Edgar Filing: HCA Holdings, Inc.

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Form 10-Q

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 June 30, 2016

¨	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.

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 July 31, 2016
Voting common stock, $.01 par value		378,646,200 shares

HCA HOLDINGS, INC.

Form 10-Q

June 30, 2016


		Page of Form 10-Q
Part I.	Financial Information

Item 1.	Financial Statements (Unaudited):

	Condensed Consolidated Income Statements — for the quarters and six months ended June 30, 2016 and 2015		2

	Condensed Consolidated Comprehensive Income Statements — for the quarters and six months ended June 30, 2016 and 2015		3

	Condensed Consolidated Balance Sheets — June 30, 2016 and December 31, 2015		4

	Condensed Consolidated Statements of Cash Flows — for the six months ended June 30, 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		46

Item 4.	Controls and Procedures		46

Part II.	Other Information

Item 1.	Legal Proceedings		46

Item 1A.	Risk Factors		47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		48

Item 6.	Exhibits		49

Signatures			50

HCA HOLDINGS, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS

FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 2016 AND 2015

Unaudited

(Dollars in millions, except per share amounts)


	Quarter						Six Months
	2016			2015			2016			2015
Revenues before provision for doubtful accounts	$	11,081		$	10,932		$	22,131		$	21,254
Provision for doubtful accounts		762			1,035			1,552			1,681

Revenues		10,319			9,897			20,579			19,573

Salaries and benefits		4,691			4,492			9,393			8,890
Supplies		1,718			1,670			3,432			3,308
Other operating expenses		1,873			1,755			3,730			3,472
Electronic health record incentive income		(5	)		(18	)		(9	)		(37	)
Equity in earnings of affiliates		(10	)		(10	)		(22	)		(29	)
Depreciation and amortization		489			469			968			942
Interest expense		427			425			843			844
Losses (gains) on sales of facilities		(6	)		5			(5	)		(4	)
Losses on retirement of debt		—			125			—			125
Legal claim costs		10			—			22			—

		9,187			8,913			18,352			17,511

Income before income taxes		1,132			984			2,227			2,062
Provision for income taxes		341			319			625			677

Net income		791			665			1,602			1,385
Net income attributable to noncontrolling interests		133			158			250			287

Net income attributable to HCA Holdings, Inc.	$	658		$	507		$	1,352		$	1,098

Per share data:
Basic earnings per share	$	1.70		$	1.22		$	3.45		$	2.63
Diluted earnings per share	$	1.65		$	1.18		$	3.34		$	2.54
Shares used in earnings per share calculations (in millions):
Basic		386.406			416.407			391.401			418.267
Diluted		398.659			429.369			404.617			432.329

See accompanying notes.

HCA HOLDINGS, INC.

CONDENSED CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS

FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 2016 AND 2015

Unaudited

(Dollars in millions)


	Quarter						Six Months
	2016			2015			2016			2015
Net income	$	791		$	665		$	1,602		$	1,385
Other comprehensive income (loss) before taxes:
Foreign currency translation		(86	)		64			(129	)		13

Unrealized gains (losses) on available-for-sale securities		3			(5	)		5			(4	)

Defined benefit plans		—			—			—			—
Pension costs included in salaries and benefits		5			5			9			11

		5			5			9			11

Change in fair value of derivative financial instruments		(32	)		(7	)		(70	)		(30	)
Interest costs included in interest expense		28			31			56			62

		(4	)		24			(14	)		32

Other comprehensive income (loss) before taxes		(82	)		88			(129	)		52
Income taxes (benefits) related to other comprehensive income items		(32	)		34			(50	)		19

Other comprehensive income (loss)		(50	)		54			(79	)		33

Comprehensive income		741			719			1,523			1,418
Comprehensive income attributable to noncontrolling interests		133			158			250			287

Comprehensive income attributable to HCA Holdings, Inc.	$	608		$	561		$	1,273		$	1,131

See accompanying notes.

HCA HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

(Dollars in millions)


	June 30, 2016			December 31, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	691		$	741
Accounts receivable, less allowance for doubtful accounts of $5,046 and $5,326		5,669			5,889
Inventories		1,481			1,439
Other		1,254			1,163

		9,095			9,232

Property and equipment, at cost		35,873			34,614
Accumulated depreciation		(20,249	)		(19,600	)

		15,624			15,014

Investments of insurance subsidiaries		341			432
Investments in and advances to affiliates		201			178
Goodwill and other intangible assets		6,694			6,731
Other		1,250			1,157

	$	33,205		$	32,744

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	1,934		$	2,170
Accrued salaries		1,405			1,233
Other accrued expenses		1,833			1,880
Long-term debt due within one year		224			233

		5,396			5,516

Long-term debt, less net debt issuance costs of $173 and $167		31,228			30,255
Professional liability risks		1,126			1,115
Income taxes and other liabilities		1,953			1,904

Stockholders’ deficit:
Common stock $0.01 par; authorized 1,800,000,000 shares; outstanding 380,061,600 shares in 2016 and 398,738,700 shares in 2015		4			4
Accumulated other comprehensive loss		(344	)		(265	)
Retained deficit		(7,767	)		(7,338	)

Stockholders’ deficit attributable to HCA Holdings, Inc.		(8,107	)		(7,599	)
Noncontrolling interests		1,609			1,553

		(6,498	)		(6,046	)

	$	33,205		$	32,744

See accompanying notes.

HCA HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

Unaudited

(Dollars in millions)


	2016			2015
Cash flows from operating activities:
Net income	$	1,602		$	1,385
Adjustments to reconcile net income to net cash provided by operating activities:
Increase (decrease) in cash from operating assets and liabilities:
Accounts receivable		(1,364	)		(1,784	)
Provision for doubtful accounts		1,552			1,681

Accounts receivable, net		188			(103	)
Inventories and other assets		(176	)		(195	)
Accounts payable and accrued expenses		(102	)		(117	)
Depreciation and amortization		968			942
Income taxes		67			(101	)
Gains on sales of facilities		(5	)		(4	)
Losses on retirement of debt		—			125
Legal claim costs		22			—
Amortization of debt issuance costs		18			19
Share-based compensation		129			103
Other		37			21

Net cash provided by operating activities		2,748			2,075


Cash flows from investing activities:
Purchase of property and equipment		(1,172	)		(1,004	)
Acquisition of hospitals and health care entities		(430	)		(95	)
Disposal of hospitals and health care entities		14			22
Change in investments		18			67
Other		15			1

Net cash used in investing activities		(1,555	)		(1,009	)


Cash flows from financing activities:
Issuances of long-term debt		3,000			4,048
Net change in revolving bank credit facilities		—			(300	)
Repayment of long-term debt		(2,065	)		(3,644	)
Distributions to noncontrolling interests		(205	)		(237	)
Payment of debt issuance costs		(24	)		(33	)
Repurchases of common stock		(1,858	)		(940	)
Other		(91	)		147

Net cash used in financing activities		(1,243	)		(959	)

Change in cash and cash equivalents		(50	)		107
Cash and cash equivalents at beginning of period		741			566

Cash and cash equivalents at end of period	$	691		$	673

Interest payments	$	767		$	810
Income tax payments, net	$	558		$	581

See accompanying notes.

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 June 30, 2016, these affiliates owned and operated 169 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 $93 million and $84 million for the quarters ended June 30, 2016 and 2015, respectively, and $178 million and $158 million for the six months ended June 30, 2016 and 2015, respectively. Operating results for the quarter and the six months ended June 30, 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.

HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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 and six months ended June 30, 2016 and 2015 are summarized in the following table (dollars in millions):


	Quarter
	2016			Ratio			2015			Ratio
Medicare	$	2,217			21.5	%	$	2,144			21.7	%
Managed Medicare		1,078			10.4			1,016			10.3
Medicaid		416			4.0			408			4.1
Managed Medicaid		608			5.9			571			5.8
Managed care and other insurers		5,759			55.8			5,461			55.1
International (managed care and other insurers)		324			3.1			327			3.3

		10,402			100.7			9,927			100.3
Uninsured		225			2.2			558			5.6
Other		454			4.4			447			4.5

Revenues before provision for doubtful accounts		11,081			107.3			10,932			110.4
Provision for doubtful accounts		(762	)		(7.3	)		(1,035	)		(10.4	)

Revenues	$	10,319			100.0	%	$	9,897			100.0	%


	Six Months
	2016			Ratio			2015			Ratio
Medicare	$	4,483			21.8	%	$	4,378			22.4	%
Managed Medicare		2,182			10.6			2,068			10.6
Medicaid		843			4.1			860			4.4
Managed Medicaid		1,205			5.9			1,120			5.7
Managed care and other insurers		11,461			55.7			10,677			54.5
International (managed care and other insurers)		641			3.1			648			3.3

		20,815			101.2			19,751			100.9
Uninsured		414			2.0			626			3.2
Other		902			4.4			877			4.5

Revenues before provision for doubtful accounts		22,131			107.6			21,254			108.6
Provision for doubtful accounts		(1,552	)		(7.6	)		(1,681	)		(8.6	)

Revenues	$	20,579			100.0	%	$	19,573			100.0	%

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

HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Recent Pronouncements (continued)

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. While we are continuing to evaluate the effects the adoption of this standard will have on our financial statements and financial disclosures, we do not believe the adoption will have a significant impact on our recognition of net revenues.

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.

NOTE 2 — ACQUISITIONS AND DISPOSITIONS

During the six months ended June 30, 2016, we paid $343 million to acquire three hospital facilities and $87 million to acquire other nonhospital health care entities. During the six months ended June 30, 2015, we paid $15 million to acquire a hospital and $80 million to acquire other nonhospital health care entities.

During the six months ended June 30, 2016, we received proceeds of $14 million and recognized a net pretax gain of $5 million related to sales of real estate and other investments. During the six months ended June 30, 2015, we received proceeds of $22 million and recognized a net pretax gain of $4 million related to sales of real estate and other investments.

HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3 — INCOME TAXES

Our liability for unrecognized tax benefits was $542 million, including accrued interest of $71 million, as of June 30, 2016 ($554 million and $73 million, respectively, as of December 31, 2015). Unrecognized tax benefits of $223 million ($233 million as of December 31, 2015) would affect the effective rate, if recognized.

Our provision for income taxes for the quarter and six months ended June 30, 2016 included tax benefits of $44 million and $118 million, respectively, 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 benefits for the quarter and six months ending June 30, 2015, related to the settlement of employee equity awards, were $115 million and $185 million, respectively, and were 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.

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. 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.

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 and six months ended June 30, 2016 and 2015 (dollars and shares in millions, except per share amounts):


	Quarter				Six Months
	2016		2015		2016		2015
Net income attributable to HCA Holdings, Inc.	$	658	$	507	$	1,352	$	1,098

Weighted average common shares outstanding		386.406		416.407		391.401		418.267
Effect of dilutive incremental shares		12.253		12.962		13.216		14.062

Shares used for diluted earnings per share		398.659		429.369		404.617		432.329

Earnings per share:
Basic earnings per share	$	1.70	$	1.22	$	3.45	$	2.63
Diluted earnings per share	$	1.65	$	1.18	$	3.34	$	2.54

HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 5 — INVESTMENTS OF INSURANCE SUBSIDIARIES

A summary of our insurance subsidiaries’ investments at June 30, 2016 and December 31, 2015 follows (dollars in millions):


	June 30, 2016
	Amortized Cost		Unrealized Amounts					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
Debt securities:
States and municipalities	$	392	$	22	$	—		$	414
Money market funds		49		—		—			49

		441		22		—			463
Equity securities		1		3		—			4

	$	442	$	25	$	—			467

Amounts classified as current assets									(126	)

Investment carrying value								$	341


	December 31, 2015
	Amortized Cost		Unrealized Amounts					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
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 June 30, 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). Amounts classified as current assets at June 30, 2016 include $75 million to be distributed to the Company from a 100% owned insurance subsidiary.

Scheduled maturities of investments in debt securities at June 30, 2016 were as follows (dollars in millions):


	Amortized Cost		Fair Value
Due in one year or less	$	88	$	88
Due after one year through five years		160		165
Due after five years through ten years		124		136
Due after ten years		69		74

	$	441	$	463

HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 5 — INVESTMENTS OF INSURANCE SUBSIDIARIES (continued)

The average expected maturity of the investments in debt securities at June 30, 2016 was 3.7 years, compared to the average scheduled maturity of 5.2 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.

The following table sets forth our interest rate swap agreements, which have been designated as cash flow hedges, at June 30, 2016 (dollars in millions):


	Notional Amount		Maturity Date		Fair Value
Pay-fixed interest rate swaps	$	3,000		December 2016	$	(46	)
Pay-fixed interest rate swaps		1,000		December 2017		(26	)
Pay-fixed interest rate swaps (starting in December 2016)		2,000		December 2021		(52	)

During the next 12 months, we estimate $73 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 six months ended June 30, 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	$	44		Interest expense	$	56

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 June 30, 2016, we have not been required to post any collateral related to these agreements. If we had breached these provisions at June 30, 2016, we would have been required to settle our obligations under the agreements at their aggregate, estimated termination value of $126 million.

HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 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 June 30, 2016 and December 31, 2015, we determined the credit valuation adjustments were not significant to the overall valuation of our derivatives.

HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

The following tables summarize our assets and liabilities measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015, aggregated by the level in the fair value hierarchy within which those measurements fall (dollars in millions):


	June 30, 2016
	Fair Value			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	$	414		$	—		$	409		$	5
Money market funds		49			49			—			—

		463			49			409			5
Equity securities		4			4			—			—

Investments of insurance subsidiaries		467			53			409			5
Less amounts classified as current assets		(126	)		(49	)		(77	)		—

	$	341		$	4		$	332		$	5

Liabilities:
Interest rate swaps (Income taxes and other liabilities)	$	124		$	—		$	124		$	—

	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		$	—

HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7 — ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (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 six months ended June 30, 2016. The estimated fair value of our long-term debt was $33.018 billion and $31.411 billion at June 30, 2016 and December 31, 2015, respectively, compared to carrying amounts, excluding net debt issuance costs, aggregating $31.625 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 June 30, 2016 and December 31, 2015, including related interest rates at June 30, 2016, follows (dollars in millions):


	June 30, 2016			December 31, 2015
Senior secured asset-based revolving credit facility (effective interest rate of 1.9%)	$	3,030		$	3,030
Senior secured revolving credit facility		—			—
Senior secured term loan facilities (effective interest rate of 5.3%)		5,134			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%)		609			634

First lien debt		21,373			20,403
Senior unsecured notes (effective interest rate of 6.5%)		10,252			10,252
Net debt issuance costs		(173	)		(167	)

Total debt (average life of 6.3 years, rates averaging 5.5%)		31,452			30,488
Less amounts due within one year		224			233

	$	31,228		$	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. The pretax loss on retirement of debt was $3 million.

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 7³/₄% senior notes due 2021. The pretax loss on retirement of debt related to this redemption was $122 million.

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

HCA HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9 — CONTINGENCIES AND LEGAL CLAIM COSTS (continued)

Government Investigations, Claims and Litigation (continued)

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 expected during the third quarter 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.

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, began 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 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 June 30, 2016, the Company had accrued liabilities of $458 million 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.

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		Capital in Excess of Par Value			Accumulated Other Comprehensive Loss			Retained Deficit
Balances at December 31, 2015		398.739		$	4	$	—		$	(265	)	$	(7,338	)	$	1,553		$	(6,046	)
Comprehensive income		—			—		—			(79	)		1,352			250			1,523
Repurchase of common stock		(24.427	)		—		(77	)		—			(1,781	)		—			(1,858	)
Distributions		—			—		—			—			—			(205	)		(205	)
Share-based benefit plans		5.750			—		74			—			—			—			74
Other		—			—		3			—			—			11			14

Balances at June 30, 2016		380.062		$	4	$	—		$	(344	)	$	(7,767	)	$	1,609		$	(6,498	)

During May 2016, we repurchased 9.361 million shares of our common stock beneficially owned by affiliates of Kohlberg Kravis Roberts & Co. at a purchase price of $80.12 per share, the closing price of our common stock on the New York Stock Exchange on May 10, 2016, less a discount of 1%. During the six months ended June 30, 2016, we also repurchased 15.066 million shares of our common stock at an average price of $73.51 per share through market purchases, resulting in total repurchases of 24.427 million shares of our common stock at an average price of $76.04 per share for the six months ended June 30, 2016 pursuant to the $3.0 billion share repurchase program authorized during October 2015. At June 30, 2016, we had $746 million 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 $2 of income taxes		3		—			—			—			3
Foreign currency translation adjustments, net of $50 income tax benefit		—		(79	)		—			—			(79	)
Change in fair value of derivative instruments, net of $26 income tax benefit		—		—			—			(44	)		(44	)
Expense reclassified into operations from other comprehensive income, net of $3 and $21, respectively, income tax benefits		—		—			6			35			41

Balances at June 30, 2016	$	16	$	(153	)	$	(129	)	$	(78	)	$	(344	)

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 79 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.

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, losses on retirement of debt, 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 and six months ended June 30, 2016 and 2015 are summarized in the following table (dollars in millions):


	Quarter						Six Months
	2016			2015			2016			2015
Revenues:
National Group	$	4,931		$	4,698		$	9,898		$	9,348
American Group		4,855			4,699			9,635			9,200
Corporate and other		533			500			1,046			1,025

	$	10,319		$	9,897		$	20,579		$	19,573

Equity in earnings of affiliates:
National Group	$	(2	)	$	(4	)	$	(4	)	$	(7	)
American Group		(8	)		(8	)		(17	)		(16	)
Corporate and other		—			2			(1	)		(6	)

	$	(10	)	$	(10	)	$	(22	)	$	(29	)

Adjusted segment EBITDA:
National Group	$	1,131		$	1,088		$	2,269		$	2,169
American Group		1,004			1,044			1,987			1,993
Corporate and other		(83	)		(124	)		(201	)		(193	)

	$	2,052		$	2,008		$	4,055		$	3,969

Depreciation and amortization:
National Group	$	201		$	188		$	398		$	377
American Group		225			222			443			443
Corporate and other		63			59			127			122

	$	489		$	469		$	968		$	942

Adjusted segment EBITDA	$	2,052		$	2,008		$	4,055		$	3,969
Depreciation and amortization		489			469			968			942
Interest expense		427			425			843			844
Losses (gains) on sales of facilities		(6	)		5			(5	)		(4	)
Losses on retirement of debt		—			125			—			125
Legal claim costs		10			—			22			—

Income before income taxes	$	1,132		$	984		$	2,227		$	2,062

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 7³/₄% 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 and six months ended June 30, 2016 and 2015, condensed consolidating balance sheets at June 30, 2016 and December 31, 2015 and condensed consolidating statements of cash flows for the six months ended June 30, 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 JUNE 30, 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	$	—		$	—		$	5,693		$	5,388		$	—		$	11,081
Provision for doubtful accounts		—			—			498			264			—			762

Revenues		—			—			5,195			5,124			—			10,319

Salaries and benefits		—			—			2,347			2,344			—			4,691
Supplies		—			—			886			832			—			1,718
Other operating expenses		2			—			895			976			—			1,873
Electronic health record incentive income		—			—			(2	)		(3	)		—			(5	)
Equity in earnings of affiliates		(563	)		—			(1	)		(9	)		563			(10	)
Depreciation and amortization		—			—			238			251			—			489
Interest expense		16			670			(204	)		(55	)		—			427
Gains on sales of facilities		—			—			(2	)		(4	)		—			(6	)
Legal claim costs		—			10			—			—			—			10
Management fees		—			—			(235	)		235			—			—

		(545	)		680			3,922			4,567			563			9,187

Income (loss) before income taxes		545			(680	)		1,273			557			(563	)		1,132
Provision (benefit) for income taxes		(113	)		(303	)		555			202			—			341

Net income (loss)		658			(377	)		718			355			(563	)		791
Net income attributable to noncontrolling interests		—			—			21			112			—			133

Net income (loss) attributable to HCA Holdings, Inc.	$	658		$	(377	)	$	697		$	243		$	(563	)	$	658

Comprehensive income (loss) attributable to HCA Holdings, Inc.	$	608		$	(379	)	$	701		$	191		$	(513	)	$	608

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 JUNE 30, 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	$	—		$	—		$	5,597		$	5,335		$	—		$	10,932
Provision for doubtful accounts		—			—			550			485			—			1,035

Revenues		—			—			5,047			4,850			—			9,897

Salaries and benefits		—			—			2,250			2,242			—			4,492
Supplies		—			—			869			801			—			1,670
Other operating expenses		(4	)		—			838			921			—			1,755
Electronic health record incentive income		—			—			(12	)		(6	)		—			(18	)
Equity in earnings of affiliates		(603	)		—			(2	)		(8	)		603			(10	)
Depreciation and amortization		—			—			223			246			—			469
Interest expense		38			604			(168	)		(49	)		—			425
Losses on sales of facilities		—			—			5			—			—			5
Losses on retirement of debt		122			3			—			—			—			125
Management fees		—			—			(178	)		178			—			—

		(447	)		607			3,825			4,325			603			8,913

Income (loss) before income taxes		447			(607	)		1,222			525			(603	)		984
Provision (benefit) for income taxes		(60	)		(234	)		462			151			—			319

Net income (loss)		507			(373	)		760			374			(603	)		665
Net income attributable to noncontrolling interests		—			—			24			134			—			158

Net income (loss) attributable to HCA Holdings, Inc.	$	507		$	(373	)	$	736		$	240		$	(603	)	$	507

Comprehensive income (loss) attributable to HCA Holdings, Inc.	$	561		$	(358	)	$	740		$	275		$	(657	)	$	561

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 SIX MONTHS ENDED JUNE 30, 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	$	—		$	—		$	11,366		$	10,765		$	—		$	22,131
Provision for doubtful accounts		—			—			992			560			—			1,552

Revenues		—			—			10,374			10,205			—			20,579

Salaries and benefits		—			—			4,701			4,692			—			9,393
Supplies		—			—			1,784			1,648			—			3,432
Other operating expenses		4			—			1,755			1,971			—			3,730
Electronic health record incentive income		—			—			(5	)		(4	)		—			(9	)
Equity in earnings of affiliates		(1,270	)		—			(3	)		(19	)		1,270			(22	)
Depreciation and amortization		—			—			465			503			—			968
Interest expense		32			1,320			(411	)		(98	)		—			843
Gains on sales of facilities		—			—			—			(5	)		—			(5	)
Legal claim costs		—			22			—			—			—			22
Management fees		—			—			(395	)		395			—			—

		(1,234	)		1,342			7,891			9,083			1,270			18,352

Income (loss) before income taxes		1,234			(1,342	)		2,483			1,122			(1,270	)		2,227
Provision (benefit) for income taxes		(118	)		(495	)		900			338			—			625

Net income (loss)		1,352			(847	)		1,583			784			(1,270	)		1,602
Net income attributable to noncontrolling interests		—			—			43			207			—			250

Net income (loss) attributable to HCA Holdings, Inc.	$	1,352		$	(847	)	$	1,540		$	577		$	(1,270	)	$	1,352

Comprehensive income (loss) attributable to HCA Holdings, Inc.	$	1,273		$	(856	)	$	1,546		$	501		$	(1,191	)	$	1,273

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 SIX MONTHS ENDED JUNE 30, 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	$	—		$	—		$	10,798		$	10,456		$	—		$	21,254
Provision for doubtful accounts		—			—			846			835			—			1,681

Revenues		—			—			9,952			9,621			—			19,573

Salaries and benefits		—			—			4,467			4,423			—			8,890
Supplies		—			—			1,723			1,585			—			3,308
Other operating expenses		2			—			1,658			1,812			—			3,472
Electronic health record incentive income		—			—			(25	)		(12	)		—			(37	)
Equity in earnings of affiliates		(1,226	)		—			(3	)		(26	)		1,226			(29	)
Depreciation and amortization		—			—			453			489			—			942
Interest expense		84			1,199			(342	)		(97	)		—			844
Gains on sales of facilities		—			—			(4	)		—			—			(4	)
Losses on retirement of debt		122			3			—			—			—			125
Management fees		—			—			(356	)		356			—			—

		(1,018	)		1,202			7,571			8,530			1,226			17,511

Income (loss) before income taxes		1,018			(1,202	)		2,381			1,091			(1,226	)		2,062
Provision (benefit) for income taxes		(80	)		(458	)		890			325			—			677

Net income (loss)		1,098			(744	)		1,491			766			(1,226	)		1,385
Net income attributable to noncontrolling interests		—			—			47			240			—			287

Net income (loss) attributable to HCA Holdings, Inc.	$	1,098		$	(744	)	$	1,444		$	526		$	(1,226	)	$	1,098

Comprehensive income (loss) attributable to HCA Holdings, Inc.	$	1,131		$	(724	)	$	1,452		$	531		$	(1,259	)	$	1,131

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

JUNE 30, 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	$	—		$	—		$	82		$	609	$	—		$	691
Accounts receivable, net		—			—			2,917			2,752		—			5,669
Inventories		—			—			885			596		—			1,481
Other		—			—			530			724		—			1,254

		—			—			4,414			4,681		—			9,095

Property and equipment, net		—			—			8,491			7,133		—			15,624

Investments of insurance subsidiaries		—			—			—			341		—			341
Investments in and advances to affiliates		25,571			—			16			185		(25,571	)		201
Goodwill and other intangible assets		—			—			1,705			4,989		—			6,694
Other		1,041			—			16			193		—			1,250

	$	26,612		$	—		$	14,642		$	17,522	$	(25,571	)	$	33,205

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Accounts payable	$	—		$	—		$	1,210		$	724	$	—		$	1,934
Accrued salaries		—			—			775			630		—			1,405
Other accrued expenses		46			406			486			895		—			1,833
Long-term debt due within one year		—			109			60			55		—			224

		46			515			2,531			2,304		—			5,396

Long-term debt, net		992			29,742			201			293		—			31,228
Intercompany balances		33,138			(11,391	)		(24,731	)		2,984		—			—
Professional liability risks		—			—			—			1,126		—			1,126
Income taxes and other liabilities		543			582			425			403		—			1,953

		34,719			19,448			(21,574	)		7,110		—			39,703
Stockholders’ (deficit) equity attributable to HCA Holdings, Inc.		(8,107	)		(19,448	)		36,074			8,945		(25,571	)		(8,107	)
Noncontrolling interests		—			—			142			1,467		—			1,609

		(8,107	)		(19,448	)		36,216			10,412		(25,571	)		(6,498	)

	$	26,612		$	—		$	14,642		$	17,522	$	(25,571	)	$	33,205

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

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 SIX MONTHS ENDED JUNE 30, 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)	$	1,352		$	(847	)	$	1,583		$	784		$	(1,270	)	$	1,602
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Changes in operating assets and liabilities		(23	)		66			(1,140	)		(545	)		—			(1,642	)
Provision for doubtful accounts		—			—			992			560			—			1,552
Depreciation and amortization		—			—			465			503			—			968
Income taxes		67			—			—			—			—			67
Gains on sales of facilities		—			—			—			(5	)		—			(5	)
Legal claim costs		—			22			—			—			—			22
Amortization of debt issuance costs		—			18			—			—			—			18
Share-based compensation		—			—			129			—			—			129
Equity in earnings of affiliates		(1,270	)		—			—			—			1,270			—
Other		37			—			(2	)		2			—			37

Net cash provided by (used in) operating activities		163			(741	)		2,027			1,299			—			2,748

Cash flows from investing activities:
Purchase of property and equipment		—			—			(482	)		(690	)		—			(1,172	)
Acquisition of hospitals and health care entities		—			—			(148	)		(282	)		—			(430	)
Disposition of hospitals and health care entities		—			—			9			5			—			14
Change in investments		—			—			3			15			—			18
Other		—			—			(1	)		16			—			15

Net cash used in investing activities		—			—			(619	)		(936	)		—			(1,555	)

Cash flows from financing activities:
Issuance of long-term debt		—			3,000			—			—			—			3,000
Repayment of long-term debt		—			(2,005	)		(38	)		(22	)		—			(2,065	)
Distributions to noncontrolling interests		—			—			(29	)		(176	)		—			(205	)
Payment of debt issuance costs		—			(24	)		—			—			—			(24	)
Repurchases of common stock		(1,858	)		—			—			—			—			(1,858	)
Changes in intercompany balances with affiliates, net		1,799			(230)			(1,414	)		(155	)		—			—
Other		(104	)		—			—			13			—			(91	)

Net cash (used in) provided by financing activities		(163	)		741			(1,481	)		(340	)		—			(1,243	)

Change in cash and cash equivalents		—			—			(73	)		23			—			(50	)
Cash and cash equivalents at beginning of period		—			—			155			586			—			741

Cash and cash equivalents at end of period	$	—		$	—		$	82		$	609		$	—		$	691

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 SIX MONTHS ENDED JUNE 30, 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)	$	1,098		$	(744	)	$	1,491		$	766		$	(1,226	)	$	1,385
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Changes in operating assets and liabilities		21			22			(1,360	)		(779	)		—			(2,096	)
Provision for doubtful accounts		—			—			846			835			—			1,681
Depreciation and amortization		—			—			453			489			—			942
Income taxes		(101	)		—			—			—			—			(101	)
Gains on sales of facilities		—			—			(4	)		—			—			(4	)
Losses on retirement of debt		122			3			—			—			—			125
Amortization of debt issuance costs		2			17			—			—			—			19
Share-based compensation		103			—			—			—			—			103
Equity in earnings of affiliates		(1,226	)		—			—			—			1,226			—
Other		34			—			(2	)		(11	)		—			21

Net cash provided by (used in) operating activities		53			(702	)		1,424			1,300			—			2,075

Cash flows from investing activities:
Purchase of property and equipment		—			—			(470	)		(534	)		—			(1,004	)
Acquisition of hospitals and health care entities		—			—			(16	)		(79	)		—			(95	)
Disposition of hospitals and health care entities		—			—			14			8			—			22
Change in investments		—			—			6			61			—			67
Other		—			—			(6	)		7			—			1

Net cash used in investing activities		—			—			(472	)		(537	)		—			(1,009	)

Cash flows from financing activities:
Issuance of long-term debt		—			4,048			—			—			—			4,048
Net change in revolving credit facilities		—			(300	)		—			—			—			(300	)
Repayment of long-term debt		(1,632	)		(1,971	)		(24	)		(17	)		—			(3,644	)
Distributions to noncontrolling interests		—			—			(46	)		(191	)		—			(237	)
Payment of debt issuance costs		—			(33	)		—			—			—			(33	)
Repurchases of common stock		(940	)		—			—			—

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Non-accelerated filer

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Smaller reporting company