01—Abstract
Summary
Summary of the 10-K filed February 26, 2016. Cited figures are marked; the original filing is the authoritative source.
HCA Holdings' fiscal 2015 10-K shows a large, highly leveraged hospital operator that grew revenue and earnings while returning significant capital to shareholders.
Revenues rose 7.5% to $39.678 billiona, driven by a 5.5% increase in equivalent admissions and a 1.8% gain in revenue per equivalent admission. Net income attributable to HCA was $2.129 billion, or $4.99 per diluted share, up from $4.16 in 2014. Operating cash flow reached $4.734 billion, and capital expenditures were $2.375 billion.
The company repurchased 31.991 million shares for about $2.397 billionb during 2015. The main investor concerns are leverage, uncompensated care, and legal exposure. Total debt was $30.488 billion at year-end, and interest expense of $1.665 billion consumed a meaningful share of operating cash flow.
The sum of provision for doubtful accounts, uninsured discounts and charity care rose to 31.5%c of that total from 30.2% in 2014, reflecting growing patient-responsibility and uninsured burdens. Medicare and Medicaid together made up 42.1% of revenues, and Florida and Texas generated about 47% of revenues, which concentrates regulatory and hurricane risk. Legal and regulatory matters weighed on 2015 results.
HCA recorded $249 milliond of legal claim costs, including the $215 million Schuh securities settlement and a Health Midwest judgment that carries an accrued liability of $438 million and continues to accrue interest at 9%. The UK Competition and Markets Authority review of London hospitals also remains unresolved. Management expects 2016 planned capital expenditures of about $2.7 billion and continued share repurchases under the remaining $2.603 billion authorization.
02—Key points
Key Highlights
- Revenue grew 7.5% to $39.678 billion, with same-facility revenue up 6.4%, driven mainly by volume (equivalent admissions +5.5%) rather than price (revenue per equivalent admission +1.8%).
- Net income attributable to HCA Holdings rose 13.6% to $2.129 billion; diluted EPS was $4.99 versus $4.16 in 2014, helped by lower share count after buybacks.
- Total debt of $30.488 billion and interest expense of $1.665 billion keep the balance sheet highly leveraged, with a stockholders' deficit of $(6.046) billion.
- Uninsured burden is rising: uninsured discounts reached $10.692 billion (up from $8.999 billion) and the combined uncompensated care ratio climbed to 31.5% of revenue-related totals.
- Legal claim costs of $249 million in 2015 included the $215 million Schuh securities class action settlement and additional Health Midwest interest; a $438 million accrual remains for the Health Midwest judgment under appeal.
- Capital returns were significant: $2.397 billion of share repurchases in 2015, with $2.603 billion of authorization remaining, while planned 2016 capital expenditures are about $2.7 billion.
- Concentration risk is high: Florida and Texas account for roughly 47% of revenues and 81 of 168 hospitals, and Medicare plus Medicaid represent 42.1% of revenues, exposing results to federal and state reimbursement changes.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 26, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Interest Expense | $1.67B$1.74B | −4.5% |
| Net Income | $2.13B$1.88B | +13.5% |
| EPS (Basic) | $5.14$4.30 | +19.5% |
| EPS (Diluted) | $4.99$4.16 | +20.0% |
| Shares Outstanding (Basic) | 414.19M435.67M | −4.9% |
| Shares Outstanding (Diluted) | 426.72M450.35M | −5.2% |
05—Questions
Frequently Asked Questions
How strong is HCA's cash generation relative to its debt load?
Operating cash flow was $4.734 billion in 2015, up from $4.448 billion, and covered capital expenditures of $2.375 billion with room to spare. However, total debt of $30.488 billion and interest payments of $1.650 billion mean that debt service absorbs a large share of operating cash flow. Management believes operations and available credit facilities will meet liquidity needs over the next twelve months.
What drove the earnings improvement in 2015?
Volume growth was the main driver, with consolidated admissions up 4.1%, emergency room visits up 8.0%, and equivalent admissions up 5.5%. Interest expense fell $78 million on a lower average interest rate (5.6% versus 6.1%). Partly offsetting this, legal claim costs rose to $249 million from $78 million, salaries and benefits increased to 45.7% of revenue, and EHR incentive income declined sharply to $47 million from $125 million.
How much exposure does HCA have to government reimbursement changes?
Substantial exposure. Medicare and Medicaid, including managed plans, represented about 42.1% of 2015 revenues, and fee-for-service Medicare alone was 21.8%. The filing describes ongoing market-basket reductions, the two-midnight rule, value-based purchasing reductions of 1.75% rising to 2%, and planned reductions to Medicaid DSH payments beginning in 2018. Texas's Medicaid Waiver Program, which provides meaningful supplemental revenue, expires September 30, 2016, and its renewal is pending.
What are the largest pending legal risks?
The Health Midwest litigation is the most significant: a December 2015 judgment of $434 million, with interest accruing at 9% compounded annually, led HCA to record a $438 million accrued liability, and HCA filed an appeal in January 2016. The Schuh securities class action settlement of $215 million was preliminarily approved, with final approval hearings set for April 2016. The UK Competition and Markets Authority's London market review could require divesting hospitals, with a final report expected in May 2016.
Why are uninsured accounts a growing concern for investors?
Uninsured discounts increased $1.693 billion in 2015, and the provision for doubtful accounts rose $744 million to $3.913 billion. The allowance covers about 94.5% of the $5.636 billion patient-due receivable balance, and days revenue in receivables were 53. Although uninsured admissions rose 4.5% in 2015 after declining in 2014, management attributes the reversal to the anniversary of Exchange and Medicaid expansion benefits, and the combined uncompensated care burden still increased as a share of revenue.
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