HCA INC. - FORM 10-Q
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2007
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 1-11239
HCA Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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75-2497104
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.
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One Park Plaza
Nashville, Tennessee
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37203
(Zip Code
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(Address of principal executive
offices)
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(615) 344-9551
(Registrants 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 þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Indicate the number of shares outstanding of each of the
issuers classes of common stock as of the latest
practicable date.
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Class of Common Stock
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Outstanding at October 31, 2007
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Voting common stock, $.01 par value
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94,178,200 shares
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HCA
INC.
Form 10-Q
September 30, 2007
2
HCA
INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND
2006
Unaudited
(Dollars in millions)
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Quarter
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Nine Months
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2007
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2006
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2007
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2006
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Revenues
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$
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6,569
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$
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6,213
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$
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19,975
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$
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18,988
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Salaries and benefits
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2,701
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2,600
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8,002
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7,816
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Supplies
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1,085
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1,046
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3,284
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3,251
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Other operating expenses
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1,076
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1,054
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3,194
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3,063
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Provision for doubtful accounts
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774
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677
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2,218
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1,950
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Losses (gains) on investments
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1
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(40
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(6
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(140
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Equity in earnings of affiliates
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(51
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(43
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(156
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(151
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Depreciation and amortization
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356
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348
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1,072
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1,045
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Interest expense
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560
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200
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1,674
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582
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Gains on sales of facilities
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(316
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(41
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(332
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(46
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Impairment of long-lived assets
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24
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Transaction costs
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9
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9
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6,186
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5,810
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18,974
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17,379
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Income before minority interests and income taxes
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383
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403
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1,001
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1,609
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Minority interests in earnings of consolidated entities
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44
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44
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160
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145
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Income before income taxes
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339
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359
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841
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1,464
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Provision for income taxes
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39
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119
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245
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550
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Net income
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$
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300
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$
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240
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$
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596
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$
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914
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See accompanying notes.
3
HCA
INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(Dollars in millions)
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September 30,
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December 31,
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2007
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2006
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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347
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$
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634
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Accounts receivable, less allowance for doubtful accounts of
$3,908 and $3,428
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3,857
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3,705
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Inventories
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689
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669
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Deferred income taxes
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487
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476
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Other
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649
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594
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6,029
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6,078
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Property and equipment, at cost
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22,449
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21,907
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Accumulated depreciation
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(10,999
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(10,238
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11,450
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11,669
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Investments of insurance subsidiary
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1,737
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1,886
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Investments in and advances to affiliates
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683
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679
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Goodwill
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2,652
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2,601
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Deferred loan costs
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559
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614
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Other
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667
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148
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$
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23,777
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$
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23,675
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LIABILITIES AND STOCKHOLDERS DEFICIT
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Current liabilities:
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Accounts payable
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$
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1,290
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$
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1,415
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Accrued salaries
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731
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675
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Other accrued expenses
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1,389
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1,193
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Long-term debt due within one year
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299
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293
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3,709
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3,576
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Long-term debt
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27,246
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28,115
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Professional liability risks
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1,276
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1,309
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Income taxes and other liabilities
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1,189
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1,017
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Minority interests in equity of consolidated entities
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915
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907
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Equity securities with contingent redemption rights
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164
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125
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Stockholders deficit:
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Common stock $.01 par; authorized 125,000,000 shares;
outstanding 94,178,200 shares in 2007 and
92,217,800 shares in 2006
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1
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1
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Capital in excess of par value
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86
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Accumulated other comprehensive (loss) income
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(52
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16
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Retained deficit
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(10,757
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(11,391
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(10,722
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(11,374
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$
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23,777
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$
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23,675
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See accompanying notes.
4
HCA
INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
Unaudited
(Dollars in millions)
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2007
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2006
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Cash flows from operating activities:
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Net income
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$
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596
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$
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914
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Adjustments to reconcile net income to net cash provided by
operating activities:
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Provision for doubtful accounts
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2,218
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1,950
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Depreciation and amortization
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1,072
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1,045
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Income taxes
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(103
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(399
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Gains on sales of facilities
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(332
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)
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(46
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Impairment of long-lived assets
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24
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Changes in operating assets and liabilities
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(2,598
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(2,250
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Change in minority interests
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33
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79
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Share-based compensation
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17
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69
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Other
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58
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(9
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Net cash provided by operating activities
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985
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1,353
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Cash flows from investing activities:
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Purchase of property and equipment
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(997
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(1,330
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Acquisition of hospitals and health care entities
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(21
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(103
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Disposition of hospitals and health care entities
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484
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328
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Change in investments
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156
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(122
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)
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Other
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13
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1
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Net cash used in investing activities
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(365
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)
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(1,226
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)
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Cash flows from financing activities:
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Issuance of long-term debt
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2
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1,400
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Net change in revolving bank credit facility
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(370
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)
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665
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Repayment of long-term debt
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(623
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(1,222
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Repurchases of common stock
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(1
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(653
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Issuances of common stock
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100
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97
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Payment of cash dividends
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(201
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Other
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(15
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(8
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Net cash (used in) provided by financing activities
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(907
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78
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Change in cash and cash equivalents
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(287
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)
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205
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Cash and cash equivalents at beginning of period
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634
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336
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Cash and cash equivalents at end of period
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$
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347
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$
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541
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Interest payments
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$
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1,522
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$
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554
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Income tax payments, net of refunds
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$
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348
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$
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935
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See accompanying notes.
5
HCA
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
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NOTE 1
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INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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Merger,
Recapitalization and Reporting Entity
On November 17, 2006 HCA Inc. (the Company)
completed its merger (the Merger) with Hercules
Acquisition Corporation pursuant to which the Company was
acquired by Hercules Holding II, LLC, a Delaware limited
liability company owned by a private investor group including
affiliates of Bain Capital, Kohlberg Kravis Roberts &
Co., Merrill Lynch Global Private Equity (each a
Sponsor) and affiliates of HCA founder,
Dr. Thomas F. Frist Jr., (the Frist Entities,
and together with the Sponsors, the Investors), and
by members of management and certain other investors. The
Merger, the financing transactions related to the Merger and
other related transactions are collectively referred to in this
quarterly report as the Recapitalization. The Merger
was accounted for as a recapitalization in our financial
statements, with no adjustments to the historical basis of our
assets and liabilities. As a result of the Recapitalization, our
outstanding capital stock is owned by the Investors, certain
members of management and key employees and certain other
investors. Our common stock is no longer registered under the
Securities Exchange Act of 1934, as amended, and is no longer
traded on a national securities exchange. Effective
September 26, 2007, we registered certain of our senior
secured notes issued in connection with the Recapitalization
with the Securities and Exchange Commission, thus subjecting us
to the reporting requirements of Section 15(d) of the Securities
Exchange Act of 1934.
Basis of
Presentation
HCA 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 Inc. and partnerships and joint ventures in which such
subsidiaries are partners. At September 30, 2007, these
affiliates owned and operated 162 hospitals, 98 freestanding
surgery centers and facilities which provide extensive
outpatient and ancillary services. Affiliates of HCA Inc. are
also partners in joint ventures that own and operate eight
hospitals and nine freestanding surgery centers which are
accounted for using the equity method. The Companys
facilities are located in 20 states and England. The terms
HCA, Company, we,
our or us, as used in this Quarterly
Report on
Form 10-Q,
refer to HCA Inc. and its affiliates unless otherwise stated or
indicated by context.
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 of 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 cost of
revenue items. Costs that could be classified as general
and administrative would include our corporate office costs,
which were $42 million and $47 million for the
quarters ended September 30, 2007 and 2006, respectively,
and $122 million and $133 million for the nine months
ended September 30, 2007 and 2006, respectively. Operating
results for the quarter and nine months ended September 30,
2007 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2007. 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, 2006.
Certain prior year amounts have been reclassified to conform to
the current year presentation.
Recent
Pronouncements
In September 2006, the Financial Accounting Standards Board (the
FASB) issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 establishes a
generally accepted accounting principles (GAAP)
framework for measuring fair value, clarifies the definition of
fair value within that framework and expands disclosures about
the use of fair value measurements. SFAS 157 is effective
for
6
HCA
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
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NOTE 1
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INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
Recent
Pronouncements (continued)
fiscal years beginning after November 15, 2007. We do not
expect the adoption of SFAS 157 to have a material effect
on our financial position or results of operations.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159 allows entities to
voluntarily choose, at specified election dates, to measure many
financial assets and financial liabilities (as well as certain
nonfinancial instruments that are similar to financial
instruments) at fair value. The election is made on an
instrument-by-instrument
basis and is irrevocable. If the fair value option is elected
for an instrument, then all subsequent changes in fair value for
that instrument should be reported in results of operations.
SFAS 159 is effective for fiscal years beginning after
November 15, 2007. Differences between the amounts
recognized in the statements of financial position prior to the
adoption of SFAS 159 and the amounts recognized after
adoption will be accounted for as a cumulative effect adjustment
recorded to the beginning balance of retained earnings. We are
currently evaluating the impact of adopting SFAS 159.
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|
NOTE 2
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SHARE-BASED
COMPENSATION
|
Effective January 1, 2006, we adopted Statement of
Financial Accounting Standards No. 123(R),
Share-Based Payment (SFAS 123(R)),
using the modified prospective application transition method.
Under this method, compensation cost is recognized, beginning
January 1, 2006, based on the requirements of
SFAS 123(R) for all share-based payments granted after the
effective date, and based on Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based
Compensation for all awards granted to employees prior to
January 1, 2006 that remain unvested on the effective date.
Share-based compensation related to stock options (and our
employee stock purchase plan in 2006) was $6 million
and $11 million for the quarters ended September 30,
2007 and 2006, respectively, and $17 million and
$29 million for the nine months ended September 30,
2007 and 2006, respectively.
We have the following share-based compensation plans:
2006
Stock Incentive Plan
In connection with the Recapitalization, the HCA Inc. 2006 Stock
Incentive Plan for Key Employees of HCA Inc. and its Affiliates
(the 2006 Plan) was established. The 2006 Plan is
designed to promote the long term financial interests and growth
of the Company and its subsidiaries by attracting and retaining
management and other personnel and key service providers. The
2006 Plan permits the granting of awards covering 10% of our
fully diluted equity immediately after consummation of the
Recapitalization. A portion of the options under the 2006 Plan
will vest solely based upon continued employment over a specific
period of time, and a portion of the options will vest based
both upon continued employment over a specific period of time
and upon the achievement of predetermined operating performance
and market condition targets over time. We granted 147,100
options during the quarter ended September 30, 2007. As of
September 30, 2007, no options granted under the 2006 Plan
have vested, and there were 1,878,700 shares available for
future grants under the 2006 Plan.
2005
Equity Incentive Plan
Prior to the Recapitalization, the HCA 2005 Equity Incentive
Plan was the primary plan under which stock options and
restricted stock were granted to officers, employees and
directors. During the quarter and nine months ended
September 30, 2006, we recognized $15 million and
$40 million, respectively, of compensation expense related
to restricted share grants. Upon consummation of the
Recapitalization, all shares of restricted stock became fully
vested, were cancelled and converted into the right to receive a
cash payment of $51.00 per restricted share. All outstanding
stock options became fully vested and (other than certain
options held by certain rollover shareholders)
7
HCA
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 2
|
SHARE-BASED
COMPENSATION (continued)
|
2005
Equity Incentive Plan (continued)
were cancelled and converted into the right to receive a cash
payment equal to the number of shares underlying the options
multiplied by the amount (if any) by which $51.00 exceeded the
option exercise price. Certain management holders of outstanding
HCA stock options were permitted to retain certain of their
stock options (the Rollover Options) in lieu of
receiving the merger consideration (the amount, if any, by which
$51.00 exceeded the option exercise price). The Rollover Options
remain outstanding in accordance with the terms of the governing
stock incentive plans and grant agreements pursuant to which the
holder originally received the stock option grants. However,
immediately after the Recapitalization, the exercise price and
number of shares subject to the rollover option agreement were
adjusted so that the aggregate intrinsic value for each
applicable option holder was maintained and the exercise price
for substantially all of the options was adjusted to $12.75 per
option. Pursuant to the rollover option agreement, 10,967,500
prerecapitalization HCA stock options were converted into
2,285,200 Rollover Options, of which 2,264,900 are outstanding
and exercisable at September 30, 2007.
We are currently contesting before the Appeals Division of the
Internal Revenue Service (the IRS) certain claimed
deficiencies and adjustments proposed by the IRS in connection
with its examination of the 2001 and 2002 federal income tax
returns for HCA and 15 affiliates that are treated as
partnerships for federal income tax purposes (affiliated
partnerships). During 2006, the IRS began an examination
of the 2003 and 2004 federal income tax returns for HCA and 19
affiliated partnerships.
The disputed items pending before the IRS Appeals Division or
proposed by the IRS Examination Division through
September 30, 2007, include the deductibility of a portion
of the 2001 and 2003 government settlement payments, the timing
of recognition of certain patient service revenues in 2001
through 2004, the method for calculating the tax allowance for
doubtful accounts in 2002 through 2004, and the amount of
insurance expense deducted in 2001 and 2002. The IRS has not
determined the final amount of additional income tax, interest
and penalties that it may claim upon completion of the 2003 and
2004 examinations. We expect the IRS will complete its
examination of the 2003 and 2004 federal income tax returns and
begin an examination of our 2005 and 2006 federal income tax
returns within the next twelve months.
Thirty-five taxable periods of HCA, its predecessors, and
subsidiaries ended in 1987 through 2000, for which the primary
remaining issue is the computation of the tax allowance for
doubtful accounts, are pending before the IRS Examination
Division, the United States Tax Court and the United States
Court of Federal Claims as of September 30, 2007. In 2004,
we made a payment of $109 million for additional federal
tax and interest, based on our estimate of amounts due for the
31 taxable periods through 1996. We have reached tentative
agreement with the IRS with respect to the tax and interest
computations for two of these taxable periods. HCA, its
predecessors and subsidiaries are also subject to examination in
approximately 36 states for taxable periods ended in 1987
through 2006. Our international operations are subject to
examination by United Kingdom taxing authorities for taxable
periods from 2004 through 2006 and by Swiss taxing authorities
for taxable periods from 2002 through 2006.
Effective January 1, 2007, we adopted FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). FIN 48 creates a
single model to address uncertainty in income tax positions and
clarifies the accounting for income taxes by prescribing the
minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. It also
provides guidance on derecognition, measurement, classification,
interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 applies to all tax
positions related to income taxes subject to FASB Statement
No. 109, Accounting for Income Taxes.
FIN 48 requires expanded disclosures, which include a
tabular rollforward of the beginning and ending aggregate
unrecognized tax benefits, as well as specific detail related to
tax uncertainties for which it is reasonably possible the amount
of unrecognized tax benefit will significantly increase or
decrease within twelve months. These
8
HCA
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 3
|
INCOME
TAXES (continued)
|
disclosures will be required at each annual reporting period and
during any interim period in which a significant change in any
uncertain tax position occurs.
Differences between the amounts recognized in the statements of
financial position prior to the adoption of FIN 48 and the
amounts recognized after adoption of $38 million were
recorded as a cumulative effect adjustment, decreasing our
liability for unrecognized tax benefits and increasing the
balance of our retained earnings as of January 1, 2007.
FIN 48 permits interest and penalties on any underpayments
of income taxes to be classified in income tax expense, interest
expense or another appropriate expense classification. A
$9 million reduction to interest expense related to taxing
authority examinations is included in the provision for income
taxes for the quarter ended September 30, 2007, and
$13 million of interest expense related to taxing authority
examinations is included in the provision for income taxes for
the nine months ended September 30, 2007.
Our liability for unrecognized tax benefits was
$760 million, including accrued interest of
$209 million, as of January 1, 2007 ($803 million
and $204 million, respectively, as of September 30,
2007). Of the $760 million, $556 ($489 million as
of September 30, 2007) million would affect the
effective tax rate, if recognized. The liability for
unrecognized tax benefits does not reflect deferred tax assets
related to deductible interest and state income taxes or a
$215 million refundable deposit that we made in 2006, which
is recorded in noncurrent assets. During the quarter and the
nine months ended September 30, 2007, we recognized
increases of $23 million and $43 million,
respectively, in our liability for unrecognized tax benefits,
including interest. Based on new information received during the
third quarter of 2007 related primarily to tax positions taken
in prior taxable periods, we reduced our provision for income
taxes and the related liability by $85 million and
increased our deferred tax assets and the related liabilities,
including interest, by $108 million.
Depending on the resolution of the IRS disputes, the completion
of examinations by federal, state or international 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 twelve
months. However, we are currently unable to estimate the range
of any possible change.
|
|
NOTE 4
|
INVESTMENTS OF INSURANCE SUBSIDIARY
|
A summary of the insurance subsidiarys investments at
September 30, 2007 and December 31, 2006 follows
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Amortized
|
|
|
Amounts
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and municipalities
|
|
$
|
1,618
|
|
|
$
|
20
|
|
|
$
|
(3
|
)
|
|
$
|
1,635
|
|
Money market funds
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
118
|
|
Asset-backed securities
|
|
|
60
|
|
|
|
1
|
|
|
|
|
|
|
|
61
|
|
Corporate and other
|
|
|
12
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,808
|
|
|
|
21
|
|
|
|
(4
|
)
|
|
|
1,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stocks
|
|
|
158
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
158
|
|
Common stocks
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,970
|
|
|
$
|
22
|
|
|
$
|
(5
|
)
|
|
|
1,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount classified as current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment carrying value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
HCA
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 4
|
INVESTMENTS OF INSURANCE SUBSIDIARY (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Amortized
|
|
|
Amounts
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and municipalities
|
|
$
|
1,174
|
|
|
$
|
24
|
|
|
$
|
(3
|
)
|
|
$
|
1,195
|
|
Money market funds
|
|
|
858
|
|
|
|
|
|
|
|
|
|
|
|
858
|
|
Asset-backed securities
|
|
|
64
|
|
|
|
4
|
|
|
|
|
|
|
|
68
|
|
Corporate and other
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,104
|
|
|
|
28
|
|
|
|
(3
|
)
|
|
|
2,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stocks
|
|
|
10
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
9
|
|
Common stocks
|
|
|
4
|
|
|
|
1
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,118
|
|
|
$
|
29
|
|
|
$
|
(4
|
)
|
|
|
2,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount classified as current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment carrying value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2007 and December 31, 2006, the
investments of our insurance subsidiary were classified as
available-for-sale. The fair value of investment
securities is generally based on quoted market prices. Changes
in temporary unrealized gains and losses are recorded as
adjustments to other comprehensive income. At September 30,
2007, $99 million of money market funds were subject to the
restrictions included in insurance bond collateralization and
assumed reinsurance contracts.
10
HCA
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of long-term debt at September 30, 2007 and
December 31, 2006, including related interest rates at
September 30, 2007, follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Senior secured asset-based revolving credit facility (effective
interest rate of 6.9%)
|
|
$
|
1,500
|
|
|
$
|
1,830
|
|
Senior secured revolving credit facility
|
|
|
|
|
|
|
40
|
|
Senior secured term loan facilities (effective interest rate of
7.1%)
|
|
|
12,403
|
|
|
|
12,870
|
|
Other senior secured debt (effective interest rate of 6.7%)
|
|
|
419
|
|
|
|
445
|
|
|
|
|
|
|
|
|
|
|
First lien debt
|
|
|
14,322
|
|
|
|
15,185
|
|
|
|
|
|
|
|
|
|
|
Senior secured cash-pay notes (effective interest rate of 9.6%)
|
|
|
4,200
|
|
|
|
4,200
|
|
Senior secured toggle notes (effective interest rate of 10.0%)
|
|
|
1,500
|
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
Second lien debt
|
|
|
5,700
|
|
|
|
5,700
|
|
|
|
|
|
|
|
|
|
|
Senior unsecured notes payable through 2095 (effective interest
rate of 7.3%)
|
|
|
7,523
|
|
|
|
7,523
|
|
|
|
|
|
|
|
|
|
|
Total debt (average life of seven years, rates averaging 7.7%)
|
|
|
27,545
|
|
|
|
28,408
|
|
Less amounts due within one year
|
|
|
299
|
|
|
|
293
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,246
|
|
|
$
|
28,115
|
|
|
|
|
|
|
|
|
|
|
Senior
Secured Credit Facilities
On November 17, 2006, in connection with the
Recapitalization, we entered into (i) a $2.000 billion
senior secured asset-based revolving credit facility with a
borrowing base of 85% of eligible accounts receivable, subject
to customary reserves and eligibility criteria
($419 million available at September 30, 2007) (the
ABL credit facility) and (ii) a senior secured
credit agreement (the cash flow credit facility and,
together with the ABL credit facility, the senior secured
credit facilities), consisting of a $2.000 billion
revolving credit facility ($1.858 billion available at
September 30, 2007, after giving effect to certain
outstanding letters of credit), a $2.750 billion term loan
A ($2.666 billion outstanding at September 30, 2007),
a $8.800 billion term loan B ($8.734 billion
outstanding at September 30, 2007) and a
1.000 billion European term loan
(703 million or $1.003 billion outstanding at
September 30, 2007) under which one of our European
subsidiaries is the borrower.
Borrowings under the senior secured credit facilities bear
interest at a rate equal to, as determined by the type of
borrowing, either (a) a base rate determined by reference
to the higher of (1) the federal funds rate plus
1/2
of 1% or (2) the prime rate of Bank of America or
(b) a LIBOR rate for the currency of such borrowing for the
relevant interest period, plus, in each case, an applicable
margin. The applicable margin for borrowings under the senior
secured credit facilities, with the exception of term loan B
where the margin is static, may be reduced subject to attaining
certain leverage ratios. On February 16, 2007, we amended
the cash flow credit facility to reduce the applicable margins
with respect to the term loan borrowings thereunder. On
June 20, 2007, we amended the ABL credit facility to reduce
the applicable margin effective January 1, 2008, with
respect to borrowings thereunder.
The senior secured credit facilities and senior secured notes
are fully and unconditionally guaranteed by substantially all
existing and future, direct and indirect, wholly-owned material
domestic subsidiaries that are Unrestricted
Subsidiaries under our Indenture dated as of
December 16, 1993 (except for certain special purpose
subsidiaries that only guarantee and pledge their assets under
our ABL credit facility). In addition, borrowings under the
European term loan are guaranteed by all material, wholly-owned
European subsidiaries.
11
HCA
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 5
|
LONG-TERM
DEBT (continued)
|
Senior
Secured Credit Facilities (continued)
The ABL credit facility and the $2.000 billion revolving
credit facility portion of the cash flow credit facility expire
November 2012. We began making required, quarterly installment
payments on each of the term loan facilities during March 2007.
The final payment under term loan A is in November 2012. The
final payments under term loan B and the European term loan are
in November 2013. The senior secured credit facilities contain a
number of covenants that restrict, subject to certain
exceptions, our (and some or all of our subsidiaries)
ability to incur additional indebtedness, repay subordinated
indebtedness, create liens on assets, sell assets, make
investments, loans or advances, engage in certain transactions
with affiliates, pay dividends and distributions, and enter into
sale and leaseback transactions. In addition, we are required to
satisfy a maximum total leverage ratio covenant under the cash
flow credit facility and, in certain situations under the ABL
credit facility, a minimum interest coverage ratio covenant.
We use interest rate swap agreements to manage the variable rate
exposure of our debt portfolio. In the fourth quarter of 2006,
we entered into two interest rate swap agreements, in a total
notional amount of $8 billion, in order to hedge a portion
of our exposure to variable rate interest payments associated
with the cash flow credit facility. The interest rate swaps
expire in November 2011.
Senior
Secured Notes
In November 2006, we issued $4.200 billion of senior
secured notes (comprised of $1.000 billion of
91/8% notes
due 2014 and $3.200 billion of
91/4% notes
due 2016), and $1.500 billion of
95/8% senior
secured toggle notes (which allow us, at our option, to pay
interest in-kind during the first five years) due 2016, which
are subject to certain standard covenants.
Significant
Legal Proceedings
We operate in a highly regulated and litigious industry. As a
result, various lawsuits, claims and legal and regulatory
proceedings have been and can be expected to be instituted or
asserted against us. The resolution of any such lawsuits, claims
or legal and regulatory proceedings could have a material,
adverse effect on our results of operations or financial
position in a given period.
In 2005, the Company and certain of its executive officers and
directors were named in various federal securities law class
actions and several shareholders filed derivative lawsuits
purportedly on behalf of the Company. Additionally, a former
employee filed a complaint against certain of our executive
officers pursuant to the Employee Retirement Income Security Act
and the Company has been served with a shareholder demand letter
addressed to our Board of Directors. We have reached an
agreement in principle for the settlement of the derivative
lawsuits, subject to court approval. We have also settled the
federal securities law class actions. We are aware of eight
asserted class action lawsuits related to the Merger filed
against us, certain of our executive officers, our directors and
the Sponsors, and one lawsuit filed against us and one of our
affiliates seeking enforcement of contractual obligations
allegedly arising from the Merger. Certain of these lawsuits,
though not all, are the subject of an agreement in principle to
settle, which is subject to court approval. We believe the
settlements, once approved, will have the effect of resolving
the remaining class action suits.
General
Liability Claims
We are 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. It is managements
12
HCA
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 6
|
CONTINGENCIES
(continued)
|
General
Liability Claims (continued)
opinion that the ultimate resolution of these pending claims and
legal proceedings will not have a material, adverse effect on
our results of operations or financial position.
Investigations
In January 2001, we entered into an eight-year Corporate
Integrity Agreement (CIA) with the Office of
Inspector General of the Department of Health and Human
Services. Violation or breach of the CIA, or violation of
federal or state laws relating to Medicare, Medicaid or similar
programs, could subject us to substantial monetary fines, civil
and criminal penalties
and/or
exclusion from participation in the Medicare and Medicaid
programs. Alleged violations may be pursued by the government or
through private qui tam actions. Sanctions imposed
against us as a result of such actions could have a material,
adverse effect on our results of operations or financial
position.
|
|
NOTE 7
|
COMPREHENSIVE
INCOME
|
The components of comprehensive income, net of related taxes,
for the quarters and nine months ended September 30, 2007
and 2006 are as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
Nine Months
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Net income
|
|
$
|
300
|
|
|
$
|
240
|
|
|
$
|
596
|
|
|
$
|
914
|
|
Change in fair value of derivative instruments
|
|
|
(126
|
)
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
Change in unrealized net gains on available-for-sale securities
|
|
|
8
|
|
|
|
10
|
|
|
|
(5
|
)
|
|
|
(51
|
)
|
Currency translation adjustments
|
|
|
(10
|
)
|
|
|
2
|
|
|
|
(10
|
)
|
|
|
21
|
|
Defined benefit plans
|
|
|
2
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
174
|
|
|
$
|
252
|
|
|
$
|
528
|
|
|
$
|
884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive (loss) income,
net of related taxes, are as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Change in fair value of derivative instruments
|
|
$
|
(40
|
)
|
|
$
|
18
|
|
Net unrealized gains on available-for-sale securities
|
|
|
11
|
|
|
|
16
|
|
Currency translation adjustments
|
|
|
39
|
|
|
|
49
|
|
Defined benefit plans
|
|
|
(62
|
)
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive (loss) income
|
|
$
|
(52
|
)
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 8
|
SEGMENT
AND GEOGRAPHIC INFORMATION
|
We operate in one line of business, which is operating hospitals
and related health care entities. During the quarters ended
September 30, 2007 and 2006, approximately 24% and 25%,
respectively, of our patient revenues related to patients
participating in the Medicare program. During the nine months
ended September 30, 2007 and 2006, approximately 24% and
26%, respectively, of our patient revenues related to patients
participating in the Medicare program.
Our operations are structured into three geographically
organized groups: the Eastern Group includes 50 consolidating
hospitals located in the Eastern United States, the Central
Group includes 52 consolidating hospitals
13
HCA
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 8
|
SEGMENT
AND GEOGRAPHIC INFORMATION (continued)
|
located in the Central United States and the Western Group
includes 54 consolidating hospitals located in the Western
United States. We also operate six consolidating 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, impairment of long-lived assets, transaction costs,
minority interests and income taxes. 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 nine months
ended September 30, 2007 and 2006, with prior year amounts
reclassified to conform to the 2007 operational structure, are
summarized in the following table (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
Nine Months
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Group
|
|
$
|
1,567
|
|
|
$
|
1,470
|
|
|
$
|
4,691
|
|
|
$
|
4,409
|
|
Eastern Group
|
|
|
1,990
|
|
|
|
1,867
|
|
|
|
6,071
|
|
|
|
5,794
|
|
Western Group
|
|
|
2,782
|
|
|
|
2,590
|
|
|
|
8,473
|
|
|
|
7,729
|
|
Corporate and other
|
|
|
230
|
|
|
|
286
|
|
|
|
740
|
|
|
|
1,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,569
|
|
|
$
|
6,213
|
|
|
$
|
19,975
|
|
|
$
|
18,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Group
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
6
|
|
|
$
|
(3
|
)
|
Eastern Group
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Western Group
|
|
|
(52
|
)
|
|
|
(41
|
)
|
|
|
(161
|
)
|
|
|
(143
|
)
|
Corporate and other
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(51
|
)
|
|
$
|
(43
|
)
|
|
$
|
(156
|
)
|
|
$
|
(151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted segment EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Group
|
|
$
|
254
|
|
|
$
|
208
|
|
|
$
|
813
|
|
|
$
|
719
|
|
Eastern Group
|
|
|
256
|
|
|
|
243
|
|
|
|
939
|
|
|
|
875
|
|
Western Group
|
|
|
484
|
|
|
|
489
|
|
|
|
1,641
|
|
|
|
1,497
|
|
Corporate and other
|
|
|
(11
|
)
|
|
|
(21
|
)
|
|
|
46
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
983
|
|
|
$
|
919
|
|
|
$
|
3,439
|
|
|
$
|
3,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Group
|
|
$
|
90
|
|
|
$
|
83
|
|
|
$
|
275
|
|
|
$
|
246
|
|
Eastern Group
|
|
|
92
|
|
|
|
92
|
|
|
|
277
|
|
|
|
273
|
|
Western Group
|
|
|
135
|
|
|
|
121
|
|
|
|
396
|
|
|
|
366
|
|
Corporate and other
|
|
|
39
|
|
|
|
52
|
|
|
|
124
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
356
|
|
|
$
|
348
|
|
|
$
|
1,072
|
|
|
$
|
1,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
HCA
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 8
|
SEGMENT
AND GEOGRAPHIC INFORMATION (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
Nine Months
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Adjusted segment EBITDA
|
|
$
|
983
|
|
|
$
|
919
|
|
|
$
|
3,439
|
|
|
$
|
3,199
|
|
Depreciation and amortization
|
|
|
356
|
|
|
|
348
|
|
|
|
1,072
|
|
|
|
1,045
|
|
Interest expense
|
|
|
560
|
|
|
|
200
|
|
|
|
1,674
|
|
|
|
582
|
|
Gains on sales of facilities
|
|
|
(316
|
)
|
|
|
(41
|
)
|
|
|
(332
|
)
|
|
|
(46
|
)
|
Impairment of long-lived assets
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
Transaction costs
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests and income taxes
|
|
$
|
383
|
|
|
$
|
403
|
|
|
$
|
1,001
|
|
|
$
|
1,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 9
|
ACQUISITIONS,
DIVESTITURES AND IMPAIRMENT OF LONG-LIVED ASSETS
|
During the nine months ended September 30, 2007, we paid
$21 million for health care entity acquisitions. During the
nine months ended September 30, 2006, we paid
$62 million to acquire three hospitals and $41 million
to acquire other health care entities.
During the quarter and nine months ended September 30,
2007, we received proceeds of $419 million and
$484 million, respectively, and recognized gains of
$316 million and $332 million, respectively, related
to sales of our two Switzerland hospitals and certain real
estate investments. We recognized gains of $46 million
during the nine months ended September 30, 2006, related
primarily to sales of one of our Virginia hospitals and an
investment in a hospital joint venture. The results of
operations of the sold hospitals were not significant to our
consolidated results of operations.
During the nine months ended September 30, 2007, we
recorded a charge of $24 million to adjust the value of a
building in our Central Group to estimated fair value.
|
|
NOTE 10
|
SUPPLEMENTAL
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
|
The senior secured credit facilities and senior secured notes
described in Note 5 are fully and unconditionally
guaranteed by substantially all existing and future, direct and
indirect, wholly-owned material domestic subsidiaries that are
Unrestricted Subsidiaries under our Indenture dated
as of December 16, 1993 (except for certain special purpose
subsidiaries that only guarantee and pledge their assets under
our ABL credit facility).
Our summarized condensed consolidating balance sheets at
September 30, 2007 and December 31, 2006, condensed
consolidating statements of income for the quarters and nine
months ended September 30, 2007 and 2006 and condensed
consolidating statements of cash flows for the nine months ended
September 30, 2007 and 2006, segregating the parent company
issuer, the subsidiary guarantors, the subsidiary non-guarantors
and eliminations, follow:
15
HCA
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 10
|
SUPPLEMENTAL
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(continued)
|
HCA
INC.
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE QUARTER ENDED SEPTEMBER 30, 2007
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiary
|
|
|
Non-
|
|
|
|
|
|
Condensed
|
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
3,826
|
|
|
$
|
2,743
|
|
|
$
|
|
|
|
$
|
6,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
|
|
|
|
1,640
|
|
|
|
1,061
|
|
|
|
|
|
|
|
2,701
|
|
Supplies
|
|
|
|
|
|
|
628
|
|
|
|
457
|
|
|
|
|
|
|
|
1,085
|
|
Other operating expenses
|
|
|
|
|
|
|
592
|
|
|
|
484
|
|
|
|
|
|
|
|
1,076
|
|
Provision for doubtful accounts
|
|
|
|
|
|
|
469
|
|
|
|
305
|
|
|
|
|
|
|
|
774
|
|
Losses on investments
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Equity in earnings of affiliates
|
|
|
(809
|
)
|
|
|
(23
|
)
|
|
|
(28
|
)
|
|
|
809
|
|
|
|
(51
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
195
|
|
|
|
161
|
|
|
|
|
|
|
|
356
|
|
Interest expense
|
|
|
540
|
|
|
|
16
|
|
|
|
4
|
|
|
|
|
|
|
|
560
|
|
Gains on sales of facilities
|
|
|
|
|
|
|
(2
|
)
|
|
|
(314
|
)
|
|
|
|
|
|
|
(316
|
)
|
Management fees
|
|
|
|
|
|
|
(103
|
)
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(269
|
)
|
|
|
3,412
|
|
|
|
2,234
|
|
|
|
809
|
|
|
|
6,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interests and income taxes
|
|
|
269
|
|
|
|
414
|
|
|
|
509
|
|
|
|
(809
|
)
|
|
|
383
|
|
Minority interests in earnings of consolidated entities
|
|
|
|
|
|
|
5
|
|
|
|
39
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
269
|
|
|
|
409
|
|
|
|
470
|
|
|
|
(809
|
)
|
|
|
339
|
|
Provision for income taxes
|
|
|
(31
|
)
|
|
|
(5
|
)
|
|
|
75
|
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
300
|
|
|
$
|
414
|
|
|
$
|
395
|
|
|
$
|
(809
|
)
|
|
$
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
HCA
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 10
|
SUPPLEMENTAL
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(continued)
|
HCA
INC.
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE QUARTER ENDED SEPTEMBER 30, 2006
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiary
|
|
|
Non-
|
|
|
|
|
|
Condensed
|
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
3,640
|
|
|
$
|
2,573
|
|
|
$
|
|
|
|
$
|
6,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
|
|
|
|
1,580
|
|
|
|
1,020
|
|
|
|
|
|
|
|
2,600
|
|
Supplies
|
|
|
|
|
|
|
601
|
|
|
|
445
|
|
|
|
|
|
|
|
1,046
|
|
Other operating expenses
|
|
|
|
|
|
|
591
|
|
|
|
463
|
|
|
|
|
|
|
|
1,054
|
|
Provision for doubtful accounts
|
|
|
|
|
|
|
425
|
|
|
|
252
|
|
|
|
|
|
|
|
677
|
|
Gains on investments
|
|
|
|
|
|
|
|
|
|
|
(40
|
)
|
|
|
|
|
|
|
(40
|
)
|
Equity in earnings of affiliates
|
|
|
(355
|
)
|
|
|
(17
|
)
|
|
|
(26
|
)
|
|
|
355
|
|
|
|
(43
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
187
|
|
|
|
161
|
|
|
|
|
|
|
|
348
|
|
Interest expense
|
|
|
184
|
|
|
|
21
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
200
|
|
Gains on sales of facilities
|
|
|
|
|
|
|
(7
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
(41
|
)
|
Transaction costs
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Management fees
|
|
|
|
|
|
|
(110
|
)
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(171
|
)
|
|
|
3,280
|
|
|
|
2,346
|
|
|
|
355
|
|
|
|
5,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interests and income taxes
|
|
|
171
|
|
|
|
360
|
|
|
|
227
|
|
|
|
(355
|
)
|
|
|
403
|
|
Minority interests in earnings of consolidated entities
|
|
|
|
|
|
|
5
|
|
|
|
39
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
171
|
|
|
|
355
|
|
|
|
188
|
|
|
|
(355
|
)
|
|
|
359
|
|
Provision for income taxes
|
|
|
(69
|
)
|
|
|
116
|
|
|
|
72
|
|
|
|
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
240
|
|
|
$
|
239
|
|
|
$
|
116
|
|
|
$
|
(355
|
)
|
|
$
|
240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
HCA
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 10
|
SUPPLEMENTAL
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(continued)
|
HCA
INC.
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiary
|
|
|
Non-
|
|
|
|
|
|
Condensed
|
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
11,574
|
|
|
$
|
8,401
|
|
|
$
|
|
|
|
$
|
19,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
|
|
|
|
4,835
|
|
|
|
3,167
|
|
|
|
|
|
|
|
8,002
|
|
Supplies
|
|
|
|
|
|
|
1,903
|
|
|
|
1,381
|
|
|
|
|
|
|
|
3,284
|
|
Other operating expenses
|
|
|
|
|
|
|
1,719
|
|
|
|
1,475
|
|
|
|
|
|
|
|
3,194
|
|
Provision for doubtful accounts
|
|
|
|
|
|
|
1,376
|
|
|
|
842
|
|
|
|
|
|
|
|
2,218
|
|
Gains on investments
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
(6
|
)
|
Equity in earnings of affiliates
|
|
|
(1,736
|
)
|
|
|
(69
|
)
|
|
|
(87
|
)
|
|
|
1,736
|
|
|
|
(156
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
589
|
|
|
|
483
|
|
|
|
|
|
|
|
1,072
|
|
Interest expense
|
|
|
1,609
|
|
|
|
50
|
|
|
|
15
|
|
|
|
|
|
|
|
1,674
|
|
Gains on sales of facilities
|
|
|
|
|
|
|
(2
|
)
|
|
|
(330
|
)
|
|
|
|
|
|
|
(332
|
)
|
Impairment of long-lived assets
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
24
|
|
Management fees
|
|
|
|
|
|
|
(304
|
)
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(127
|
)
|
|
|
10,097
|
|
|
|
7,268
|
|
|
|
1,736
|
|
|
|
18,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interests and income taxes
|
|
|
127
|
|
|
|
1,477
|
|
|
|
1,133
|
|
|
|
(1,736
|
)
|
|
|
1,001
|
|
Minority interests in earnings of consolidated entities
|
|
|
|
|
|
|
17
|
|
|
|
143
|
|
|
|
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
127
|
|
|
|
1,460
|
|
|
|
990
|
|
|
|
(1,736
|
)
|
|
|
841
|
|
Provision for income taxes
|
|
|
(469
|
)
|
|
|
426
|
|
|
|
288
|
|
|
|
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
596
|
|
|
$
|
1,034
|
|
|
$
|
702
|
|
|
$
|
(1,736
|
)
|
|
$
|
596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
HCA
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 10
|
SUPPLEMENTAL
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(continued)
|
HCA
INC.
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiary
|
|
|
Non-
|
|
|
|
|
|
Condensed
|
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
11,088
|
|
|
$
|
7,900
|
|
|
$
|
|
|
|
$
|
18,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
|
|
|
|
4,752
|
|
|
|
3,064
|
|
|
|
|
|
|
|
7,816
|
|
Supplies
|
|
|
|
|
|
|
1,870
|
|
|
|
1,381
|
|
|
|
|
|
|
|
3,251
|
|
Other operating expenses
|
|
|
|
|
|
|
1,732
|
|
|
|
1,331
|
|
|
|
|
|
|
|
3,063
|
|
Provision for doubtful accounts
|
|
|
|
|
|
|
1,192
|
|
|
|
758
|
|
|
|
|
|
|
|
1,950
|
|
Gains on investments
|
|
|
|
|
|
|
|
|
|
|
(140
|
)
|
|
|
|
|
|
|
(140
|
)
|
Equity in earnings of affiliates
|
|
|
(1,251
|
)
|
|
|
(62
|
)
|
|
|
(89
|
)
|
|
|
1,251
|
|
|
|
(151
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
565
|
|
|
|
480
|
|
|
|
|
|
|
|
1,045
|
|
Interest expense
|
|
|
538
|
|
|
|
47
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
582
|
|
Gains on sales of facilities
|
|
|
|
|
|
|
(12
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
(46
|
)
|
Transaction costs
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Management fees
|
|
|
|
|
|
|
(311
|
)
|
|
|
311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(713
|
)
|
|
|
9,782
|
|
|
|
7,059
|
|
|
|
1,251
|
|
|
|
17,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interests and income taxes
|
|
|
713
|
|
|
|
1,306
|
|
|
|
841
|
|
|
|
(1,251
|
)
|
|
|
1,609
|
|
Minority interests in earnings of consolidated entities
|
|
|
|
|
|
|
17
|
|
|
|
128
|
|
|
|
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
713
|
|
|
|
1,289
|
|
|
|
713
|
|
|
|
(1,251
|
)
|
|
|
1,464
|
|
Provision for income taxes
|
|
|
(201
|
)
|
|
|
485
|
|
|
|
266
|
|
|
|
|
|
|
|
550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
914
|
|
|
$
|
804
|
|
|
$
|
447
|
|
|
$
|
(1,251
|
)
|
|
$
|
914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
HCA
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 10
|
SUPPLEMENTAL
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(continued)
|
HCA
INC.
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2007
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiary
|
|
|
Non-
|
|
|
|
|
|
Condensed
|
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
132
|
|
|
$
|
215
|
|
|
$
|
|
|
|
$
|
347
|
|
Accounts receivable, net
|
|
|
|
|
|
|
2,224
|
|
|
|
1,633
|
|
|
|
|
|
|
|
3,857
|
|
Inventories
|
|
|
|
|
|
|
419
|
|
|
|
270
|
|
|
|
|
|
|
|
689
|
|
Deferred income taxes
|
|
|
487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
487
|
|
Other
|
|
|
|
|
|
|
133
|
|
|
|
516
|
|
|
|
|
|
|
|
649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
487
|
|
|
|
2,908
|
|
|
|
2,634
|
|
|
|
|
|
|
|
6,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
|
6,863
|
|
|
|
4,587
|
|
|
|
|
|
|
|
11,450
|
|
Investments of insurance subsidiary
|
|
|
|
|
|
|
|
|
|
|
1,737
|
|
|
|
|
|
|
|
1,737
|
|
Investments in and advances to affiliates
|
|
|
|
|
|
|
225
|
|
|
|
458
|
|
|
|
|
|
|
|
683
|
|
Goodwill
|
|
|
|
|
|
|
1,633
|
|
|
|
1,019
|
|
|
|
|
|
|
|
2,652
|
|
Deferred loan costs
|
|
|
559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
559
|
|
Investments in and advances to subsidiaries
|
|
|
16,607
|
|
|
|
|
|
|
|
|
|
|
|
(16,607
|
)
|
|
|
|
|
Other
|
|
|
595
|
|
|
|
21
|
|
|
|
51
|
|
|
|
|
|
|
|
667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,248
|
|
|
$
|
11,650
|
|
|
$
|
10,486
|
|
|
$
|
(16,607
|
)
|
|
$
|
23,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS
(DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
|
|
|
$
|
819
|
|
|
$
|
471
|
|
|
$
|
|
|
|
$
|
1,290
|
|
Accrued salaries
|
|
|
|
|
|
|
478
|
|
|
|
253
|
|
|
|
|
|
|
|
731
|
|
Other accrued expenses
|
|
|
346
|
|
|
|
420
|
|
|
|
623
|
|
|
|
|
|
|
|
1,389
|
|
Long-term debt due within one year
|
|
|
256
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
602
|
|
|
|
1,717
|
|
|
|
1,390
|
|
|
|
|
|
|
|
3,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
26,293
|
|
|
|
94
|
|
|
|
859
|
|
|
|
|
|
|
|
27,246
|
|
Intercompany balances
|
|
|
1,135
|
|
|
|
(6,078
|
)
|
|
|
4,943
|
|
|
|
|
|
|
|
|
|
Professional liability risks
|
|
|
|
|
|
|
|
|
|
|
1,276
|
|
|
|
|
|
|
|
1,276
|
|
Income taxes and other liabilities
|
|
|
776
|
|
|
|
261
|
|
|
|
152
|
|
|
|
|
|
|
|
1,189
|
|
Minority interests in equity of consolidated entities
|
|
|
|
|
|
|
105
|
|
|
|
810
|
|
|
|
|
|
|
|
915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,806
|
|
|
|
(3,901
|
)
|
|
|
9,430
|
|
|
|
|
|
|
|
34,335
|
|
Equity securities with contingent redemption rights
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders (deficit) equity
|
|
|
(10,722
|
)
|
|
|
15,551
|
|
|
|
1,056
|
|
|
|
(16,607
|
)
|
|
|
(10,722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,248
|
|
|
$
|
11,650
|
|
|
$
|
10,486
|
|
|
$
|
(16,607
|
)
|
|
$
|
23,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
HCA
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 10
|
SUPPLEMENTAL
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(continued)
|
HCA
INC.
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2006
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiary
|
|
|
Non-
|
|
|
|
|
|
Condensed
|
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
282
|
|
|
$
|
352
|
|
|
$
|
|
|
|
$
|
634
|
|
Accounts receivable, net
|
|
|
|
|
|
|
2,145
|
|
|
|
1,560
|
|
|
|
|
|
|
|
3,705
|
|
Inventories
|
|
|
|
|
|
|
408
|
|
|
|
261
|
|
|
|
|
|
|
|
669
|
|
Deferred income taxes
|
|
|
476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
476
|
|
Other
|
|
|
171
|
|
|
|
134
|
|
|
|
289
|
|
|
|
|
|
|
|
594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
647
|
|
|
|
2,969
|
|
|
|
2,462
|
|
|
|
|
|
|
|
6,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
|
7,130
|
|
|
|
4,539
|
|
|
|
|
|
|
|
11,669
|
|
Investments of insurance subsidiary
|
|
|
|
|
|
|
|
|
|
|
1,886
|
|
|
|
|
|
|
|
1,886
|
|
Investments in and advances to affiliates
|
|
|
|
|
|
|
227
|
|
|
|
452
|
|
|
|
|
|
|
|
679
|
|
Goodwill
|
|
|
|
|
|
|
1,629
|
|
|
|
972
|
|
|
|
|
|
|
|
2,601
|
|
Deferred loan costs
|
|
|
614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
614
|
|
Investments in and advances to subsidiaries
|
|
|
14,945
|
|
|
|
|
|
|
|
|
|
|
|
(14,945
|
)
|
|
|
|
|
Other
|
|
|
69
|
|
|
|
22
|
|
|
|
57
|
|
|
|
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,275
|
|
|
$
|
11,977
|
|
|
$
|
10,368
|
|
|
$
|
(14,945
|
)
|
|
$
|
23,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
|
|
|
$
|
1,052
|
|
|
$
|
363
|
|
|
$
|
|
|
|
$
|
1,415
|
|
Accrued salaries
|
|
|
|
|
|
|
442
|
|
|
|
233
|
|
|
|
|
|
|
|
675
|
|
Other accrued expenses
|
|
|
228
|
|
|
|
345
|
|
|
|
620
|
|
|
|
|
|
|
|
1,193
|
|
Long-term debt due within one year
|
|
|
254
|
|
|
|
4
|
|
|
|
35
|
|
|
|
|
|
|
|
293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
482
|
|
|
|
1,843
|
|
|
|
1,251
|
|
|
|
|
|
|
|
3,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
26,651
|
|
|
|
194
|
|
|
|
1,270
|
|
|
|
|
|
|
|
28,115
|
|
Intercompany balances
|
|
|
|
|
|
|
(5,289
|
)
|
|
|
5,289
|
|
|
|
|
|
|
|
|
|
Professional liability risks
|
|
|
|
|
|
|
|
|
|
|
1,309
|
|
|
|
|
|
|
|
1,309
|
|
Income taxes and other liabilities
|
|
|
391
|
|
|
|
441
|
|
|
|
185
|
|
|
|
|
|
|
|
1,017
|
|
Minority interests in equity of consolidated entities
|
|
|
|
|
|
|
129
|
|
|
|
778
|
|
|
|
|
|
|
|
907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,524
|
|
|
|
(2,682
|
)
|
|
|
10,082
|
|
|
|
|
|
|
|
34,924
|
|
Equity securities with contingent redemption rights
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders (deficit) equity
|
|
|
(11,374
|
)
|
|
|
14,659
|
|
|
|
286
|
|
|
|
(14,945
|
)
|
|
|
(11,374
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,275
|
|
|
$
|
11,977
|
|
|
$
|
10,368
|
|
|
$
|
(14,945
|
)
|
|
$
|
23,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
HCA
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 10
|
SUPPLEMENTAL
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(continued)
|
HCA
INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiary
|
|
|
Non-
|
|
|
|
|
|
Condensed
|
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
596
|
|
|
$
|
1,034
|
|
|
$
|
702
|
|
|
$
|
(1,736
|
)
|
|
$
|
596
|
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
|
|
|
|
1,376
|
|
|
|
842
|
|
|
|
|
|
|
|
2,218
|
|
Depreciation and amortization
|
|
|
|
|
|
|
589
|
|
|
|
483
|
|
|
|
|
|
|
|
1,072
|
|
Income taxes
|
|
|
(103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(103
|
)
|
Gains on sales of facilities
|
|
|
|
|
|
|
(2
|
)
|
|
|
(330
|
)
|
|
|
|
|
|
|
(332
|
)
|
Impairment of long-lived assets
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
24
|
|
Equity in earnings of affiliates
|
|
|
(1,736
|
)
|
|
|
|
|
|
|
|
|
|
|
1,736
|
|
|
|
|
|
Changes in operating assets and liabilities
|
|
|
107
|
|
|
|
(1,588
|
)
|
|
|
(1,117
|
)
|
|
|
|
|
|
|
(2,598
|
)
|
Change in minority interests
|
|
|
|
|
|
|
4
|
|
|
|
29
|
|
|
|
|
|
|
|
33
|
|
Share-based compensation
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
Other
|
|
|
66
|
|
|
|
13
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(1,053
|
)
|
|
|
1,426
|
|
|
|
612
|
|
|
|
|
|
|
|
985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
|
|
|
|
(363
|
)
|
|
|
(634
|
)
|
|
|
|
|
|
|
(997
|
)
|
Acquisition of hospitals and health care entities
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
(21
|
)
|
Disposal of hospitals and health care entities
|
|
|
|
|
|
|
13
|
|
|
|
471
|
|
|
|
|
|
|
|
484
|
|
Change in investments
|
|
|
|
|
|
|
3
|
|
|
|
153
|
|
|
|
|
|
|
|
156
|
|
Other
|
|
|
|
|
|
|
(3
|
)
|
|
|
16
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
|
|
|
|
(350
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
(365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of long-term debt
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Net change in revolving bank credit facility
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(370
|
)
|
Repayment of long-term debt
|
|
|
(193
|
)
|
|
|
(3
|
)
|
|
|
(427
|
)
|
|
|
|
|
|
|
(623
|
)
|
Repurchase of common stock
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
Issuances of common stock
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
Changes in intercompany balances with affiliates, net
|
|
|
1,526
|
|
|
|
(1,223
|
)
|
|
|
(303
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
(9
|
)
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
1,053
|
|
|
|
(1,226
|
)
|
|
|
(734
|
)
|
|
|
|
|
|
|
(907
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
|
|
|
|
(150
|
)
|
|
|
(137
|
)
|
|
|
|
|
|
|
(287
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
|
|
|
|
282
|
|
|
|
352
|
|
|
|
|
|
|
|
634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
|
|
|
$
|
132
|
|
|
$
|
215
|
|
|
$
|
|
|
|
$
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
HCA
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 10
|
SUPPLEMENTAL
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(continued)
|
HCA
INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiary
|
|
|
Non-
|
|
|
|
|
|
Condensed
|
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
914
|
|
|
$
|
804
|
|
|
$
|
447
|
|
|
$
|
(1,251
|
)
|
|
$
|
914
|
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
|
|
|
|
1,192
|
|
|
|
758
|
|
|
|
|
|
|
|
1,950
|
|
Depreciation and amortization
|
|
|
|
|
|
|
565
|
|
|
|
480
|
|
|
|
|
|
|
|
1,045
|
|
Income taxes
|
|
|
(399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(399
|
)
|
Gains on sales of facilities
|
|
|
|
|
|
|
(12
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
(46
|
)
|
Equity in earnings of affiliates
|
|
|
(1,251
|
)
|
|
|
|
|
|
|
|
|
|
|
1,251
|
|
|
|
|
|
Changes in operating assets and liabilities
|
|
|
12
|
|
|
|
(1,377
|
)
|
|
|
(885
|
)
|
|
|
|
|
|
|
(2,250
|
)
|
Change in minority interests
|
|
|
|
|
|
|
14
|
|
|
|
65
|
|
|
|
|
|
|
|
79
|
|
Share-based compensation
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
Other
|
|
|
8
|
|
|
|
4
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(647
|
)
|
|
|
1,190
|
|
|
|
810
|
|
|
|
|
|
|
|
1,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
|
|
|
|
(753
|
)
|
|
|
(577
|
)
|
|
|
|
|
|
|
(1,330
|
)
|
Acquisition of hospitals and health care entities
|
|
|
|
|
|
|
(28
|
)
|
|
|
(75
|
)
|
|
|
|
|
|
|
(103
|
)
|
Disposal of hospitals and health care entities
|
|
|
|
|
|
|
104
|
|
|
|
224
|
|
|
|
|
|
|
|
328
|
|
Change in investments
|
|
|
|
|
|
|
|
|
|
|
(122
|
)
|
|
|
|
|
|
|
(122
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
|
|
|
|
(677
|
)
|
|
|
(549
|
)
|
|
|
|
|
|
|
(1,226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of long-term debt
|
|
|
1,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,400
|
|
Net change in revolving bank credit facility
|
|
|
665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
665
|
|
Repayment of long-term debt
|
|
|
(1,180
|
)
|
|
|
(5
|
)
|
|
|
(37
|
)
|
|
|
|
|
|
|
(1,222
|
)
|
Repurchases of common stock
|
|
|
(653
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(653
|
)
|
Issuances of common stock
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
|
|
Payment of cash dividends
|
|
|
(201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(201
|
)
|
Changes in intercompany balances with affiliates, net
|
|
|
527
|
|
|
|
(563
|
)
|
|
|
36
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
647
|
|
|
|
(568
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
|
|
|
|
(55
|
)
|
|
|
260
|
|
|
|
|
|
|
|
205
|
|
Cash and cash equivalents at beginning of period
|
|
|
|
|
|
|
131
|
|
|
|
205
|
|
|
|
|
|
|
|
336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
|
|
|
$
|
76
|
|
|
$
|
465
|
|
|
$
|
|
|
|
$
|
541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking
Statements
This Quarterly Report on
Form 10-Q
contains disclosures which contain forward-looking
statements. Forward-looking statements include all
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 ability to recognize the benefits of
the Recapitalization and the effect of the Recapitalization on
our customer, employee and other relationships, (2) the
impact of the substantial indebtedness incurred to finance the
Recapitalization, (3) increases in the amount and risk of
collectibility of uninsured accounts and deductibles and
copayment amounts for insured accounts, (4) the ability to
achieve operating and financial targets, and attain expected
levels of patient volumes and control the costs of providing
services, (5) possible changes in the Medicare, Medicaid
and other state programs, including Medicaid supplemental
payments pursuant to upper payment limit (UPL)
programs, that may impact reimbursements to health care
providers and insurers, (6) the highly competitive nature
of the health care business, (7) changes in revenue mix and
the ability to enter into and renew managed care provider
agreements on acceptable terms, (8) the efforts of
insurers, health care providers and others to contain health
care costs, (9) the outcome of our continuing efforts to
monitor, maintain and comply with appropriate laws, regulations,
policies and procedures and the CIA, (10) changes in
federal, state or local laws or regulations affecting the health
care industry, (11) the ability to attract and retain
qualified management and personnel, including affiliated
physicians, nurses and medical support personnel, (12) the
outcome of certain class action and derivative litigation filed
with respect to us, (13) the possible enactment of federal
or state health care reform, (14) the availability and
terms of capital to fund the expansion of our business,
(15) the continuing impact of hurricane damage in certain
markets and the ability to obtain recoveries under our insurance
policies, (16) changes in accounting practices,
(17) changes in general economic conditions,
(18) future divestitures which may result in charges,
(19) changes in business strategy or development plans,
(20) delays in receiving payments for services provided,
(21) the outcome of pending and any future tax audits,
appeals and litigation associated with our tax positions,
(22) potential liabilities and other claims that may be
asserted against us, and (23) other risk factors described
in our Annual Report on
Form 10-K
and other filings with the Securities and Exchange Commission.
As a consequence, current plans, anticipated actions and future
financial position and results 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.
Third
Quarter 2007 Operations Summary
Net income totaled $300 million for the quarter ended
September 30, 2007, compared to $240 million for the
quarter ended September 30, 2006. Revenues increased to
$6.569 billion in the third quarter of 2007 from
$6.213 billion in the third quarter of 2006. For the third
quarters of 2007 and 2006, the provision for doubtful accounts
was 11.8% and 10.9% of revenues, respectively. The third quarter
2007 results include interest expense of $560 million,
compared to $200 million in the third quarter of 2006. The
$360 million increase in interest expense is primarily due
to the increased debt related to the Recapitalization.
The financial results for the third quarters of 2007 and 2006
include gains on sales of facilities of $316 million and
$41 million, respectively. The tax provision for the third
quarter of 2007 includes an $85 million benefit based on
new information received during the third quarter of 2007
related primarily to tax positions taken in prior taxable
periods. For the third quarter of 2006, the financial results
include transaction costs related to the Recapitalization of
$9 million and gains on sales of investments of
$40 million related to securities held by our wholly-owned
insurance subsidiary.
During the third quarter of 2007, same facility admissions
decreased 1.6% and same facility equivalent admissions decreased
0.5% compared to the third quarter of 2006. Same facility
inpatient surgeries decreased 1.1% and same facility outpatient
surgeries decreased 0.7% during the third quarter of 2007
compared to the third quarter of 2006. Same facility revenue per
equivalent admission increased 7.5% in the third quarter of 2007
compared to the third quarter of 2006.
24
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Results
of Operations
Revenue/Volume
Trends
Our revenues depend upon inpatient occupancy levels, the
ancillary services and therapy programs ordered by physicians
and provided to patients, the volume of outpatient procedures
and the charge and negotiated payment rates for such services.
Gross charges typically do not reflect what our facilities are
actually paid. Our facilities have entered into agreements with
third-party payers, including government programs and managed
care health plans, under which the facilities are paid based
upon the cost of providing services, predetermined rates per
diagnosis, fixed per diem rates or discounts from gross charges.
We do not pursue collection of amounts related to patients who
meet our guidelines to qualify for charity care; therefore, they
are not reported in revenues. We provide discounts to uninsured
patients who do not qualify for Medicaid or charity care. These
discounts are similar to those provided to many local managed
care plans.
Revenues increased 5.7% from $6.213 billion in the third
quarter of 2006 to $6.569 billion for the third quarter of
2007. The increase in revenues can be attributed to the net
impact of a 7.7% increase in revenue per equivalent admission
and a 1.9% decline in equivalent admissions for the third
quarter of 2007 compared to the third quarter of 2006.
In the third quarter of 2007, consolidated admissions decreased
3.3% and same facility admissions decreased 1.6% compared to the
third quarter of 2006. Consolidated inpatient surgeries
decreased 4.1% and same facility inpatient surgeries decreased
1.1% in the third quarter of 2007 compared to the third quarter
of 2006. Consolidated outpatient surgeries decreased 0.2% and
same facility outpatient surgeries decreased 0.7% in the third
quarter of 2007 compared to the third quarter of 2006.
Same facility uninsured admissions increased by 1,260
admissions, or 5.2%, in the third quarter of 2007 compared to
the third quarter of 2006. Same facility uninsured admissions
increased, compared to 2006, 9.9% in the second quarter of 2007
and 12.4% in the first quarter of 2007. The trend of quarterly
same facility uninsured admissions growth during 2006, compared
to 2005, was 13.1% during the first quarter, 10.5% during the
second quarter, 10.1% during the third quarter and 8.7% during
the fourth quarter.
Admissions related to Medicare, managed Medicare, Medicaid,
managed Medicaid, managed care and other insurers and the
uninsured for the quarters and nine months ended
September 30, 2007 and 2006 are set forth in the following
table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
Nine Months
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Medicare
|
|
|
34
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
37
|
%
|
Managed Medicare
|
|
|
7
|
|
|
|
7
|
|
|
|
7
|
|
|
|
6
|
|
Medicaid
|
|
|
9
|
|
|
|
9
|
|
|
|
9
|
|
|
|
9
|
|
Managed Medicaid
|
|
|
7
|
|
|
|
6
|
|
|
|
7
|
|
|
|
6
|
|
Managed care and other insurers
|
|
|
36
|
|
|
|
37
|
|
|
|
36
|
|
|
|
36
|
|
Uninsured
|
|
|
7
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Results of Operations (continued)
Revenue/Volume Trends (continued)
The approximate percentages of our inpatient revenues related to
Medicare, managed Medicare, Medicaid, managed Medicaid, managed
care and other insurers and the uninsured for the quarters and
nine months ended September 30, 2007 and 2006 are set forth
in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
Nine Months
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Medicare
|
|
|
31
|
%
|
|
|
33
|
%
|
|
|
32
|
%
|
|
|
35
|
%
|
Managed Medicare
|
|
|
7
|
|
|
|
7
|
|
|
|
7
|
|
|
|
6
|
|
Medicaid
|
|
|
7
|
|
|
|
6
|
|
|
|
7
|
|
|
|
6
|
|
Managed Medicaid
|
|
|
4
|
|
|
|
3
|
|
|
|
4
|
|
|
|
3
|
|
Managed care and other insurers
|
|
|
45
|
|
|
|
45
|
|
|
|
44
|
|
|
|
45
|
|
Uninsured
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2007, we had 73 hospitals in the states of
Texas and Florida. During the third quarter of 2007, 55% of our
admissions and 50% of our revenues were generated by these
hospitals. Uninsured admissions in Texas and Florida represented
63% of our uninsured admissions during the third quarter of 2007.
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. During the past year, we have increased the indigent
care services we provide in several communities in the state of
Texas, in affiliation with other hospitals. The state of Texas
has been involved in the effort to increase the indigent care
provided by private hospitals. As a result of this additional
indigent care provided by private hospitals, public hospital
districts or counties in Texas have available funds that were
previously devoted to indigent care. The public hospital
districts or counties are under no contractual or legal
obligation to provide such indigent care. The public hospital
districts or counties have elected to offer some portion of
these amounts of newly available ad valorem tax revenues as the
state portion of the Medicaid program (which is funded by both
state and federal dollars). Such action is at the sole
discretion of the public hospital districts or counties. It is
anticipated that the state contributions will be matched with
federal Medicaid funds. The state then may make Medicaid
supplemental payments to hospitals in the state, including those
that are providing additional indigent care services. Such
payments must be within the federal UPL established by federal
regulation.
Our Texas Medicaid revenues increased by $32 million during
the third quarter of 2007 and $210 million during the first
nine months of 2007 compared to the same periods in 2006, due to
increases in Medicaid supplemental payments pursuant to UPL
programs in which we, local governments and other unaffiliated
providers participate.
Based upon a review of certain expenditures claimed for federal
Medicaid matching funds by the state of Texas, the Centers for
Medicare and Medicaid Services (CMS) recently
deferred a portion of claimed amounts. The federal deferral is
expected to continue until CMS completes its review. The outcome
of such review might affect the federal portion of these
supplemental payments, which is a significant component of the
total supplemental payments. We did not recognize any net
benefit related to the Texas Medicaid supplemental payments in
our operating results during the third quarter and will continue
this revenue recognition policy until we receive further
guidance from responsible federal and state agencies.
26
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Results of Operations (continued)
Operating
Results Summary
The following are comparative summaries of results of operations
for the quarters and nine months ended September 30, 2007
and 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Revenues
|
|
$
|
6,569
|
|
|
|
100.0
|
|
|
$
|
6,213
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
2,701
|
|
|
|
41.1
|
|
|
|
2,600
|
|
|
|
41.8
|
|
Supplies
|
|
|
1,085
|
|
|
|
16.5
|
|
|
|
1,046
|
|
|
|
16.8
|
|
Other operating expenses
|
|
|
1,076
|
|
|
|
16.4
|
|
|
|
1,054
|
|
|
|
17.1
|
|
Provision for doubtful accounts
|
|
|
774
|
|
|
|
11.8
|
|
|
|
677
|
|
|
|
10.9
|
|
Losses (gains) on investments
|
|
|
1
|
|
|
|
|
|
|
|
(40
|
)
|
|
|
(0.7
|
)
|
Equity in earnings of affiliates
|
|
|
(51
|
)
|
|
|
(0.8
|
)
|
|
|
(43
|
)
|
|
|
(0.7
|
)
|
Depreciation and amortization
|
|
|
356
|
|
|
|
5.5
|
|
|
|
348
|
|
|
|
5.6
|
|
Interest expense
|
|
|
560
|
|
|
|
8.5
|
|
|
|
200
|
|
|
|
3.2
|
|
Gains on sales of facilities
|
|
|
(316
|
)
|
|
|
(4.8
|
)
|
|
|
(41
|
)
|
|
|
(0.7
|
)
|
Transaction costs
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,186
|
|
|
|
94.2
|
|
|
|
5,810
|
|
|
|
93.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests and income taxes
|
|
|
383
|
|
|
|
5.8
|
|
|
|
403
|
|
|
|
6.5
|
|
Minority interests in earnings of consolidated entities
|
|
|
44
|
|
|
|
0.6
|
|
|
|
44
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
339
|
|
|
|
5.2
|
|
|
|
359
|
|
|
|
5.8
|
|
Provision for income taxes
|
|
|
39
|
|
|
|
0.6
|
|
|
|
119
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
300
|
|
|
|
4.6
|
|
|
$
|
240
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% changes from prior year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
5.7
|
%
|
|
|
|
|
|
|
3.1
|
%
|
|
|
|
|
Income before income taxes
|
|
|
(5.6
|
)
|
|
|
|
|
|
|
(11.0
|
)
|
|
|
|
|
Net income
|
|
|
24.9
|
|
|
|
|
|
|
|
(14.6
|
)
|
|
|
|
|
Admissions(a)
|
|
|
(3.3
|
)
|
|
|
|
|
|
|
(2.6
|
)
|
|
|
|
|
Equivalent admissions(b)
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
(3.4
|
)
|
|
|
|
|
Revenue per equivalent admission
|
|
|
7.7
|
|
|
|
|
|
|
|
6.8
|
|
|
|
|
|
Same facility % changes from prior year(c):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
7.0
|
|
|
|
|
|
|
|
5.4
|
|
|
|
|
|
Admissions(a)
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
Equivalent admissions(b)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
Revenue per equivalent admission
|
|
|
7.5
|
|
|
|
|
|
|
|
6.4
|
|
|
|
|
|
27
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Results of Operations (continued)
Operating
Results Summary (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Revenues
|
|
$
|
19,975
|
|
|
|
100.0
|
|
|
$
|
18,988
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
8,002
|
|
|
|
40.1
|
|
|
|
7,816
|
|
|
|
41.2
|
|
Supplies
|
|
|
3,284
|
|
|
|
16.4
|
|
|
|
3,251
|
|
|
|
17.1
|
|
Other operating expenses
|
|
|
3,194
|
|
|
|
16.0
|
|
|
|
3,063
|
|
|
|
16.1
|
|
Provision for doubtful accounts
|
|
|
2,218
|
|
|
|
11.1
|
|
|
|
1,950
|
|
|
|
10.3
|
|
Gains on investments
|
|
|
(6
|
)
|
|
|
|
|
|
|
(140
|
)
|
|
|
(0.7
|
)
|
Equity in earnings of affiliates
|
|
|
(156
|
)
|
|
|
(0.8
|
)
|
|
|
(151
|
)
|
|
|
(0.8
|
)
|
Depreciation and amortization
|
|
|
1,072
|
|
|
|
5.4
|
|
|
|
1,045
|
|
|
|
5.4
|
|
Interest expense
|
|
|
1,674
|
|
|
|
8.4
|
|
|
|
582
|
|
|
|
3.1
|
|
Gains on sales of facilities
|
|
|
(332
|
)
|
|
|
(1.7
|
)
|
|
|
(46
|
)
|
|
|
(0.2
|
)
|
Impairment of long-lived assets
|
|
|
24
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
Transaction costs
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,974
|
|
|
|
95.0
|
|
|
|
17,379
|
|
|
|
91.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests and income taxes
|
|
|
1,001
|
|
|
|
5.0
|
|
|
|
1,609
|
|
|
|
8.5
|
|
Minority interests in earnings of consolidated entities
|
|
|
160
|
|
|
|
0.8
|
|
|
|
145
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
841
|
|
|
|
4.2
|
|
|
|
1,464
|
|
|
|
7.7
|
|
Provision for income taxes
|
|
|
245
|
|
|
|
1.2
|
|
|
|
550
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
596
|
|
|
|
3.0
|
|
|
$
|
914
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% changes from prior year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
5.2
|
%
|
|
|
|
|
|
|
3.9
|
%
|
|
|
|
|
Income before income taxes
|
|
|
(42.5
|
)
|
|
|
|
|
|
|
(10.4
|
)
|
|
|
|
|
Net income
|
|
|
(34.8
|
)
|
|
|
|
|
|
|
(16.9
|
)
|
|
|
|
|
Admissions(a)
|
|
|
(4.1
|
)
|
|
|
|
|
|
|
(2.1
|
)
|
|
|
|
|
Equivalent admissions(b)
|
|
|
(3.5
|
)
|
|
|
|
|
|
|
(2.2
|
)
|
|
|
|
|
Revenue per equivalent admission
|
|
|
9.0
|
|
|
|
|
|
|
|
6.2
|
|
|
|
|
|
Same facility % changes from prior year(c):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
7.3
|
|
|
|
|
|
|
|
5.5
|
|
|
|
|
|
Admissions(a)
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent admissions(b)
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
Revenue per equivalent admission
|
|
|
8.5
|
|
|
|
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
(a) |
|
Represents the total number of patients admitted to our
hospitals and is used by management and certain investors as a
general measure of inpatient volume. |
|
(b) |
|
Equivalent admissions are used by management and certain
investors as a general measure of combined inpatient and
outpatient volume. Equivalent admissions are computed by
multiplying admissions (inpatient volume) by the sum of gross
inpatient revenue and gross outpatient revenue and then dividing
the resulting amount by gross inpatient revenue. The equivalent
admissions computation equates outpatient revenue to
the volume measure (admissions) used to measure inpatient
volume, resulting in a general measure of combined inpatient and
outpatient volume. |
|
(c) |
|
Same facility information excludes the operations of hospitals
and their related facilities which were either acquired or
divested during the current and prior period. |
28
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Results of Operations (continued)
Quarters
Ended September 30, 2007 and 2006
Net income totaled $300 million for the third quarter of
2007 compared to $240 million for the third quarter of
2006. Revenues increased 5.7% due to favorable pricing trends,
evidenced by net revenue per equivalent admission growth of
7.7%, and weak volume trends that resulted in a decline in
equivalent admissions of 1.9%. The $60 million increase in
net income was primarily due to the net impact of the
$41 million reduction in gains on investments, the
$275 million increase in gains on sales of facilities, the
$360 million increase in interest expense and the
$85 million income tax benefit related to new information
received during the third quarter of 2007 related primarily to
tax positions taken in prior taxable periods.
For the third quarter of 2007, consolidated admissions decreased
3.3% and same facility admissions decreased 1.6% compared to the
third quarter of 2006. Inpatient surgical volumes decreased 4.1%
on a consolidated basis and decreased 1.1% on a same facility
basis during the third quarter of 2007, compared to the third
quarter of 2006. Outpatient surgical volumes decreased 0.2% on a
consolidated basis and decreased 0.7% on a same facility basis
during the third quarter of 2007, compared to the third quarter
of 2006.
Salaries and benefits, as a percentage of revenues, were 41.1%
in the third quarter of 2007 and 41.8% in the third quarter of
2006. Salaries and benefits per equivalent admission increased
5.9% in the third quarter of 2007 compared to the third quarter
of 2006. Labor rate increases averaged 4.9% for the third
quarter of 2007 compared to the third quarter of 2006.
Supplies, as a percentage of revenues, were 16.5% in the third
quarter of 2007 and 16.8% in the third quarter of 2006. Supply
costs per equivalent admission increased 5.7% in the third
quarter of 2007 compared to the third quarter of 2006. Same
facility supply costs increased 4.8% for orthopedic devices and
16.3% for blood products in the third quarter of 2007 compared
to the third quarter of 2006.
Other operating expenses, as a percentage of revenues, decreased
to 16.4% in the third quarter of 2007 compared to 17.1% in the
third quarter of 2006. Other operating expenses are primarily
comprised of contract services, professional fees, repairs and
maintenance, rents and leases, utilities, insurance (including
professional liability insurance) and nonincome taxes. We
recorded $33 million of indigent care costs in certain
Texas markets during the third quarter of 2007 for indigent care
programs that we did not participate in during the third quarter
of 2006. Provisions for losses related to professional liability
risks were $44 million and $81 million for the third
quarters of 2007 and 2006, respectively. We expect the favorable
professional liability trends experienced during 2006 and 2005
to continue during the remainder of 2007 and have considered
those favorable trends in our 2007 estimated professional
liability expense accruals.
Provision for doubtful accounts, as a percentage of revenues,
increased to 11.8% in the third quarter of 2007 compared to
10.9% in the third quarter of 2006. The provision for doubtful
accounts and the allowance for doubtful accounts relate
primarily to uninsured amounts due directly from patients. At
September 30, 2007, our allowance for doubtful accounts
represented approximately 88% of the $4.466 billion total
patient due accounts receivable balance.
Losses on investments of $1 million in the third quarter of
2007 and gains on investments of $40 million in the third
quarter of 2006 relate to sales of investment securities by our
wholly-owned insurance subsidiary. During the fourth quarter of
2006, we reallocated the investment securities portfolio by
converting the majority of our equity securities investments
into investments in debt securities, and we expect gains on
sales of investments to be lower in the remainder of 2007 and
future years than what was realized during 2006.
Equity in earnings of affiliates was $51 million and
$43 million in the third quarters of 2007 and 2006,
respectively. These amounts related primarily to the operations
of our Denver market joint venture, which is accounted for under
the equity method of accounting.
29
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Results of Operations (continued)
Quarters
Ended September 30, 2007 and 2006 (continued)
Depreciation and amortization increased by $8 million, from
$348 million in the third quarter of 2006 to
$356 million in the third quarter of 2007.
Interest expense increased from $200 million in the third
quarter of 2006 to $560 million in the third quarter of
2007 due to the increased debt related to the Recapitalization.
Our average debt balance was $27.625 billion for the third
quarter of 2007 compared to $11.362 billion for the third
quarter of 2006. The average interest rate for our long term
debt increased from 7.1% at September 30, 2006 to 7.7% at
September 30, 2007.
During the third quarter of 2007, we recognized gains on sales
of facilities of $316 million, which included a gain of
$311 million on the sale of our two Switzerland hospitals.
Gains on sales of facilities were $41 million for the third
quarter of 2006 and included a gain of $32 million on the
sale of a hospital located in Virginia.
Minority interests in earnings of consolidated entities were
$44 million for both the third quarters of 2007 and 2006.
Our effective tax rate was 11.7% in the third quarter of 2007
and 33.3% in the third quarter of 2006. Based on new information
received during the third quarter of 2007 related primarily to
tax positions taken in prior taxable periods, we reduced our
provision for income taxes by $85 million. Excluding the
effect of this adjustment, the effective rate for the third
quarter of 2007 would have been 36.9%.
Nine
Months Ended September 30, 2007 and 2006
Net income totaled $596 million for the nine months ended
September 30, 2007 compared to $914 million for the
nine months ended September 30, 2006. Revenues increased
5.2% due to favorable pricing trends, evidenced by net revenue
per equivalent admission growth of 9.0%, and weak volume trends
that resulted in a decline in equivalent admissions of 3.5%. The
$318 million decline in net income was primarily due to the
net impact of the $286 million increase in gains on sales
of facilities, the $1.092 billion increase in interest
expense and the $305 million reduction in the provision for
income taxes.
For the nine months ended September 30, 2007, consolidated
admissions decreased 4.1% and same facility admissions decreased
1.6% compared to the nine months ended September 30, 2006.
Inpatient surgical volumes decreased 3.3% on a consolidated
basis and decreased 0.9% on a same facility basis during the
nine months ended September 30, 2007, compared to the nine
months ended September 30, 2006. Outpatient surgical
volumes decreased 2.5% on a consolidated basis and decreased
1.2% on a same facility basis during the nine months ended
September 30, 2007, compared to the nine months ended
September 30, 2006.
Salaries and benefits, as a percentage of revenues, were 40.1%
in the first nine months of 2007 and 41.2% in the first nine
months of 2006. Salaries and benefits per equivalent admission
increased 6.0% for the first nine months of 2007 compared to the
first nine months of 2006. Labor rate increases averaged 5.4%
for the first nine months of 2007 compared to the first nine
months of 2006.
Supplies, as a percentage of revenues, were 16.4% in the first
nine months of 2007 compared to 17.1% in the first nine months
of 2006. Supply costs per equivalent admission increased 4.6%
for the first nine months of 2007 compared to the first nine
months of 2006. Same facility supply costs increased 5.3% for
medical devices (cardiology and orthopedic) and 9.8% for blood
products in the first nine months of 2007 compared to the first
nine months of 2006.
Other operating expenses, as a percentage of revenues, were
16.0% in the first nine months of 2007, compared to 16.1% in the
first nine months of 2006. Other operating expenses are
primarily comprised of contract services, professional fees,
repairs and maintenance, rents and leases, utilities, insurance
(including professional liability insurance) and nonincome
taxes. We recorded $164 million of indigent care costs in
certain Texas markets during
30
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Results of Operations (continued)
Nine
Months Ended September 30, 2007 and 2006
(continued)
the first nine months of 2007 for indigent care programs that we
did not participate in during the first nine months of 2006.
Provisions for losses related to professional liability risks
were $141 million and $178 million for the nine months
ended September 30, 2007 and 2006, respectively. We
recorded reductions to our estimated professional liability
reserves of $85 million and $36 million during the
nine months ended September 30, 2006 and 2005,
respectively, to reflect the recognition by our external
actuaries of improving frequency and severity claim trends at
our facilities. We expect the favorable professional liability
trends experienced during 2006 and 2005 to continue during the
remainder of 2007 and have considered those favorable trends in
our 2007 estimated professional liability expense accruals.
Provision for doubtful accounts, as a percentage of revenues,
was 11.1% in the first nine months of 2007 compared to 10.3% in
the first nine months of 2006. The provision for doubtful
accounts and the allowance for doubtful accounts relate
primarily to uninsured amounts due directly from patients. At
September 30, 2007, our allowance for doubtful accounts
represented approximately 88% of the $4.466 billion total
patient due accounts receivable balance.
Gains on investments of $6 million in the first nine months
of 2007 and $140 million in the first nine months of 2006
relate to sales of investment securities by our wholly-owned
insurance subsidiary. We converted the majority of our equity
investments to investments in debt securities during the fourth
quarter of 2006 and do not expect to realize gains on
investments during the remainder of 2007 and future years at
amounts comparable to those realized during 2006.
Equity in earnings of affiliates was $156 million and
$151 million in the first nine months of 2007 and 2006,
respectively. These amounts related primarily to the operations
of our Denver market joint venture, which is accounted for under
the equity method of accounting.
Depreciation and amortization increased by $27 million,
from $1.045 billion in the first nine months of 2006 to
$1.072 billion in the first nine months of 2007.
Interest expense increased from $582 million in the first
nine months of 2006 to $1.674 billion in the first nine
months of 2007 due to the increased debt related to the
Recapitalization. Our average debt balance was
$27.843 billion for the first nine months of 2007 compared
to $11.228 billion for the first nine months of 2006. The
average interest rate for our long term debt increased from 7.1%
at September 30, 2006 to 7.7% at September 30, 2007.
During the first nine months of 2007, we recognized gains on
sales of facilities of $332 million, which included a gain
of $311 million on the sale of our two Switzerland
hospitals. Gains on sales of facilities were $46 million
for the first nine months of 2006, and included a
$32 million gain on the sale of a hospital in Virginia.
We recorded an impairment charge of $24 million to adjust
the value of a building to estimated fair value during the first
nine months of 2007.
Minority interest in earnings of consolidated entities increased
from $145 million in the first nine months of 2006 to
$160 million for the first nine months of 2007 due
primarily to improved operations in two Texas market
partnerships.
Our effective tax rate was 29.2% in the first nine months of
2007 and 37.6% in the first nine months of 2006. Based on new
information received during the first nine months of 2007
related primarily to tax positions taken in prior taxable
periods, we reduced our provision for income taxes by
$85 million. Excluding the effect of this adjustment, the
effective rate for the first nine months of 2007 would have been
39.3%.
31
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Liquidity
and Capital Resources
Cash provided by operating activities totaled $985 million
in the first nine months of 2007 compared to $1.353 billion
in the first nine months of 2006. Net income was
$318 million lower in the first nine months of 2007
compared to the first nine months of 2006. In the first nine
months of 2007, our combined payments for interest and taxes
were $1.870 billion, which represented a $381 million
increase compared to the first nine months of 2006. Working
capital totaled $2.320 billion at September 30, 2007
and $2.502 billion at December 31, 2006.
Cash used in investing activities was $365 million in the
first nine months of 2007 compared to $1.226 billion in the
first nine months of 2006. Excluding acquisitions, capital
expenditures were $997 million and $1.330 billion in
the first nine months of 2007 and 2006, respectively. Capital
expenditures are expected to approximate $1.6 billion in
2007 and $1.7 billion in 2008. At September 30, 2007,
there were projects under construction which had estimated
additional costs to complete and equip over the next five years
of approximately $1.7 billion. We expect to finance capital
expenditures with internally generated and borrowed funds.
During the first nine months of 2007 and 2006, we received cash
proceeds of $484 million and $328 million,
respectively, from dispositions of hospitals and health care
entities. We received cash flows from our investments of
$156 million for the first nine months of 2007 and expended
$122 million to increase investments for the first nine
months of 2006. Effective January 1, 2007, our facilities
are generally self-insured for the first $5 million of per
occurrence losses and we are not required to maintain
investments to fund the liabilities for claims that occurred
after December 31, 2006.
Cash used in financing activities totaled $907 million
during the first nine months of 2007 compared to
$78 million provided by financing activities during the
first nine months of 2006. During the first nine months of 2007,
we decreased net borrowings by $991 million and received
proceeds of $100 million for issuances of 1,972,100 shares
of common stock. During the first nine months of 2006, we
increased net borrowings by $843 million, repurchased
13.0 million shares of common stock for $653 million
and paid $201 million in cash dividends.
In addition to cash flows from operations, available sources of
capital include amounts available under the senior secured
credit facilities ($2.524 billion available as of
October 31, 2007) and anticipated access to public and
private debt markets.
Investments of our professional liability insurance subsidiary,
to maintain statutory equity and pay claims (primarily claims
that occurred prior to January 1, 2007), totaled
$1.987 billion at September 30, 2007 and
$2.143 billion at December 31, 2006, respectively.
Claims payments, net of reinsurance recoveries, during the next
twelve months are expected to approximate $250 million. Our
wholly-owned insurance subsidiary has entered into certain
reinsurance contracts, and the obligations covered by the
reinsurance contracts are included in the reserves for
professional liability risks, as the subsidiary remains liable
to the extent that the reinsurers do not meet their obligations
under the reinsurance contracts. To minimize our exposure to
losses from reinsurer insolvencies, we routinely monitor the
financial condition of our reinsurers. The amounts receivable
related to the reinsurance contracts were $43 million and
$42 million at September 30, 2007 and
December 31, 2006, respectively.
Financing
Activities
Due to the Recapitalization, we are highly leveraged and have
significant debt service requirements. Our debt totaled
$27.545 billion at September 30, 2007, which
represents a $16.202 billion increase from the total debt
of $11.343 billion at September 30, 2006. Interest
expense increased from $200 million in the third quarter of
2006 to $560 million in the third quarter of 2007. Interest
expense for the nine months ended September 30, 2007 and
2006 was $1.674 billion and $582 million, respectively.
In connection with the Recapitalization, we entered into
(i) a $2.000 billion senior secured asset-based
revolving credit facility with a borrowing base of 85% of
eligible accounts receivable, subject to customary reserves and
eligibility criteria ($419 million available at
September 30, 2007) (the ABL credit facility)
and (ii) a senior
32
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Liquidity
and Capital Resources (continued)
Financing
Activities (continued)
secured credit agreement (the cash flow credit
facility and, together with the ABL credit facility, the
senior secured credit facilities), consisting of a
$2.000 billion revolving credit facility
($1.858 billion available at September 30, 2007 after
giving effect to certain outstanding letters of credit), a
$2.750 billion term loan A ($2.666 billion outstanding
at September 30, 2007), a $8.800 billion term loan B
($8.734 billion outstanding at September 30,
2007) and a 1.000 billion European term loan
(703 million or $1.003 billion outstanding at
September 30, 2007). The senior secured credit facilities
and senior secured notes are fully and unconditionally
guaranteed by substantially all existing and future, direct and
indirect, wholly-owned material domestic subsidiaries that are
Unrestricted Subsidiaries under our Indenture dated
as of December 16, 1993 (except for certain special purpose
subsidiaries that only guarantee and pledge their assets under
our ABL credit facility). In addition, borrowings under the
European term loan are guaranteed by all material, wholly-owned
European subsidiaries.
Also in connection with the Recapitalization, we issued
$4.200 billion of senior secured notes (comprised of
$1.000 billion of
91/8% notes
due 2014 and $3.200 billion of
91/4% notes
due 2016) and $1.500 billion of
95/8% senior
secured toggle notes (which allow us, at our option, to pay
interest in kind during the first five years) due 2016, which
are subject to certain standard covenants. The notes are
guaranteed by certain of our subsidiaries.
In 2006, we issued $1.000 billion of 6.5% notes due
2016. Proceeds of $625 million were used to refinance the
amounts outstanding under our 2005 term loan and the remaining
proceeds were used to pay down amounts advanced under our bank
revolving credit facility.
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
twelve months.
Market
Risk
HCA is exposed to market risk related to changes in market
values of securities. The investments in debt and equity
securities of our wholly-owned insurance subsidiary were
$1.825 billion and $162 million, respectively, at
September 30, 2007. These investments are carried at fair
value, with changes in unrealized gains and losses being
recorded as adjustments to other comprehensive income. The fair
value of investments is generally based on quoted market prices.
At September 30, 2007, we had a net unrealized gain of
$17 million on the insurance subsidiarys investment
securities.
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 are
included in other comprehensive income.
With respect to our interest-bearing liabilities, approximately
$5.909 billion of long-term debt at September 30, 2007
is subject to variable rates of interest, while the remaining
balance in long-term debt of $21.636 billion at
September 30, 2007 is 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 rate 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, as determined by the type of
borrowing, either (a) a base rate determined by reference
to the higher of (1) the federal funds rate plus
1/2
of 1% or (2) the prime rate of Bank of America or
(b) a LIBOR rate for the currency of such borrowing for the
relevant interest period, plus, in each case, an applicable
33
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Liquidity
and Capital Resources (continued)
Market
Risk (continued)
margin. The applicable margin for borrowings under the senior
secured credit facilities, with the exception of term loan B
where the margin is static, may be reduced subject to attaining
certain leverage ratios. On February 16, 2007, we amended
the cash flow credit facility to reduce the applicable margins
with respect to the term loan borrowings thereunder. On
June 20, 2007, we amended the ABL credit facility to reduce
the applicable margin effective January 1, 2008, with respect to
borrowings thereunder.
Due primarily to the lowering of our credit ratings in
connection with the Recapitalization, the average rate for our
long-term debt increased from 7.1% at September 30, 2006 to
7.7% at September 30, 2007. The estimated fair value of our
total long-term debt was $26.718 billion at
September 30, 2007. 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
$59 million. To mitigate the impact of fluctuations in
interest rates, we generally target a portion of our debt
portfolio to be maintained at fixed rates.
Our international operations and the European term loan expose
us to market risks associated with foreign currencies. In order
to mitigate the currency exposure related to debt service
obligations through December 31, 2011 under the European
term loan, we have entered into cross currency swap agreements.
A cross currency swap is an agreement between two parties to
exchange a stream of principal and interest payments in one
currency for a stream of principal and interest payments in
another currency over a specified period.
Pending
IRS Disputes
We are currently contesting before the Appeals Division of the
Internal Revenue Service (the IRS) certain claimed
deficiencies and adjustments proposed by the IRS in connection
with its examination of the 2001 and 2002 federal income tax
returns for HCA and 15 affiliates that are treated as
partnerships for federal income tax purposes (affiliated
partnerships). During 2006, the IRS began an examination
of the 2003 and 2004 federal income tax returns for HCA and 19
affiliated partnerships.
The disputed items pending before the IRS Appeals Division or
proposed by the IRS Examination Division through
September 30, 2007, include the deductibility of a portion
of the 2001 and 2003 government settlement payments, the timing
of recognition of certain patient service revenues in 2001
through 2004, the method for calculating the tax allowance for
doubtful accounts in 2002 through 2004, and the amount of
insurance expense deducted in 2001 and 2002. Through
September 30, 2007, the IRS is seeking an additional
$1.4 billion in income taxes, interest and penalties with
respect to these issues. This amount is net of a refundable
deposit of $215 million that we made during 2006. The IRS
has not determined the final amount of additional income tax,
interest and penalties that it may claim upon completion of the
2003 and 2004 examinations. We expect the IRS will complete its
examination of the 2003 and 2004 federal income tax returns and
begin an examination of our 2005 and 2006 federal income tax
returns within the next twelve months.
During 2003, the United States Court of Appeals for the Sixth
Circuit affirmed a United States Tax Court (Tax
Court) decision received in 1996 related to the IRS
examination of Hospital Corporation of Americas 1987
through 1988 federal income tax returns, in which the IRS
contested the method that Hospital Corporation of America used
to calculate its tax allowance for doubtful accounts. Due to the
volume and complexity of calculating the tax allowance for
doubtful accounts, the IRS has not determined the amount of
additional tax and interest that it may claim for taxable years
after 1988. Thirty-one federal taxable periods for HCA, its
predecessors and subsidiaries from 1987 through 1996 are
affected by the Tax Court decision. These taxable periods are
pending before the IRS Examination Division, the Tax Court and
the United States Court of Federal Claims. In 2004, we made a
payment of $109 million for additional federal tax and
interest, based on our estimate of amounts due for
34
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Pending
IRS Disputes (continued)
taxable periods through 1996. As of September 30, 2007, we
had reached tentative agreement with the IRS with respect to the
tax and interest computations for two of the 31 federal taxable
periods.
Management believes that adequate provisions have been recorded
to satisfy final resolution of the disputed issues. Management
believes that HCA, its predecessors, subsidiaries and affiliates
properly reported taxable income and paid taxes in accordance
with applicable laws and agreements established with the IRS and
that final resolution of these disputes will not have a
material, adverse effect on our results of operations or
financial position. However, if payments due upon final
resolution of these issues exceed our recorded estimates, such
resolutions could have a material, adverse effect on our results
of operations or financial position.
35
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Operating
Data
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
CONSOLIDATING
|
|
|
|
|
|
|
|
|
Number of hospitals in operation at:
|
|
|
|
|
|
|
|
|
March 31
|
|
|
165
|
|
|
|
176
|
|
June 30
|
|
|
164
|
|
|
|
176
|
|
September 30
|
|
|
162
|
|
|
|
172
|
|
December 31
|
|
|
|
|
|
|
166
|
|
Number of freestanding outpatient surgical centers in operation
at:
|
|
|
|
|
|
|
|
|
March 31
|
|
|
99
|
|
|
|
91
|
|
June 30
|
|
|
98
|
|
|
|
92
|
|
September 30
|
|
|
98
|
|
|
|
95
|
|
December 31
|
|
|
|
|
|
|
98
|
|
Licensed hospital beds at(a):
|
|
|
|
|
|
|
|
|
March 31
|
|
|
39,269
|
|
|
|
41,539
|
|
June 30
|
|
|
39,175
|
|
|
|
41,300
|
|
September 30
|
|
|
38,939
|
|
|
|
40,382
|
|
December 31
|
|
|
|
|
|
|
39,354
|
|
Weighted average licensed beds(b):
|
|
|
|
|
|
|
|
|
Quarter:
|
|
|
|
|
|
|
|
|
First
|
|
|
39,269
|
|
|
|
41,255
|
|
Second
|
|
|
39,222
|
|
|
|
41,263
|
|
Third
|
|
|
38,990
|
|
|
|
40,352
|
|
Fourth
|
|
|
|
|
|
|
39,762
|
|
Year
|
|
|
|
|
|
|
40,653
|
|
Average daily census(c):
|
|
|
|
|
|
|
|
|
Quarter:
|
|
|
|
|
|
|
|
|
First
|
|
|
22,461
|
|
|
|
23,228
|
|
Second
|
|
|
20,874
|
|
|
|
21,682
|
|
Third
|
|
|
20,444
|
|
|
|
20,993
|
|
Fourth
|
|
|
|
|
|
|
20,883
|
|
Year
|
|
|
|
|
|
|
21,688
|
|
Admissions(d):
|
|
|
|
|
|
|
|
|
Quarter:
|
|
|
|
|
|
|
|
|
First
|
|
|
403,800
|
|
|
|
421,000
|
|
Second
|
|
|
383,200
|
|
|
|
402,900
|
|
Third
|
|
|
381,700
|
|
|
|
394,700
|
|
Fourth
|
|
|
|
|
|
|
391,500
|
|
Year
|
|
|
|
|
|
|
1,610,100
|
|
36
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Operating
Data (Continued)
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Equivalent admissions(e):
|
|
|
|
|
|
|
|
|
Quarter:
|
|
|
|
|
|
|
|
|
First
|
|
|
601,200
|
|
|
|
626,000
|
|
Second
|
|
|
582,500
|
|
|
|
609,900
|
|
Third
|
|
|
583,400
|
|
|
|
594,500
|
|
Fourth
|
|
|
|
|
|
|
586,300
|
|
Year
|
|
|
|
|
|
|
2,416,700
|
|
Average length of stay (days)(f):
|
|
|
|
|
|
|
|
|
Quarter:
|
|
|
|
|
|
|
|
|
First
|
|
|
5.0
|
|
|
|
5.0
|
|
Second
|
|
|
5.0
|
|
|
|
4.9
|
|
Third
|
|
|
4.9
|
|
|
|
4.9
|
|
Fourth
|
|
|
|
|
|
|
4.9
|
|
Year
|
|
|
|
|
|
|
4.9
|
|
Emergency room visits(g):
|
|
|
|
|
|
|
|
|
Quarter:
|
|
|
|
|
|
|
|
|
First
|
|
|
1,295,200
|
|
|
|
1,332,500
|
|
Second
|
|
|
1,258,700
|
|
|
|
1,325,600
|
|
Third
|
|
|
1,273,900
|
|
|
|
1,289,600
|
|
Fourth
|
|
|
|
|
|
|
1,265,800
|
|
Year
|
|
|
|
|
|
|
5,213,500
|
|
Outpatient surgeries(h):
|
|
|
|
|
|
|
|
|
Quarter:
|
|
|
|
|
|
|
|
|
First
|
|
|
204,200
|
|
|
|
212,900
|
|
Second
|
|
|
204,200
|
|
|
|
210,700
|
|
Third
|
|
|
196,400
|
|
|
|
196,700
|
|
Fourth
|
|
|
|
|
|
|
200,600
|
|
Year
|
|
|
|
|
|
|
820,900
|
|
Inpatient surgeries(i):
|
|
|
|
|
|
|
|
|
Quarter:
|
|
|
|
|
|
|
|
|
First
|
|
|
130,500
|
|
|
|
135,300
|
|
Second
|
|
|
131,200
|
|
|
|
134,000
|
|
Third
|
|
|
128,300
|
|
|
|
133,800
|
|
Fourth
|
|
|
|
|
|
|
130,000
|
|
Year
|
|
|
|
|
|
|
533,100
|
|
37
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Operating
Data (Continued)
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Days in accounts receivable(j):
|
|
|
|
|
|
|
|
|
Quarter:
|
|
|
|
|
|
|
|
|
First
|
|
|
52
|
|
|
|
49
|
|
Second
|
|
|
51
|
|
|
|
49
|
|
Third
|
|
|
54
|
|
|
|
53
|
|
Fourth
|
|
|
|
|
|
|
53
|
|
Year
|
|
|
|
|
|
|
53
|
|
Gross patient revenues(k) (dollars in millions):
|
|
|
|
|
|
|
|
|
Quarter:
|
|
|
|
|
|
|
|
|
First
|
|
$
|
23,161
|
|
|
$
|
21,530
|
|
Second
|
|
|
22,503
|
|
|
|
20,908
|
|
Third
|
|
|
22,381
|
|
|
|
20,493
|
|
Fourth
|
|
|
|
|
|
|
21,982
|
|
Year
|
|
|
|
|
|
|
84,913
|
|
Outpatient revenues as a % of patient revenues(l)
|
|
|
|
|
|
|
|
|
Quarter:
|
|
|
|
|
|
|
|
|
First
|
|
|
36
|
%
|
|
|
36
|
%
|
Second
|
|
|
37
|
%
|
|
|
37
|
%
|
Third
|
|
|
38
|
%
|
|
|
36
|
%
|
Fourth
|
|
|
|
|
|
|
36
|
%
|
Year
|
|
|
|
|
|
|
36
|
%
|
NONCONSOLIDATING(m)
|
|
|
|
|
|
|
|
|
Number of hospitals in operation at:
|
|
|
|
|
|
|
|
|
March 31
|
|
|
8
|
|
|
|
7
|
|
June 30
|
|
|
8
|
|
|
|
7
|
|
September 30
|
|
|
8
|
|
|
|
7
|
|
December 31
|
|
|
|
|
|
|
7
|
|
Number of freestanding outpatient surgical centers in operation
at:
|
|
|
|
|
|
|
|
|
March 31
|
|
|
9
|
|
|
|
7
|
|
June 30
|
|
|
9
|
|
|
|
9
|
|
September 30
|
|
|
9
|
|
|
|
9
|
|
December 31
|
|
|
|
|
|
|
9
|
|
Licensed hospital beds at:
|
|
|
|
|
|
|
|
|
March 31
|
|
|
2,356
|
|
|
|
2,249
|
|
June 30
|
|
|
2,334
|
|
|
|
2,249
|
|
September 30
|
|
|
2,337
|
|
|
|
2,246
|
|
December 31
|
|
|
|
|
|
|
2,246
|
|
38
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Operating
Data (Continued)
BALANCE
SHEET DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Accounts Receivable
|
|
|
|
Under 91 Days
|
|
|
91 180 Days
|
|
|
Over 180 Days
|
|
|
Accounts receivable aging at September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare and Medicaid
|
|
|
12
|
%
|
|
|
1
|
%
|
|
|
2
|
%
|
Managed care and other discounted
|
|
|
19
|
|
|
|
4
|
|
|
|
4
|
|
Uninsured
|
|
|
20
|
|
|
|
11
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
51
|
%
|
|
|
16
|
%
|
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Licensed beds are those beds for which a facility has been
granted approval to operate from the applicable state licensing
agency. |
|
(b) |
|
Weighted average licensed beds represents the average number of
licensed beds, weighted based on periods owned. |
|
(c) |
|
Represents the average number of patients in our hospital beds
each day. |
|
(d) |
|
Represents the total number of patients admitted to our
hospitals and is used by management and certain investors as a
general measure of inpatient volume. |
|
(e) |
|
Equivalent admissions are used by management and certain
investors as a general measure of combined inpatient and
outpatient volume. Equivalent admissions are computed by
multiplying admissions (inpatient volume) by the sum of gross
inpatient revenue and gross outpatient revenue and then dividing
the resulting amount by gross inpatient revenue. The equivalent
admissions computation equates outpatient revenue to
the volume measure (admissions) used to measure inpatient volume
resulting in a general measure of combined inpatient and
outpatient volume. |
|
(f) |
|
Represents the average number of days admitted patients stay in
our hospitals. |
|
(g) |
|
Represents the number of patients treated in our emergency rooms. |
|
(h) |
|
Represents the number of surgeries performed on patients who
were not admitted to our hospitals. Pain management and
endoscopy procedures are not included in outpatient surgeries. |
|
(i) |
|
Represents the number of surgeries performed on patients who
have been admitted to our hospitals. Pain management and
endoscopy procedures are not included in inpatient surgeries. |
|
(j) |
|
Days in accounts receivable are calculated by dividing the
revenues for the period by the days in the period (revenues per
day). Accounts receivable, net of allowance for doubtful
accounts, at the end of the period is then divided by the
revenues per day. |
|
(k) |
|
Gross patient revenues are based upon our standard charge
listing. Gross charges/revenues typically do not reflect what
our hospital facilities are paid. Gross charges/revenues are
reduced by contractual adjustments, discounts and charity care
to determine reported revenues. |
|
(l) |
|
Represents the percentage of patient revenues related to
patients who are not admitted to our hospitals. |
|
(m) |
|
The nonconsolidating facilities include facilities operated
through 50/50 joint ventures which we do not control and are
accounted for using the equity method of accounting. |
39
|
|
ITEM 3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
The information called for by this item is provided under the
caption Market Risk under Item 2.
Managements Discussion and Analysis of Financial Condition
and Results of Operations.
|
|
ITEM 4.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
HCAs chief executive officer and chief financial officer
have reviewed and evaluated the effectiveness of HCAs
disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
promulgated under the Securities Exchange Act of 1934 (the
Exchange Act)) 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
that HCAs disclosure controls and procedures effectively
and timely provide them with material information relating to
HCA and its consolidated subsidiaries required to be disclosed
in the reports HCA files or submits under the Exchange Act.
Changes
in Internal Control Over Financial Reporting
During the period covered by this report, there have been no
changes in the Companys internal control over financial
reporting that have materially affected or are reasonably likely
to materially affect the Companys internal control over
financial reporting.
Part II:
Other Information
|
|
Item 1:
|
Legal
Proceedings
|
General
Liability
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. The resolution of any such lawsuits, claims
or legal and regulatory proceedings could have a material,
adverse effect on our results of operations or financial
position in a given period.
Government
Investigations, Claims and Litigation
In January 2001, we entered into an eight-year Corporate
Integrity Agreement (CIA) with the Office of
Inspector General of the Department of Health and Human
Services. Violation or breach of the CIA, or violation of
federal or state laws relating to Medicare, Medicaid or similar
programs, could subject us to substantial monetary fines, civil
and criminal penalties
and/or
exclusion from participation in the Medicare and Medicaid
programs. Alleged violations may be pursued by the government or
through private qui tam actions. Sanctions imposed
against us as a result of such actions could have a material,
adverse effect on our results of operations or financial
position.
Securities
Class Action Litigation
In November 2005, two putative federal securities law class
actions were filed in the United States District Court for the
Middle District of Tennessee seeking monetary damages on behalf
of persons who purchased our stock between January 12, 2005
and July 13, 2005. These substantially similar lawsuits
assert claims pursuant to Sections 10(b) and 20(a) of the
Exchange Act, and
Rule 10b-5
promulgated thereunder, against us and our Chairman and Chief
Executive Officer, President and Chief Operating Officer, and
Executive Vice President and Chief Financial Officer, related to
our July 13, 2005 announcement of preliminary results of
operations for the quarter ended June 30, 2005.
On January 5, 2006, the court consolidated these actions
and all later-filed related securities actions under the caption
In re HCA Inc. Securities Litigation, case number
3:05-CV-00960. Pursuant to federal statute, on January 25,
2006, the court appointed co-lead plaintiffs to represent the
interests of the asserted class members in this litigation.
Co-lead plaintiffs filed a consolidated amended complaint on
April 21, 2006. We believe that the allegations
40
contained within these class action lawsuits are without merit.
These cases have now been settled, with approval by the court on
October 12, 2007.
Shareholder
Derivative Lawsuits in Federal Court
In November 2005, two then current shareholders each filed a
derivative lawsuit, purportedly on behalf of HCA, in the United
States District Court for the Middle District of Tennessee
against our Chairman and Chief Executive Officer, President and
Chief Operating Officer, Executive Vice President and Chief
Financial Officer, other executives, and certain members of our
Board of Directors. Each lawsuit asserts claims for breaches of
fiduciary duty, abuse of control, gross mismanagement, waste of
corporate assets, and unjust enrichment in connection with our
July 13, 2005 announcement of preliminary results of
operations for the quarter ended June 30, 2005 and seeks
monetary damages.
On January 23, 2006, the Court consolidated these actions
as In re HCA Inc. Derivative Litigation, case number
3:05-CV-0968. The court stayed this action on February 27,
2006, pending resolution of a motion to dismiss the consolidated
amended complaint in the related federal securities class action
against us. On March 24, 2006, a consolidated derivative
complaint was filed pursuant to a prior court order. On
November 8, 2006, we reached an agreement in principle for
the settlement of this consolidated action. The proposed
settlement is subject to definitive documentation and court
approval.
Shareholder
Derivative Lawsuit in State Court
On January 18, 2006, a then current shareholder filed a
derivative lawsuit, purportedly on behalf of HCA, in the Circuit
Court for the State of Tennessee (Nashville District), against
our Chairman and Chief Executive Officer, President and Chief
Operating Officer, Executive Vice President and Chief Financial
Officer, other executives, and certain members of our Board of
Directors. This lawsuit is substantially identical in all
material respects to the consolidated federal litigation
described above under Shareholder Derivative Lawsuits in
Federal Court. The Court stayed this action on
April 3, 2006, pending resolution of a motion to dismiss
the consolidated amended complaint in the related federal
securities class action against us. On November 8, 2006, we
reached an agreement in principle for the settlement of this
action. The proposed settlement is subject to definitive
documentation and court approval.
ERISA
Litigation
On November 22, 2005, Brenda Thurman, a former employee of
an HCA affiliate, filed a complaint in the United States
District Court for the Middle District of Tennessee on behalf of
herself, the HCA Savings and Retirement Program (the
Plan), and a class of participants in the Plan who
held an interest in our common stock, against our Chairman and
Chief Executive Officer, President and Chief Operating Officer,
Executive Vice President and Chief Financial Officer, and other
unnamed individuals. The lawsuit, filed under
sections 502(a)(2) and 502(a)(3) of the Employee Retirement
Income Security Act (ERISA), 29 U.S.C.
§§ 1132(a)(2) and (3), alleges that defendants
breached their fiduciary duties owed to the Plan and to plan
participants and seeks monetary damages and injunctions and
other relief.
On January 13, 2006, the court signed an order staying all
proceedings and discovery in this matter, pending resolution of
a motion to dismiss the consolidated amended complaint in the
related federal securities class action against HCA. On
January 18, 2006, the magistrate judge signed an order
(1) consolidating Thurmans cause of action with all
other future actions making the same claims and arising out of
the same operative facts, (2) appointing Thurman as lead
plaintiff, and (3) appointing Thurmans attorneys as
lead counsel and liaison counsel in the case. On
January 26, 2006, the court issued an order reassigning the
case to United States District Court Judge William J.
Haynes, Jr., who has been presiding over the federal
securities class action and federal derivative lawsuits.
Merger
Litigation in State Court
We are aware of six asserted class action lawsuits related to
the Merger filed against us, our Chairman and Chief Executive
Officer, our President and Chief Operating Officer, members of
the Board of Directors and each of
41
the Sponsors in the Chancery Court for Davidson County,
Tennessee. The complaints are substantially similar and allege,
among other things, that the Merger was the product of a flawed
process, that the consideration to be paid to our shareholders
in the Merger was unfair and inadequate, and that there was a
breach of fiduciary duties. The complaints further allege that
the Sponsors abetted the actions of our officers and directors
in breaching their fiduciary duties to our shareholders. The
complaints sought, among other relief, an injunction preventing
completion of the Merger. On August 3, 2006, the Chancery
Court consolidated these actions and all later-filed actions as
In re HCA Inc. Shareholder Litigation, case number
06-1816-III.
On November 8, 2006, we and the other named parties entered
into a memorandum of understanding with plaintiffs counsel
in connection with these actions.
Under the terms of the memorandum, we, the other named parties
and the plaintiffs have agreed to settle the lawsuit subject to
court approval. If the court approves the settlement
contemplated in the memorandum, the lawsuit will be dismissed
with prejudice. We and the other defendants deny all of the
allegations in the lawsuit. Pursuant to the terms of the
memorandum, Hercules Holding agreed to waive that portion in
excess of $220 million of any termination fee that it had a
right to receive under the Merger Agreement. Also, we and the
other parties agreed not to assert that a then current
shareholders demand for appraisal was untimely under
Section 262 of the General Corporation Law of the State of
Delaware (the DGCL) where such shareholder submitted
a written demand for appraisal within 30 calendar days of the
shareholders meeting held to adopt the Merger Agreement. We and
the other parties also agreed not to assert that (i) the
surviving corporation in the Merger or then current shareholder
who was entitled to appraisal rights may not file a petition in
the Court of Chancery of the State of Delaware demanding a
determination of the value of the shares held by all such
shareholders if such petition was not filed within 120 days
of the effective time of the Merger so long as such petition was
filed within 150 days of the effective time, (ii) a
then current shareholder may not withdraw such
shareholders demand for appraisal and accept the terms
offered by the Merger if such withdrawal was not made within
60 days of the effective time of the Merger so long as such
withdrawal was made within 90 days of the effective time of
the Merger and (iii) that a then current shareholder may
not, upon written request, receive from the surviving
corporation a statement setting forth the aggregate number of
shares not voted in favor of the Merger with respect to which
demands for appraisal have been received and the aggregate
number of holders of such shares if such request was not made
within 120 days of the effective time of the Merger so long
as such request was made within 150 days of the effective
time. We and the other parties counsel also agreed to a
payment of attorney fees, as awarded by the court, of up to
$12.4 million. Court approval of the settlement and
attorneys fees is pending.
Two cases making similar allegations and seeking similar relief
on behalf of purported classes of then current shareholders have
also been filed in Delaware. These two actions have also been
consolidated under case number 2307-N and are pending in the
Delaware Chancery Court, New Castle County. We believe this
lawsuit is without merit and plan to defend it vigorously. We
further believe the claims asserted in this lawsuit are subject
to the November 8, 2006 agreement in principle to settle
the Merger litigation and shareholder derivative lawsuits.
On October 23, 2006, the Foundation for Seacoast Health
filed a lawsuit against us and one of our affiliates, HCA Health
Services of New Hampshire, Inc., in the Superior Court of
Rockingham County, New Hampshire. Among other things, the
complaint seeks to enforce certain provisions of an asset
purchase agreement between the parties, including a purported
right of first refusal to purchase a New Hampshire hospital,
that allegedly were triggered by the Merger and other prior
events. The Foundation initially sought to enjoin the Merger.
However, the parties reached an agreement that allowed the
Merger to proceed, while preserving the plaintiffs
opportunity to litigate whether the Merger triggered the right
of first refusal to purchase the hospital and, if so, at what
price the hospital could be repurchased. On May 25, 2007,
the court granted HCAs motion for summary judgment
disposing of the Foundations central claims. The
Foundation has filed an appeal from the final judgment.
General
Liability and Other Claims
On April 10, 2006, a class action complaint was filed
against us in the District Court of Kansas alleging, among other
matters, nurse understaffing at all of our hospitals, certain
consumer protection act violations, negligence and unjust
enrichment. The complaint is seeking, among other relief,
declaratory relief and monetary damages, including disgorgement
of profits of $12.250 billion. A motion to dismiss this
action was granted on July 27, 2006,
42
but the plaintiffs have appealed this dismissal. We believe this
lawsuit is without merit and plan to defend it vigorously.
We are a party to certain proceedings relating to claims for
income taxes and related interest in the United States Tax Court
and the United States Court of Federal Claims. For a description
of those proceedings, see Item 2, Managements
Discussion and Analysis of Financial Condition and Results of
Operations Pending IRS Disputes and
Note 3 to our condensed consolidated financial statements.
We are also subject to claims and suits arising in the ordinary
course of business, including claims for personal injuries or
for wrongful restriction of, or interference with,
physicians staff privileges. In certain of these actions
the claimants have asked for punitive damages against us, which
may not be covered by insurance. In the opinion of management,
the ultimate resolution of these pending claims and legal
proceedings will not have a material, adverse effect on our
results of operations or financial position.
Reference is made to the factors set forth under the caption
Forward-Looking Statements in Part I,
Item 2 of this
Form 10-Q
and other risk factors described in our Annual Report on
Form 10-K,
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
other than as set forth below.
Changes
In Governmental Interpretations May Negatively Impact Our
Ability To Obtain Reimbursement Of Medicare Bad Debts.
The Medicare program will reimburse 70% of bad debts related to
deductibles and coinsurance for patients with Medicare coverage,
after the provider has made a reasonable effort to collect these
amounts. On March 30, 2006, the United States District
Court for the Western District of Michigan entered a final order
in Battle Creek Health System v. Thompson, which provided
that reasonable collection efforts have not been satisfied as
long as the Medicare accounts remained with an external
collection agency. The case was appealed to the United States
Court of Appeals for the Sixth Circuit. A decision adverse to
Battle Creek was issued on August 14, 2007. We utilize
extensive in-house and external collection efforts for our
accounts receivable, including deductible and coinsurance
amounts owed by patients with Medicare coverage. We utilize a
secondary collection agency after in-house and primary
collection agency efforts have been unsuccessful. We have
modified our accounts receivable collection processes to provide
us with reasonable collection results and comply with CMSs
interpretation of reasonable collection efforts. Possible future
changes in judicial and administrative interpretations of laws
and regulations governing Medicare could disrupt our collections
processes, increase our costs or otherwise adversely affect our
business and results of operations.
Changes
In Governmental Programs May Reduce Our Revenues.
A significant portion of our patient volumes is derived from
government health care programs, principally Medicare and
Medicaid, which are highly regulated and subject to frequent and
substantial changes. We derived approximately 58% of our
admissions from the Medicare and Medicaid programs in 2006. In
recent years, legislative and regulatory changes have resulted
in limitations on and, in some cases, reductions in levels of
payments to health care providers for certain services under
these government programs. Possible future changes in the
Medicare, Medicaid, and other state programs, including Medicaid
supplement payments pursuant to UPL programs, may impact
reimbursements to health care providers and insurers. Such
changes may also increase our operating costs, which could
reduce our profitability.
Effective January 1, 2007, as a result of the federal
Deficit Reduction Act of 2005 (DRA 2005),
reimbursements for ambulatory surgery center (ASC)
overhead costs are limited to no more than the overhead costs
paid to hospital outpatient departments under the Medicare
hospital outpatient prospective payment system for the same
procedure. On August 2, 2007, CMS issued final regulations
that change payment for procedures performed in an ASC,
effective January 1, 2008. Under this rule, ASC payment
groups will increase from the current nine clinically disparate
payment groups to the 221 Ambulatory Procedure Classification
groups (APCs) used under the outpatient prospective
payment system for these surgical services. CMS estimates that
the rates for procedures performed in an ASC setting will equal
65% of the corresponding rates paid for the same procedures
performed in an outpatient hospital setting. Moreover, if CMS
determines that a procedure is commonly performed in a
43
physicians office, the ASC reimbursement for that
procedure will be limited to the reimbursement allowable under
the Medicare Part B Physician Fee Schedule. In addition,
all surgical procedures, other than those that pose a
significant safety risk or generally require an overnight stay,
will be payable as ASC procedures. This will expand the number
of procedures that Medicare will pay for if performed in an ASC.
Because the new payment system will have a significant impact on
payments for certain procedures, the final rule establishes a
four-year transition period for implementing the revised payment
rates. More Medicare procedures that are now performed in
hospitals, such as ours, may be moved to ASCs reducing surgical
volume in our hospitals. Also, more Medicare procedures that are
now performed in ASCs, such as ours, may be moved to
physicians offices. Commercial third-party payers may
adopt similar policies.
On August 1, 2007, CMS announced a final rule for federal
fiscal year 2008 for the hospital inpatient prospective payment
system. This rule adopts a two-year implementation of Medicare
Severity Diagnosis-Related Groups (MS-DRGs), a
severity-adjusted diagnosis-related group system. This change
represents a refinement to the existing diagnosis-related group
(DRG) system, making its impact on revenue difficult
to predict. Realignments in the DRG system could impact the
margins we receive for certain services. This rule provides for
a 3.3% market basket update for hospitals that submit certain
quality patient care indicators and a 1.3% update for hospitals
that do not submit this data. While we will endeavor to comply
with all data submission requirements, our submissions may not
be deemed timely or sufficient to entitle us to the full market
basket adjustment for all of our hospitals. Medicare payments to
hospitals in federal fiscal year 2008 will be reduced by 0.6% to
eliminate what CMS estimates will be the effect of coding or
classification changes as a result of hospitals implementing the
MS-DRG system. This documentation and coding
adjustment will increase to 0.9% for federal fiscal year
2009. For federal fiscal year 2010 and subsequent years, in the
process of rate setting, CMS will be able to evaluate actual
claims data from experience with the MS-DRG system. This
evaluation of changes in case-mix based on actual claims data
may yield a higher documentation and coding adjustment thereby
potentially reducing our revenues and impacting our results of
operations in ways that cannot be quantified at this time.
Additionally, Medicare payments to hospitals are subject to a
number of other adjustments, and the actual impact on payments
to specific hospitals may vary. In some cases, commercial
third-party payers rely on all or portions of the Medicare DRG
system to determine payment rates. The change from traditional
Medicare DRGs to MS-DRGs could adversely impact those rates if
commercial third-party payers adopt MS-DRGs.
Hospital operating margins have been, and may continue to be,
under pressure because of deterioration in pricing flexibility
and payer mix, and growth in operating expenses in excess of the
increase in prospective payment system payments under the
Medicare program.
Since states must operate with balanced budgets and since the
Medicaid program is often the states largest program,
states can be expected to adopt or consider adopting legislation
designed to reduce their Medicaid expenditures. DRA 2005
includes Medicaid cuts of approximately $4.8 billion over
five years. On May 29, 2007, CMS published a final rule
entitled Medicaid Program; Cost Limit for Providers
Operated by Units of Government and Provisions to Ensure the
Integrity of Federal-State Financial Partnership. A
moratorium was placed on this rule, delaying its implementation
until 2008. However, when the moratorium expires next year, this
final rule could significantly impact state Medicaid programs.
In its proposed form, this rule was expected to reduce federal
Medicaid funding by $12.2 billion over five years. As a
result of the moratorium on implementing the final rule, the
impact of the final rule has not been quantified. States have
also adopted, or are considering, legislation designed to reduce
coverage and program eligibility, enroll Medicaid recipients in
managed care programs
and/or
impose additional taxes on hospitals to help finance or expand
the states Medicaid systems. Future legislation or other
changes in the administration or interpretation of government
health programs could have a material, adverse effect on our
financial position and results of operations.
We May Be
Subject To Liabilities From Claims By The IRS.
We are currently contesting certain claimed deficiencies and
adjustments proposed by the Internal Revenue Service (the
IRS) in connection with its examinations of prior
year federal income tax returns for HCA and certain affiliates
that are treated as partnerships for federal income tax purposes
(affiliated partnerships). The disputed items
include the deductibility of a portion of the 2001 and 2003
government settlement payments, the timing of recognition of
certain patient service revenues in 2001 through 2004, the
method for calculating the tax allowance for doubtful accounts
in 2002 through 2004, and the amount of insurance expense
deducted in 2001 and 2002. See
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Managements Discussion and Analysis of Financial
Condition and Results of Operations Pending IRS
Disputes.
Through September 30, 2007, the IRS is seeking an
additional $1.4 billion in federal income taxes, interest
and penalties with respect to these issues. These amounts are
net of a refundable deposit of $215 million that we made in
2006. The IRS has not determined the final amount of additional
income tax, interest and penalties that it may claim upon
completion of current or future examinations.
We believe that HCA and the affiliated partnerships properly
reported taxable income in accordance with applicable laws and
agreements established with the IRS and that adequate provisions
have been recorded to satisfy final resolution of the disputed
issues. However, if payments due upon final resolution of these
issues exceed our recorded estimates, such resolutions could
have a material, adverse effect on our results of operations or
financial position.
Item 2: Unregistered
Sales of Equity Securities and Use of Proceeds
During the quarter ended September 30, 2007, HCA issued 14,862
shares of common stock in connection with the exercise of stock
options for aggregate consideration of $189,491. The shares were
issued without registration in reliance on the exemptions
afforded by Section 4(2) of the Securities Act of 1933, as
amended (the Securities Act) and Rule 701
promulgated thereunder.
HCA recently completed exchange offers pursuant to a
registration statement on Form S-4; as disclosed in the
prospectus relating thereto, we did not receive any cash
proceeds from the exchange offers.
(a) List of Exhibits:
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Exhibit 31
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.1
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Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
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Exhibit 31
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.2
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Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
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Exhibit 32
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Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
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Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HCA INC.
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By:
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/s/ R.
Milton Johnson
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R. Milton Johnson
Executive Vice President and
Chief Financial Officer
Date: November 8, 2007
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