA recorded $249 million in legal claim costs, versus $78 million in 2014, including $120 million net of expected insurance recoveries for shareholder and derivative settlements and $129 million related to Health Midwest litigation.
- Debt increased by about $1.062 billion year over year despite refinancing activity. HCA repurchased 31.991 million shares for $2.397 billion in 2015, compared with $1.750 billion in 2014; no dividends were declared in either year.
- HCA recorded $47 million of electronic health record incentive income, down from $125 million in 2014.
Outlook, management commentary, risks and unusual items
- Management expected 2016 capital expenditures of approximately $2.7 billion, with about $2.1 billion of additional costs to complete projects under construction over the next five years. It expected cash flows, credit-facility availability and anticipated debt-market access to meet liquidity needs over the next 12 months.
- HCA had approximately $2.179 billion available under its senior secured credit facilities at December 31, 2015. Management cautioned that HCA is highly leveraged; debt agreements include restrictive covenants and financial-ratio requirements.
- Key exposure includes government reimbursement changes, value-based payment programs, managed-care contract terms, labor costs, patient collections and uninsured care. Medicare and Medicaid represented 42.1% of 2015 revenue; domestic managed care and other insurers represented 55.2%.
- Florida and Texas accounted for approximately 47% of consolidated revenue. The Texas Medicaid Waiver Program, which contributed $347 million of supplemental Medicaid payments in 2015, was scheduled to expire September 30, 2016; its extension remained undecided.
- A court judgment in the Health Midwest matter totaled $434 million; HCA accrued $438 million including costs and interest at year-end and appealed in January 2016. The London competition regulator was reconsidering remedies that could require a hospital divestiture; further decisions were expected in 2016.
- A shareholder class-action settlement contemplated a $215 million HCA payment, subject to final court approval. HCA had recorded related legal costs; derivative claims included $19 million of insurance proceeds to HCA and $5.5 million of attorneys’ fees.
- Beginning in April 2016, selected-market hospitals, including many HCA facilities, were to participate in the mandatory Comprehensive Care for Joint Replacement bundled-payment model. HCA also cited risks from cybersecurity, regulatory investigations, litigation, insurance claims and hurricane exposure.
- HCA estimated 2016 EHR incentive income would not exceed $10 million. The filing does not provide a clear numeric earnings or revenue forecast for 2016.
Most important facts for investors to verify
- Reconcile reported revenue growth with the sharp increase in uninsured discounts and doubtful-account provision, and assess subsequent patient collections and payer mix.
- Review debt maturities, variable-rate exposure, covenant headroom, refinancing needs and the cash available to fund planned capital spending and repurchases.
- Track the final outcome and cash impact of the Health Midwest appeal, shareholder settlement approvals and UK competition proceedings.
- Confirm whether the Texas Medicaid Waiver was extended and how supplemental payments and other state programs changed after year-end.
- Assess 2016 performance against management’s capital-expenditure plans and the financial effects of bundled-payment and other reimbursement changes.