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HCA Healthcare, Inc. - Quarter Report: 2016 March (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2016

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 Holdings, 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)

Not Applicable

(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  x    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  x    No  ¨

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

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

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, 2016

Voting common stock, $.01 par value   391,053,900 shares

 

 

 


Table of Contents

HCA HOLDINGS, INC.

Form 10-Q

March 31, 2016

 

         Page of
Form  10-Q
 

Part I.

  Financial Information   

Item 1.

  Financial Statements (Unaudited):   
 

Condensed Consolidated Income Statements — for the quarters ended March 31, 2016 and 2015

     2   
 

Condensed Consolidated Comprehensive Income Statements — for the quarters ended March 31, 2016 and 2015

     3   
 

Condensed Consolidated Balance Sheets — March 31, 2016 and December 31, 2015

     4   
 

Condensed Consolidated Statements of Cash Flows — for the quarters ended March 31, 2016 and 2015

     5   
 

Notes to Condensed Consolidated Financial Statements

     6   

Item 2.

 

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

     27   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     43   

Item 4.

 

Controls and Procedures

     43   

Part II.

  Other Information   

Item 1.

 

Legal Proceedings

     43   

Item 1A.

 

Risk Factors

     46   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     47   

Item 6.

 

Exhibits

     48   

Signatures

     49   

 

1


Table of Contents

HCA HOLDINGS, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS

FOR THE QUARTERS ENDED MARCH 31, 2016 AND 2015

Unaudited

(Dollars in millions, except per share amounts)

 

     2016     2015  

Revenues before provision for doubtful accounts

   $ 11,050      $ 10,322   

Provision for doubtful accounts

     790        646   
  

 

 

   

 

 

 

Revenues

     10,260        9,676   

Salaries and benefits

     4,702        4,398   

Supplies

     1,714        1,638   

Other operating expenses

     1,857        1,717   

Electronic health record incentive income

     (4     (19

Equity in earnings of affiliates

     (12     (19

Depreciation and amortization

     479        473   

Interest expense

     416        419   

Losses (gains) on sales of facilities

     1        (9

Legal claim costs

     12          
  

 

 

   

 

 

 
     9,165        8,598   
  

 

 

   

 

 

 

Income before income taxes

     1,095        1,078   

Provision for income taxes

     284        358   
  

 

 

   

 

 

 

Net income

     811        720   

Net income attributable to noncontrolling interests

     117        129   
  

 

 

   

 

 

 

Net income attributable to HCA Holdings, Inc.

   $ 694      $ 591   
  

 

 

   

 

 

 

Per share data:

    

Basic earnings per share

   $ 1.75      $ 1.41   

Diluted earnings per share

   $ 1.69      $ 1.36   

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

    

Basic

     396.397        420.148   

Diluted

     410.575        435.309   

See accompanying notes.

 

2


Table of Contents

HCA HOLDINGS, INC.

CONDENSED CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS

FOR THE QUARTERS ENDED MARCH 31, 2016 AND 2015

Unaudited

(Dollars in millions)

 

     2016     2015  

Net income

   $ 811      $ 720   

Other comprehensive income (loss) before taxes:

    

Foreign currency translation

     (43     (51

Unrealized gains on available-for-sale securities

     2        1   

Defined benefit plans

              

Pension costs included in salaries and benefits

     4        6   
  

 

 

   

 

 

 
     4        6   

Change in fair value of derivative financial instruments

     (38     (23

Interest costs included in interest expense

     28        31   
  

 

 

   

 

 

 
     (10     8   
  

 

 

   

 

 

 

Other comprehensive loss before taxes

     (47     (36

Income tax benefits related to other comprehensive income items

     (18     (15
  

 

 

   

 

 

 

Other comprehensive loss

     (29     (21
  

 

 

   

 

 

 

Comprehensive income

     782        699   

Comprehensive income attributable to noncontrolling interests

     117        129   
  

 

 

   

 

 

 

Comprehensive income attributable to HCA Holdings, Inc.

   $ 665      $ 570   
  

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

HCA HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

(Dollars in millions)

 

     March 31,
2016
    December 31,
2015
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 852      $ 741   

Accounts receivable, less allowance for doubtful accounts of $5,205 and $5,326

     5,880        5,889   

Inventories

     1,415        1,439   

Other

     1,054        1,163   
  

 

 

   

 

 

 
     9,201        9,232   

Property and equipment, at cost

     34,978        34,614   

Accumulated depreciation

     (19,921     (19,600
  

 

 

   

 

 

 
     15,057        15,014   

Investments of insurance subsidiaries

     425        432   

Investments in and advances to affiliates

     174        178   

Goodwill and other intangible assets

     6,713        6,731   

Other

     1,206        1,157   
  

 

 

   

 

 

 
   $ 32,776      $ 32,744   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ DEFICIT     

Current liabilities:

    

Accounts payable

   $ 1,944      $ 2,170   

Accrued salaries

     1,309        1,233   

Other accrued expenses

     1,919        1,880   

Long-term debt due within one year

     226        233   
  

 

 

   

 

 

 
     5,398        5,516   

Long-term debt, less net debt issuance costs of $179 and $167

     30,328        30,255   

Professional liability risks

     1,116        1,115   

Income taxes and other liabilities

     1,933        1,904   

Stockholders’ deficit:

    

Common stock $0.01 par; authorized 1,800,000,000 shares; outstanding 393,650,000 shares in 2016 and 398,738,700 shares in 2015

     4        4   

Accumulated other comprehensive loss

     (294     (265

Retained deficit

     (7,266     (7,338
  

 

 

   

 

 

 

Stockholders’ deficit attributable to HCA Holdings, Inc.

     (7,556     (7,599

Noncontrolling interests

     1,557        1,553   
  

 

 

   

 

 

 
     (5,999     (6,046
  

 

 

   

 

 

 
   $ 32,776      $ 32,744   
  

 

 

   

 

 

 

See accompanying notes.

 

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HCA HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE QUARTERS ENDED MARCH 31, 2016 AND 2015

Unaudited

(Dollars in millions)

 

     2016     2015  

Cash flows from operating activities:

    

Net income

   $ 811      $ 720   

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

    

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

    

Accounts receivable

     (789     (895

Provision for doubtful accounts

     790        646   
  

 

 

   

 

 

 

Accounts receivable, net

     1        (249

Inventories and other assets

     14        (106

Accounts payable and accrued expenses

     (371     (312

Depreciation and amortization

     479        473   

Income taxes

     360        438   

Losses (gains) on sales of facilities

     1        (9

Legal claim costs

     12          

Amortization of debt issuance costs

     10        10   

Share-based compensation

     65        48   

Other

     17        5   
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,399        1,018   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of property and equipment

     (509     (446

Acquisition of hospitals and health care entities

     (9     (28

Disposal of hospitals and health care entities

     4        15   

Change in investments

     11        22   

Other

     7        5   
  

 

 

   

 

 

 

Net cash used in investing activities

     (496     (432
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Issuances of long-term debt

     3,000        1,000   

Net change in revolving bank credit facilities

     (930     (260

Repayment of long-term debt

     (2,011     (791

Distributions to noncontrolling interests

     (111     (132

Payment of debt issuance costs

     (22     (11

Repurchases of common stock

     (621     (366

Other

     (97     (6
  

 

 

   

 

 

 

Net cash used in financing activities

     (792     (566
  

 

 

   

 

 

 

Change in cash and cash equivalents

     111        20   

Cash and cash equivalents at beginning of period

     741        566   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 852      $ 586   
  

 

 

   

 

 

 

Interest payments

   $ 490      $ 487   

Income tax refunds, net

   $ (76   $ (118

See accompanying notes.

 

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HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Reporting Entity

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 Holdings, Inc. and partnerships and joint ventures in which such subsidiaries are partners. At March 31, 2016, these affiliates owned and operated 168 hospitals, 116 freestanding surgery centers and provided extensive outpatient and ancillary services. HCA Holdings, 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 Holdings, 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 $85 million and $74 million for the quarters ended March 31, 2016 and 2015, respectively. Operating results for the quarter ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. 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, 2015.

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 Medicare, Medicaid and other programs), managed care health plans (including the health insurance exchanges), commercial insurance companies 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 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 related to uninsured accounts to record the net self-pay revenues at the estimated amounts we expect to collect. Our revenues from third-party payers, the uninsured and other payers for the quarters ended March 31, 2016 and 2015 are summarized in the following table (dollars in millions):

 

     2016      Ratio     2015      Ratio  

Medicare

   $ 2,266         22.1   $ 2,234         23.1

Managed Medicare

     1,104         10.8        1,052         10.9   

Medicaid

     427         4.2        452         4.7   

Managed Medicaid

     597         5.8        549         5.7   

Managed care and other insurers

     5,702         55.6        5,216         53.9   

International (managed care and other insurers)

     317         3.1        321         3.3   
  

 

 

    

 

 

   

 

 

    

 

 

 
     10,413         101.6        9,824         101.6   

Uninsured

     189         1.8        68         0.7   

Other

     448         4.4        430         4.4   
  

 

 

    

 

 

   

 

 

    

 

 

 

Revenues before provision for doubtful accounts

     11,050         107.8        10,322         106.7   

Provision for doubtful accounts

     (790      (7.8     (646      (6.7
  

 

 

    

 

 

   

 

 

    

 

 

 

Revenues

   $ 10,260         100.0   $ 9,676         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

 

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 United States Generally Accepted Accounting Principles (“US GAAP”) and International Financial Reporting Standards revenue recognition guidance, will require significant management judgment in addition to changing the way many companies recognize revenue in their financial statements. The standard was originally scheduled to become effective for public entities for annual and interim periods beginning after December 15, 2016. Early adoption was originally not to be permitted under US GAAP. In July 2015, the FASB decided to defer the effective date of the new revenue standard by one year, but will permit entities to adopt one year earlier if they choose (i.e., the original effective date). 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.

In November 2015, the FASB issued Accounting Standards Update 2015-17, Balance Sheet Classification of Deferred Taxes, which requires that all deferred tax assets and liabilities be classified as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. The FASB determined that this simplification could reduce cost and complexity without decreasing the usefulness of information provided to financial statement users. We elected to adopt the new presentation prospectively at December 31, 2015.

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 entities for annual 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. While we are currently evaluating the provisions of ASU 2016-02 to determine how our financial statements will be affected, we believe the primary effect of adopting the new standard will be to record assets and obligations for current operating leases.

In March 2016, the FASB issued Accounting Standards Update 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (“ASU 2016-05”), which clarified that a novation of a derivative contract in a hedge accounting relationship does not, in and of itself, represent a termination of the original derivative instrument or a change in the critical terms of the hedge relationship. We elected to adopt ASU 2016-05 prospectively effective January 1, 2016.

In March 2016, the FASB issued Accounting Standards Update 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which requires changes to how companies account for certain aspects of share-based payments to employees, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. We elected to adopt ASU 2016-09 prospectively effective January 1, 2016.

Reclassifications

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

 

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Table of Contents

HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

NOTE 2 — ACQUISITIONS AND DISPOSITIONS

During the quarters ended March 31, 2016 and 2015, we paid $9 million and $28 million, respectively, to acquire other nonhospital health care entities. 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 quarter ended March 31, 2015, we received proceeds of $15 million and recognized net pretax gains of $9 million related to sales of real estate and other investments.

NOTE 3 — INCOME TAXES

During 2014, the IRS Examination Division began an audit of HCA Holdings, Inc.’s 2011 and 2012 federal income tax returns. We are also subject to examination by state and foreign taxing authorities.

Our liability for unrecognized tax benefits was $537 million, including accrued interest of $67 million, as of March 31, 2016 ($554 million and $73 million, respectively, as of December 31, 2015). Unrecognized tax benefits of $215 million ($233 million as of December 31, 2015) would affect the effective rate, if recognized. The provision for income taxes also reflects a $6 million ($4 million net of tax) reduction in interest expense related to taxing authority examinations for the quarter ended March 31, 2016.

Our provision for income taxes for the first quarter of 2016 included a tax benefit of $74 million related to the adoption of ASU 2016-09, which changes how companies account for certain aspects of share-based payments to employees. Under ASU 2016-09, we no longer record 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) in equity. Instead, we recognize these tax benefits (and deficiencies, if applicable) as a component of our tax provision. This reporting change is applied prospectively and prior period amounts are not restated (the excess tax benefit for the first quarter of 2015, related to the settlement of employee equity awards, was $70 million and was recorded in equity). ASU 2016-09 requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity, as previously required. We have elected to apply the change to the statement of cash flows presentation prospectively.

Depending on the resolution of any IRS, 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.

 

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Table of Contents

HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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, 2016 and 2015 (dollars and shares in millions, except per share amounts):

 

     2016      2015  

Net income attributable to HCA Holdings, Inc.

   $ 694       $ 591   

Weighted average common shares outstanding

     396.397         420.148   

Effect of dilutive incremental shares

     14.178         15.161   
  

 

 

    

 

 

 

Shares used for diluted earnings per share

     410.575         435.309   
  

 

 

    

 

 

 

Earnings per share:

     

Basic earnings per share

   $ 1.75       $ 1.41   

Diluted earnings per share

   $ 1.69       $ 1.36   

NOTE 5 — INVESTMENTS OF INSURANCE SUBSIDIARIES

A summary of our insurance subsidiaries’ investments at March 31, 2016 and December 31, 2015 follows (dollars in millions):

 

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

Debt securities:

          

States and municipalities

   $ 415       $ 20       $ (1   $ 434   

Money market funds

     39                        39   
  

 

 

    

 

 

    

 

 

   

 

 

 
     454         20         (1     473   

Equity securities

     1         3                4   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 455       $ 23       $ (1     477   
  

 

 

    

 

 

    

 

 

   

Amounts classified as current assets

             (52
          

 

 

 

Investment carrying value

           $ 425   
          

 

 

 

 

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Table of Contents

HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 5 — INVESTMENTS OF INSURANCE SUBSIDIARIES (continued)

 

     December 31, 2015  
     Amortized
Cost
     Unrealized
Amounts
    Fair
Value
 
        Gains      Losses    

Debt securities:

          

States and municipalities

   $ 428       $ 17       $ (1   $ 444   

Money market funds

     34                        34   
  

 

 

    

 

 

    

 

 

   

 

 

 
     462         17         (1     478   

Equity securities

             4                4   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 462       $ 21       $ (1     482   
  

 

 

    

 

 

    

 

 

   

Amounts classified as current assets

             (50
          

 

 

 

Investment carrying value

           $ 432   
          

 

 

 

At March 31, 2016 and December 31, 2015, 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, 2016 were as follows (dollars in millions):

 

     Amortized
Cost
     Fair
Value
 

Due in one year or less

   $ 92       $ 92   

Due after one year through five years

     152         156   

Due after five years through ten years

     135         146   

Due after ten years

     75         79   
  

 

 

    

 

 

 
   $ 454       $ 473   
  

 

 

    

 

 

 

The average expected maturity of the investments in debt securities at March 31, 2016 was 3.8 years, compared to the average scheduled maturity of 5.4 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 HOLDINGS, 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, 2016 (dollars in millions):

 

     Notional
Amount
     Maturity Date      Fair
Value
 

Pay-fixed interest rate swaps

   $ 3,000         December 2016       $ (68

Pay-fixed interest rate swaps

     1,000         December 2017         (28

Pay-fixed interest rate swaps (starting in December 2016)

     2,000         December 2021         (24

During the next 12 months, we estimate $89 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, 2016 (dollars in millions):

 

Derivatives in Cash Flow Hedging Relationships

   Amount of Loss
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

   $ 24         Interest expense       $ 28   

Credit-risk-related Contingent Features

We have agreements with each of our derivative counterparties that contain a provision where we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness. As of March 31, 2016, we have not been required to post any collateral related to these agreements. If we had breached these provisions at March 31, 2016, we would have been required to settle our obligations under the agreements at their aggregate, estimated termination value of $122 million.

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, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes 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

 

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HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

 

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, and considers factors specific to the asset or liability.

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 management’s judgment, after consideration of market factors and the absence of market transparency, market liquidity and observable inputs. Our valuation models derived fair market values compared to tax-equivalent yields of other securities of similar credit worthiness and similar effective maturities.

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.

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, 2016 and December 31, 2015, we determined the credit valuation adjustments were not significant to the overall valuation of our derivatives.

 

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HCA HOLDINGS, 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, 2016 and December 31, 2015, aggregated by the level in the fair value hierarchy within which those measurements fall (dollars in millions):

 

    March 31, 2016  
    Fair Value     Fair Value Measurements Using  
      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

  $ 434      $      $ 429      $ 5   

Money market funds

    39        39                 
 

 

 

   

 

 

   

 

 

   

 

 

 
    473        39        429        5   

Equity securities

    4        4                 
 

 

 

   

 

 

   

 

 

   

 

 

 

Investments of insurance subsidiaries

    477        43        429        5   

Less amounts classified as current assets

    (52     (39     (13       
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 425      $ 4      $ 416      $ 5   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

       

Interest rate swaps (Income taxes and other liabilities)

  $ 120      $      $ 120      $   
    December 31, 2015  
          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

  $ 444      $      $ 438      $ 6   

Money market funds

    34        34                 
 

 

 

   

 

 

   

 

 

   

 

 

 
    478        34        438        6   

Equity securities

    4        4                 
 

 

 

   

 

 

   

 

 

   

 

 

 

Investments of insurance subsidiaries

    482        38        438        6   

Less amounts classified as current assets

    (50     (34     (16       
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 432      $ 4      $ 422      $ 6   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

       

Interest rate swaps (Income taxes and other liabilities)

  $ 110      $      $ 110      $  —   

 

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HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Derivative Financial Instruments (continued)

 

We had $1 million of settlements related to the investments of our insurance subsidiaries which have fair value measurements based on significant unobservable inputs (Level 3) during the quarter ended March 31, 2016. The estimated fair value of our long-term debt was $31.858 billion and $31.411 billion at March 31, 2016 and December 31, 2015, respectively, compared to carrying amounts, excluding net debt issuance costs, aggregating $30.733 billion and $30.655 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, 2016 and December 31, 2015, including related interest rates at March 31, 2016, follows (dollars in millions):

 

     March 31,
2016
    December 31,
2015
 

Senior secured asset-based revolving credit facility (effective interest rate of 1.8%)

   $ 2,100      $ 3,030   

Senior secured revolving credit facility

              

Senior secured term loan facilities (effective interest rate of 5.3%)

     5,161        5,639   

Senior secured first lien notes (effective interest rate of 5.5%)

     12,600        11,100   

Other senior secured debt (effective interest rate of 5.7%)

     620        634   
  

 

 

   

 

 

 

First lien debt

     20,481        20,403   

Senior unsecured notes (effective interest rate of 6.5%)

     10,252        10,252   

Net debt issuance costs

     (179     (167
  

 

 

   

 

 

 

Total debt (average life of 6.6 years, rates averaging 5.5%)

     30,554        30,488   

Less amounts due within one year

     226        233   
  

 

 

   

 

 

 
   $ 30,328      $ 30,255   
  

 

 

   

 

 

 

2016 Activity

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.

2015 Activity

During December 2015, we issued $500 million aggregate principal amount of 5.875% senior notes due 2026. We used the net proceeds for general corporate purposes.

During November 2015, we issued $1.000 billion aggregate principal amount of 5.875% senior notes due 2026. We used the net proceeds to redeem all $1.000 billion aggregate principal amount of our outstanding 6.500% senior notes due 2016.

During June 2015, we entered into a joinder agreement to retire certain of our existing senior secured term loans using proceeds from a new $1.400 billion senior secured term loan credit facility maturing in June 2020.

 

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HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8 — LONG-TERM DEBT (continued)

2015 Activity (continued)

 

During May 2015, we issued $1.600 billion aggregate principal amount of 5.375% senior notes due 2025. We used the net proceeds to redeem all $1.525 billion aggregate principal amount of our outstanding 7 3/4% senior notes due 2021.

During January 2015, we issued $1.000 billion aggregate principal amount of 5.375% senior notes due 2025. We used a portion of the net proceeds to repay at maturity our $750 million aggregate principal amount of 6.375% senior notes due 2015.

NOTE 9 — CONTINGENCIES AND LEGAL CLAIM COSTS

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 punitive damages against us which may not be covered by insurance. We are subject to claims 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.

Government Investigations, Claims and Litigation

Health care companies are subject to numerous investigations by various governmental agencies. Further, 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.

On April 2, 2014, the UK Competition and Markets Authority (“Authority”) issued a final report on its investigation of the private health care market in London. It concluded, among other things, that many private hospitals face little competition in central London, and that there are high barriers to entry. As part of its remedies package, the Authority ordered HCA to sell either: (a) its London Bridge and Princess Grace hospitals; or (b) its Wellington Hospital, including the Platinum Medical Centre. It also imposed other remedial conditions on HCA and other private health care providers, including: regulation of incentives to referring physicians; increased access to information about fees and performance; and restrictions on future arrangements between private providers and National Health Service private patient units. HCA disagrees with the Authority’s assessment of the competitive conditions for hospitals in London, as well as its proposed divestiture remedy, and appealed the decision to the Competition Appeal Tribunal. The Competition Appeal Tribunal overturned certain of the Authority’s findings and sent the matter back to the Authority for further proceedings. In November 2015, following consideration of additional evidence, the Authority issued a provisional decision that again found there were adverse effects on competition in the private hospital market in central London. The November 2015 provisional decision modified some of the Authority’s earlier factual conclusions and acknowledged certain mitigating factors for some of the effects noted in the prior decision. The November 2015 provisional decision also offered additional potential remedies, which continued to include divestment of one or more of HCA’s London hospitals. Following a period of consultation on the potential additional remedies, the Authority concluded, in a provisional decision issued March 22, 2016, that none of the additional remedies, including divestiture,

 

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HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9 — CONTINGENCIES AND LEGAL CLAIM COSTS (continued)

Government Investigations, Claims and Litigation (continued)

would be both effective and proportionate. A final decision is anticipated in May or June of 2016. Should HCA or any other party disagree with the Authority’s final decision, there would be an opportunity to appeal to the Competitive Appeal Tribunal.

Securities Class Action Litigation

On October 28, 2011, a shareholder action, Schuh v. HCA Holdings, Inc. et al., was filed in the United States District Court for the Middle District of Tennessee seeking monetary relief. The case sought to include as a class all persons who acquired the Company’s stock pursuant or traceable to the Company’s Registration Statement issued in connection with the March 9, 2011 initial public offering. The lawsuit asserted a claim under Section 11 of the Securities Act of 1933 against the Company, certain members of the board of directors, and certain underwriters in the offering. It further asserted a claim under Section 15 of the Securities Act of 1933 against the same members of the board of directors. The action alleged various deficiencies in the Company’s disclosures in the Registration Statement. Subsequently, two additional class action complaints, Kishtah v. HCA Holdings, Inc. et al. and Daniels v. HCA Holdings, Inc. et al., setting forth substantially similar claims against substantially the same defendants were filed in the same federal court on November 16, 2011 and December 12, 2011, respectively. All three of the cases were consolidated. On May 3, 2012, the court appointed New England Teamsters & Trucking Industry Pension Fund as Lead Plaintiff for the consolidated action. On July 13, 2012, the lead plaintiff filed an amended complaint asserting claims under Sections 11 and 12(a)(2) of the Securities Act of 1933 against the Company, certain members of the board of directors, and certain underwriters in the offering. It further asserted a claim under Section 15 of the Securities Act of 1933 against the same members of the board of directors and Hercules Holding II, LLC, a majority shareholder of the Company at the time of the initial public offering. The consolidated complaint alleged deficiencies in the Company’s disclosures in the Registration Statement and Prospectus relating to: (1) the accounting for the Company’s 2006 recapitalization and 2010 reorganization; (2) the Company’s failure to maintain effective internal controls relating to its accounting for such transactions; and (3) the Company’s Medicare and Medicaid revenue growth rates. The Company and other defendants moved to dismiss the amended complaint on September 11, 2012. The court granted the motion in part on May 28, 2013. The action proceeded to discovery on the remaining claims. The plaintiffs’ motion for class certification was granted on September 22, 2014. The court certified a class consisting of all persons that acquired HCA stock on or before October 28, 2011 (the date of the lawsuit) pursuant to the Registration Statement issued in connection with the March 9, 2011 initial public offering. A request to the court of appeals to hear an immediate appeal of this ruling was denied. Following the close of discovery, plaintiffs and defendants each filed motions for summary judgment and to strike certain of the expert witnesses.

In addition to the above described consolidated shareholder class action, on December 8, 2011, a federal shareholder derivative action, Sutton v. Bracken, et al., putatively initiated in the name of the Company, was filed in the United States District Court for the Middle District of Tennessee against certain officers and present and former directors of the Company seeking monetary relief. The action alleged breaches of fiduciary duties by the named officers and directors in connection with the accounting and earnings claims set forth in the shareholder class actions described above. Setting forth substantially similar claims against substantially the same defendants, an additional federal derivative action, Schroeder v. Bracken, et al., was filed in the United States District Court for the Middle District of Tennessee on December 16, 2011, and a state derivative action, Bagot v. Bracken, et al., was filed in Tennessee state court in the Davidson County Circuit Court on December 20, 2011. The federal derivative actions were consolidated in the Middle District of Tennessee and stayed pending developments in the shareholder class actions. The state derivative action had also been stayed pending developments in the shareholder class actions, but that stay has expired. The plaintiff in the state

 

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HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9 — CONTINGENCIES AND LEGAL CLAIM COSTS (continued)

Securities Class Action Litigation (continued)

 

derivative action subsequently filed an amended complaint on September 9, 2013 that added additional allegations made in the shareholder class actions. On September 24, 2013, an additional state derivative action, Steinberg v. Bracken, et al., was filed in Tennessee state court in the Davidson County Circuit Court. This action against our board of directors was consolidated with the earlier filed state derivative action. The plaintiffs in the consolidated action filed a consolidated complaint on December 4, 2013. The Company filed a motion to again stay the state derivative action pending developments in the class action, but the court did not act on the motion.

On November 3, 2015, the Company reached a preliminary agreement in principle to settle the Schuh shareholder class action and the Sutton, Schroeder and Bagot derivative actions. The preliminary settlement agreement provided for a resolution of all of the pending claims in the shareholder class action and the derivative suits, without any admission or concession of wrongdoing by the Company or the other defendants, and was contingent upon, among other things, execution of final settlement documents, successful negotiation of certain non-monetary terms, approval by the Company’s Board of Directors, notification to the Schuh shareholder class, and preliminary and final approval of the settlements by the state and federal courts in Tennessee. The federal court gave preliminary approval to the shareholder class action settlement on January 13, 2016, provided for class notification, set a hearing for final approval of the settlement for April 11, 2016, and gave final approval of the settlement on that date. The state court in Bagot gave preliminary approval to the settlement of the derivative claims on January 28, 2016, set a hearing for final approval on April 12, 2016, and gave final approval of the settlement on that date. The federal derivative action will be dismissed by stipulation of the parties.

The monetary terms of the settlement in the Schuh case include a payment by HCA of $215 million in return for a full release of all claims against all defendants, including the Company, its officers and directors, the underwriters and Hercules Holding II, LLC, a majority shareholder of the Company at the time of the initial public offering. The terms of the settlement of the derivative cases include receipt by the Company of $19 million from insurance policies covering the claims asserted in the derivative cases, certain corporate governance reforms and agreement by the Company to pay attorneys’ fees in the aggregate amount of $5.5 million in return for releases of all claims against all defendants. In the fourth quarter of 2015, HCA recorded legal claim costs, net of expected insurance recoveries, of $120 million for the expected settlements of the shareholder action, the derivative cases and related costs.

Health Midwest Litigation

In October 2009, the Health Care Foundation of Greater Kansas City, a nonprofit health foundation, filed suit against HCA Inc. in the Circuit Court of Jackson County, Missouri and alleged that HCA did not fund the level of capital expenditures and uncompensated care agreed to in connection with HCA’s purchase of hospitals from Health Midwest in 2003. The central issue in the case was whether HCA’s construction of new hospitals counted towards its $450 million five-year capital commitment. In addition, the plaintiff alleged that HCA did not make its required capital expenditures in a timely fashion. On January 24, 2013, the court ruled in favor of the plaintiff and awarded at least $162 million. The court also ordered a court-supervised accounting of HCA’s capital expenditures, as well as of expenditures on charity and uncompensated care during the ten years following the purchase. The court also indicated it would award plaintiff attorneys fees, which the parties have stipulated are approximately $12 million for the trial phase. HCA recorded $175 million of legal claim costs in the fourth quarter of 2012 related to this ruling, and, consistent with the judge’s order, has been accruing interest on that sum at 9% per annum. On April 25, 2014, the parties stipulated to an additional $78 million shortfall relating to the capital expenditures issue. HCA recorded $78 million of legal claims costs in the first quarter of 2014 as a result of the stipulation, and accrued interest on that amount at 9% per annum. Pursuant to the terms of the

 

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HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9 — CONTINGENCIES AND LEGAL CLAIM COSTS (continued)

Health Midwest Litigation (continued)

 

stipulation, the parties have preserved their respective rights to contest the judge’s underlying ruling, whether through motions in the trial court or on appeal. On February 9, 2015, the parties reached an agreement to settle the part of their dispute relating to charity and uncompensated care for $15 million. The foundation is required to use that amount, net of attorneys’ fees, for charitable activities in the Kansas City area. The parties also agreed on an additional amount for attorneys’ fees for the plaintiff for the accounting phase of the case. The parties filed post-trial motions, on which the court ruled on October 21, 2015. The court denied defendants’ motion to have the court change its rulings on liability and damages related to the capital expenditures issue. The court granted the plaintiff’s motion for an award of additional pre-judgment interest, but did not specify whether the interest awarded was simple interest or would be compounded. The court subsequently concluded that interest was to be compounded, and on December 9, 2015, the court entered judgment in the case in the total sum of $434 million, with interest continuing to accrue at 9% per annum, compounded annually, from and after November 19, 2015, until the matter is resolved. At March 31, 2016 and December 31, 2015, the Company had accrued liabilities of $448 million and $438 million, respectively, for the damages, costs and interest related to this litigation. On January 15, 2016, the Company filed a Notice of Appeal in the Missouri Court of Appeals for the Western District. The Court of Appeals has set a schedule that would complete the parties’ briefing by November 2016. Briefing will likely be followed by oral argument, which has not yet been scheduled.

 

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HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 10 — CAPITAL STRUCTURE

 

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

 

    Equity (Deficit) Attributable to HCA Holdings, 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, 2015

    398.739      $ 4      $      $ (265   $ (7,338   $ 1,553      $ (6,046

Comprehensive income

                         (29     694        117        782   

Repurchase of common stock

    (8.921                          (621            (621

Distributions

                                       (111     (111

Share-based benefit plans

    3.832               (2                          (2

Other

                  2               (1     (2     (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at March 31, 2016

    393.650      $ 4      $      $ (294   $ (7,266   $ 1,557      $ (5,999
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the quarter ended March 31, 2016, we repurchased 8,921,200 shares of our common stock at an average price of $69.56 per share through market purchases pursuant to the $3.0 billion share repurchase program authorized during October 2015. At March 31, 2016, we had $1.983 billion of repurchase authorization available under the October 2015 authorization.

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, 2015

   $ 13       $ (74   $ (135   $ (69   $ (265

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

     2                              2   

Foreign currency translation adjustments, net of $17 income tax benefit

             (26                   (26

Change in fair value of derivative instruments, net of $14 income tax benefit

                           (24     (24

Expense reclassified into operations from other comprehensive income, net of $2 and $11, respectively, income tax benefits

                    2        17        19   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances at March 31, 2016

   $ 15       $ (100   $ (133   $ (76   $ (294
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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 84 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 78 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.

 

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HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 11 — SEGMENT AND GEOGRAPHIC INFORMATION (continued)

 

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, adjusted segment EBITDA and depreciation and amortization for the quarters ended March 31, 2016 and 2015 are summarized in the following table (dollars in millions):

 

     2016      2015  

Revenues:

     

National Group

   $ 4,967       $ 4,650   

American Group

     4,780         4,501   

Corporate and other

     513         525   
  

 

 

    

 

 

 
   $ 10,260       $ 9,676   
  

 

 

    

 

 

 

Equity in earnings of affiliates:

     

National Group

   $ (2    $ (3

American Group

     (9      (8

Corporate and other

     (1      (8
  

 

 

    

 

 

 
   $ (12    $ (19
  

 

 

    

 

 

 

Adjusted segment EBITDA:

     

National Group

   $ 1,138       $ 1,081   

American Group

     983         949   

Corporate and other

     (118      (69
  

 

 

    

 

 

 
   $ 2,003       $ 1,961   
  

 

 

    

 

 

 

Depreciation and amortization:

     

National Group

   $ 197       $ 189   

American Group

     218         221   

Corporate and other

     64         63   
  

 

 

    

 

 

 
   $ 479       $ 473   
  

 

 

    

 

 

 

Adjusted segment EBITDA

   $ 2,003       $ 1,961   

Depreciation and amortization

     479         473   

Interest expense

     416         419   

Losses (gains) on sales of facilities

     1         (9

Legal claim costs

     12           
  

 

 

    

 

 

 

Income before income taxes

   $ 1,095       $ 1,078   
  

 

 

    

 

 

 

 

20


Table of Contents

HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

NOTE 12 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

During November 2010, HCA Holdings, Inc. issued $1.525 billion aggregate principal amount of 7 3/4% senior unsecured notes due 2021, which were redeemed in full during May 2015. During December 2012, HCA Holdings, 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 Holdings, 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 Holdings, Inc.). The senior secured notes and senior unsecured notes issued by HCA Inc. are fully and unconditionally guaranteed by HCA Holdings, 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 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, 2016 and 2015, condensed consolidating balance sheets at March 31, 2016 and December 31, 2015 and condensed consolidating statements of cash flows for the quarters ended March 31, 2016 and 2015, segregating HCA Holdings, Inc. issuer, HCA Inc. issuer, the subsidiary guarantors, the subsidiary non-guarantors and eliminations, follow:

HCA HOLDINGS, INC.

CONDENSED CONSOLIDATING COMPREHENSIVE INCOME STATEMENT

FOR THE QUARTER ENDED MARCH 31, 2016

(Dollars in millions)

 

     HCA
Holdings, 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               860        995               1,857   

Electronic health record incentive income

                   (3     (1            (4

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 Holdings, Inc.

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

 

HCA HOLDINGS, INC.

CONDENSED CONSOLIDATING COMPREHENSIVE INCOME STATEMENT

FOR THE QUARTER ENDED MARCH 31, 2015

(Dollars in millions)

 

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

Revenues before provision for doubtful accounts

   $      $      $ 5,201      $ 5,121      $      $ 10,322   

Provision for doubtful accounts

                   296        350               646   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenues

                   4,905        4,771               9,676   

Salaries and benefits

                   2,217        2,181               4,398   

Supplies

                   854        784               1,638   

Other operating expenses

     6               820        891               1,717   

Electronic health record incentive income

                   (13     (6            (19

Equity in earnings of affiliates

     (623            (1     (18     623        (19

Depreciation and amortization

                   230        243               473   

Interest expense

     46        595        (174     (48            419   

Gains on sales of facilities

                   (9                   (9

Management fees

                   (178     178                 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (571     595        3,746        4,205        623        8,598   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     571        (595     1,159        566        (623     1,078   

Provision (benefit) for income taxes

     (20     (224     428        174               358   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     591        (371     731        392        (623     720   

Net income attributable to noncontrolling interests

                   23        106               129   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 591      $ (371   $ 708      $ 286      $ (623   $ 591   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 570      $ (366   $ 712      $ 256      $ (602   $ 570   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

 

HCA HOLDINGS, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

MARCH 31, 2016

(Dollars in millions)

 

     HCA

Holdings,  Inc.

Issuer
    HCA  Inc.

Issuer
    Subsidiary

Guarantors
    Subsidiary

Non-

Guarantors
     Eliminations     Condensed

Consolidated
 
ASSETS              

Current assets:

             

Cash and cash equivalents

   $ 1      $      $ 221      $ 630       $      $ 852   

Accounts receivable, net

                   3,041        2,839                5,880   

Inventories

                   834        581                1,415   

Other

                   454        600                1,054   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     1               4,550        4,650                9,201   

Property and equipment, net

                   8,267        6,790                15,057   

Investments of insurance subsidiaries

                          425                425   

Investments in and advances to affiliates

     24,980               18        156         (24,980     174   

Goodwill and other intangible assets

                   1,702        5,011                6,713   

Other

     973               19        214                1,206   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
   $ 25,954      $      $ 14,556      $ 17,246       $ (24,980   $ 32,776   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

LIABILITIES AND

STOCKHOLDERS’ (DEFICIT)

EQUITY

             

Current liabilities:

             

Accounts payable

   $ 1      $      $ 1,199      $ 744       $      $ 1,944   

Accrued salaries

                   729        580                1,309   

Other accrued expenses

     303        271        450        895                1,919   

Long-term debt due within one year

            109        62        55                226   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     304        380        2,440        2,274                5,398   

Long-term debt, net

     992        28,833        212        291                30,328   

Intercompany balances

     31,677        (10,764     (23,936     3,023                  

Professional liability risks

                          1,116                1,116   

Income taxes and other liabilities

     537        568        426        402                1,933   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     33,510        19,017        (20,858     7,106                38,775   

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

     (7,556     (19,017     35,280        8,717         (24,980     (7,556

Noncontrolling interests

                   134        1,423                1,557   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     (7,556     (19,017     35,414        10,140         (24,980     (5,999
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
   $ 25,954      $      $ 14,556      $ 17,246       $ (24,980   $ 32,776   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

23


Table of Contents

HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

 

HCA HOLDINGS, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2015

(Dollars in millions)

 

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

Current assets:

           

Cash and cash equivalents

  $      $      $ 155      $ 586      $      $ 741   

Accounts receivable, net

                  2,982        2,907               5,889   

Inventories

                  852        587               1,439   

Other

    223               403        537               1,163   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    223               4,392        4,617               9,232   

Property and equipment, net

                  8,328        6,686               15,014   

Investments of insurance subsidiaries

                         432               432   

Investments in and advances to affiliates

    24,380               14        164        (24,380     178   

Goodwill and other intangible assets

                  1,703        5,028               6,731   

Other

    943               19        195               1,157   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 25,546      $      $ 14,456      $ 17,122      $ (24,380   $ 32,744   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ (DEFICIT)

EQUITY

           

Current liabilities:

           

Accounts payable

  $ 2      $      $ 1,375      $ 793      $      $ 2,170   

Accrued salaries

                  712        521               1,233   

Other accrued expenses

    172        340        458        910               1,880   

Long-term debt due within one year

           114        65        54               233   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    174        454        2,610        2,278               5,516   

Long-term debt, net

    984        28,756        226        289               30,255   

Intercompany balances

    31,432        (11,171     (23,435     3,174                 

Professional liability risks

                         1,115               1,115   

Income taxes and other liabilities

    555        548        417        384               1,904   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    33,145        18,587        (20,182)        7,240               38,790   

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

    (7,599     (18,587     34,510        8,457        (24,380     (7,599

Noncontrolling interests

                  128        1,425               1,553   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (7,599)        (18,587)        34,638        9,882        (24,380)        (6,046)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 25,546      $      $ 14,456      $ 17,122      $ (24,380   $ 32,744   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

24


Table of Contents

HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

 

HCA HOLDINGS, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE QUARTER ENDED MARCH 31, 2016

(Dollars in millions)

 

    HCA
Holdings, 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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)

 

HCA HOLDINGS, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE QUARTER ENDED MARCH 31, 2015

(Dollars in millions)

 

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

Cash flows from operating activities:

           

Net income (loss)

  $ 570      $ (371   $ 731      $ 392      $ (602   $ 720   

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

           

Changes in operating assets and liabilities

    17        (79     (739     (512            (1,313

Provision for doubtful accounts

                  296        350               646   

Depreciation and amortization

                  230        243               473   

Income taxes

    438                                    438   

Gains on sales of facilities

                  (9                   (9

Amortization of debt issuance costs

    1        9                             10   

Share-based compensation

                  48                      48   

Equity in earnings of affiliates

    (602                          602          

Other

    16                      (11            5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

    440        (441     557        462               1,018   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

           

Purchase of property and equipment

                  (182     (264            (446

Acquisition of hospitals and health care entities

                  (10     (18            (28

Disposition of hospitals and health care entities

                  14        1               15   

Change in investments

                  6        16               22   

Other

                         5               5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

                  (172     (260            (432
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

           

Issuance of long-term debt

           1,000                             1,000   

Net change in revolving credit facilities

           (260                          (260

Repayment of long-term debt

           (771     (12     (8            (791

Distributions to noncontrolling interests

                  (32     (100            (132

Payment of debt issuance costs

           (11                          (11

Repurchases of common stock

    (366                                 (366

Changes in intercompany balances with affiliates, net

    (68     483        (317     (98              

Other

    (6                                 (6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

    (440     441        (361     (206            (566
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents

                  24        (4            20   

Cash and cash equivalents at beginning of period

                  87        479               566   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $      $      $ 111      $ 475      $      $ 586   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


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 effects related to the implementation 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”), possible delays in or complications related to implementation of the Health Reform Law, court challenges, the possible enactment of additional federal or state health care reforms and possible changes to the Health Reform Law and 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) our ongoing ability to demonstrate meaningful use of certified electronic health record (“EHR”) technology, and (22) other risk factors described in our annual report on Form 10-K for the year ended December 31, 2015 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.

 

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Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Health Care Reform

The Health Reform Law changes how health care services are covered, delivered and reimbursed through expanded coverage of uninsured individuals, reduced growth in Medicare program spending, reductions in Medicare and Medicaid Disproportionate Share Hospital payments, and the establishment of programs in which reimbursement is tied to quality and integration. In addition, the Health Reform Law reforms certain aspects of health insurance, expands existing efforts to tie Medicare and Medicaid payments to performance and quality, and contains provisions intended to strengthen fraud and abuse enforcement. The Health Reform Law is expanding coverage through a combination of public program expansion and private sector health insurance and other reforms. Most of the provisions of the Health Reform Law that seek to decrease the number of uninsured became effective January 1, 2014. However, the ongoing effect of the Health Reform Law is uncertain as a result of a number of factors, including the 2016 federal election, efforts to repeal or revise the law and uncertainty regarding how many states will ultimately implement the Medicaid expansion provisions of the law.

First Quarter 2016 Operations Summary

Revenues increased to $10.260 billion in the first quarter of 2016 from $9.676 billion in the first quarter of 2015. Net income attributable to HCA Holdings, Inc. totaled $694 million, or $1.69 per diluted share, for the quarter ended March 31, 2016, compared to $591 million, or $1.36 per diluted share, for the quarter ended March 31, 2015. First quarter 2016 results include a $74 million tax benefit, or $0.18 per diluted share, related to our early adoption of a new accounting standard that requires the excess tax benefits related to employee equity award settlements to be recorded as a component of the provision for income taxes for periods subsequent to adoption. First quarter 2016 results also include legal claim costs of $12 million, or $0.02 per diluted share, and net losses on sales of facilities of $1 million. First quarter 2015 results include net gains on sales of facilities of $9 million, or $0.01 per diluted share. All “per diluted share” disclosures are based upon amounts net of the applicable income taxes. Shares used for diluted earnings per share were 410.575 million shares for the quarter ended March 31, 2016 and 435.309 million shares for the quarter ended March 31, 2015. During 2015 and the first quarter of 2016, we repurchased 31.991 million and 8.921 million shares of our common stock, respectively.

Revenues increased 6.0% on a consolidated basis and increased 5.4% on a same facility basis for the quarter ended March 31, 2016, compared to the quarter ended March 31, 2015. The increase in consolidated revenues can be attributed primarily to the combined impact of a 2.2% increase in revenue per equivalent admission and a 3.7% increase in equivalent admissions. The same facility revenues increase resulted primarily from the combined impact of a 2.2% increase in same facility revenue per equivalent admission and a 3.1% increase in same facility equivalent admissions.

During the quarter ended March 31, 2016, consolidated admissions and same facility admissions increased 1.8% and 1.6%, respectively, compared to the quarter ended March 31, 2015. Inpatient surgeries increased 1.3% on a consolidated basis and 1.4% on a same facility basis during the quarter ended March 31, 2016, compared to the quarter ended March 31, 2015. Outpatient surgeries increased 5.6% on a consolidated basis and 4.4% on a same facility basis during the quarter ended March 31, 2016, compared to the quarter ended March 31, 2015. Emergency department visits increased 7.6% on a consolidated basis and 6.9% on a same facility basis during the quarter ended March 31, 2016, compared to the quarter ended March 31, 2015.

For the quarter ended March 31, 2016, the provision for doubtful accounts increased $144 million, compared to the quarter ended March 31, 2015. The self-pay revenue deductions for charity care and uninsured discounts increased $63 million and $571 million, respectively, during the first quarter of 2016, compared to the first quarter of 2015. The sum of the provision for doubtful accounts, uninsured discounts and charity care, as a

 

28


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

First Quarter 2016 Operations Summary (continued)

 

percentage of the sum of revenues, provision for doubtful accounts, uninsured discounts and charity care, was 32.1% for the first quarter of 2016, compared to 29.6% for the first quarter of 2015. Same facility uninsured admissions increased 10.6% for the quarter ended March 31, 2016, compared to the quarter ended March 31, 2015.

Electronic health record incentive income declined $15 million, from $19 million in the first quarter of 2015 to $4 million in the first quarter of 2016. Share-based compensation expense increased $17 million, from $48 million in the first quarter of 2015 to $65 million in the first quarter of 2016.

Cash flows from operating activities increased $381 million from $1.018 billion for the first quarter of 2015 to $1.399 billion for the first quarter of 2016. The increase is related primarily to the $91 million increase in net income and net positive changes in working capital items of $311 million.

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

 

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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)

 

Revenues increased 6.0% from $9.676 billion in the first quarter of 2015 to $10.260 billion in the first quarter of 2016. 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 Medicare, Medicaid and other programs), managed care health plans (including the health insurance exchanges), commercial insurance companies 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 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 related to uninsured accounts to record the net self-pay revenues at the estimated amounts we expect to collect. Our revenues from our third-party payers, the uninsured and other payers for the quarters ended March 31, 2016 and 2015 are summarized in the following table (dollars in millions):

 

     2016      Ratio     2015      Ratio  

Medicare

   $ 2,266         22.1   $ 2,234         23.1

Managed Medicare

     1,104         10.8        1,052         10.9   

Medicaid

     427         4.2        452         4.7   

Managed Medicaid

     597         5.8        549         5.7   

Managed care and other insurers

     5,702         55.6        5,216         53.9   

International (managed care and other insurers)

     317         3.1        321         3.3   
  

 

 

    

 

 

   

 

 

    

 

 

 
     10,413         101.6        9,824         101.6   

Uninsured

     189         1.8        68         0.7   

Other

     448         4.4        430         4.4   
  

 

 

    

 

 

   

 

 

    

 

 

 

Revenues before provision for doubtful accounts

     11,050         107.8        10,322         106.7   

Provision for doubtful accounts

     (790      (7.8     (646      (6.7
  

 

 

    

 

 

   

 

 

    

 

 

 

Revenues

   $ 10,260         100.0   $ 9,676         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Consolidated and same facility revenue per equivalent admission each increased 2.2% in the first quarter of 2016, compared to the first quarter of 2015. Consolidated and same facility equivalent admissions increased 3.7% and 3.1%, respectively, in the first quarter of 2016, compared to the first quarter of 2015. Consolidated and same facility admissions increased 1.8% and 1.6%, respectively, in the first quarter of 2016, compared to the first quarter of 2015. Consolidated and same facility outpatient surgeries increased 5.6% and 4.4%, respectively, in the first quarter of 2016, compared to the first quarter of 2015. Consolidated and same facility inpatient surgeries increased 1.3% and 1.4%, respectively, in the first quarter of 2016, compared to the first quarter of 2015. Consolidated and same facility emergency department visits increased 7.6% and 6.9%, respectively, in the first quarter of 2016, compared to the first quarter of 2015.

 

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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)

 

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, 2016, our allowance for doubtful accounts represented 94.3% of the $5.520 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 adjustments to revenues amounts, related to uninsured accounts, for the quarters ended March 31, 2016 and 2015 follows (dollars in millions):

 

     2016      Ratio     2015      Ratio  

Charity care

   $ 955         20   $ 892         22

Uninsured discounts

     3,097         64        2,526         62   

Provision for doubtful accounts

     790         16        646         16   
  

 

 

    

 

 

   

 

 

    

 

 

 

Totals

   $ 4,842         100   $ 4,064         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Same facility uninsured admissions increased by 3,119 admissions, or 10.6%, in the first quarter of 2016, compared to the first quarter of 2015. Same facility uninsured admissions in 2015, compared to 2014, increased 8.6% in the fourth quarter of 2015, increased 13.6% in the third quarter of 2015, increased 8.7% in the second quarter of 2015 and declined 12.5% in the first quarter of 2015. We believe the decline in the first quarter of 2015, compared to the prior year quarter, was primarily due to previously uninsured patients obtaining medical coverage through the health insurance exchanges and Medicaid expansion programs. We believe the benefits from the health insurance exchanges and Medicaid expansion programs that we began realizing during 2014 are now reflected in both periods in our quarterly comparisons.

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, 2016 and 2015 are set forth in the following table.

 

     2016     2015  

Medicare

     32     32

Managed Medicare

     15        15   

Medicaid

     6        6   

Managed Medicaid

     11        12   

Managed care and other insurers

     29        29   

Uninsured

     7        6   
  

 

 

   

 

 

 
     100     100
  

 

 

   

 

 

 

 

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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)

 

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, 2016 and 2015 are set forth in the following table.

 

     2016     2015  

Medicare

     28     29

Managed Medicare

     12        13   

Medicaid

     6        6   

Managed Medicaid

     6        6   

Managed care and other insurers

     48        46   

Uninsured

              
  

 

 

   

 

 

 
     100     100
  

 

 

   

 

 

 

At March 31, 2016, we had 81 hospitals in the states of Texas and Florida. During the first quarter of 2016, 56% of our admissions and 47% of our revenues were generated by these hospitals. Uninsured admissions in Texas and Florida represented 69% of our uninsured admissions during the first quarter of 2016.

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. Although Texas currently operates its Medicaid Waiver Program pursuant to this waiver, the current waiver expires on September 30, 2016. Texas submitted an application to extend its Waiver Program, and in May 2016, CMS agreed to extend the Waiver Program 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 $102 million ($28 million DSRIP related and $74 million indigent care related) and $77 million ($26 million DSRIP related and $51 million indigent care related) during the first quarters of 2016 and 2015, respectively.

 

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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)

 

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.

Electronic Health Record Incentive Payments

The American Recovery and Reinvestment Act of 2009 provides for Medicare and Medicaid incentive payments for eligible hospitals and professionals that adopt and meaningfully use certified EHR technology. We recognized $4 million and $19 million of electronic health record incentive income, primarily related to Medicare, during the first quarters of 2016 and 2015, respectively. For 2016, we estimate EHR incentive income will not exceed $10 million.

 

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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)

 

Operating Results Summary

The following is a comparative summary of results from operations for the quarters ended March 31, 2016 and 2015 (dollars in millions):

 

     2016     2015  
     Amount     Ratio     Amount     Ratio  

Revenues before provision for doubtful accounts

   $ 11,050        $ 10,322     

Provision for doubtful accounts

     790          646     
  

 

 

     

 

 

   

Revenues

     10,260        100.0        9,676        100.0   

Salaries and benefits

     4,702        45.8        4,398        45.5   

Supplies

     1,714        16.7        1,638        16.9   

Other operating expenses

     1,857        18.1        1,717        17.7   

Electronic health record incentive income

     (4            (19     (0.2

Equity in earnings of affiliates

     (12     (0.1     (19     (0.2

Depreciation and amortization

     479        4.6        473        5.0   

Interest expense

     416        4.1        419        4.3   

Losses (gains) on sales of facilities

     1               (9     (0.1

Legal claim costs

     12        0.1                 
  

 

 

   

 

 

   

 

 

   

 

 

 
     9,165        89.3        8,598        88.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     1,095        10.7        1,078        11.1   

Provision for income taxes

     284        2.8        358        3.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     811        7.9        720        7.4   

Net income attributable to noncontrolling interests

     117        1.1        129        1.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to HCA Holdings, Inc.

   $ 694        6.8      $ 591        6.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

% changes from prior year:

        

Revenues

     6.0       9.5  

Income before income taxes

     1.6          58.6     

Net income attributable to HCA Holdings, Inc.

     17.3          70.5     

Admissions(a)

     1.8          5.8     

Equivalent admissions(b)

     3.7          7.9     

Revenue per equivalent admission

     2.2          1.5     

Same facility % changes from prior year(c):

        

Revenues

     5.4          8.5     

Admissions(a)

     1.6          5.1     

Equivalent admissions(b)

     3.1          6.8     

Revenue per equivalent admission

     2.2          1.6     

 

(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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Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Results of Operations (continued)

 

Quarters Ended March 31, 2016 and 2015

Net income attributable to HCA Holdings, Inc. totaled $694 million, or $1.69 per diluted share, for the first quarter of 2016 compared to $591 million, or $1.36 per diluted share, for the first quarter of 2015. First quarter 2016 results include a $74 million tax benefit, or $0.18 per diluted share, related to our early adoption of a new accounting standard that requires the excess tax benefits related to employee equity award settlements to be recorded as a component of the provision for income taxes for periods subsequent to adoption. First quarter 2016 results also include legal claim costs of $12 million, or $0.02 per diluted share, and net losses on sales of facilities of $1 million. First quarter 2015 results include net gains on sales of facilities of $9 million, or $0.01 per diluted share. All “per diluted share” disclosures are based upon amounts net of the applicable income taxes. Shares used for diluted earnings per share were 410.575 million shares for the quarter ended March 31, 2016 and 435.309 million shares for the quarter ended March 31, 2015. During 2015 and the first quarter of 2016, we repurchased 31.991 million and 8.921 million shares of our common stock, respectively.

For the first quarter of 2016, consolidated and same facility admissions increased 1.8% and 1.6%, respectively, compared to the first quarter of 2015. Consolidated and same facility outpatient surgical volumes increased 5.6% and 4.4%, respectively, during the first quarter of 2016, compared to the first quarter of 2015. Consolidated and same facility inpatient surgeries increased 1.3% and 1.4%, respectively, in the first quarter of 2016, compared to the first quarter of 2015. Consolidated and same facility emergency department visits increased 7.6% and 6.9%, respectively, during the quarter ended March 31, 2016, compared to the quarter ended March 31, 2015.

Revenues before provision for doubtful accounts increased 7.1% for the first quarter of 2016 compared to the first quarter of 2015. The provision for doubtful accounts increased $144 million from $646 million in the first quarter of 2015 to $790 million in the first quarter of 2016. 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 $63 million and $571 million, respectively, during the first quarter of 2016, compared to the first quarter of 2015. 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 32.1% for the first quarter of 2016, compared to 29.6% for the first quarter of 2015. At March 31, 2016, our allowance for doubtful accounts represented 94.3% of the $5.520 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 6.0% due primarily to the combined impact of revenue per equivalent admission growth of 2.2% and a 3.7% increase in equivalent admissions for the first quarter of 2016 compared to the first quarter of 2015. Same facility revenues increased 5.4% due to the combined impact of a 2.2% increase in same facility revenue per equivalent admission and a 3.1% increase in same facility equivalent admissions for the first quarter of 2016 compared to the first quarter of 2015.

 

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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, 2016 and 2015 (continued)

 

Salaries and benefits, as a percentage of revenues, were 45.8% in the first quarter of 2016 and 45.5% in the first quarter of 2015. Salaries and benefits per equivalent admission increased 3.1% in the first quarter of 2016 compared to the first quarter of 2015. Same facility labor rates increased 2.5% for the first quarter of 2016 compared to the first quarter of 2015.

Supplies, as a percentage of revenues, were 16.7% in the first quarter of 2016 and 16.9% in the first quarter of 2015. Supply costs per equivalent admission increased 0.8% in the first quarter of 2016 compared to the first quarter of 2015. Supply costs per equivalent admission increased 5.2% for pharmacy supplies and 3.2% for medical devices and declined 2.6% for general medical and surgical items in the first quarter of 2016 compared to the first quarter of 2015.

Other operating expenses, as a percentage of revenues, were 18.1% in the first quarter of 2016 and 17.7% in the first quarter of 2015. 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 $112 million and $92 million for the first quarters of 2016 and 2015, respectively.

We recognized $4 million and $19 million of electronic health record incentive income primarily related to Medicare incentives during the first quarters of 2016 and 2015, respectively.

Equity in earnings of affiliates was $12 million and $19 million in the first quarters of 2016 and 2015, respectively.

Depreciation and amortization increased $6 million, from $473 million in the first quarter of 2015 to $479 million in the first quarter of 2016.

Interest expense was $416 million in the first quarter of 2016 and $419 million in the first quarter of 2015. The decline in interest expense was due to a decline in the average interest rate. Our average debt balance was $30.532 billion for the first quarter of 2016 compared to $29.412 billion for the first quarter of 2015. The average effective interest rate for our long-term debt declined from 5.8% for the quarter ended March 31, 2015 to 5.5% for the quarter ended March 31, 2016.

During the first quarters of 2016 and 2015, we recorded net losses on sales of facilities of $1 million and net gains on sales of facilities of $9 million, respectively.

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

The effective tax rates were 29.1% and 37.7% for the first quarters of 2016 and 2015, respectively. The effective tax rate computations exclude net income attributable to noncontrolling interests as it relates to consolidated partnerships. Our provision for income taxes for the first quarter of 2016 included a tax benefit of $74 million related to our early prospective adoption of ASU 2016-09 which requires the excess tax benefits related to employee equity award settlements be recorded as a component of the provision for income taxes for periods subsequent to adoption. Excluding the effect of this adjustment, the effective tax rate for the first quarter of 2016 would have been 36.7%.

 

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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, 2016 and 2015 (continued)

 

Net income attributable to noncontrolling interests declined from $129 million for the first quarter of 2015 to $117 million for the first quarter of 2016. The decline in net income attributable to noncontrolling interests related primarily to decreases in operating results of joint ventures in two of our Texas markets.

Liquidity and Capital Resources

Cash provided by operating activities totaled $1.399 billion in the first quarter of 2016 compared to $1.018 billion in the first quarter of 2015. The $381 million increase in cash provided by operating activities in the first quarter of 2016 compared to the first quarter of 2015 related primarily to the $91 million increase in net income (which includes the $74 million tax benefit related to our adoption of ASU 2016-09) and net positive changes in working capital items of $311 million. The combined interest payments and net tax payments in the first quarter of 2016 and 2015 were $414 million and $369 million, respectively. Working capital totaled $3.803 billion at March 31, 2016 and $3.716 billion at December 31, 2015.

Cash used in investing activities was $496 million in the first quarter of 2016 compared to $432 million in the first quarter of 2015. Excluding acquisitions, capital expenditures were $509 million in the first quarter of 2016 and $446 million in the first quarter of 2015. Capital expenditures, excluding acquisitions, are expected to approximate $2.7 billion in 2016. At March 31, 2016, there were projects under construction which had estimated additional costs to complete and equip over the next five years of approximately $2.2 billion. We expect to finance capital expenditures with internally generated and borrowed funds.

Cash used in financing activities totaled $792 million in the first quarter of 2016 compared to $566 million in the first quarter of 2015. 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, distributions to noncontrolling interests of $111 million and payments of debt issuance costs of $22 million. During the first quarter of 2015, net cash flows used in financing activities included a net decline of $51 million in our indebtedness, repurchases of common stock of $366 million, distributions to noncontrolling interests of $132 million and payments of debt issuance costs of $11 million.

We are a highly leveraged company with significant debt service requirements. Our debt totaled $30.554 billion at March 31, 2016. Our interest expense was $416 million for the first quarter of 2016 and $419 million for the first quarter of 2015. The decline in interest expense was due to the decline in the average interest rate.

In addition to cash flows from operations, available sources of capital include amounts available under our senior secured credit facilities ($2.907 billion and $2.502 billion available as of March 31, 2016 and April 30, 2016, 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.

During December 2015, we issued $500 million aggregate principal amount of 5.875% senior notes due 2026. We used the net proceeds for general corporate purposes.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources (continued)

 

During November 2015, we issued $1.000 billion aggregate principal amount of 5.875% senior notes due 2026. We used the net proceeds to redeem all $1.000 billion aggregate principal amount of our outstanding 6.500% senior notes due 2016.

During June 2015, we entered into a joinder agreement to retire certain of our existing senior secured term loans using proceeds from a new $1.400 billion senior secured term loan credit facility maturing in June 2020.

During May 2015, we issued $1.600 billion aggregate principal amount of 5.375% senior notes due 2025. We used the net proceeds to redeem all $1.525 billion aggregate principal amount of our outstanding 7 3/4% senior notes due 2021.

During January 2015, we issued $1.000 billion aggregate principal amount of 5.375% senior notes due 2025. We used a portion of the net proceeds to repay at maturity our $750 million aggregate principal amount of 6.375% senior notes due 2015.

Investments of our professional liability insurance subsidiaries, to maintain statutory equity and pay claims, totaled $477 million and $482 million at March 31, 2016 and December 31, 2015, respectively. An insurance subsidiary maintained net reserves for professional liability risks of $236 million and $261 million at March 31, 2016 and December 31, 2015, respectively. 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 $1.213 billion and $1.160 billion at March 31, 2016 and December 31, 2015, respectively. Claims payments, net of reinsurance recoveries, during the next 12 months are expected to approximate $363 million. We estimate that approximately $311 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 $473 million and $4 million, respectively, at March 31, 2016. 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, 2016, we had a net unrealized gain of $22 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 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.

 

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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)

 

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 $3.262 billion of long-term debt at March 31, 2016 was subject to variable rates of interest, while the remaining balance in long-term debt of $27.292 billion at March 31, 2016 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 5.8% for the quarter ended March 31, 2015 to 5.5% for the quarter ended March 31, 2016.

The estimated fair value of our total long-term debt was $31.858 billion at March 31, 2016. 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 $33 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

The IRS Examination Division began an audit of HCA Holdings, Inc.’s 2011 and 2012 federal income tax returns during 2014. We are also subject to examination by state and foreign taxing authorities.

Management believes HCA Holdings, 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

 

     2016      2015  

Number of hospitals in operation at:

     

March 31

     168         168   

June 30

        168   

September 30

        168   

December 31

        168   

Number of freestanding outpatient surgical centers in operation at:

     

March 31

     116         113   

June 30

        112   

September 30

        114   

December 31

        116   

Licensed hospital beds at(a):

     

March 31

     43,817         43,500   

June 30

        43,647   

September 30

        43,731   

December 31

        43,771   

Weighted average licensed beds(b):

     

Quarter:

     

First

     43,780         43,451   

Second

        43,619   

Third

        43,700   

Fourth

        43,705   

Year

        43,620   

Average daily census(c):

     

Quarter:

     

First

     26,325         26,039   

Second

        24,920   

Third

        24,573   

Fourth

        24,824   

Year

        25,084   

Admissions(d):

     

Quarter:

     

First

     479,600         470,900   

Second

        464,200   

Third

        466,400   

Fourth

        467,300   

Year

        1,868,800   

Equivalent admissions(e):

     

Quarter:

     

First

     798,000         769,400   

Second

        778,200   

Third

        787,300   

Fourth

        787,800   

Year

        3,122,700   

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Operating Data (continued)

 

     2016     2015  

Average length of stay (days)(f):

    

Quarter:

    

First

     5.0        5.0   

Second

       4.9   

Third

       4.8   

Fourth

       4.9   

Emergency room visits(g):

    

Quarter:

    

First

     2,133,300        1,982,000   

Second

       2,007,400   

Third

       2,023,100   

Fourth

       2,037,700   

Year

       8,050,200   

Outpatient surgeries(h):

    

Quarter:

    

First

     226,500        214,500   

Second

       228,300   

Third

       226,400   

Fourth

       240,200   

Year

       909,400   

Inpatient surgeries(i):

    

Quarter:

    

First

     131,800        130,100   

Second

       131,800   

Third

       134,000   

Fourth

       134,000   

Year

       529,900   

Days revenues in accounts receivable(j):

    

Quarter:

    

First

     52        55   

Second

       53   

Third

       54   

Fourth

       53   

Outpatient revenues as a % of patient revenues(k):

    

Quarter:

    

First

     39     38

Second

       40

Third

       40

Fourth

       41

Year

       40

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

BALANCE SHEET DATA

 

     % of Accounts Receivable  
     Under 91 Days     91 – 180 Days     Over 180 Days  

Accounts receivable aging at March 31, 2016(l):

      

Medicare and Medicaid

     11     1     1

Managed care and other discounted

     27        5        5   

Uninsured

     19        7        24   
  

 

 

   

 

 

   

 

 

 

Total

     57     13     30
  

 

 

   

 

 

   

 

 

 

 

(a) Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency.
(b) Represents the average number of licensed beds, weighted based on periods owned.
(c) Represents the average number of patients in our hospital beds each day.
(d) 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.
(e) 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.
(f) Represents the average number of days admitted patients stay in our hospitals.
(g) Represents the number of patients treated in our emergency rooms.
(h) Represents the number of surgeries performed on patients who were not admitted to our hospitals. Pain management and endoscopy procedures are not included in outpatient surgeries.
(i) Represents the number of surgeries performed on patients who have been admitted to our hospitals. Pain management and endoscopy procedures are not included in inpatient surgeries.
(j) Revenues per day is calculated by dividing the revenues for the quarter by the days in the quarter. Days revenues in accounts receivable is then calculated as accounts receivable, net of allowance for doubtful accounts, at the end of the quarter divided by the revenues per day. “Revenues” used in this computation are net of the provision for doubtful accounts.
(k) Represents the percentage of patient revenues related to patients who are not admitted to our hospitals.
(l) Accounts receivable aging data is based upon consolidated gross accounts receivable of $11.085 billion (each 1% is equivalent to approximately $111 million of gross accounts receivable).

 

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ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information called for by this item is provided under the caption “Market Risk” under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

ITEM 4.     CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

HCA’s chief executive officer and chief financial officer have reviewed and evaluated the effectiveness of HCA’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934) as of the end of the period covered by this quarterly report. Based on that evaluation, the chief executive officer and chief financial officer have concluded HCA’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

During the period covered by this report, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

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 punitive damages against us which may not be covered by insurance. We are subject to claims 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.

Government Investigations, Claims and Litigation

Health care companies are subject to numerous investigations by various governmental agencies. Further, 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.

On April 2, 2014, the UK Competition and Markets Authority (“Authority”) issued a final report on its investigation of the private health care market in London. It concluded, among other things, that many private hospitals face little competition in central London, and that there are high barriers to entry. As part of its remedies package, the Authority ordered HCA to sell either: (a) its London Bridge and Princess Grace hospitals; or (b) its Wellington Hospital, including the Platinum Medical Centre. It also imposed other remedial conditions on HCA and other private health care providers, including: regulation of incentives to referring physicians; increased access to information about fees and performance; and restrictions on future arrangements between private providers and National Health Service private patient units. HCA disagrees with the Authority’s

 

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assessment of the competitive conditions for hospitals in London, as well as its proposed divestiture remedy, and appealed the decision to the Competition Appeal Tribunal. The Competition Appeal Tribunal overturned certain of the Authority’s findings and sent the matter back to the Authority for further proceedings. In November 2015, following consideration of additional evidence, the Authority issued a provisional decision that again found there were adverse effects on competition in the private hospital market in central London. The November 2015 provisional decision modified some of the Authority’s earlier factual conclusions and acknowledged certain mitigating factors for some of the effects noted in the prior decision. The November 2015 provisional decision also offered additional potential remedies, which continued to include divestment of one or more of HCA’s London hospitals. Following a period of consultation on the potential additional remedies, the Authority concluded, in a provisional decision issued March 22, 2016, that none of the additional remedies, including divestiture, would be both effective and proportionate. A final decision is anticipated in May or June of 2016. Should HCA or any other party disagree with the Authority’s final decision, there would be an opportunity to appeal to the Competitive Appeal Tribunal.

Securities Class Action Litigation

On October 28, 2011, a shareholder action, Schuh v. HCA Holdings, Inc. et al., was filed in the United States District Court for the Middle District of Tennessee seeking monetary relief. The case sought to include as a class all persons who acquired the Company’s stock pursuant or traceable to the Company’s Registration Statement issued in connection with the March 9, 2011 initial public offering. The lawsuit asserted a claim under Section 11 of the Securities Act of 1933 against the Company, certain members of the board of directors, and certain underwriters in the offering. It further asserted a claim under Section 15 of the Securities Act of 1933 against the same members of the board of directors. The action alleged various deficiencies in the Company’s disclosures in the Registration Statement. Subsequently, two additional class action complaints, Kishtah v. HCA Holdings, Inc. et al. and Daniels v. HCA Holdings, Inc. et al., setting forth substantially similar claims against substantially the same defendants were filed in the same federal court on November 16, 2011 and December 12, 2011, respectively. All three of the cases were consolidated. On May 3, 2012, the court appointed New England Teamsters & Trucking Industry Pension Fund as Lead Plaintiff for the consolidated action. On July 13, 2012, the lead plaintiff filed an amended complaint asserting claims under Sections 11 and 12(a)(2) of the Securities Act of 1933 against the Company, certain members of the board of directors, and certain underwriters in the offering. It further asserted a claim under Section 15 of the Securities Act of 1933 against the same members of the board of directors and Hercules Holding II, LLC, a majority shareholder of the Company at the time of the initial public offering. The consolidated complaint alleged deficiencies in the Company’s disclosures in the Registration Statement and Prospectus relating to: (1) the accounting for the Company’s 2006 recapitalization and 2010 reorganization; (2) the Company’s failure to maintain effective internal controls relating to its accounting for such transactions; and (3) the Company’s Medicare and Medicaid revenue growth rates. The Company and other defendants moved to dismiss the amended complaint on September 11, 2012. The court granted the motion in part on May 28, 2013. The action proceeded to discovery on the remaining claims. The plaintiffs’ motion for class certification was granted on September 22, 2014. The court certified a class consisting of all persons that acquired HCA stock on or before October 28, 2011 (the date of the lawsuit) pursuant to the Registration Statement issued in connection with the March 9, 2011 initial public offering. A request to the court of appeals to hear an immediate appeal of this ruling was denied. Following the close of discovery, plaintiffs and defendants each filed motions for summary judgment and to strike certain of the expert witnesses.

In addition to the above described consolidated shareholder class action, on December 8, 2011, a federal shareholder derivative action, Sutton v. Bracken, et al., putatively initiated in the name of the Company, was filed in the United States District Court for the Middle District of Tennessee against certain officers and present and former directors of the Company seeking monetary relief. The action alleged breaches of fiduciary duties by the named officers and directors in connection with the accounting and earnings claims set forth in the shareholder class actions described above. Setting forth substantially similar claims against substantially the same defendants, an additional federal derivative action, Schroeder v. Bracken, et al., was filed in the United States District Court for the Middle District of Tennessee on December 16, 2011, and a state derivative action,

 

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Bagot v. Bracken, et al., was filed in Tennessee state court in the Davidson County Circuit Court on December 20, 2011. The federal derivative actions were consolidated in the Middle District of Tennessee and stayed pending developments in the shareholder class actions. The state derivative action had also been stayed pending developments in the shareholder class actions, but that stay has expired. The plaintiff in the state derivative action subsequently filed an amended complaint on September 9, 2013 that added additional allegations made in the shareholder class actions. On September 24, 2013, an additional state derivative action, Steinberg v. Bracken, et al., was filed in Tennessee state court in the Davidson County Circuit Court. This action against our board of directors was consolidated with the earlier filed state derivative action. The plaintiffs in the consolidated action filed a consolidated complaint on December 4, 2013. The Company filed a motion to again stay the state derivative action pending developments in the class action, but the court did not act on the motion.

On November 3, 2015, the Company reached a preliminary agreement in principle to settle the Schuh shareholder class action and the Sutton, Schroeder and Bagot derivative actions. The preliminary settlement agreement provided for a resolution of all of the pending claims in the shareholder class action and the derivative suits, without any admission or concession of wrongdoing by the Company or the other defendants, and was contingent upon, among other things, execution of final settlement documents, successful negotiation of certain non-monetary terms, approval by the Company’s Board of Directors, notification to the Schuh shareholder class, and preliminary and final approval of the settlements by the state and federal courts in Tennessee. The federal court gave preliminary approval to the shareholder class action settlement on January 13, 2016, provided for class notification, set a hearing for final approval of the settlement for April 11, 2016, and gave final approval of the settlement on that date. The state court in Bagot gave preliminary approval to the settlement of the derivative claims on January 28, 2016, set a hearing for final approval on April 12, 2016, and gave final approval of the settlement on that date. The federal derivative action will be dismissed by stipulation of the parties.

The monetary terms of the settlement in the Schuh case include a payment by HCA of $215 million in return for a full release of all claims against all defendants, including the Company, its officers and directors, the underwriters and Hercules Holding II, LLC, a majority shareholder of the Company at the time of the initial public offering. The terms of the settlement of the derivative cases include receipt by the Company of $19 million from insurance policies covering the claims asserted in the derivative cases, certain corporate governance reforms and agreement by the Company to pay attorneys’ fees in the aggregate amount of $5.5 million in return for releases of all claims against all defendants. In the fourth quarter of 2015, HCA recorded legal claim costs, net of expected insurance recoveries, of $120 million for the expected settlements of the shareholder action, the derivative cases and related costs.

Health Midwest Litigation

In October 2009, the Health Care Foundation of Greater Kansas City, a nonprofit health foundation, filed suit against HCA Inc. in the Circuit Court of Jackson County, Missouri and alleged that HCA did not fund the level of capital expenditures and uncompensated care agreed to in connection with HCA’s purchase of hospitals from Health Midwest in 2003. The central issue in the case was whether HCA’s construction of new hospitals counted towards its $450 million five-year capital commitment. In addition, the plaintiff alleged that HCA did not make its required capital expenditures in a timely fashion. On January 24, 2013, the court ruled in favor of the plaintiff and awarded at least $162 million. The court also ordered a court-supervised accounting of HCA’s capital expenditures, as well as of expenditures on charity and uncompensated care during the ten years following the purchase. The court also indicated it would award plaintiff attorneys fees, which the parties have stipulated are approximately $12 million for the trial phase. HCA recorded $175 million of legal claim costs in the fourth quarter of 2012 related to this ruling, and, consistent with the judge’s order, has been accruing interest on that sum at 9% per annum. On April 25, 2014, the parties stipulated to an additional $78 million shortfall relating to the capital expenditures issue. HCA recorded $78 million of legal claims costs in the first quarter of 2014 as a result of the stipulation, and accrued interest on that amount at 9% per annum. Pursuant to the terms of the stipulation, the parties have preserved their respective rights to contest the judge’s underlying ruling, whether through motions in the trial court or on appeal. On February 9, 2015, the parties reached an agreement to settle

 

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the part of their dispute relating to charity and uncompensated care for $15 million. The foundation is required to use that amount, net of attorneys’ fees, for charitable activities in the Kansas City area. The parties also agreed on an additional amount for attorneys’ fees for the plaintiff for the accounting phase of the case. The parties filed post-trial motions, on which the court ruled on October 21, 2015. The court denied defendants’ motion to have the court change its rulings on liability and damages related to the capital expenditures issue. The court granted the plaintiff’s motion for an award of additional pre-judgment interest, but did not specify whether the interest awarded was simple interest or would be compounded. The court subsequently concluded that interest was to be compounded, and on December 9, 2015, the court entered judgment in the case in the total sum of $434 million, with interest continuing to accrue at 9% per annum, compounded annually, from and after November 19, 2015, until the matter is resolved. At March 31, 2016 and December 31, 2015, the Company had accrued liabilities of $448 million and $438 million, respectively, for the damages, costs and interest related to this litigation. On January 15, 2016, the Company filed a Notice of Appeal in the Missouri Court of Appeals for the Western District. The Court of Appeals has set a schedule that would complete the parties’ briefing by November 2016. Briefing will likely be followed by oral argument, which has not yet been scheduled.

ITEM 1A.     RISK FACTORS

Reference is made to the factors set forth under the caption “Forward-Looking Statements” in Part I, Item 2 of this Form 10-Q and other risk factors described in our annual report on Form 10-K for the year ended December 31, 2015, which are incorporated herein by reference. There have not been any material changes to the risk factors previously disclosed in our annual report on Form 10-K for the year ended December 31, 2015.

 

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ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On October 26, 2015, our board of directors authorized a share repurchase program for up to $3 billion of our outstanding common stock. Repurchases made during the first quarter of 2016, as detailed below, were made through market purchases pursuant to this authorization.

The following table provides certain information with respect to our repurchases of common stock from January 1, 2016 through March 31, 2016 (dollars in millions, except per share amounts).

 

Period

   Total Number
of Shares
Purchased
     Average Price
Paid per Share
     Total Number
of Shares
Purchased as
Part  of
Publicly
Announced
Plans or
Programs
     Approximate
Dollar Value of
Shares That
May Yet  Be
Purchased
Under Publicly
Announced
Plans or
Programs
 

January 1, 2016 through January 31, 2016

     2,495,697       $ 66.38         2,495,697       $ 2,438   

February 1, 2016 through February 29, 2016

     3,125,330       $ 68.14         3,125,330       $ 2,225   

March 1, 2016 through March 31, 2016

     3,300,200       $ 73.32         3,300,200       $ 1,983   
  

 

 

       

 

 

    

Total for first quarter 2016

     8,921,227       $ 69.56         8,921,227       $ 1,983   
  

 

 

       

 

 

    

 

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ITEM 6.    EXHIBITS

(a) List of Exhibits:

 

  4.1     

Supplemental Indenture No. 15, dated as of March 15, 2016, among HCA Inc., HCA Holdings, Inc., the subsidiary guarantors named therein, Law Debenture Trust Company of New York, as trustee, and Deutsche Bank Trust Company Americas, as paying agent, registrar and transfer agent (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed March 15, 2016 and incorporated herein by reference).

  4.2     

Form of Global Notes representing the Notes (included in Exhibit 4.1).

  4.3     

Additional Receivables Intercreditor Agreement, dated as of March 15, 2016, by and between Bank of America, N.A., as ABL Collateral Agent, and Bank of America, N.A., as First Lien Collateral Agent (filed as Exhibit 4.7 to the Company’s Current Report on Form 8-K filed March 15, 2016 and incorporated herein by reference).

  4.4     

Joinder Agreement No. 2, dated as of March 18, 2016, by and among HCA Inc., as borrower, the guarantors party thereto, Bank of America, N.A., as administrative agent and collateral agent and the lenders party thereto (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed March 18, 2016 and incorporated herein by reference).

  10.1     

HCA Holdings, Inc. 2016 Senior Officer Performance Excellence Program (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 1, 2016 and incorporated herein by reference).*

  10.2     

Form of Director Restricted Share Unit Agreement (Annual Award) Under the 2006 Stock Incentive Plan for Key Employees of HCA Holdings, Inc. and its Affiliates, as Amended and Restated.*

  31.1     

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  31.2     

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  32     

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101     

The following financial information from our quarterly report on Form 10-Q for the quarters ended March 31, 2016 and 2015, filed with the SEC on May 6, 2016, formatted in Extensible Business Reporting Language: (i) the condensed consolidated balance sheets at March 31, 2016 and December 31, 2015, (ii) the condensed consolidated income statements for the quarters ended March 31, 2016 and 2015, (iii) the condensed consolidated comprehensive income statements for the quarters ended March 31, 2016 and 2015, (iv) the condensed consolidated statements of cash flows for the quarters ended March 31, 2016 and 2015 and (v) the notes to condensed consolidated financial statements.

 

* Management compensatory plan or arrangement.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

HCA Holdings, Inc.

By:

 

/S/ WILLIAM B. RUTHERFORD

  William B. Rutherford
  Executive Vice President and Chief Financial Officer

Date: May 6, 2016

 

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