UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
For the quarterly period ended March 31, 2018
Or
For the transition period from to
Commission file number 1-11239
HCA Healthcare, Inc.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
One Park Plaza
Nashville, Tennessee
(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 ☒ 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 ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
Non-accelerated filer
☐ (Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
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, 2018
Voting common stock, $.01 par value
HCA HEALTHCARE, INC.
March 31, 2018
Part I.
Item 1.
Condensed Consolidated Income Statements — for the quarters ended March 31, 2018 and 2017
Condensed Consolidated Comprehensive Income Statements — for the quarters ended March 31, 2018 and 2017
Condensed Consolidated Balance Sheets — March 31, 2018 and December 31, 2017
Condensed Consolidated Statements of Cash Flows — for the quarters ended March 31, 2018 and 2017
Notes to Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
Part II.
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
Signatures
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CONDENSED CONSOLIDATED INCOME STATEMENTS
FOR THE QUARTERS ENDED MARCH 31, 2018 AND 2017
Unaudited
(Dollars in millions, except per share amounts)
Revenues
Salaries and benefits
Supplies
Other operating expenses
Equity in earnings of affiliates
Depreciation and amortization
Interest expense
Gains on sales of facilities
Income before income taxes
Provision for income taxes
Net income
Net income attributable to noncontrolling interests
Net income attributable to HCA Healthcare, Inc.
Per share data:
Basic earnings per share
Diluted earnings per share
Cash dividends declared per share
Shares used in earnings per share calculations (in millions):
Basic
Diluted
See accompanying notes.
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CONDENSED CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS
(Dollars in millions)
Other comprehensive income (loss) before taxes:
Foreign currency translation
Unrealized gains (losses) on available-for-sale securities
Defined benefit plans
Pension costs included in salaries and benefits
Change in fair value of derivative financial instruments
Interest costs included in interest expense
Other comprehensive income before taxes
Income taxes related to other comprehensive income items
Other comprehensive income
Comprehensive income
Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to HCA Healthcare, Inc.
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CONDENSED CONSOLIDATED BALANCE SHEETS
Current assets:
Cash and cash equivalents
Accounts receivable
Inventories
Other
Property and equipment, at cost
Accumulated depreciation
Investments of insurance subsidiaries
Investments in and advances to affiliates
Goodwill and other intangible assets
Current liabilities:
Accounts payable
Accrued salaries
Other accrued expenses
Long-term debt due within one year
Long-term debt, less net debt issuance costs of $158 and $164
Professional liability risks
Income taxes and other liabilities
Stockholders’ deficit:
Common stock $0.01 par; authorized 1,800,000,000 shares; outstanding 350,987,500 shares in 2018 and 350,091,600 shares in 2017
Accumulated other comprehensive loss
Retained deficit
Stockholders’ deficit attributable to HCA Healthcare, Inc.
Noncontrolling interests
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Increase (decrease) in cash from operating assets and liabilities:
Inventories and other assets
Accounts payable and accrued expenses
Income taxes
Amortization of debt issuance costs
Share-based compensation
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of property and equipment
Acquisition of hospitals and health care entities
Disposal of hospitals and health care entities
Change in investments
Net cash used in investing activities
Cash flows from financing activities:
Net change in revolving bank credit facilities
Repayment of long-term debt
Distributions to noncontrolling interests
Payment of debt issuance costs
Payment of cash dividends
Repurchases of common stock
Net cash used in financing activities
Change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Interest payments
Income tax payments (refunds), net
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Reporting Entity
HCA Healthcare, 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 Healthcare, Inc. and partnerships and joint ventures in which such subsidiaries are partners. At March 31, 2018, these affiliates owned and operated 178 hospitals, 120 freestanding surgery centers and provided extensive outpatient and ancillary services. HCA Healthcare, 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 Healthcare, 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 $81 million and $82 million for the quarters ended March 31, 2018 and 2017, respectively. Operating results for the quarter ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. 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, 2017.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new standard related to revenue recognition. We adopted the new standard effective January 1, 2018, using the full retrospective method. The adoption of the new standard did not have an impact on our recognition of net revenues for any periods prior to adoption. The most significant impact of adopting the new standard is to the presentation of our consolidated income statements, where we no longer present the “Provision for doubtful accounts” as a separate line item and our “Revenues” are presented net of estimated implicit price concession revenue deductions. We also have eliminated the related presentation of “allowances for doubtful accounts” on our consolidated balance sheets as a result of the adoption of the new standard.
Our revenues generally relate to contracts with patients in which our performance obligations are to provide health care services to the patients. Revenues are recorded during the period our obligations to provide health care services are satisfied. Our performance obligations for inpatient services are generally satisfied over periods that average approximately five days, and revenues are recognized based on charges incurred in relation to total expected charges. Our performance obligations for outpatient services are generally satisfied over a period of less than one day. The contractual relationships with patients, in most cases, also involve a third-party payer (Medicare, Medicaid, managed care health plans and commercial insurance companies, including plans offered through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated with (managed care health plans and commercial insurance companies) the third-party payers. The payment arrangements with third-party payers for the services
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenues (continued)
we provide to the related patients typically specify payments at amounts less than our standard charges. Medicare generally pays for inpatient and outpatient services at prospectively determined rates based on clinical, diagnostic and other factors. Services provided to patients having Medicaid coverage are generally paid at prospectively determined rates per discharge, per identified service or per covered member. Agreements with commercial insurance carriers, managed care and preferred provider organizations generally provide for payments based upon predetermined rates per diagnosis, per diem rates or discounted fee-for-service rates. Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms resulting from contract renegotiations and renewals.
Our revenues are based upon the estimated amounts we expect to be entitled to receive from patients and third-party payers. Estimates of contractual allowances under managed care and commercial insurance plans are based upon the payment terms specified in the related contractual agreements. Revenues related to uninsured patients and uninsured copayment and deductible amounts for patients who have health care coverage may have discounts applied (uninsured discounts and contractual discounts). We also record estimated implicit price concessions (based primarily on historical collection experience) related to uninsured accounts to record self-pay revenues at the estimated amounts we expect to collect. Our revenues from third-party payers and others (including uninsured patients) for the quarters ended March 31, 2018 and 2017 are summarized in the following table (dollars in millions):
Medicare
Managed Medicare
Medicaid
Managed Medicaid
Managed care and insurers
International (managed care and insurers)
Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. As a result, there is at least a reasonable possibility recorded estimates will change by a material amount. Estimated reimbursement amounts are adjusted in subsequent periods as cost reports are prepared and filed and as final settlements are determined (in relation to certain government programs, primarily Medicare, this is generally referred to as the “cost report” filing and settlement process).
The Emergency Medical Treatment and Labor Act (“EMTALA”) requires any hospital participating in the Medicare program to conduct an appropriate medical screening examination of every person who presents to the hospital’s emergency room for treatment and, if the individual is suffering from an emergency medical condition, to either stabilize the condition or make an appropriate transfer of the individual to a facility able to handle the condition. The obligation to screen and stabilize emergency medical conditions exists regardless of an individual’s ability to pay for treatment. Federal and state laws and regulations require, and our commitment to providing quality patient care encourages, us to provide services to patients who are financially unable to pay for the health care services they receive. Prior to November 2017, patients treated at hospitals for non-elective care, who have income at or below 200% of the federal poverty level, were eligible for charity care. During November
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2017, we expanded our charity policy to include patients who have income above 200%, but at or below 400%, of the federal poverty level and we will limit the patient responsibility amounts for these patients to a percentage of their annual household income, computed on a sliding scale based upon their annual income and the applicable percentage of the federal poverty level. The federal poverty level is established by the federal government and is based on income and family size. Because we do not pursue collection of amounts determined to qualify as charity care, they are not reported in revenues. We provide discounts to uninsured patients who do not qualify for Medicaid or charity care. In implementing the uninsured discount policy, we may first attempt to provide assistance to uninsured patients to help determine whether they may qualify for Medicaid, other federal or state assistance, or charity care. If an uninsured patient does not qualify for these programs, the uninsured discount is applied.
The collection of outstanding receivables for Medicare, Medicaid, managed care payers, other third-party payers and patients is our primary source of cash and is critical to our operating performance. The primary collection risks relate to uninsured patient accounts, including patient accounts for which the primary insurance carrier has paid the amounts covered by the applicable agreement, but patient responsibility amounts (deductibles and copayments) remain outstanding. Implicit price concessions relate primarily to amounts due directly from patients. Estimated implicit price concessions are recorded for all uninsured accounts, regardless of the aging of those accounts. Accounts are written off when all reasonable internal and external collection efforts have been performed.
The estimates for implicit price concessions are based upon management’s assessment of historical writeoffs and expected net collections, business and economic conditions, trends in federal, state and private employer health care coverage and other collection indicators. Management relies on the results of detailed reviews of historical writeoffs and collections at facilities that represent a majority of our revenues and accounts receivable (the “hindsight analysis”) as a primary source of information in estimating the collectability of our accounts receivable. We perform the hindsight analysis quarterly, utilizing rolling twelve-months accounts receivable collection and writeoff data. We believe our quarterly updates to the estimated implicit price concession amounts at each of our hospital facilities provide reasonable estimates of our revenues and valuations of our accounts receivable. These routine, quarterly changes in estimates have not resulted in material adjustments to the valuations of our accounts receivable or period-to-period comparisons of our results of operations. At March 31, 2018 and 2017, estimated implicit price concessions of $5.312 billion and $4.880 billion had been recorded as reductions to our revenues and accounts receivable balances to enable us to record our revenues and accounts receivable at the estimated amounts we expect to collect.
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To quantify the total impact of the trends related to uninsured accounts, we believe it is beneficial to view total uncompensated care, which is comprised of charity care, uninsured discounts and implicit price concessions. A summary of the estimated cost of total uncompensated care for the quarters ended March 31, 2018 and 2017 follows (dollars in millions):
Patient care costs (salaries and benefits, supplies, other operating expenses and depreciation and amortization)
Cost-to-charges ratio (patient care costs as percentage of gross patient charges)
Total uncompensated care
Multiply by the cost-to-charges ratio
Estimated cost of total uncompensated care
Total uncompensated care as a percentage of the sum of revenues and total uncompensated care was 35.4% and 33.4% for the quarters ended March 31, 2018 and 2017, respectively. The total uncompensated care amounts include charity care of $1.879 billion and $1.086 billion, and the related estimated costs of charity care were $233 million and $139 million for the quarters ended March 31, 2018 and 2017, respectively.
Recent Pronouncements
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 and interim periods beginning after December 15, 2018. Early adoption is permitted. We are continuing to evaluate the provisions of ASU 2016-02 (and related developments) to determine how our financial statements will be affected, and we believe the primary effect of adopting the new standard will be to record right-of-use assets and obligations for our leases currently classified as operating leases.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
NOTE 2 — ACQUISITIONS AND DISPOSITIONS
During the quarter ended March 31, 2018, we paid $360 million to acquire a hospital facility and $19 million to acquire other nonhospital health care entities. During the quarter ended March 31, 2017, we paid $90 million to acquire other nonhospital health care entities.
During the quarter ended March 31, 2018, we received proceeds of $758 million and recognized a net pretax gain of $376 million related to the sale of the two hospital facilities in our Oklahoma market. During the quarter ended March 31, 2018, we also received proceeds of $9 million and recognized a net pretax gain of $29 million related to sales of real estate and other investments. During the quarter ended March 31, 2017, we received proceeds of $4 million and recognized a net pretax gain of $1 million related to sales of real estate and other investments.
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NOTE 3 — INCOME TAXES
Our provision for income taxes for the quarters ended March 31, 2018 and 2017, was $257 million and $289 million, respectively, and the effective tax rates were 18.4% and 30.4%, respectively. The reduction in the effective tax rate was primarily related to the estimated impact of tax rate changes under the 2017 Tax Cuts and Jobs Act (the “Tax Act”). Our provision for income taxes for the quarters ended March 31, 2018 and 2017 included tax benefits of $92 million and $67 million, respectively, related to the settlement of employee equity awards. The Tax Act was enacted on December 22, 2017, and it significantly revised U.S. corporate income taxes, including lowering the federal statutory corporate tax rate from 35% to 21% beginning in 2018. Due to the complexity and uncertainty regarding numerous provisions of the Tax Act, we have not completed our accounting for its effects. However, we have made reasonable estimates and recorded provisional amounts in our financial statements as of March 31, 2018.
As we complete our analysis of the Tax Act, we may make adjustments to the provisional amounts and record additional amounts for those federal, state, and foreign tax assets and liabilities for which we were unable to make reasonable estimates as of March 31, 2018. Any adjustments or additional amounts recorded may materially impact our provision for income taxes and effective tax rate in the periods in which they are made.
Our liability for unrecognized tax benefits was $446 million, including accrued interest of $48 million, as of March 31, 2018 ($439 million and $44 million, respectively, as of December 31, 2017). Unrecognized tax benefits of $152 million ($145 million as of December 31, 2017) would affect the effective rate, if recognized.
We are subject to examination by federal, state and foreign taxing authorities. Depending on the resolution of any federal, 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.
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, 2018 and 2017 (dollars and shares in millions, except per share amounts):
Weighted average common shares outstanding
Effect of dilutive incremental shares
Shares used for diluted earnings per share
Earnings per share:
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NOTE 5 — INVESTMENTS OF INSURANCE SUBSIDIARIES
A summary of our insurance subsidiaries’ investments at March 31, 2018 and December 31, 2017 follows (dollars in millions):
Debt securities
Money market funds and other
Amounts classified as current assets
Investment carrying value
At March 31, 2018 and December 31, 2017, 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, 2018 were as follows (dollars in millions):
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
The average expected maturity of the investments in debt securities at March 31, 2018 was 4.8 years, compared to the average scheduled maturity of 6.4 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.
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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 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.
The following table sets forth our interest rate swap agreements, which have been designated as cash flow hedges, at March 31, 2018 (dollars in millions):
Pay-fixed interest rate swaps
During the next 12 months, we estimate $14 million will be reclassified from other comprehensive income (“OCI”) and will reduce 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, 2018 (dollars in millions):
Derivatives in Cash Flow Hedging Relationships
Interest rate swaps
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, and fair value measurements should be determined based on the assumptions market participants would use in pricing assets or liabilities. ASC 820 utilizes 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 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,
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NOTE 7 — ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (continued)
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.
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.
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 of these instruments.
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, 2018 and December 31, 2017, we determined the credit valuation adjustments were not significant to the overall valuation of our derivatives.
The following tables summarize our assets measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017, aggregated by the level in the fair value hierarchy within which those measurements fall (dollars in millions):
Assets:
Investments of insurance subsidiaries:
Less amounts classified as current assets
Interest rate swaps (Other)
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Derivative Financial Instruments (continued)
The estimated fair value of our long-term debt was $34.084 billion and $34.689 billion at March 31, 2018 and December 31, 2017, respectively, compared to carrying amounts, excluding net debt issuance costs, aggregating $33.449 billion and $33.222 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, 2018 and December 31, 2017, including related interest rates at March 31, 2018, follows (dollars in millions):
Senior secured asset-based revolving credit facility (effective interest rate of 3.3%)
Senior secured revolving credit facility (effective interest rate of 3.4%)
Senior secured term loan facilities (effective interest rate of 3.5%)
Senior secured notes (effective interest rate of 5.4%)
Other senior secured debt (effective interest rate of 5.8%)
Senior secured debt
Senior unsecured notes (effective interest rate of 6.4%)
Net debt issuance costs
Total debt (average life of 6.6 years, rates averaging 5.2%)
Less amounts due within one year
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NOTE 9 — CONTINGENCIES
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 also subject to claims by various taxing authorities 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.
Health care companies are subject to numerous investigations by various governmental agencies. Under the federal False Claims Act, 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.
NOTE 10 — CAPITAL STRUCTURE
The changes in stockholders’ deficit, including changes in stockholders’ deficit attributable to HCA Healthcare, Inc. and changes in equity attributable to noncontrolling interests, are as follows (dollars and shares in millions):
Balances at December 31, 2017
Repurchase of common stock
Dividends and distributions
Share-based benefit plans
Dispositions of entities with noncontrolling interests
Balances at March 31, 2018
During the quarter ended March 31, 2018, we repurchased 4.370 million shares of our common stock at an average price of $96.80 per share through market purchases pursuant to the $2.0 billion share repurchase program authorized during October 2017. At March 31, 2018, we had $1.379 billion of repurchase authorization available under the October 2017 authorization. On January 30, 2018, our Board of Directors initiated and declared a quarterly dividend of $0.35 per share on our common stock. Dividends were paid on March 30, 2018 to stockholders of record on March 1, 2018.
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NOTE 10 — CAPITAL STRUCTURE (continued)
The components of accumulated other comprehensive loss are as follows (dollars in millions):
Unrealized losses on available-for-sale securities, net of $1 income tax benefit
Foreign currency translation adjustments
Change in fair value of derivative instruments, net of $8 of income taxes
Expense reclassified into operations from other comprehensive income, net of $1 income tax benefit
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 88 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 84 hospitals located in Colorado, northern Georgia, Kansas, southern Kentucky, Louisiana, Mississippi, Missouri, Tennessee and Texas. We also operate six hospitals in England, and these facilities are included in the Corporate and other group.
Adjusted segment EBITDA is defined as income before depreciation and amortization, interest expense, gains on sales of facilities, 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
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NOTE 11 — SEGMENT AND GEOGRAPHIC INFORMATION (continued)
depreciation and amortization for the quarters ended March 31, 2018 and 2017 are summarized in the following table (dollars in millions):
Revenues:
National Group
American Group
Corporate and other
Equity in earnings of affiliates:
Adjusted segment EBITDA:
Depreciation and amortization:
Adjusted segment EBITDA
NOTE 12 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
During December 2012, HCA Healthcare, 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 Healthcare, 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 Healthcare, Inc.). The senior secured notes and senior unsecured notes issued by HCA Inc. are fully and unconditionally guaranteed by HCA Healthcare, 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
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NOTE 12 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)
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, 2018 and 2017, condensed consolidating balance sheets at March 31, 2018 and December 31, 2017 and condensed consolidating statements of cash flows for the quarters ended March 31, 2018 and 2017, segregating HCA Healthcare, Inc. issuer, HCA Inc. issuer, the subsidiary guarantors, the subsidiary non-guarantors and eliminations, follow:
CONDENSED CONSOLIDATING COMPREHENSIVE INCOME STATEMENT
FOR THE QUARTER ENDED MARCH 31, 2018
Management fees
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Net income (loss) attributable to HCA Healthcare, Inc.
Comprehensive income (loss) attributable to HCA Healthcare, Inc.
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FOR THE QUARTER ENDED MARCH 31, 2017
Losses (gains) on sales of facilities
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CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2018
Property and equipment, net
LIABILITIES AND
STOCKHOLDERS’ (DEFICIT)
EQUITY
Long-term debt, net
Intercompany balances
Stockholders’ (deficit) equity attributable to HCA Healthcare, Inc.
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DECEMBER 31, 2017
21
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Changes in operating assets and liabilities
Net cash provided by (used in) operating activities
Disposition of hospitals and health care entities
Net change in revolving credit facilities
Changes in intercompany balances with affiliates, net
Net cash (used in) provided by financing activities
22
23
The above supplemental condensed consolidating financial information for the quarter ended March 31, 2017 has been adjusted to properly record the impact of certain subsidiaries that were non-guarantors becoming guarantors, primarily related to the Company acquiring previous noncontrolling interests of non-guarantor subsidiaries that then became guarantor subsidiaries. The impact of these adjustments was immaterial as they had no impact to our consolidated income statements, balance sheets or statements of cash flows, had no impact on any liquidity measures of the Company, nor did they impact any financial ratios based on our consolidated balance sheets or income statements. There was also no impact to our loan covenant reporting or compliance. The impact of the adjustments was limited to reclassifications between the Subsidiary Guarantors and Subsidiary Non-Guarantors columns of the condensed consolidating financial statements. The application of these adjustments to the consolidating information for the quarter ended March 31, 2017 is summarized as follows (dollars in millions):
Quarter ended March 31, 2017
Net income (loss) attributable to HCA Healthcare, Inc.:
HCA Healthcare, Inc. Issuer
HCA Inc. Issuer
Subsidiary Guarantors
Subsidiary Non-Guarantors
Eliminations
Condensed Consolidated
Net cash provided (used in) operating activities:
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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 impact 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”), including the effects of any repeal of, or changes to, the Health Reform Law or changes to its implementation, the possible enactment of additional federal or state health care reforms and possible changes to 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 supplemental payment programs or Medicaid waiver programs, that may impact reimbursements to health care providers and insurers and the size of the uninsured or underinsured population, (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 third-party payer agreements, the ability to enter into and renew third-party payer provider agreements on acceptable terms and the impact of consumer-driven health plans and physician utilization trends and practices, (9) the efforts of health insurers, health care providers, large employer groups 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) the impact of potential cybersecurity incidents or security breaches, (22) our ongoing ability to demonstrate meaningful use of certified electronic health record (“EHR”) technology, (23) the impact of natural disasters, such as hurricanes and floods, or similar events beyond our control, (24) changes in interpretations, assumptions and expectations regarding the 2017 Tax Cuts and Jobs Act, including additional guidance that may be issued by federal and state taxing authorities or other standard-setting bodies, and (25) other risk factors described in our annual report on Form 10-K for the year ended December 31, 2017 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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FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
First Quarter 2018 Operations Summary
Revenues increased to $11.423 billion in the first quarter of 2018 from $10.623 billion in the first quarter of 2017. Net income attributable to HCA Healthcare, Inc. totaled $1.144 billion, or $3.18 per diluted share, for the quarter ended March 31, 2018, compared to $659 million, or $1.74 per diluted share, for the quarter ended March 31, 2017. First quarter 2018 results include net gains on sales of facilities of $405 million, or $0.85 per diluted share. Our provision for income taxes for the first quarters of 2018 and 2017 included tax benefits of $92 million, or $0.26 per diluted share, and $67 million, or $0.18 per diluted share, respectively, related to employee equity award settlements. First quarter 2018 results also included our recognition of a reduction to the provision for income taxes of $0.20 per diluted share related to the estimated impact of tax rate changes under The 2017 Tax Cuts and Jobs Act which, along with other revisions, lowered the federal statutory corporate tax rate from 35% to 21% beginning in 2018. Cash flows from operating activities increased $20 million from $1.280 billion for the first quarter of 2017 to $1.300 billion for the first quarter of 2018. All “per diluted share” disclosures are based upon amounts net of the applicable income taxes. Shares used for diluted earnings per share were 359.749 million shares for the quarter ended March 31, 2018 and 379.980 million shares for the quarter ended March 31, 2017. During 2017 and the first quarter of 2018, we repurchased 25.092 million shares and 4.370 million shares of our common stock, respectively.
Revenues increased 7.5% on a consolidated basis and increased 5.8% on a same facility basis for the quarter ended March 31, 2018, compared to the quarter ended March 31, 2017. The increase in consolidated revenues can be attributed to the combined impact of a 2.9% increase in revenue per equivalent admission and a 4.6% increase in equivalent admissions. The same facility revenues increase primarily resulted from the combined impact of a 3.9% increase in same facility revenue per equivalent admission and a 1.8% increase in same facility equivalent admissions.
During the quarter ended March 31, 2018, consolidated admissions and same facility admissions increased 4.6% and 2.2%, respectively, compared to the quarter ended March 31, 2017. Surgeries increased 2.3% on a consolidated basis and declined 0.2% on a same facility basis during the quarter ended March 31, 2018, compared to the quarter ended March 31, 2017. Emergency department visits increased 6.4% on a consolidated basis and increased 3.5% on a same facility basis during the quarter ended March 31, 2018, compared to the quarter ended March 31, 2017. Same facility uninsured admissions increased 10.1% for the quarter ended March 31, 2018, compared to the quarter ended March 31, 2017.
Results of Operations
Revenue/Volume Trends
Our revenues generally relate to contracts with patients in which our performance obligations are to provide health care services to the patients. Revenues are recorded during the period our obligations to provide health care services are satisfied. Our performance obligations for inpatient services are generally satisfied over periods that average approximately five days, and revenues are recognized based on charges incurred in relation to total expected charges. Our performance obligations for outpatient services are generally satisfied over a period of less than one day. The contractual relationships with patients, in most cases, also involve a third-party payer (Medicare, Medicaid, managed care health plans and commercial insurance companies, including plans offered through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated with (managed care health plans and commercial insurance companies) the third-party payers. The payment arrangements with third-party payers for the services we provide to the related patients typically specify payments at amounts less than our standard charges. Medicare
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Results of Operations (continued)
Revenue/Volume Trends (continued)
generally pays for inpatient and outpatient services at prospectively determined rates based on clinical, diagnostic and other factors. Services provided to patients having Medicaid coverage are generally paid at prospectively determined rates per discharge, per identified service or per covered member. Agreements with commercial insurance carriers, managed care and preferred provider organizations generally provide for payments based upon predetermined rates per diagnosis, per diem rates or discounted fee-for-service rates. Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms resulting from contract renegotiations and renewals.
Revenues increased 7.5% from $10.623 billion in the first quarter of 2017 to $11.423 billion in the first quarter of 2018. Our revenues are based upon the estimated amounts we expect to be entitled to receive from patients and third-party payers. Estimates of contractual allowances under managed care and commercial insurance plans are based upon the payment terms specified in the related contractual agreements. Revenues related to uninsured patients and uninsured copayment and deductible amounts for patients who have health care coverage may have discounts applied (uninsured discounts and contractual discounts). We also record estimated implicit price concessions (based primarily on historical collection experience) related to uninsured accounts to record self-pay revenues at the estimated amounts we expect to collect. Our revenues from third-party payers and others (including uninsured patients) for the quarters ended March 31, 2018 and 2017 are summarized in the following table (dollars in millions):
Consolidated and same facility revenue per equivalent admission increased 2.9% and 3.9%, respectively, in the first quarter of 2018, compared to the first quarter of 2017. Consolidated and same facility equivalent admissions increased 4.6% and 1.8%, respectively, in the first quarter of 2018, compared to the first quarter of 2017. Consolidated and same facility outpatient surgeries increased 2.2% and declined 0.5%, respectively, in the first quarter of 2018, compared to the first quarter of 2017. Consolidated and same facility inpatient surgeries increased 2.5% and 0.3%, respectively, in the first quarter of 2018, compared to the first quarter of 2017. Consolidated and same facility emergency department visits increased 6.4% and 3.5%, respectively, in the first quarter of 2018, compared to the first quarter of 2017.
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Total uncompensated care as a percentage of the sum of revenues and total uncompensated care was 35.4% and 33.4% for the quarters ended March 31, 2018 and 2017, respectively.
Same facility uninsured admissions increased by 3,259 admissions, or 10.1%, in the first quarter of 2018, compared to the first quarter of 2017. Same facility uninsured admissions in 2017, compared to 2016, increased 6.4% in the fourth quarter of 2017, increased 6.4% in the third quarter of 2017, increased 4.9% in the second quarter of 2017 and increased 3.2% in the first quarter of 2017.
The approximate percentages of our admissions related to Medicare, managed Medicare, Medicaid, managed Medicaid, managed care and insurers and the uninsured for the quarters ended March 31, 2018 and 2017 are set forth in the following table.
Uninsured
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The approximate percentages of our inpatient revenues related to Medicare, managed Medicare, Medicaid, managed Medicaid, and managed care and insurers for the quarters ended March 31, 2018 and 2017 are set forth in the following table.
At March 31, 2018, we had 91 hospitals in the states of Texas and Florida. During the first quarter of 2018, 57% of our admissions and 49% of our revenues were generated by these hospitals. Uninsured admissions in Texas and Florida represented 70% of our uninsured admissions during the first quarter of 2018.
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 December 2017, the Centers for Medicare & Medicaid Services (“CMS”) announced that it will phase out federal matching funds for Designated State Health Programs under waivers granted under section 1115 of the Social Security Act. Texas currently operates its Healthcare Transformation and Quality Improvement Program pursuant to a Medicaid waiver. In December 2017, CMS approved an extension of this waiver through September 30, 2022, but indicated that it will phase out some of the federal funding. Our Texas Medicaid revenues included Medicaid supplemental payments of $98 million and $106 million during the first quarters of 2018 and 2017, respectively.
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 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.
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Operating Results Summary
The following is a comparative summary of results of operations for the quarters ended March 31, 2018 and 2017 (dollars in millions):
% changes from prior year:
Admissions(a)
Equivalent admissions(b)
Revenue per equivalent admission
Same facility % changes from prior year(c):
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Quarters Ended March 31, 2018 and 2017
Net income attributable to HCA Healthcare, Inc. totaled $1.144 billion, or $3.18 per diluted share, for the first quarter of 2018, compared to $659 million, or $1.74 per diluted share, for the first quarter of 2017. First quarter 2018 results include net gains on sales of facilities of $405 million, or $0.85 per diluted share. Our provisions for income taxes for the first quarters of 2018 and 2017 included tax benefits of $92 million, or $0.26 per diluted share, and $67 million, or $0.18 per diluted share, respectively, related to employee equity award settlements. All “per diluted share” disclosures are based upon amounts net of the applicable income taxes. Shares used for diluted earnings per share were 359.749 million shares for the quarter ended March 31, 2018 and 379.980 million shares for the quarter ended March 31, 2017. During 2017 and the first quarter of 2018, we repurchased 25.092 million and 4.370 million shares of our common stock, respectively.
Revenues increased 7.5% due to the combined impact of revenue per equivalent admission growth of 2.9% and a 4.6% increase in equivalent admissions for the first quarter of 2018 compared to the first quarter of 2017. Same facility revenues increased 5.8% due to the combined impact of a 3.9% increase in same facility revenue per equivalent admission and a 1.8% increase in same facility equivalent admissions for the first quarter of 2018 compared to the first quarter of 2017.
Salaries and benefits, as a percentage of revenues, were 46.3% in the first quarter of 2018 and 46.1% in the first quarter of 2017. Salaries and benefits per equivalent admission increased 3.2% in the first quarter of 2018 compared to the first quarter of 2017. Same facility labor rate increases averaged 3.4% for the first quarter of 2018 compared to the first quarter of 2017.
Supplies, as a percentage of revenues, were 16.8% in the first quarter of 2018 and 16.9% in the first quarter of 2017. Supply costs per equivalent admission increased 1.9% in the first quarter of 2018 compared to the first quarter of 2017. Supply costs per equivalent admission increased 1.6% for medical devices and 5.7% for general medical and surgical items and declined 6.0% for pharmacy supplies in the first quarter of 2018 compared to the first quarter of 2017.
Other operating expenses, as a percentage of revenues, were 18.5% in the first quarter of 2018 and 18.2% in the first quarter of 2017. 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 $120 million and $119 million for the first quarters of 2018 and 2017, respectively.
Equity in earnings of affiliates was $9 million and $10 million in the first quarters of 2018 and 2017, respectively.
Depreciation and amortization increased $32 million, from $521 million in the first quarter of 2017 to $553 million in the first quarter of 2018. The increase in depreciation relates to both acquired facilities and increased capital expenditures at our existing facilities.
Interest expense was $431 million in the first quarter of 2018 and $419 million in the first quarter of 2017. Our average debt balance was $33.140 billion for the first quarter of 2018 compared to $31.387 billion for the first quarter of 2017. The average effective interest rate for our long-term debt declined to 5.3% from 5.4% for the quarters ended March 31, 2018 and 2017, respectively.
During the first quarters of 2018 and 2017, we recorded net gains on sales of facilities of $405 million and $1 million, respectively. The net gains on sales of facilities for 2018 related primarily to the sale of the two hospital facilities in our Oklahoma market.
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Quarters Ended March 31, 2018 and 2017 (continued)
The effective tax rates were 18.4% and 30.4% for the first quarters of 2018 and 2017, respectively. The effective tax rate computations exclude net income attributable to noncontrolling interests as it relates to consolidated partnerships. Our provisions for income taxes for the first quarters of 2018 and 2017 included tax benefits of $92 million and $67 million, respectively, related to employee equity award settlements. Excluding the effect of these adjustments, the effective tax rate for the first quarters of 2018 and 2017 would have been 25.0% and 37.5%, respectively. The reduction in the effective tax rate was primarily related to the estimated impact of tax rate changes under the 2017 Tax Cuts and Jobs Act which, along with other revisions, lowered the federal statutory corporate tax rate from 35% to 21% beginning in 2018.
Net income attributable to noncontrolling interests increased from $118 million for the first quarter of 2017 to $138 million for the first quarter of 2018. The increase in net income attributable to noncontrolling interests related primarily to one of our Texas markets.
Liquidity and Capital Resources
Cash provided by operating activities totaled $1.300 billion in the first quarter of 2018 compared to $1.280 billion in the first quarter of 2017. The combined interest payments and net tax payments in the first quarters of 2018 and 2017 were $560 million and $537 million, respectively. Working capital totaled $2.913 billion at March 31, 2018 and $3.819 billion at December 31, 2017. The decline in working capital of $906 million is primarily related to the net effect of an increase in long-term debt due within one year of $1.497 billion and an increase in cash and cash equivalents of $354 million.
Cash used in investing activities was $335 million in the first quarter of 2018 compared to $669 million in the first quarter of 2017. Acquisitions of hospitals and health care entities increased from $90 million in the first quarter of 2017 to $379 million in the first quarter of 2018. Excluding acquisitions, capital expenditures were $694 million in the first quarter of 2018 and $571 million in the first quarter of 2017. Capital expenditures, excluding acquisitions, are expected to approximate $3.5 billion in 2018. At March 31, 2018, there were projects under construction which had estimated additional costs to complete and equip over the next five years of approximately $3.6 billion. We expect to finance capital expenditures with internally generated and borrowed funds. Disposals of hospitals and health care entities increased $763 million for the first quarter of 2018 compared to the first quarter of 2017 primarily related to the sale of the two hospital facilities in our Oklahoma market.
Cash used in financing activities totaled $611 million in the first quarter of 2018 compared to $504 million in the first quarter of 2017. During the first quarter of 2018, net cash flows used in financing activities included a net increase of $220 million in our indebtedness, payment of cash dividends of $123 million, repurchases of common stock of $423 million and distributions to noncontrolling interests of $92 million. During the first quarter of 2017, net cash flows used in financing activities included a net increase of $117 million in our indebtedness, repurchases of common stock of $424 million and distributions to noncontrolling interests of $145 million.
On January 30, 2018, our Board of Directors initiated and declared a quarterly dividend of $0.35 per share on our common stock. Dividend payments of $123 million were paid on March 30, 2018 to stockholders of record on March 1, 2018.
We are a highly leveraged company with significant debt service requirements. Our debt totaled $33.291 billion at March 31, 2018. Our interest expense was $431 million for the first quarter of 2018 and $419 million for the first quarter of 2017.
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Liquidity and Capital Resources (continued)
In addition to cash flows from operations, available sources of capital include amounts available under our senior secured credit facilities ($1.777 billion and $1.742 billion available as of March 31, 2018 and April 30, 2018, respectively) and anticipated access to public and private debt markets.
During March 2018, we entered into a joinder agreement to refinance our existing senior secured term B-8 loan credit facility maturing on February 15, 2024, repay a portion of our existing senior secured term B-9 loan credit facility maturing on March 18, 2023 and pay related fees and expenses with a new $1.500 billion senior secured term B-10 loan credit facility maturing on March 13, 2025. The senior secured term B-10 loan credit facility will bear interest at LIBOR plus an applicable margin of 2.00% or a base rate plus an applicable margin of 1.00%, compared to applicable margins of 2.25% and 1.25%, respectively, under the senior secured term B-8 loan credit facility.
During March 2018, we also entered into an additional joinder agreement to refinance a portion of our existing senior secured term B-9 loan credit facility maturing on March 18, 2023 and pay related fees and expenses with a new approximately $1.166 billion senior secured term B-11 loan credit facility maturing on March 18, 2023. The senior secured term B-11 loan credit facility will bear interest at LIBOR plus an applicable margin of 1.75% or a base rate plus an applicable margin of 0.75%, compared to applicable margins of 2.00% and 1.00%, respectively, under the senior secured term B-9 loan credit facility.
Investments of our professional liability insurance subsidiaries, to maintain statutory equity and pay claims, totaled $461 million and $472 million at March 31, 2018 and December 31, 2017, respectively. An insurance subsidiary maintained net reserves for professional liability risks of $188 million and $194 million at March 31, 2018 and December 31, 2017, respectively. Our facilities are insured by a 100% owned insurance subsidiary for losses up to $50 million per occurrence; however, this coverage is generally subject to a $15 million per occurrence self-insured retention. Net reserves for the self-insured professional liability risks retained were $1.457 billion and $1.409 billion at March 31, 2018 and December 31, 2017, respectively. Claims payments, net of reinsurance recoveries, during the next 12 months are expected to approximate $434 million. We estimate that approximately $394 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 our 100% owned insurance subsidiaries were $461 million at March 31, 2018. 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, 2018, we had a net unrealized gain of $5 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
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Market Risk (continued)
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.
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 $5.324 billion of long-term debt at March 31, 2018 was subject to variable rates of interest, while the remaining balance in long-term debt of $27.967 billion at March 31, 2018 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 5.4% for the quarter ended March 31, 2017 to 5.3% for the quarter ended March 31, 2018.
The estimated fair value of our total long-term debt was $34.084 billion at March 31, 2018. 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 $53 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.
We are exposed to currency translation risk related to our foreign operations. We currently do not consider the market risk related to foreign currency translation to be material to our consolidated financial statements or our liquidity.
Tax Examinations
We are subject to examination by federal, state and foreign taxing authorities. Management believes HCA Healthcare, 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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Operating Data
Number of hospitals in operation at:
March 31
June 30
September 30
December 31
Number of freestanding outpatient surgical centers in operation at:
Licensed hospital beds at(a):
Weighted average licensed beds(b):
Quarter:
First
Second
Third
Fourth
Year
Average daily census(c):
Admissions(d):
Equivalent admissions(e):
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Operating Data (continued)
Average length of stay (days)(f):
Emergency room visits(g):
Outpatient surgeries(h):
Inpatient surgeries(i):
Days revenues in accounts receivable(j):
Outpatient revenues as a % of patient revenues(k):
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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.”
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
1. LEGAL PROCEEDINGS
Health care companies are subject to numerous investigations by various governmental agencies. Further, under the federal False Claims Act, 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.
1A. RISK FACTORS
Reference is made to the factors set forth under the caption “Forward-Looking Statements” in Part I, Item 2 of this quarterly report on Form 10-Q and other risk factors described in our annual report on Form 10-K for the year ended December 31, 2017, 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, 2017.
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2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter ended March 31, 2018, we repurchased 4,370,398 shares of our common stock at an average price of $96.80 per share through market purchases pursuant to the $2 billion share repurchase program authorized during October 2017. At March 31, 2018, we had $1.379 billion of repurchase authorization available under the October 2017 authorization.
The following table provides certain information with respect to our repurchases of common stock from January 1, 2018 through March 31, 2018 (dollars in millions, except per share amounts).
Period
January 1, 2018 through January 31, 2018
February 1, 2018 through February 28, 2018
March 1, 2018 through March 31, 2018
Total for first quarter 2018
On April 30, 2018, our Board of Directors declared a quarterly dividend of $0.35 per share on our common stock payable on June 29, 2018 to stockholders of record on June 1, 2018. Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to the final determination of our Board of Directors. Our ability to declare future dividends may also from time to time be limited by the terms of our debt agreements.
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6. EXHIBITS
(a) List of Exhibits:
Joinder Agreement No. 6, dated as of March 13, 2018, 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 13, 2018 (File No. 001-11239), and incorporated herein by reference).
Joinder Agreement No. 7, dated as of March 13, 2018, 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 4.2 to the Company’s Current Report on Form 8-K filed March 13, 2018 (File No. 001-11239), and incorporated herein by reference).
HCA Healthcare, Inc. 2018 Senior Officer Performance Excellence Program (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 5, 2018 (File No. 001-11239), and incorporated herein by reference).*
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The following financial information from our quarterly report on Form 10-Q for the quarters ended March 31, 2018 and 2017, filed with the SEC on May 8, 2018, formatted in Extensible Business Reporting Language: (i) the condensed consolidated balance sheets at March 31, 2018 and December 31, 2017, (ii) the condensed consolidated income statements for the quarters ended March 31, 2018 and 2017, (iii) the condensed consolidated comprehensive income statements for the quarters ended March 31, 2018 and 2017, (iv) the condensed consolidated statements of cash flows for the quarters ended March 31, 2018 and 2017 and (v) the notes to condensed consolidated financial statements.
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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.
By:
/S/ WILLIAM B. RUTHERFORD
Date: May 8, 2018
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