HCA Inc.
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, 2006
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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
(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 definitions of accelerated filer and
large accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
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 of the latest practicable
date.
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Class of Common Stock
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Outstanding at September 30, 2006
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Voting common stock, $.01 par
value
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388,679,600 shares
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Nonvoting common stock,
$.01 par value
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21,000,000 shares
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HCA
INC.
Form 10-Q
September 30, 2006
2
HCA
INC.
FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30,
2006 AND 2005
Unaudited
(Dollars in millions, except per share amounts)
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Quarter
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Nine Months
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2006
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2005
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2006
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2005
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Revenues
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$
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6,213
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$
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6,025
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$
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18,988
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$
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18,277
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Salaries and benefits
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2,600
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2,484
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7,816
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7,390
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Supplies
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1,046
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1,009
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3,251
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3,102
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Other operating expenses
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1,037
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1,030
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3,069
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2,983
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Provision for doubtful accounts
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677
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618
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1,950
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1,733
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Gains on investments
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(40
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(21
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(140
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(52
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Equity in earnings of affiliates
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(43
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(44
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(151
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(150
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Depreciation and amortization
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348
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337
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1,045
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1,038
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Interest expense
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200
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160
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582
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489
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Gains on sales of facilities
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(41
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(46
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(29
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Transaction costs
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9
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9
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5,793
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5,573
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17,385
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16,504
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Income before minority interests
and income taxes
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420
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452
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1,603
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1,773
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Minority interests in earnings of
consolidated entities
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44
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43
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145
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132
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Income before income taxes
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376
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409
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1,458
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1,641
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Provision for income taxes
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136
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129
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544
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542
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Net income
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$
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240
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$
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280
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$
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914
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$
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1,099
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Per share data:
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Basic earnings per share
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$
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0.59
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$
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0.63
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$
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2.26
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$
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2.50
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Diluted earnings per share
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$
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0.58
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$
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0.62
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$
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2.23
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$
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2.46
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Cash dividends declared per share
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$
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$
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0.15
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$
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0.34
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$
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0.45
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Shares used in earnings per share
calculations (in thousands):
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Basic
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403,461
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448,654
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403,398
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440,016
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Diluted
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411,151
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454,878
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410,205
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447,500
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See accompanying notes.
3
HCA
INC.
Unaudited
(Dollars in millions)
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September 30,
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December 31,
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2006
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2005
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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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541
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$
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336
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Accounts receivable, less
allowance for doubtful accounts of $3,353 and $2,897
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3,567
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3,332
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Inventories
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659
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616
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Deferred income taxes
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588
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372
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Other
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462
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559
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5,817
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5,215
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Property and equipment, at cost
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21,957
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20,818
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Accumulated depreciation
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(10,248
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(9,439
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11,709
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11,379
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Investments of insurance subsidiary
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2,105
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2,134
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Investments in and advances to
affiliates
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680
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627
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Goodwill
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2,663
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2,626
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Deferred loan costs
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72
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85
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Other
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79
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159
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$
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23,125
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$
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22,225
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LIABILITIES AND
STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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1,268
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$
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1,484
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Accrued salaries
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638
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561
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Other accrued expenses
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1,345
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1,264
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Long-term debt due within one year
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831
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586
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4,082
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3,895
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Long-term debt
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10,512
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9,889
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Professional liability risks
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1,351
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1,336
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Deferred income taxes and other
liabilities
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1,135
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1,414
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Minority interests in equity of
consolidated entities
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919
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828
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Stockholders equity:
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Common stock $.01 par; authorized
1,650,000,000 shares; outstanding 409,679,600 shares
in 2006 and 417,512,700 shares in 2005
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4
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4
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Accumulated other comprehensive
income
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100
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130
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Retained earnings
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5,022
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4,729
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5,126
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4,863
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$
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23,125
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$
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22,225
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See accompanying notes.
4
HCA
INC.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND
2005
Unaudited
(Dollars in millions)
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2006
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2005
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Cash flows from operating
activities:
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Net income
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$
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914
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$
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1,099
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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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1,950
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1,733
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Depreciation and amortization
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1,045
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1,038
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Income taxes
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(399
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)
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158
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Gains on sales of facilities
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(46
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(29
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Changes in operating assets and
liabilities
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(2,250
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(1,521
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Other
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210
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151
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Net cash provided by operating
activities
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1,424
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2,629
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Cash flows from investing
activities:
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Purchase of property and equipment
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(1,330
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(1,048
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Acquisition of hospitals and
health care entities
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(103
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(100
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Disposition of hospitals and
health care entities
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328
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57
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Change in investments
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(122
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)
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(206
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)
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Other
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1
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23
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Net cash used in investing
activities
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(1,226
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(1,274
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Cash flows from financing
activities:
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Issuance of long-term debt
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1,400
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Net change in revolving bank
credit facility
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665
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(700
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Repayment of long-term debt
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(1,222
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(560
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Payment of cash dividends
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(201
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)
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(191
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Repurchases of common stock
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(653
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)
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Issuances of common stock
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97
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947
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Other
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(79
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(159
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)
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Net cash provided by (used in)
financing activities
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7
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(663
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)
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Change in cash and cash equivalents
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205
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692
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Cash and cash equivalents at
beginning of period
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336
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258
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Cash and cash equivalents at end
of period
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$
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541
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$
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950
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Interest payments
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$
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554
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$
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454
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Income tax payments, net of refunds
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$
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935
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$
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384
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See accompanying notes.
5
HCA
INC.
Unaudited
NOTE 1
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, 2006, these
affiliates owned and operated 172 hospitals,
95 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 seven hospitals and nine freestanding surgery centers
which are accounted for using the equity method. The
Companys facilities are located in 21 states, England
and Switzerland. 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 $47 million and $44 million for the
quarters ended September 30, 2006 and 2005, respectively,
and $133 million and $126 million for the nine months
ended September 30, 2006 and 2005, respectively. Operating
results for the quarter and nine months ended September 30,
2006 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2006. 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, 2005.
Certain prior year amounts have been reclassified to conform to
the current year presentation.
Professional
Liability Insurance Claims
A substantial portion of our professional liability risks is
insured through a wholly-owned insurance subsidiary, which is
funded annually. Reserves for professional liability risks were
$1.621 billion at September 30, 2006 and
December 31, 2005. The current portion of the reserves,
$270 million and $285 million at September 30,
2006 and December 31, 2005, respectively, is included in
other accrued expenses in the condensed consolidated
balance sheet. Provisions for losses related to professional
liability risks were $81 million and $95 million for
the quarters ended September 30, 2006 and 2005,
respectively, and $178 million and $256 million for
the nine months ended September 30, 2006 and 2005,
respectively, and are included in other operating
expenses in the condensed consolidated income statement.
We recognized a reduction in our estimated professional
liability reserves of $85 million pretax, or $0.13 per
diluted share, during the nine months ended September 30,
2006. Results for the nine months ended September 30, 2005
included a reduction in our estimated professional liability
reserves of $36 million pretax, or $0.05 per diluted
share. The malpractice reserve reductions in 2006 and 2005
reflect the recognition by our external actuaries of improving
frequency and severity claim trends. This declining frequency
and moderating severity can be primarily attributed to tort
reforms enacted in key states, particularly Texas, and our risk
management and patient safety initiatives, particularly in the
areas of obstetrics and emergency services.
Recent
Pronouncements
In July 2006, the Financial Accounting Standards Board
(FASB) issued the final 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
6
HCA
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 1
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INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
Recent
Pronouncements (continued)
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 disclosures will be
required at each annual reporting period unless a significant
change occurs in an interim period. FIN 48 is effective for
fiscal years beginning after December 15, 2006. Differences
between the amounts recognized in the statements of financial
position prior to the adoption of FIN 48 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 FIN 48.
During September 2006, the FASB issued Statement No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106 and 132(R)
(SFAS 158). SFAS 158 represents the
completion of the first phase in the FASBs postretirement
benefits accounting project and requires an entity to: recognize
in its balance sheet an asset for a defined benefit
postretirement plans overfunded status or a liability for
a plans underfunded status; measure a defined benefit
postretirement plans assets and obligations that determine
its funded status as of the end of the employers fiscal
year; and recognize changes in the funded status of a defined
benefit postretirement plan in comprehensive income in the year
in which the changes occur. SFAS 158 does not change the
amount of net periodic benefit cost included in net income. The
requirement to recognize the funded status of a defined benefit
postretirement plan and the disclosure requirements are
effective for fiscal years ending after December 15, 2006,
for public entities. We do not expect the adoption of
SFAS 158 to have a material effect on our financial
position.
NOTE 2
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 (SFAS 123), for all awards
granted to employees prior to January 1, 2006 that remain
unvested on the effective date. Prior to January 1, 2006,
we applied Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25) and related interpretations in
accounting for our employee stock benefit plans. Accordingly, no
compensation cost was recognized for stock options granted under
the plans because the exercise prices for options granted were
equal to the quoted market prices on the option grant dates and
all option grants were to employees or directors. Results for
prior periods have not been restated.
As a result of adopting SFAS 123(R), income before taxes
for the quarter and nine months ended September 30, 2006
was lower by $11 million and $29 million, respectively
($8 million and $23 million, respectively, after tax),
or $0.02 and $0.06, respectively, per diluted share, than if we
had continued to account for share-based compensation under
APB 25. SFAS 123(R) requires that the benefits of tax
deductions in excess of amounts recognized as compensation cost
be reported as a financing cash flow, rather than an operating
cash flow, as required under prior accounting guidance. Tax
deductions in excess of amounts recognized as compensation cost
of $2 million and $9 million, respectively, were
reported as financing cash flows in the quarter and nine months
ended September 30, 2006 compared to $4 million and
$159 million, respectively, being reported as operating
cash flows for the quarter and nine months ended
September 30, 2005.
7
HCA
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 2
|
SHARE-BASED
COMPENSATION (continued)
|
For periods prior to the adoption of SFAS 123(R),
SFAS 123 required us to determine pro forma net income and
earnings per share as if compensation cost for our employee
stock option and stock purchase plans had been determined based
upon fair values at the grant dates. These pro forma amounts for
the quarter and nine months ended September 30, 2005 are as
follows (dollars in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Third
|
|
|
Nine
|
|
|
|
Quarter
|
|
|
Months
|
|
|
|
2005
|
|
|
2005
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
280
|
|
|
$
|
1,099
|
|
Share-based employee compensation
expense determined under a fair value method, net of income taxes
|
|
|
5
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
275
|
|
|
$
|
1,085
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
0.63
|
|
|
$
|
2.50
|
|
Pro forma
|
|
$
|
0.61
|
|
|
$
|
2.47
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
0.62
|
|
|
$
|
2.46
|
|
Pro forma
|
|
$
|
0.60
|
|
|
$
|
2.42
|
|
As of January 1, 2006, we had the following share-based
compensation plans:
HCA 2005
Equity Incentive Plan
In May 2005, our stockholders approved the HCA 2005 Equity
Incentive Plan (the 2005 Plan). The 2005 Plan is the
primary plan under which stock options and restricted stock may
be granted to officers, employees and directors. Prior to 2005,
we primarily utilized stock option grants for equity
compensation purposes. During 2005, an increasing equity
compensation emphasis was placed on restricted share grants. The
restricted shares granted in 2005 are subject to back-end
vesting provisions, with no shares vesting in the first two
years after grant and then a third of the shares vesting in each
of the third, fourth and fifth years. The restricted shares
granted in 2006 vest in equal annual increments over a five-year
period. During the quarters ended September 30, 2006 and
2005, we recognized $15 million and $9 million,
respectively, and during the nine months ended
September 30, 2006 and 2005, we recognized $40 million
and $22 million, respectively, of compensation costs
related to restricted share grants. The number of options or
shares authorized under the 2005 Plan is 34,000,000 (which
includes 14,000,000 shares authorized under a former plan).
In addition, options granted under certain former plans that are
cancelled become available for subsequent grants. Exercise
provisions vary, but options are generally exercisable, in whole
or in part, beginning one to four years after the grant date and
ending ten years after the grant date. As of September 30,
2006, there were 28,203,000 shares available for future
grants under the 2005 Plan. Options to purchase common stock
have also been granted to officers, employees and directors
under various predecessor plans. Options granted have exercise
prices no less than the market price on the date of grant.
Dividends are not paid on unexercised stock options, but are
generally paid on unvested restricted shares.
The fair value of each option award was estimated on the grant
date, using the Black-Scholes option valuation model with the
weighted average assumptions indicated in the following table.
Generally, awards are subject to graded vesting. Each grant is
valued as a single award with an expected term equal to the
average expected term of the component vesting tranches. We use
historical option exercise behavior data and other factors to
estimate the expected term of the options. The expected term of
the option is limited by the contractual term, and employee
post-vesting termination behavior is incorporated in the
historical option exercise behavior data. Compensation cost is
recognized on the straight-line attribution method. The
straight-line attribution method requires that compensation
expense is recognized at least equal to the portion of the
grant-date fair value that is vested at that date. The expected
8
HCA
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 2
|
SHARE-BASED
COMPENSATION (continued)
|
HCA
2005 Equity Incentive Plan (continued)
volatility is derived using weekly, historical data for periods
preceding the date of grant. The risk-free interest rate is the
approximate yield on United States Treasury Strips having a life
equal to the expected option life on the date of grant. The
expected life is an estimate of the number of years an option
will be held before it is exercised. The valuation model was not
adjusted for nontransferability, risk of forfeiture or the
vesting restrictions of the options, all of which would reduce
the value if factored into the calculation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Risk-free interest rate
|
|
|
4.79
|
%
|
|
|
4.02
|
%
|
|
|
4.73
|
%
|
|
|
3.87
|
%
|
Expected volatility
|
|
|
27
|
%
|
|
|
33
|
%
|
|
|
28
|
%
|
|
|
33
|
%
|
Expected life, in years
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
Expected dividend yield
|
|
|
1.48
|
%
|
|
|
1.22
|
%
|
|
|
1.42
|
%
|
|
|
1.30
|
%
|
Information regarding stock option activity for the first nine
months of 2006 is summarized below (share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Stock
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Options outstanding,
December 31, 2005
|
|
|
27,806
|
|
|
$
|
36.35
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,968
|
|
|
|
48.13
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,690
|
)
|
|
|
34.70
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(211
|
)
|
|
|
38.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding,
September 30, 2006
|
|
|
27,873
|
|
|
|
37.27
|
|
|
|
5.4
|
|
|
$
|
352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable,
September 30, 2006
|
|
|
23,880
|
|
|
|
35.43
|
|
|
|
4.7
|
|
|
$
|
345
|
|
The weighted average fair values of stock options granted during
the quarters ended September 30, 2006 and 2005 were $14.04
and $15.72 per share, respectively. The weighed average
fair values of stock options granted during the nine months
ended September 30, 2006 and 2005 were $13.82 and
$15.68 per share, respectively. The total intrinsic value
of stock options exercised in the nine months ended
September 30, 2006 was $22 million.
A summary of the status of our unvested restricted shares as of
September 30, 2006 and changes during the first nine months
of 2006 follows (share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Weighted Average
|
|
|
|
of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Restricted shares,
December 31, 2005
|
|
|
3,748
|
|
|
$
|
43.42
|
|
Granted
|
|
|
2,979
|
|
|
|
49.11
|
|
Vested
|
|
|
(480
|
)
|
|
|
41.27
|
|
Cancelled
|
|
|
(222
|
)
|
|
|
45.93
|
|
|
|
|
|
|
|
|
|
|
Restricted shares,
September 30, 2006
|
|
|
6,025
|
|
|
|
46.31
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006, there was $195 million in
unrecognized compensation costs related to unvested restricted
shares. This cost is expected to be recognized over a weighted
average period of approximately 3.6 years. As of
September 30, 2006, there was $40 million of
unrecognized compensation costs related to unvested stock
options. These costs are expected to be recognized over a
weighted average period of approximately 2.5 years. During
the quarter and nine months ended September 30, 2006,
17,800 and 876,200, respectively, stock options
9
HCA
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 2
|
SHARE-BASED
COMPENSATION (continued)
|
HCA
2005 Equity Incentive Plan (continued)
vested. These stock options had aggregate fair values of $190
thousand and $12 million, respectively, for the quarter and
nine months ended September 30, 2006. If the Merger (see
Note 11 Merger Agreement) is consummated, all
unvested stock options and restricted shares will become vested
and all related unrecognized compensation costs will be
recognized during the period in which the transaction is
consummated.
In December 2004, we accelerated the vesting of all unvested
stock options awarded to employees and officers which had
exercise prices greater than the closing price at
December 14, 2004 of $40.89 per share. Options to
purchase approximately 19.1 million shares became
exercisable immediately as a result of the vesting acceleration.
The decision to accelerate vesting of the identified stock
options will result in us not being required to recognize
share-based compensation expense, net of taxes, of approximately
$36 million in 2006, $19 million in 2007, and
$2 million in 2008. The elimination of the requirement to
recognize compensation expense in future periods related to the
unvested stock options was managements basis for the
decision to accelerate the vesting.
Employee
Stock Purchase Plan (ESPP)
Our ESPP provides an opportunity to purchase shares of HCA
common stock at a discount (through payroll deductions over
six-month periods) to substantially all employees. During the
nine months ended September 30, 2006, ESPP purchases of
931,000 shares were made. At September 30, 2006,
3,969,200 shares of common stock were reserved for purchase
under the ESPP provisions. The fair value of the right to
purchase ESPP shares was estimated using a valuation model with
the weighted average assumptions indicated in the following
table.
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
2006
|
|
|
2005
|
|
|
Risk-free interest rate
|
|
|
4.37
|
%
|
|
|
2.51
|
%
|
Expected volatility
|
|
|
14
|
%
|
|
|
25
|
%
|
Expected life, in years
|
|
|
0.50
|
|
|
|
0.50
|
|
Expected dividend yield
|
|
|
1.46
|
%
|
|
|
1.21
|
%
|
Grant date fair value
|
|
$
|
10.02
|
|
|
$
|
8.81
|
|
Management
Stock Purchase Plan (MSPP)
The MSPP allows eligible employees to defer an elected
percentage (not to exceed 25%) of their base salaries through
the purchase of restricted stock at a 25% discount from the
average market price. Purchases of restricted shares are made
twice a year and the shares vest after three years. During the
quarter and nine months ended September 30, 2006,
respectively, MSPP purchases of 89,900 shares and
156,600 shares were made at weighted average purchase date
discounted (25% discount) fair values of $34.56 per share
and $35.77 per share, respectively. There are
1,627,600 shares available for future purchases under this
plan.
NOTE 3
INCOME TAXES
We are currently contesting before the Appeals Division of the
Internal Revenue Service (the IRS), the United
States Tax Court (the Tax Court), and the United
States Court of Federal Claims, certain claimed deficiencies and
adjustments proposed by the IRS in conjunction with its
examinations of HCAs 1994 through 2002 federal income tax
returns, Columbia Healthcare Corporations
(CHC) 1993 and 1994 federal income tax returns,
HCA-Hospital Corporation of Americas (Hospital
Corporation of America) 1991 through 1993 federal income
tax returns and Healthtrust, Inc. The Hospital
Companys (Healthtrust) 1990 through 1994
federal income tax returns.
During the third quarter of 2005, we recorded a tax benefit of
$22 million, or $0.05 per diluted share, related to
the repatriation of accumulated earnings from our international
subsidiaries.
10
HCA
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 3
|
INCOME
TAXES (continued)
|
During the second quarter 2005, HCA recorded an income tax
benefit of $48 million, or $0.11 per diluted share,
related to a partial settlement reached with the IRS Appeals
Division regarding the amount of gain or loss recognized on the
divestiture of certain noncore business units.
During 2003, the United States Court of Appeals for the Sixth
Circuit affirmed a 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. HCA filed
a petition for review by the United States Supreme Court, which
was denied in October 2004. 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. In December 2004, HCA
made a deposit of $109 million for additional tax and
interest, based on its estimate of amounts due for taxable
periods through 1996.
Other disputed items include the deductibility of a portion of
the 2001 government settlement payment, the timing of
recognition of certain patient service revenues in 2000 through
2004, the method for calculating the tax allowance for
uncollectible accounts in 2002, and the amount of insurance
expense deducted in 1999 through 2002. The IRS is seeking an
additional $662 million in income taxes, interest and
penalties, through September 30, 2006, with respect to
these issues. This amount is net of a refundable tax deposit of
$177 million, and related interest, made by HCA during the
first quarter of 2006.
During 2006, the IRS began an examination of HCAs 2003 and
2004 federal income tax returns. The IRS has not determined the
amount of any additional income tax, interest and penalties that
it may claim upon completion of this examination.
Management believes that adequate provisions have been recorded
to satisfy final resolution of the disputed issues. Management
believes that HCA, CHC, Hospital Corporation of America and
Healthtrust properly reported taxable income and paid taxes in
accordance with applicable laws and agreements established with
the IRS during previous examinations and that final resolution
of these disputes will not have a material adverse effect on
results of operations or financial position.
NOTE 4
EARNINGS PER SHARE
We compute basic earnings per share using the weighted average
number of common shares outstanding. We compute diluted earnings
per share using the weighted average number of common shares
outstanding, plus the dilutive effect of outstanding stock
options and other stock awards, computed using the treasury
stock method.
The following table sets forth the computation of basic and
diluted earnings per share for the quarters and nine months
ended September 30, 2006 and 2005 (dollars in millions,
except per share amounts, and shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Net income
|
|
$
|
240
|
|
|
$
|
280
|
|
|
$
|
914
|
|
|
$
|
1,099
|
|
Weighted average common shares
outstanding
|
|
|
403,461
|
|
|
|
448,654
|
|
|
|
403,398
|
|
|
|
440,016
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
6,009
|
|
|
|
4,927
|
|
|
|
5,378
|
|
|
|
6,187
|
|
Other
|
|
|
1,681
|
|
|
|
1,297
|
|
|
|
1,429
|
|
|
|
1,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used for diluted earnings
per share
|
|
|
411,151
|
|
|
|
454,878
|
|
|
|
410,205
|
|
|
|
447,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.59
|
|
|
$
|
0.63
|
|
|
$
|
2.26
|
|
|
$
|
2.50
|
|
Diluted earnings per share
|
|
$
|
0.58
|
|
|
$
|
0.62
|
|
|
$
|
2.23
|
|
|
$
|
2.46
|
|
11
HCA
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 5
|
INVESTMENTS OF INSURANCE SUBSIDIARY
|
A summary of the insurance subsidiarys investments at
September 30, 2006 and December 31, 2005 follows
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Amortized
|
|
|
Amounts
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government
|
|
$
|
229
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
229
|
|
States and municipalities
|
|
|
1,133
|
|
|
|
26
|
|
|
|
(2
|
)
|
|
|
1,157
|
|
Asset-backed securities
|
|
|
57
|
|
|
|
4
|
|
|
|
|
|
|
|
61
|
|
Corporate and other
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Money market funds
|
|
|
359
|
|
|
|
|
|
|
|
|
|
|
|
359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,787
|
|
|
|
30
|
|
|
|
(2
|
)
|
|
|
1,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stocks
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Common stocks
|
|
|
562
|
|
|
|
80
|
|
|
|
(3
|
)
|
|
|
639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
572
|
|
|
|
80
|
|
|
|
(3
|
)
|
|
|
649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,359
|
|
|
$
|
110
|
|
|
$
|
(5
|
)
|
|
|
2,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount classified as current asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment carrying value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Amortized
|
|
|
Amounts
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and municipalities
|
|
$
|
1,199
|
|
|
$
|
27
|
|
|
$
|
(5
|
)
|
|
$
|
1,221
|
|
Asset-backed securities
|
|
|
41
|
|
|
|
4
|
|
|
|
|
|
|
|
45
|
|
Corporate and other
|
|
|
22
|
|
|
|
1
|
|
|
|
|
|
|
|
23
|
|
Money market funds
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,392
|
|
|
|
32
|
|
|
|
(5
|
)
|
|
|
1,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stocks
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Common stocks
|
|
|
798
|
|
|
|
161
|
|
|
|
(4
|
)
|
|
|
955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
808
|
|
|
|
161
|
|
|
|
(4
|
)
|
|
|
965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,200
|
|
|
$
|
193
|
|
|
$
|
(9
|
)
|
|
|
2,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount classified as current asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment carrying value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2006 and December 31, 2005, 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. The aggregate common stock investment is comprised of
451 equity positions at September 30, 2006, with 415
positions reflecting
12
HCA
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 5
|
INVESTMENTS
OF INSURANCE SUBSIDIARY (continued)
|
unrealized gains and 36 positions reflecting unrealized losses
(none of the individual unrealized loss positions exceed
$1 million). None of the equity positions with unrealized
losses at September 30, 2006 represent situations where
there is a continuous decline of more than 20% from cost for
more than one year. The equity positions (including those with
unrealized losses) at September 30, 2006 are not
concentrated in any particular industries.
NOTE 6
LONG-TERM DEBT
Our revolving credit facility (the Credit Facility)
is a $1.75 billion agreement that expires November 2009. At
September 30, 2006, we had $557 million available
under the Credit Facility. At September 30, 2006, interest
was payable generally at either a spread to LIBOR, plus 0.4% to
1.0% (depending on HCAs credit ratings), the prime lending
rate or a competitive bid rate. The Credit Facility contains
customary covenants which include (i) a limitation on debt
levels, (ii) a limitation on sales of assets, mergers and
changes of ownership and (iii) maintenance of minimum
interest coverage ratios. As of September 30, 2006, we were
in compliance with all such covenants.
NOTE 7
CONTINGENCIES
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 and 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 cannot predict the
results of these lawsuits, or the effect that findings in such
lawsuits may have on us.
General
Liability Claims
We are subject to claims and suits arising in the ordinary
course of business, including claims for personal injury 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 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.
Government
Investigation, 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.
In September 2005, we received a subpoena from the Office of the
United States Attorney for the Southern District of New York
seeking the production of documents. Also in September 2005, we
were informed that the SEC had issued a formal order of
investigation. Both the subpoena and formal order of
investigation relate to trading in our securities. We are
cooperating fully with these investigations.
13
HCA
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 8
COMPREHENSIVE INCOME
The components of comprehensive income, net of related taxes,
for the quarters and nine months ended September 30, 2006
and 2005 are as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Net income
|
|
$
|
240
|
|
|
$
|
280
|
|
|
$
|
914
|
|
|
$
|
1,099
|
|
Change in unrealized net gains on
available-for-sale
securities
|
|
|
10
|
|
|
|
(3
|
)
|
|
|
(51
|
)
|
|
|
(40
|
)
|
Currency translation adjustments
|
|
|
2
|
|
|
|
(4
|
)
|
|
|
21
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
252
|
|
|
$
|
273
|
|
|
$
|
884
|
|
|
$
|
1,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive income, net of
related taxes, are as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Net unrealized gains on
available-for-sale
securities
|
|
$
|
67
|
|
|
$
|
118
|
|
Currency translation adjustments
|
|
|
51
|
|
|
|
30
|
|
Defined benefit plans
|
|
|
(18
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
income
|
|
$
|
100
|
|
|
$
|
130
|
|
|
|
|
|
|
|
|
|
|
NOTE 9
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, 2006 and 2005, approximately 25% and 27%,
respectively, of our patient revenues related to patients
participating in the Medicare program. During the nine months
ended September 30, 2006 and 2005, approximately 26% and
28%, respectively, of our patient revenues related to patients
participating in the Medicare program.
Effective January 1, 2006, we reorganized our operations
management to create a third operating group, the Central Group,
and created smaller, more focused divisions and markets, along
with market-based service line strategies. Our operations are
structured into three geographically organized groups: the
Eastern Group includes 57 consolidating hospitals located
in the Eastern United States, the Central Group includes 53
consolidating hospitals located in the Central United States and
the Western Group includes 54 consolidating hospitals located in
the Western United States. We also operate eight consolidating
hospitals in England and Switzerland 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, 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
14
HCA
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 9
|
SEGMENT
AND GEOGRAPHIC INFORMATION (continued)
|
amortization, with prior year amounts reclassified to conform to
the 2006 operational structure, are summarized in the following
table (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Group
|
|
$
|
1,326
|
|
|
$
|
1,363
|
|
|
$
|
4,162
|
|
|
$
|
4,153
|
|
Eastern Group
|
|
|
2,081
|
|
|
|
1,986
|
|
|
|
6,465
|
|
|
|
6,143
|
|
Western Group
|
|
|
2,590
|
|
|
|
2,424
|
|
|
|
7,729
|
|
|
|
7,203
|
|
Corporate and other
|
|
|
216
|
|
|
|
252
|
|
|
|
632
|
|
|
|
778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,213
|
|
|
$
|
6,025
|
|
|
$
|
18,988
|
|
|
$
|
18,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Group
|
|
$
|
(1
|
)
|
|
$
|
(2
|
)
|
|
$
|
(4
|
)
|
|
$
|
(5
|
)
|
Eastern Group
|
|
|
|
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Western Group
|
|
|
(41
|
)
|
|
|
(40
|
)
|
|
|
(143
|
)
|
|
|
(152
|
)
|
Corporate and other
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(43
|
)
|
|
$
|
(44
|
)
|
|
$
|
(151
|
)
|
|
$
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted segment EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Group
|
|
$
|
170
|
|
|
$
|
235
|
|
|
$
|
631
|
|
|
$
|
737
|
|
Eastern Group
|
|
|
273
|
|
|
|
292
|
|
|
|
978
|
|
|
|
1,074
|
|
Western Group
|
|
|
489
|
|
|
|
464
|
|
|
|
1,497
|
|
|
|
1,477
|
|
Corporate and other
|
|
|
4
|
|
|
|
(42
|
)
|
|
|
87
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
936
|
|
|
$
|
949
|
|
|
$
|
3,193
|
|
|
$
|
3,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Group
|
|
$
|
74
|
|
|
$
|
77
|
|
|
$
|
232
|
|
|
$
|
234
|
|
Eastern Group
|
|
|
108
|
|
|
|
100
|
|
|
|
322
|
|
|
|
308
|
|
Western Group
|
|
|
121
|
|
|
|
117
|
|
|
|
366
|
|
|
|
362
|
|
Corporate and other
|
|
|
45
|
|
|
|
43
|
|
|
|
125
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
348
|
|
|
$
|
337
|
|
|
$
|
1,045
|
|
|
$
|
1,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted segment EBITDA
|
|
$
|
936
|
|
|
$
|
949
|
|
|
$
|
3,193
|
|
|
$
|
3,271
|
|
Depreciation and amortization
|
|
|
348
|
|
|
|
337
|
|
|
|
1,045
|
|
|
|
1,038
|
|
Interest expense
|
|
|
200
|
|
|
|
160
|
|
|
|
582
|
|
|
|
489
|
|
Gains on sales of facilities
|
|
|
(41
|
)
|
|
|
|
|
|
|
(46
|
)
|
|
|
(29
|
)
|
Transaction costs
|
|
|
9
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests
and income taxes
|
|
$
|
420
|
|
|
$
|
452
|
|
|
$
|
1,603
|
|
|
$
|
1,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 10
ACQUISITIONS AND DIVESTITURES
Effective July 1, 2006, we sold four hospitals (three in
West Virginia and one in Virginia) to LifePoint Hospitals, Inc.
for $256 million. A gain of $32 million pretax, or
$0.05 per diluted share, was recognized in the third
quarter of 2006 related to the sale of the hospital located in
Virginia. Certificates of Need (CONs) are required
for the sale of the three West Virginia hospitals included in
the transaction. Because filings seeking the revocation of the
CONs are pending, we and LifePoint have agreed that under
certain circumstances, LifePoint may require us to
15
HCA
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 10
|
ACQUISITIONS
AND DIVESTITURES (continued)
|
repurchase the three West Virginia hospitals. Generally, those
circumstances require a final and nonappealable order revoking
the CONs or an order requiring LifePoint to divest the hospitals
or cease operations. In the event of such a repurchase, the
repurchase price would be based upon the purchase price and
adjusted for working capital changes, capital expenditures and
other items. Due to the CON appeals and the repurchase
provision, the recognition of the gain related to the three West
Virginia hospitals of approximately $61 million pretax will
be deferred until the CON appeals are resolved. During the third
quarter of 2006, we sold our investment in a hospital joint
venture for $28 million and recognized a pretax gain of
$7 million, or $0.01 per diluted share. The results of
operations of the sold hospitals were not significant to our
consolidated results of operations.
During 2006, we paid $62 million to acquire three hospitals
and $41 million to acquire other health care entities. The
following is a summary of hospitals and other health care
entities acquired during 2006 (dollars in millions):
|
|
|
|
|
|
|
2006
|
|
|
Number of hospitals
|
|
|
3
|
|
Number of licensed beds
|
|
|
433
|
|
Purchase price information:
|
|
|
|
|
Hospitals
|
|
|
|
|
Fair value of assets acquired
|
|
$
|
80
|
|
Liabilities assumed
|
|
|
(18
|
)
|
|
|
|
|
|
Net assets acquired
|
|
|
62
|
|
Other healthcare entities
|
|
|
41
|
|
|
|
|
|
|
Net cash paid for acquisitions
|
|
$
|
103
|
|
|
|
|
|
|
During the nine months ended September 30, 2005, we did not
acquire any hospitals, but paid $100 million for other
health care entities and recognized a previously deferred gain
on the sale of certain medical office buildings of
$29 million, or $0.04 per diluted share.
|
|
NOTE 11
|
MERGER AGREEMENT
|
On July 24, 2006, we entered into an Agreement and Plan of
Merger (the Merger Agreement) with Hercules
Holding II, LLC, a Delaware limited liability company
(Parent), and Hercules Acquisition Corporation, a
Delaware corporation and a wholly-owned subsidiary of Parent
(Merger Sub). Under the terms of the Merger
Agreement, Merger Sub will be merged with and into HCA, with HCA
continuing as the surviving corporation and a wholly-owned
subsidiary of Parent (the Merger). Parent is owned
by a consortium of private investment funds affiliated with Bain
Capital Partners LLC, Kohlberg Kravis Roberts & Co.
L.P., and Merrill Lynch Global Private Equity (collectively, the
Sponsors). We will hold a special meeting on
November 16, 2006, at 11:00 a.m. local time for our
shareholders of record on October 6, 2006 to consider the
Merger.
Entities affiliated with Dr. Thomas F. Frist, Jr. have
agreed and certain members of our senior management team have
agreed in principle (collectively, the Rollover
Shareholders), at the request of the Sponsors, to
contribute a portion of their HCA equity to Parent, or an
affiliate thereof. Our Board of Directors approved the Merger
Agreement on the unanimous recommendation of a Special Committee
comprised entirely of disinterested directors.
At the effective time of the Merger, each outstanding share of
our common stock, other than any shares contributed by the
Rollover Shareholders or shares owned by HCA, Merger Sub or by
any shareholders who are entitled to and who properly exercise
appraisal rights under Delaware law, will be cancelled and
converted into the right to receive $51.00 in cash, without
interest.
16
HCA
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 11
|
MERGER
AGREEMENT (continued)
|
Consummation of the Merger is not subject to a financing
condition, but is subject to various other conditions, including
approval of the Merger by our shareholders and other customary
closing conditions. The parties expect to close the transaction
during the fourth quarter of 2006.
It is anticipated that the funds necessary to consummate the
Merger and related transactions will be funded by new credit
facilities, private
and/or
public offerings of debt securities and equity financing. On
October 6, 2006, we commenced a tender offer for all of our
outstanding 8.850% Medium Term Notes due 2007, 7.000% Notes
due 2007, 7.250% Notes due 2008, 5.250% Notes due 2008
and 5.500% Notes due 2009, in the aggregate principal amount of
$1.36 billion, and it is anticipated that our remaining
public debt, in the principal amount of $7.49 billion, will
remain outstanding.
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, each of our
directors, and each of the Sponsors in the Chancery Court for
Davidson County, Tennessee. The complaints are substantially
similar and allege, among other things, that the Merger is the
product of a flawed process, that the consideration to be paid
to our shareholders in the Merger is unfair and inadequate, and
breach of fiduciary duty. The complaints further allege that the
Sponsors aided and abetted the actions of our officers and
directors in breaching their fiduciary duties to our
shareholders. The complaints seek, 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. Two cases making similar
allegations and seeking similar relief on behalf of a purported
class of shareholders have also been filed in Delaware. These
two actions have also been consolidated and are pending in the
Delaware Chancery Court, New Castle County. On October 23,
2006, an additional lawsuit was filed against us and one of our
affiliates in the Superior Court of Rockingham County, New
Hampshire seeking enforcement of certain provisions of an asset
purchase agreement between the parties that allegedly are
triggered by to the Merger. We believe these lawsuits are
without merit and plan to defend them vigorously. Additional
lawsuits pertaining to the Merger could be filed in the future.
17
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, that 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 occurrence of any event, change or
other circumstances that could give rise to the termination of
the merger agreement; (2) the outcome of any legal
proceedings that have been or may be instituted against us and
others relating to the merger agreement; (3) the inability
to complete the merger due to the failure to obtain shareholder
approval or the failure to satisfy other conditions to
completion of the merger; (4) the failure to obtain the
necessary debt financing arrangements set forth in commitment
letters received in connection with the merger; (5) the
failure of the merger to close for any other reason;
(6) risks that the proposed merger disrupts current plans
and operations and the potential difficulties in employee
retention as a result of the merger; (7) the effect of the
announcement of the merger on our customer relationships,
operating results and business generally; (8) the ability
to recognize the benefits of the merger; (9) the amount of
the costs, fees, expenses and charges related to the merger and
the actual terms of certain financings that will be obtained for
the merger; (10) the impact of the substantial indebtedness
incurred to finance the consummation of the merger,
(11) increases in the amount and risk of collectability of
uninsured accounts, and deductibles and copayment amounts for
insured accounts, (12) the ability to achieve operating and
financial targets, attain expected levels of patient volumes and
control the costs of providing services, (13) possible
changes in the Medicare, Medicaid and other state programs that
may impact reimbursements to health care providers and insurers,
(14) the highly competitive nature of the health care
business, (15) changes in revenue mix and the ability to
enter into and renew managed care provider agreements on
acceptable terms, (16) the efforts of insurers, health care
providers and others to contain health care costs, (17) the
impact of our charity care and uninsured discounting policies,
(18) the outcome of our continuing efforts to monitor,
maintain and comply with appropriate laws, regulations, policies
and procedures and our corporate integrity agreement with the
government, (19) changes in federal, state or local
regulations affecting the health care industry, (20) delays
in receiving payments for services provided, (21) the
ability to attract and retain qualified management and
personnel, including affiliated physicians, nurses and medical
support personnel, (22) the outcome of governmental
investigations by the United States Attorney for the Southern
District of New York and the Securities and Exchange Commission
(the SEC), (23) the outcome of certain class
action and derivative litigation filed with respect to us,
(24) the possible enactment of federal or state health care
reform, (25) the availability and terms of capital to fund
the expansion of our business, (26) the continuing impact
of hurricanes on our facilities, the ability to obtain
recoveries under our insurance policies and the ability to
secure adequate insurance coverage in future periods,
(27) the resolution of the CON appeal with respect to the
three West Virginia hospitals sold to LifePoint,
(28) changes in accounting practices, (29) changes in
general economic conditions, (30) future divestitures which
may result in charges, (31) changes in business strategy or
development plans, (32) the outcome of pending and any
future tax audits, appeals and litigation associated with our
tax positions, (33) potential liabilities and other claims
that may be asserted against us, and (34) other risk
factors described in our Annual Report on
Form 10-K
and other filings with the SEC. As a consequence, current plans,
anticipated actions and future financial position and results of
operations may differ from those expressed in any
forward-looking statements made by us or on our behalf. You are
cautioned not to unduly rely on such forward-looking statements
when evaluating the information presented in this report,
including in Managements Discussion and Analysis of
Financial Condition and Results of Operations.
Third
Quarter 2006 Operations Summary
Net income totaled $240 million, or $0.58 per diluted
share, for the quarter ended September 30, 2006, compared
to $280 million, or $0.62 per diluted share, for the
quarter ended September 30, 2005. Shares used for diluted
earnings per share for the quarter ended September 30, 2006
were 411.2 million shares, compared to 454.9 million
shares for the quarter ended September 30, 2005.
18
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Third
Quarter 2006 Operations Summary (continued)
The third quarter 2006 results include additional compensation
costs of $11 million, or $0.02 per diluted share, due
to the expensing of stock options and employee stock purchase
plan shares associated with the January 1, 2006 adoption of
FASB Statement 123(R), Share-Based Payment,
gains on sales of facilities of $41 million, or
$0.06 per diluted share, and transaction costs related to
the proposed merger of $9 million, or $0.01 per
diluted share. The third quarter 2005 results include costs, net
of estimated recoveries, of $33 million, or $0.05 per
diluted share, as a result of property damage, business
disruption and other costs associated with hurricanes Katrina
and Rita to certain hospitals in Louisiana, Mississippi and
Texas. Third quarter 2005 results also include a tax benefit of
$22 million, or $0.05 per diluted share, from the
repatriation of foreign earnings.
During the third quarter of 2006, same facility equivalent
admissions decreased 0.9% compared to the third quarter of 2005.
Same facility outpatient surgeries decreased 2.8% during the
third quarter of 2006 compared to the third quarter of 2005.
Same facility revenues increased 5.4% and same facility revenue
per equivalent admission increased 6.4% in the third quarter of
2006 compared to the third quarter of 2005.
For the third quarters of 2006 and 2005, the provision for
doubtful accounts was 10.9% and 10.3% of revenues, respectively.
Adjusting for the effect of the uninsured discounts, the
provision for doubtful accounts for the third quarter of 2006
was 14.7% of revenues compared to 13.7% of revenues in the third
quarter of 2005. Our uninsured discount policy, which became
effective January 1, 2005, resulted in the recording of
discounts to the uninsured of $277 million and
$241 million during the third quarters of 2006 and 2005,
respectively. See Supplemental Non-GAAP Disclosures,
Operating Measures Adjusted for the Impact of Discounts for the
Uninsured.
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. On January 1, 2005, we
modified our policies to 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 3.1% from $6.0 billion in the third
quarter of 2005 to $6.2 billion for the third quarter of
2006. The increase in revenues can be attributed to the net
impact of a 6.8% increase in revenue per equivalent admission
and a 3.4% decline in equivalent admissions for the third
quarter of 2006 compared to the third quarter of 2005.
In the third quarter of 2006, consolidated admissions decreased
2.6% and same facility admissions increased 0.1% compared to the
third quarter of 2005. Consolidated outpatient surgeries
decreased 4.6% and same facility outpatient surgeries decreased
2.8% in the third quarter of 2006 compared to the third quarter
of 2005.
19
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Results
of Operations (continued)
|
|
|
Revenue/Volume
Trends (continued)
|
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, 2006 and 2005 are set forth in the following
table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Medicare
|
|
|
35
|
%
|
|
|
37
|
%
|
|
|
37
|
%
|
|
|
38
|
%
|
Managed Medicare
|
|
|
7
|
|
|
|
(a
|
)
|
|
|
6
|
|
|
|
(a
|
)
|
Medicaid
|
|
|
9
|
|
|
|
10
|
|
|
|
9
|
|
|
|
10
|
|
Managed Medicaid
|
|
|
6
|
|
|
|
5
|
|
|
|
6
|
|
|
|
5
|
|
Managed care and other insurers(a)
|
|
|
37
|
|
|
|
42
|
|
|
|
36
|
|
|
|
42
|
|
Uninsured
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Prior to 2006, managed Medicare admissions were classified as
managed care. |
Same facility uninsured admissions increased by 2,257
admissions, or 10.1%, in the third quarter of 2006 compared to
the third quarter of 2005. Same facility uninsured admissions
increased, compared to 2005, 10.5% in the second quarter of 2006
and 13.1% in the first quarter of 2006. The trend of quarterly
same facility uninsured admissions growth during 2005, compared
to 2004, was 3.3% during the first quarter, 5.1% during the
second quarter, 15.0% during the third quarter and 15.3% during
the fourth quarter.
At September 30, 2006, we had 75 hospitals in the states of
Texas and Florida. During the third quarter of 2006, 53.8% of
our admissions and 50.3% of our revenues were generated by these
hospitals. Uninsured admissions in Texas and Florida represented
59.9% of our uninsured admissions during the third quarter of
2006.
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. The recording of
$277 million and $241 million in discounts to the
uninsured during the third quarters of 2006 and 2005,
respectively, lowered the rate of growth in revenue per
equivalent admission for the third quarter of 2006, compared to
the third quarter of 2005. Revenue per equivalent admission
increased 6.8% in the third quarter of 2006 compared to the 2005
third quarter. Adjusting for the effect of the discount policy
for the uninsured, revenue per equivalent admission increased
7.3% for the third quarter of 2006 compared to the third quarter
of 2005. Charity care and discounts to the uninsured totaled
$607 million in the third quarter of 2006, compared to
$539 million in the third quarter of 2005.
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, 2006 and 2005 are set forth
in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Medicare
|
|
|
33
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
36
|
%
|
Managed Medicare
|
|
|
7
|
|
|
|
(a
|
)
|
|
|
6
|
|
|
|
(a
|
)
|
Medicaid
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
7
|
|
Managed Medicaid
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
Managed care and other insurers(a)
|
|
|
45
|
|
|
|
50
|
|
|
|
45
|
|
|
|
49
|
|
Uninsured
|
|
|
6
|
|
|
|
6
|
|
|
|
5
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Prior to 2006, managed Medicare revenues were classified as
managed care. |
20
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Results
of Operations (continued)
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. Legislative changes have resulted in limitations and
even reductions in levels of payments to health care providers
for certain services under these government programs.
21
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, 2006
and 2005 (dollars in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Revenues
|
|
$
|
6,213
|
|
|
|
100.0
|
|
|
$
|
6,025
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
2,600
|
|
|
|
41.8
|
|
|
|
2,484
|
|
|
|
41.2
|
|
Supplies
|
|
|
1,046
|
|
|
|
16.8
|
|
|
|
1,009
|
|
|
|
16.8
|
|
Other operating expenses
|
|
|
1,037
|
|
|
|
16.8
|
|
|
|
1,030
|
|
|
|
17.1
|
|
Provision for doubtful accounts
|
|
|
677
|
|
|
|
10.9
|
|
|
|
618
|
|
|
|
10.3
|
|
Gains on investments
|
|
|
(40
|
)
|
|
|
(0.7
|
)
|
|
|
(21
|
)
|
|
|
(0.4
|
)
|
Equity in earnings of affiliates
|
|
|
(43
|
)
|
|
|
(0.7
|
)
|
|
|
(44
|
)
|
|
|
(0.7
|
)
|
Depreciation and amortization
|
|
|
348
|
|
|
|
5.6
|
|
|
|
337
|
|
|
|
5.5
|
|
Interest expense
|
|
|
200
|
|
|
|
3.2
|
|
|
|
160
|
|
|
|
2.7
|
|
Gains on sales of facilities
|
|
|
(41
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
Transaction costs
|
|
|
9
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,793
|
|
|
|
93.2
|
|
|
|
5,573
|
|
|
|
92.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests
and income taxes
|
|
|
420
|
|
|
|
6.8
|
|
|
|
452
|
|
|
|
7.5
|
|
Minority interests in earnings of
consolidated entities
|
|
|
44
|
|
|
|
0.7
|
|
|
|
43
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
376
|
|
|
|
6.1
|
|
|
|
409
|
|
|
|
6.8
|
|
Provision for income taxes
|
|
|
136
|
|
|
|
2.2
|
|
|
|
129
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
240
|
|
|
|
3.9
|
|
|
$
|
280
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.59
|
|
|
|
|
|
|
$
|
0.63
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.58
|
|
|
|
|
|
|
$
|
0.62
|
|
|
|
|
|
% changes from prior year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
3.1
|
%
|
|
|
|
|
|
|
4.0
|
%
|
|
|
|
|
Income before income taxes
|
|
|
(7.8
|
)
|
|
|
|
|
|
|
11.2
|
|
|
|
|
|
Net income
|
|
|
(14.6
|
)
|
|
|
|
|
|
|
23.3
|
|
|
|
|
|
Basic earnings per share
|
|
|
(6.3
|
)
|
|
|
|
|
|
|
34.0
|
|
|
|
|
|
Diluted earnings per share
|
|
|
(6.5
|
)
|
|
|
|
|
|
|
31.9
|
|
|
|
|
|
Admissions(a)
|
|
|
(2.6
|
)
|
|
|
|
|
|
|
(1.4
|
)
|
|
|
|
|
Equivalent admissions(b)
|
|
|
(3.4
|
)
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
Revenue per equivalent admission
|
|
|
6.8
|
|
|
|
|
|
|
|
3.3
|
|
|
|
|
|
Same facility % changes from prior
year(c):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
5.4
|
|
|
|
|
|
|
|
4.6
|
|
|
|
|
|
Admissions(a)
|
|
|
0.1
|
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
|
|
Equivalent admissions(b)
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
1.1
|
|
|
|
|
|
Revenue per equivalent admission
|
|
|
6.4
|
|
|
|
|
|
|
|
3.4
|
|
|
|
|
|
22
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Results
of Operations (continued)
|
|
|
Operating
Results Summary (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Revenues
|
|
$
|
18,988
|
|
|
|
100.0
|
|
|
$
|
18,277
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
7,816
|
|
|
|
41.2
|
|
|
|
7,390
|
|
|
|
40.4
|
|
Supplies
|
|
|
3,251
|
|
|
|
17.1
|
|
|
|
3,102
|
|
|
|
17.0
|
|
Other operating expenses
|
|
|
3,069
|
|
|
|
16.1
|
|
|
|
2,983
|
|
|
|
16.3
|
|
Provision for doubtful accounts
|
|
|
1,950
|
|
|
|
10.3
|
|
|
|
1,733
|
|
|
|
9.5
|
|
Gains on investments
|
|
|
(140
|
)
|
|
|
(0.7
|
)
|
|
|
(52
|
)
|
|
|
(0.3
|
)
|
Equity in earnings of affiliates
|
|
|
(151
|
)
|
|
|
(0.8
|
)
|
|
|
(150
|
)
|
|
|
(0.8
|
)
|
Depreciation and amortization
|
|
|
1,045
|
|
|
|
5.5
|
|
|
|
1,038
|
|
|
|
5.7
|
|
Interest expense
|
|
|
582
|
|
|
|
3.1
|
|
|
|
489
|
|
|
|
2.7
|
|
Gains on sales of facilities
|
|
|
(46
|
)
|
|
|
(0.2
|
)
|
|
|
(29
|
)
|
|
|
(0.2
|
)
|
Transaction costs
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,385
|
|
|
|
91.6
|
|
|
|
16,504
|
|
|
|
90.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests
and income taxes
|
|
|
1,603
|
|
|
|
8.4
|
|
|
|
1,773
|
|
|
|
9.7
|
|
Minority interests in earnings of
consolidated entities
|
|
|
145
|
|
|
|
0.7
|
|
|
|
132
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,458
|
|
|
|
7.7
|
|
|
|
1,641
|
|
|
|
9.0
|
|
Provision for income taxes
|
|
|
544
|
|
|
|
2.9
|
|
|
|
542
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
914
|
|
|
|
4.8
|
|
|
$
|
1,099
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
2.26
|
|
|
|
|
|
|
$
|
2.50
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
2.23
|
|
|
|
|
|
|
$
|
2.46
|
|
|
|
|
|
% changes from prior year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
3.9
|
%
|
|
|
|
|
|
|
4.1
|
%
|
|
|
|
|
Income before income taxes
|
|
|
(11.1
|
)
|
|
|
|
|
|
|
10.0
|
|
|
|
|
|
Net income
|
|
|
(16.9
|
)
|
|
|
|
|
|
|
18.9
|
|
|
|
|
|
Basic earnings per share
|
|
|
(9.6
|
)
|
|
|
|
|
|
|
30.9
|
|
|
|
|
|
Diluted earnings per share
|
|
|
(9.3
|
)
|
|
|
|
|
|
|
30.9
|
|
|
|
|
|
Admissions(a)
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
|
|
Equivalent admissions(b)
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
1.3
|
|
|
|
|
|
Revenue per equivalent admission
|
|
|
6.2
|
|
|
|
|
|
|
|
2.7
|
|
|
|
|
|
Same facility % changes from prior
year(c):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
5.5
|
|
|
|
|
|
|
|
4.5
|
|
|
|
|
|
Admissions(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent admissions(b)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
1.5
|
|
|
|
|
|
Revenue per equivalent admission
|
|
|
5.6
|
|
|
|
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
(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.
|
23
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Results
of Operations (continued)
|
|
|
Operating
Results Summary (continued)
|
Supplemental
Non-GAAP Disclosures
Operating Measures Adjusted for the Impact of Discounts for the
Uninsured
(Dollars in millions, except revenue per equivalent
admission)
The results of operations for the quarters and nine months ended
September 30, 2006 and September 30, 2005,
respectively, adjusted for the impact of HCAs uninsured
discount policy, are presented in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP %
|
|
|
|
|
|
|
Uninsured
|
|
|
Non-GAAP
|
|
|
GAAP % of
|
|
|
of Adjusted
|
|
|
|
GAAP
|
|
|
Discounts
|
|
|
Adjusted
|
|
|
Revenues
|
|
|
Revenues
|
|
|
|
Amounts
|
|
|
Adjustment(a)
|
|
|
Amounts(b)
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Revenues
|
|
$
|
6,213
|
|
|
$
|
277
|
|
|
$
|
6,490
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Salaries and benefits
|
|
|
2,600
|
|
|
|
|
|
|
|
2,600
|
|
|
|
41.8
|
|
|
|
41.2
|
|
|
|
40.1
|
|
|
|
39.6
|
|
Supplies
|
|
|
1,046
|
|
|
|
|
|
|
|
1,046
|
|
|
|
16.8
|
|
|
|
16.8
|
|
|
|
16.1
|
|
|
|
16.1
|
|
Other operating expenses
|
|
|
1,037
|
|
|
|
|
|
|
|
1,037
|
|
|
|
16.8
|
|
|
|
17.1
|
|
|
|
16.0
|
|
|
|
16.5
|
|
Provision for doubtful accounts
|
|
|
677
|
|
|
|
277
|
|
|
|
954
|
|
|
|
10.9
|
|
|
|
10.3
|
|
|
|
14.7
|
|
|
|
13.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Admissions
|
|
|
394,700
|
|
|
|
|
|
|
|
394,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent admissions
|
|
|
594,500
|
|
|
|
|
|
|
|
599,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per equivalent admission
|
|
$
|
10,453
|
|
|
|
|
|
|
$
|
10,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% change from prior year
|
|
|
6.8
|
%
|
|
|
|
|
|
|
7.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Facility(c):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,067
|
|
|
$
|
272
|
|
|
$
|
6,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Admissions
|
|
|
389,700
|
|
|
|
|
|
|
|
389,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent admissions
|
|
|
583,400
|
|
|
|
|
|
|
|
583,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per equivalent admission
|
|
$
|
10,399
|
|
|
|
|
|
|
$
|
10,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% change from prior year
|
|
|
6.4
|
%
|
|
|
|
|
|
|
6.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Results
of Operations (continued)
|
|
|
Operating
Results Summary (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP %
|
|
|
|
|
|
|
Uninsured
|
|
|
Non-GAAP
|
|
|
GAAP % of
|
|
|
of Adjusted
|
|
|
|
GAAP
|
|
|
Discounts
|
|
|
Adjusted
|
|
|
Revenues
|
|
|
Revenues
|
|
|
|
Amounts
|
|
|
Adjustment(a)
|
|
|
Amounts(b)
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Revenues
|
|
$
|
18,988
|
|
|
$
|
791
|
|
|
$
|
19,779
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Salaries and benefits
|
|
|
7,816
|
|
|
|
|
|
|
|
7,816
|
|
|
|
41.2
|
|
|
|
40.4
|
|
|
|
39.5
|
|
|
|
39.3
|
|
Supplies
|
|
|
3,251
|
|
|
|
|
|
|
|
3,251
|
|
|
|
17.1
|
|
|
|
17.0
|
|
|
|
16.4
|
|
|
|
16.5
|
|
Other operating expenses
|
|
|
3,069
|
|
|
|
|
|
|
|
3,069
|
|
|
|
16.1
|
|
|
|
16.3
|
|
|
|
15.6
|
|
|
|
15.8
|
|
Provision for doubtful accounts
|
|
|
1,950
|
|
|
|
791
|
|
|
|
2,741
|
|
|
|
10.3
|
|
|
|
9.5
|
|
|
|
13.9
|
|
|
|
12.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Admissions
|
|
|
1,218,600
|
|
|
|
|
|
|
|
1,218,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent admissions
|
|
|
1,830,400
|
|
|
|
|
|
|
|
1,830,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per equivalent admission
|
|
$
|
10,374
|
|
|
|
|
|
|
$
|
10,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% change from prior year
|
|
|
6.2
|
%
|
|
|
|
|
|
|
7.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Facility(c):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
18,400
|
|
|
$
|
782
|
|
|
$
|
19,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Admissions
|
|
|
1,192,400
|
|
|
|
|
|
|
|
1,192,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent admissions
|
|
|
1,779,100
|
|
|
|
|
|
|
|
1,779,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per equivalent admission
|
|
$
|
10,342
|
|
|
|
|
|
|
$
|
10,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% change from prior year
|
|
|
5.6
|
%
|
|
|
|
|
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents the impact of the discounts for the uninsured for the
period. On January 1, 2005, we modified our policies to
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. In implementing the
discount policy, we first attempt to qualify uninsured patients
for Medicaid, other federal or state assistance or charity care.
If an uninsured patient does not qualify for these programs, the
uninsured discount is applied. On a consolidated basis, we
recorded $277 million and $241 million of uninsured
discounts during the third quarters of 2006 and 2005,
respectively. On a consolidated basis, we recorded
$791 million and $534 million of uninsured discounts
during the first nine months of 2006 and 2005, respectively. |
|
(b) |
|
Revenues, the provision for doubtful accounts, certain operating
expense categories as a percentage of revenues and revenue per
equivalent admission have been adjusted to exclude the discounts
under our uninsured discount policy (non-GAAP financial
measures). We believe these non-GAAP financial measures are
useful to investors to provide disclosures of our results of
operations on the same basis as that used by management.
Management uses this information to compare revenues, the
provision for doubtful accounts, certain operating expense
categories as a percentage of revenues and revenue per
equivalent admission, adjusted for the impact of the uninsured
discount policy. Management finds this information to be useful
to enable the evaluation of revenue and certain expense category
trends that are influenced by patient volumes and are generally
analyzed as a percentage of net revenues. These non-GAAP
financial measures should not be considered an alternative to
GAAP financial measures. We believe this supplemental
information provides management and the users of its financial
statements with useful information for
period-to-period
comparisons. Investors are encouraged to use GAAP measures when
evaluating our overall financial performance. |
|
(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. |
25
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Results
of Operations (continued)
Quarters
Ended September 30, 2006 and 2005
Net income totaled $240 million, or $0.58 per diluted
share, for the third quarter of 2006 compared to
$280 million, or $0.62 per diluted share, for the
third quarter of 2005. Third quarter 2006 results include
compensation costs of $11 million, or $0.02 per
diluted share, related to the expensing of stock options and
employee stock purchase plan shares, gains on sales of
facilities of $41 million, or $0.06 per diluted share,
and transaction costs related to the proposed merger of
$9 million, or $0.01 per diluted share. We recorded
costs, net of estimated recoveries, of $33 million, or
$0.05 per diluted share, in the third quarter of 2005 as a
result of property damage, business disruption and other costs
associated with hurricanes Katrina and Rita to certain of our
hospitals in Louisiana, Mississippi, and Texas. Third quarter
2005 results also include a tax benefit of $22 million, or
$0.05 per diluted share, from the repatriation of foreign
earnings. Shares used for diluted earnings per share for the
quarter ended September 30, 2006 were 411.2 million
shares, compared to 454.9 million shares for the quarter
ended September 30, 2005.
For the third quarter of 2006, admissions decreased 2.6% and
same facility admissions increased 0.1% compared to the third
quarter of 2005. Outpatient surgical volumes decreased 4.6% on a
consolidated basis and decreased 2.8% on a same facility basis
during the third quarter of 2006, compared to the third quarter
of 2005.
Our uninsured discount policy, which became effective
January 1, 2005, resulted in $277 million and
$241 million in discounts to the uninsured being recorded
during the third quarters of 2006 and 2005, respectively. The
discounts to the uninsured had the effect of reducing revenues
and the provision for doubtful accounts by generally
corresponding amounts. The reduction of revenues caused expense
items, other than the provision for doubtful accounts, to
increase, as a percentage of revenues, compared to what they
would have been if the uninsured discount policy had not been
implemented.
Salaries and benefits, as a percentage of revenues, were 41.8%
in the third quarter of 2006 and 41.2% in the same quarter of
2005. Adjusting for the effect of the discount policy for the
uninsured, salaries and benefits, as a percentage of revenues,
were 40.1% in the third quarter of 2006 compared to 39.6% in the
third quarter of 2005. Salaries and benefits per equivalent
admission increased 8.4% in the third quarter of 2006 compared
to the third quarter of 2005.
Supplies, as a percentage of revenues, were 16.8% in the third
quarters of both 2006 and 2005. Adjusting for the effect of the
discount policy for the uninsured, supplies, as a percentage of
revenues, were 16.1% in the third quarters of both 2006 and
2005. Supply cost per equivalent admission increased 7.2% in the
third quarter of 2006 compared to the third quarter of 2005.
Other operating expenses, as a percentage of revenues, decreased
to 16.8% in the third quarter of 2006 compared to 17.1% in the
third quarter of 2005. Adjusting for the effect of the discount
policy for the uninsured, other operating expenses, as a
percentage of revenues, were 16.0% in the third quarter of 2006
compared to 16.5% in the third quarter of 2005. Other operating
expenses is primarily comprised of contract services,
professional fees, repairs and maintenance, rents and leases,
utilities, insurance (including professional liability
insurance) and nonincome taxes. Other operating expenses include
expenses which resulted from hurricanes and were estimated to
have cost, net of expected insurance recoveries,
$33 million in the third quarter of 2005.
Provision for doubtful accounts, as a percentage of revenues,
increased to 10.9% in the third quarter of 2006 compared to
10.3% in the third quarter of 2005. Adjusting for the effect of
the discount policy for the uninsured, the provision for
doubtful accounts, as a percentage of revenues, was 14.7% in the
third quarter of 2006 compared to 13.7% in the third quarter of
2005. The provision for doubtful accounts and the allowance for
doubtful accounts relate primarily to uninsured amounts due
directly from patients. At September 30, 2006, our
allowance for doubtful accounts represented approximately 87% of
the $3.9 billion total patient due accounts receivable
balance.
Gains on investments of $40 million in the third quarter of
2006 and $21 million in the third quarter of 2005 relate to
sales of investment securities by our wholly-owned insurance
subsidiary.
26
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Results
of Operations (continued)
|
|
|
Quarters
Ended September 30, 2006 and 2005 (continued)
|
Equity in earnings of affiliates decreased from $44 million
in the third quarter of 2005 to $43 million in the third
quarter of 2006 due to a decrease in profits at joint ventures
accounted for under the equity method of accounting.
Depreciation and amortization increased by $11 million,
from $337 million in the third quarter of 2005 to
$348 million in the third quarter of 2006.
Interest expense increased from $160 million in the third
quarter of 2005 to $200 million in the third quarter of
2006. Interest expense increased due to both an increase in our
average debt outstanding and an increase in interest rates. Our
average debt balance was $11.4 billion for the third
quarter of 2006 compared to $9.3 billion for the third
quarter of 2005. The average interest rate for our long term
debt increased from 7.0% at September 30, 2005 to 7.1% at
September 30, 2006.
Minority interests in earnings of consolidated entities
increased from $43 million for the third quarter of 2005 to
$44 million for the third quarter of 2006.
The effective tax rate was 36.3% in the third quarter of 2006
and 31.3% in the third quarter of 2005. The effective tax rate
for the third quarter of 2005 was reduced due to the recording
of an estimated tax benefit of $22 million for the
repatriation of foreign earnings. Excluding the effect of the
$22 million benefit, the effective tax rate for the third
quarter of 2005 would have been 36.7%.
Nine
Months Ended September 30, 2006 and 2005
Net income totaled $914 million, or $2.23 per diluted
share, for the nine months ended September 30, 2006
compared to $1.099 billion, or $2.46 per diluted
share, for the nine months ended September 30, 2005. For
the nine months ended September 30, 2005, we recorded a
favorable tax settlement of $48 million related to the
divestiture of certain noncore business units in previous years
and a tax benefit of $22 million from the repatriation of
foreign earnings, which provided a combined positive impact on
net income of $0.16 per diluted share. Shares used for
diluted earnings per share for the nine months ended
September 30, 2006 were 410.2 million shares, compared
to 447.5 million shares for the nine months ended
September 30, 2005.
Same facility admissions were flat for the nine months ended
September 30, 2006 compared to the nine months ended
September 30, 2005. Same facility inpatient surgeries
increased 1.2% and same facility outpatient surgeries decreased
1.5% for the nine months ended September 30, 2006 compared
to the nine months ended September 30, 2005. Same facility
emergency room visits decreased 1.0% during the nine months
ended September 30, 2006 compared to the nine months ended
September 30, 2005.
Revenues increased 3.9% to $18.988 billion for the first
nine months of 2006 from $18.277 billion for the first nine
months of 2005. Adjusting for the effect of the uninsured
discount policy, revenues increased 5.1% for the first nine
months of 2006 compared to the same period in 2005. The increase
in revenues for the nine months ended September 30, 2006
can be attributed to a 5.5% increase in same facility revenues,
which was the result of a 5.6% increase in same facility revenue
per equivalent admission and a 0.2% decline in same facility
equivalent admissions.
Our uninsured discount policy, which became effective
January 1, 2005, resulted in $791 million and
$534 million in discounts to the uninsured being recorded
during the first nine months of 2006 and 2005, respectively. The
discounts to the uninsured had the effect of reducing revenues
and the provision for doubtful accounts by generally
corresponding amounts. The reduction of revenues caused expense
items, other than the provision for doubtful accounts, to
increase, as a percentage of revenues, compared to what they
would have been if the uninsured discount policy had not been
implemented.
Salaries and benefits, as a percentage of revenues, were 41.2%
in the first nine months of 2006 and 40.4% in the first nine
months of 2005. Adjusting for the effect of the discount policy
for the uninsured, salaries and benefits, as a
27
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Results
of Operations (continued)
|
|
|
Nine
Months Ended September 30, 2006 and 2005
(continued)
|
percentage of revenues, increased slightly to 39.5% in the first
nine months of 2006 from 39.3% in the first nine months of 2005.
Salaries and benefits per equivalent admission increased 8.2%
for the first nine months of 2006 compared to the first nine
months of 2005.
Supplies, as a percentage of revenues, were 17.1% in the first
nine months of 2006 compared to 17.0% in the first nine months
of 2005. Adjusting for the effect of the discount policy for the
uninsured, supplies, as a percentage of revenues, were 16.4% in
the first nine months of 2006 and 16.5% in the first nine months
of 2005. Supply cost per equivalent admission increased 7.1% for
the first nine months of 2006 compared to the first nine months
of 2005.
Other operating expenses, as a percentage of revenues, were
16.1% in the first nine months of 2006, compared to 16.3% in the
first nine months of 2005. Adjusting for the effect of the
discount policy for the uninsured, other operating expenses, as
a percentage of revenues, were 15.6% in the first nine months of
2006 compared to 15.8% in the first nine months of 2005. Other
operating expenses for the first nine months of 2006 reflect a
reduction in our estimated professional liability reserves of
$85 million, or $0.13 per diluted share, compared to a
$36 million reduction, or $0.05 per diluted share,
recorded in the first nine months of 2005. Other operating
expenses include expenses which resulted from hurricanes and are
estimated to cost, net of expected insurance recoveries,
$33 million in the first nine months of 2005. Other
operating expenses is primarily comprised of contract services,
professional fees, repairs and maintenance, rents and leases,
utilities, insurance (including professional liability
insurance) and nonincome taxes.
Provision for doubtful accounts, as a percentage of revenues,
was 10.3% in the first nine months of 2006 compared to 9.5% in
the first nine months of 2005. Adjusting for the effect of the
discount policy for the uninsured, the provision for doubtful
accounts, as a percentage of revenues, was 13.9% in the first
nine months of 2006 compared to 12.1% in the first nine months
of 2005. The provision for doubtful accounts and the allowance
for doubtful accounts relate primarily to uninsured amounts due
directly from patients. At September 30, 2006, our
allowance for doubtful accounts represented approximately 87% of
the $3.9 billion total patient due accounts receivable
balance.
Gains on investments of $140 million in the first nine
months of 2006 and $52 million in the first nine months of
2005 relate to sales of investment securities by our
wholly-owned insurance subsidiary. Net unrealized gains on
investment securities have declined from $184 million at
December 31, 2005 to $105 million at
September 30, 2006.
Equity in earnings of affiliates increased from
$150 million in the first nine months of 2005 to
$151 million in the first nine months of 2006.
Depreciation and amortization increased by $7 million, from
$1.038 billion in the first nine months of 2005 to
$1.045 billion in the first nine months of 2006. During the
nine months ended September 30, 2005, we incurred
additional depreciation expense of approximately
$44 million to correct accumulated depreciation of certain
facilities and assure a consistent application of our accounting
policy relative to certain short-lived medical equipment.
Interest expense increased from $489 million in the first
nine months of 2005 to $582 million in the first nine
months of 2006. Our average debt balance was $11.2 billion
for first nine months of 2006 compared to $9.8 billion for
the first nine months of 2005. The average interest rate for our
long term debt increased from 7.0% at September 30, 2005 to
7.1% at September 30, 2006.
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. Gains on sales of facilities of $29
million for the first nine months of 2005, related to the
recognition of previously deferred gains on the sale of a group
of medical office buildings.
28
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Results
of Operations (continued)
|
|
|
Nine
Months Ended September 30, 2006 and 2005
(continued)
|
Minority interest in earnings of consolidated entities increased
from $132 million in the first nine months of 2005 to $145
million for the first nine months of 2006. The increase relates
primarily to the operations of surgery centers and other
outpatient services entities.
The effective tax rate was 37.3% in the first nine months of
2006 and 33.0% in the first nine months of 2005. The effective
tax rate for the nine months ended September 30, 2005 was
reduced due to a favorable tax settlement of $48 million
related to the divestiture of certain noncore business units and
a tax benefit of $22 million from the repatriation of
foreign earnings. Excluding the effect of the combined
$70 million tax benefit, the effective tax rate for the
first nine months of 2005 would have been 37.3%.
Liquidity
and Capital Resources
Cash provided by operating activities totaled
$1.424 billion in the first nine months of 2006 compared to
$2.629 billion in the first nine months of 2005. Net income
was $185 million lower in the first nine months of 2006
compared to the first nine months of 2005. In the first nine
months of 2006, we made $935 million in tax payments, net
of refunds, and in the first nine months of 2005, we made tax
payments, net of refunds, of $384 million. Cash provided by
operating activities for the nine months ended
September 30, 2006 was also negatively impacted by a $222
million increase in net accounts receivable and a $221 million
decrease in accounts payable. Working capital totaled
$1.735 billion at September 30, 2006 and
$1.320 billion at December 31, 2005.
Cash used in investing activities was $1.226 billion in the
first nine months of 2006 compared to $1.274 billion in the
first nine months of 2005. Excluding acquisitions, capital
expenditures were $1.330 billion in the first nine months
of 2006 and $1.048 billion in the first nine months of
2005. Capital expenditures are expected to approximate
$1.850 billion in 2006. At September 30, 2006, there
were projects under construction which had estimated additional
costs to complete and equip over the next five years of
approximately $2.2 billion. We expect to finance capital
expenditures with internally generated and borrowed funds.
Effective July 1, 2006, we sold four hospitals (three in
West Virginia and one in Virginia) to LifePoint Hospitals, Inc.
for $256 million. The cash proceeds of $256 million
related to the sale of the hospitals is included in
disposition of hospitals and health care entities on
our condensed consolidated statement of cash flows for the nine
months ended September 30, 2006. Certificates of Need
(CONs) were required for the sale of the three West
Virginia hospitals included in the transaction. Because filings
seeking the revocation of the CONs were pending at the time of
closing, we and LifePoint have agreed that, under certain
circumstances LifePoint may require us to repurchase the three
West Virginia hospitals. Generally, those circumstances require
a final and nonappealable order revoking the CONs or an order
requiring LifePoint to divest the hospitals or cease operations.
In the event of such a repurchase, the repurchase price would be
based upon the purchase price and adjusted for working capital
changes, capital expenditures and other items.
Effective October 1, 2006, we sold two hospitals in Florida for
$266 million. A pretax gain of approximately $91 million, or
$0.09 per diluted share, will be recognized in the fourth
quarter of 2006 related to this sale.
Cash provided by financing activities totaled $7 million
during the first nine months of 2006 compared to
$663 million used in financing activities during the first
nine months of 2005. During the first nine months of 2006, we
increased net borrowings by $843 million and repurchased
13.0 million shares of common stock for $653 million.
In addition to cash flows from operations, available sources of
capital include amounts available under the Credit Facility
($886 million available as of October 16,
2006) and anticipated access to public and private debt
markets. Management believes that its available sources of
capital are adequate to expand, improve and equip its existing
health care facilities and to complete selective acquisitions.
It is anticipated that the funds necessary to consummate the
Merger and related transactions will be funded by new credit
facilities, private
and/or
public offerings of debt securities and equity financing.
29
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Liquidity
and Capital Resources (continued)
Investments of our professional liability insurance subsidiary
are held to maintain statutory equity and provide the funding
source to pay claims, and totaled $2.464 billion at
September 30, 2006 and $2.384 billion at
December 31, 2005, respectively. Claims payments, net of
reinsurance recoveries, during the next twelve months are
expected to approximate $250 million. The estimation of the
timing of claims payments beyond a year can vary significantly.
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 of $43 million at
September 30, 2006 and December 31, 2005 are included
in other assets.
Financing
Activities
HCAs $2.5 billion credit agreement (the 2004
Credit Agreement) consists of a $750 million
amortizing term loan which matures in 2009 (the 2004 Term
Loan) and a $1.750 billion revolving credit facility
that expires in November 2009 (the Credit Facility).
Interest under the 2004 Credit Agreement is payable at a spread
to LIBOR, a spread to the prime lending rate or a competitive
bid rate. The spread is dependent on our credit ratings. The
2004 Credit Agreement contains customary covenants which include
(i) limitations on debt levels, (ii) limitations on
sales of assets, mergers and changes of ownership, and
(iii) maintenance of minimum interest coverage ratios. As
of September 30, 2006, we were in compliance with all such
covenants.
In February 2006, we issued $1.0 billion of 6.5% notes
due February 2016. Proceeds from the notes were used to repay
all amounts outstanding under a bank term loan entered into in
November 2005 and to pay down amounts advanced under the Credit
Facility.
In May 2006, we entered into a $400 million credit
agreement which matures in May 2007. Under this agreement, we
borrowed $400 million (the 2006 Term Loan). The
proceeds from the 2006 Term Loan were used for general corporate
purposes.
Merger
Agreement
On July 24, 2006, we entered into an Agreement and Plan of
Merger (the Merger Agreement) with Hercules
Holding II, LLC, a Delaware limited liability company
(Parent), and Hercules Acquisition Corporation, a
Delaware corporation and a wholly-owned subsidiary of Parent
(Merger Sub). Under the terms of the Merger
Agreement, Merger Sub will be merged with and into HCA, with HCA
continuing as the surviving corporation and a wholly-owned
subsidiary of Parent (the Merger). Parent is owned
by a consortium of private investment funds affiliated with Bain
Capital Partners LLC, Kohlberg Kravis Roberts & Co.
L.P., and Merrill Lynch Global Private Equity (collectively, the
Sponsors).
It is anticipated that the funds necessary to consummate the
Merger and related transactions will be funded by new credit
facilities, private
and/or
public offerings of debt securities and equity financing. On
October 6, 2006, we commenced a tender offer for all of our
outstanding 8.850% Medium Term Notes due 2007, 7.000% Notes
due 2007, 7.250% Notes due 2008, 5.250% Notes due 2008
and 5.500% Notes due 2009, in the aggregate principal amount of
$1.36 billion, and it is anticipated that our remaining
public debt, in the principal amount of $7.49 billion, will
remain outstanding.
Our capitalization, liquidity and capital resources will change
substantially if the Merger is approved by our shareholders and
the related recapitalization transactions are completed. Upon
the closing of the recapitalization transactions, we will be
highly leveraged. Our liquidity requirements will be
significant, primarily due to debt service requirements and
financing costs relating to the indebtedness expected to be
incurred in connection with the closing of the refinancing
transactions.
30
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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
$1.815 billion and $649 million, respectively, at
September 30, 2006. 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.
If the insurance subsidiary were to experience significant
declines in the fair value of its investments, this could
require us to make additional investments to enable the
insurance subsidiary to satisfy its minimum capital requirements.
Management evaluates, among other things, the financial position
and near term prospects of the issuer, conditions in the
issuers industry, liquidity of the investment, changes in
the amount or timing of expected future cash flows from the
investment, and recent downgrades of the issuer by a rating
agency to determine if and when a decline in the fair value of
an investment below amortized cost is considered
other-than-temporary.
The length of time and extent to which the fair value of the
investment is less than amortized cost and our ability and
intent to retain the investment to allow for any anticipated
recovery in the investments fair value are important
components of managements investment securities evaluation
process. At September 30, 2006, we had a net unrealized
gain of $105 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 and interest payments in these agreements match
the cash flows of the related liabilities. The notional amounts
of the swap agreements represent balances used to calculate the
exchange of cash flows and are not our assets or liabilities.
Any market risk or opportunity associated with these swap
agreements is offset by the opposite market impact on the
related debt. 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 and the
related hedged debt amounts have been recognized in the
financial statements at their respective fair values.
With respect to our interest-bearing liabilities, approximately
$3.125 billion of long-term debt at September 30, 2006
is subject to variable rates of interest, while the remaining
balance in long-term debt of $8.218 billion at
September 30, 2006 is subject to fixed rates of interest.
Both the general level of U.S. interest rates and, for the
2004 Credit Agreement, our credit rating affect our variable
interest rates. Our variable rate debt is primarily comprised of
amounts outstanding under the 2004 Credit Agreement, the 2006
Term Loan and fixed rate notes on which interest rate swaps have
been employed. The 2004 Credit Agreement consists of the Credit
Facility, on which interest is payable generally at LIBOR plus
0.4% to 1.0% and the 2004 Term Loan, on which interest is
payable generally at LIBOR plus 0.5% to 1.25%. The 2006 Term
Loan is subject to the same interest rates and conditions as the
2004 Term Loan. The fixed rate notes on which interest rate
swaps have been employed have interest that is payable at LIBOR
plus 1.39% to 1.59%. Due to increases in LIBOR, the average rate
for our long-term debt increased from 7.01% at
September 30, 2005 to 7.10% at September 30, 2006. The
estimated fair value of our total long-term debt was
$10.213 billion at September 30, 2006. 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 $31 million. The impact of
such a change in interest rates on the fair value of long-term
debt would not be significant. The estimated changes to interest
expense and the fair value of long-term debt are determined
considering the impact of hypothetical interest rates on our
borrowing cost and long-term debt balances. To mitigate the
impact of fluctuations in interest rates, we generally target a
portion of our debt portfolio to be maintained at fixed rates.
Foreign operations and the related market risks associated with
foreign currency are currently insignificant to our results of
operations and financial position.
31
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Pending
IRS Disputes
HCA is currently contesting before the Appeals Division of the
Internal Revenue Service (the IRS), the United
States Tax Court (the Tax Court), and the United
States Court of Federal Claims, certain claimed deficiencies and
adjustments proposed by the IRS in conjunction with its
examinations of HCAs 1994 through 2002 federal income tax
returns, Columbia Healthcare Corporations
(CHC) 1993 and 1994 federal income tax returns,
HCA-Hospital Corporation of Americas (Hospital
Corporation of America) 1991 through 1993 federal income
tax returns and Healthtrust, Inc. The Hospital
Companys (Healthtrust) 1990 through 1994
federal income tax returns.
During 2005, HCA recorded an income tax benefit of
$48 million, or $0.11 per diluted share, related to a
partial settlement reached with the IRS Appeals Division
regarding the amount of gain or loss recognized on the
divestiture of certain noncore business units.
During 2003, the United States Court of Appeals for the Sixth
Circuit affirmed a 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. HCA filed
a petition for review by the United States Supreme Court, which
was denied in October 2004. 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. In December 2004, HCA
made a deposit of $109 million for additional tax and
interest, based on its estimate of amounts due for taxable
periods through 1996.
Other disputed items include the deductibility of a portion of
the 2001 government settlement payment, the timing of
recognition of certain patient service revenues in 2000 through
2004, the method for calculating the tax allowance for
uncollectible accounts in 2002, and the amount of insurance
expense deducted in 1999 through 2002. The IRS is seeking an
additional $662 million in income taxes, interest and
penalties, through September 30, 2006, with respect to
these issues. This amount is net of a refundable tax deposit of
$177 million, and related interest, made by HCA during the
first quarter of 2006.
During 2006, the IRS began an examination of HCAs 2003 and
2004 federal income tax returns. The IRS has not determined the
amount of any additional income tax, interest and penalties that
it may claim upon completion of this examination.
Management believes that adequate provisions have been recorded
to satisfy final resolution of the disputed issues. Management
believes that HCA, CHC, Hospital Corporation of America and
Healthtrust properly reported taxable income and paid taxes in
accordance with applicable laws and agreements established with
the IRS during previous examinations and that final resolution
of these disputes will not have a material adverse effect on
results of operations or financial position.
32
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Operating
Data
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
CONSOLIDATING
|
|
|
|
|
|
|
|
|
Number of hospitals in operation
at(a):
|
|
|
|
|
|
|
|
|
March 31
|
|
|
176
|
|
|
|
183
|
|
June 30
|
|
|
176
|
|
|
|
183
|
|
September 30
|
|
|
172
|
|
|
|
180
|
|
December 31
|
|
|
|
|
|
|
175
|
|
Number of freestanding outpatient
surgical centers in operation at:
|
|
|
|
|
|
|
|
|
March 31
|
|
|
91
|
|
|
|
84
|
|
June 30
|
|
|
92
|
|
|
|
84
|
|
September 30
|
|
|
95
|
|
|
|
86
|
|
December 31
|
|
|
|
|
|
|
87
|
|
Licensed hospital beds at(b):
|
|
|
|
|
|
|
|
|
March 31
|
|
|
41,539
|
|
|
|
41,892
|
|
June 30
|
|
|
41,300
|
|
|
|
42,013
|
|
September 30
|
|
|
40,382
|
|
|
|
42,119
|
|
December 31
|
|
|
|
|
|
|
41,265
|
|
Weighted average licensed beds(c):
|
|
|
|
|
|
|
|
|
Quarter:
|
|
|
|
|
|
|
|
|
First
|
|
|
41,255
|
|
|
|
41,856
|
|
Second
|
|
|
41,263
|
|
|
|
41,948
|
|
Third
|
|
|
40,352
|
|
|
|
42,089
|
|
Fourth
|
|
|
|
|
|
|
41,713
|
|
Year
|
|
|
|
|
|
|
41,902
|
|
Average daily census(d):
|
|
|
|
|
|
|
|
|
Quarter:
|
|
|
|
|
|
|
|
|
First
|
|
|
23,228
|
|
|
|
23,991
|
|
Second
|
|
|
21,682
|
|
|
|
22,078
|
|
Third
|
|
|
20,993
|
|
|
|
21,343
|
|
Fourth
|
|
|
|
|
|
|
21,525
|
|
Year
|
|
|
|
|
|
|
22,225
|
|
Admissions(e):
|
|
|
|
|
|
|
|
|
Quarter:
|
|
|
|
|
|
|
|
|
First
|
|
|
421,000
|
|
|
|
432,600
|
|
Second
|
|
|
402,900
|
|
|
|
407,600
|
|
Third
|
|
|
394,700
|
|
|
|
405,100
|
|
Fourth
|
|
|
|
|
|
|
402,500
|
|
Year
|
|
|
|
|
|
|
1,647,800
|
|
Equivalent admissions(f):
|
|
|
|
|
|
|
|
|
Quarter:
|
|
|
|
|
|
|
|
|
First
|
|
|
626,000
|
|
|
|
636,400
|
|
Second
|
|
|
609,900
|
|
|
|
619,700
|
|
Third
|
|
|
594,500
|
|
|
|
615,500
|
|
Fourth
|
|
|
|
|
|
|
605,000
|
|
Year
|
|
|
|
|
|
|
2,476,600
|
|
33
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Operating
Data (Continued)
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Average length of stay (days)(g):
|
|
|
|
|
|
|
|
|
Quarter:
|
|
|
|
|
|
|
|
|
First
|
|
|
5.0
|
|
|
|
5.0
|
|
Second
|
|
|
4.9
|
|
|
|
4.9
|
|
Third
|
|
|
4.9
|
|
|
|
4.8
|
|
Fourth
|
|
|
|
|
|
|
4.9
|
|
Year
|
|
|
|
|
|
|
4.9
|
|
Emergency room visits(h):
|
|
|
|
|
|
|
|
|
Quarter:
|
|
|
|
|
|
|
|
|
First
|
|
|
1,332,500
|
|
|
|
1,391,800
|
|
Second
|
|
|
1,325,600
|
|
|
|
1,345,600
|
|
Third
|
|
|
1,289,600
|
|
|
|
1,357,700
|
|
Fourth
|
|
|
|
|
|
|
1,320,100
|
|
Year
|
|
|
|
|
|
|
5,415,200
|
|
Outpatient surgeries(i):
|
|
|
|
|
|
|
|
|
Quarter:
|
|
|
|
|
|
|
|
|
First
|
|
|
212,900
|
|
|
|
211,000
|
|
Second
|
|
|
210,700
|
|
|
|
216,200
|
|
Third
|
|
|
196,700
|
|
|
|
206,300
|
|
Fourth
|
|
|
|
|
|
|
203,100
|
|
Year
|
|
|
|
|
|
|
836,600
|
|
Inpatient surgeries(j):
|
|
|
|
|
|
|
|
|
Quarter:
|
|
|
|
|
|
|
|
|
First
|
|
|
135,300
|
|
|
|
135,500
|
|
Second
|
|
|
134,000
|
|
|
|
136,400
|
|
Third
|
|
|
133,800
|
|
|
|
136,300
|
|
Fourth
|
|
|
|
|
|
|
133,200
|
|
Year
|
|
|
|
|
|
|
541,400
|
|
Days in accounts receivable(k):
|
|
|
|
|
|
|
|
|
Quarter:
|
|
|
|
|
|
|
|
|
First
|
|
|
49
|
|
|
|
47
|
|
Second
|
|
|
49
|
|
|
|
48
|
|
Third
|
|
|
53
|
|
|
|
48
|
|
Fourth
|
|
|
|
|
|
|
50
|
|
Year
|
|
|
|
|
|
|
50
|
|
Gross patient revenues(l) (dollars
in millions):
|
|
|
|
|
|
|
|
|
Quarter:
|
|
|
|
|
|
|
|
|
First
|
|
$
|
21,530
|
|
|
$
|
19,988
|
|
Second
|
|
|
20,908
|
|
|
|
19,453
|
|
Third
|
|
|
20,493
|
|
|
|
19,042
|
|
Fourth
|
|
|
|
|
|
|
20,179
|
|
Year
|
|
|
|
|
|
|
78,662
|
|
34
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Operating
Data (Continued)
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Outpatient revenues as a % of
patient revenues(m)
|
|
|
|
|
|
|
|
|
Quarter:
|
|
|
|
|
|
|
|
|
First
|
|
|
36
|
%
|
|
|
36
|
%
|
Second
|
|
|
37
|
%
|
|
|
38
|
%
|
Third
|
|
|
36
|
%
|
|
|
36
|
%
|
Fourth
|
|
|
|
|
|
|
36
|
%
|
Year
|
|
|
|
|
|
|
36
|
%
|
NONCONSOLIDATING(n)
|
|
|
|
|
|
|
|
|
Number of hospitals in operation
at:
|
|
|
|
|
|
|
|
|
March 31
|
|
|
7
|
|
|
|
7
|
|
June 30
|
|
|
7
|
|
|
|
7
|
|
September 30
|
|
|
7
|
|
|
|
7
|
|
December 31
|
|
|
|
|
|
|
7
|
|
Number of freestanding outpatient
surgical centers in operation at:
|
|
|
|
|
|
|
|
|
March 31
|
|
|
7
|
|
|
|
8
|
|
June 30
|
|
|
9
|
|
|
|
8
|
|
September 30
|
|
|
9
|
|
|
|
8
|
|
December 31
|
|
|
|
|
|
|
7
|
|
Licensed hospital beds at:
|
|
|
|
|
|
|
|
|
March 31
|
|
|
2,249
|
|
|
|
2,231
|
|
June 30
|
|
|
2,249
|
|
|
|
2,231
|
|
September 30
|
|
|
2,246
|
|
|
|
2,231
|
|
December 31
|
|
|
|
|
|
|
2,249
|
|
35
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, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare and Medicaid
|
|
|
13
|
%
|
|
|
1
|
%
|
|
|
2
|
%
|
Managed care and other discounted
|
|
|
20
|
|
|
|
4
|
|
|
|
4
|
|
Uninsured
|
|
|
20
|
|
|
|
11
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
53
|
%
|
|
|
16
|
%
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Three hospitals located on the same campus have been
consolidated and, as of September 30, 2005, counted as one
hospital. |
|
(b) |
|
Licensed beds are those beds for which a facility has been
granted approval to operate from the applicable state licensing
agency. |
|
(c) |
|
Weighted average licensed beds represents the average number of
licensed beds, weighted based on periods owned. |
|
(d) |
|
Represents the average number of patients in our hospital beds
each day. |
|
(e) |
|
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. |
|
(f) |
|
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. |
|
(g) |
|
Represents the average number of days admitted patients stay in
our hospitals. |
|
(h) |
|
Represents the number of patients treated in our emergency rooms. |
|
(i) |
|
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. |
|
(j) |
|
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. |
|
(k) |
|
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. |
|
(l) |
|
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. |
|
(m) |
|
Represents the percentage of patient revenues related to
patients who are not admitted to our hospitals. |
|
(n) |
|
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. |
36
|
|
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 and 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 other 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 and financial
position.
Governmental
Investigations
In September 2005, we received a subpoena from the Office of the
United States Attorney for the Southern District of New York
seeking the production of documents. Also in September 2005, we
were informed that the SEC had issued a formal order of
investigation. Both the subpoena and the formal order of
investigation relate to trading in our securities. We are
cooperating fully with these investigations.
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 on behalf of persons who purchased
our stock between January 12, 2005 and July 12, 2005.
These substantially similar lawsuits asserted claims pursuant to
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, and
Rule 10b-5
promulgated thereunder, against us, our Chairman and Chief
Executive Officer, President and Chief Operating Officer,
Executive Vice President and Chief Financial Officer, and
37
other officers related to our July 13, 2005, announcement
of preliminary results of operations for the second 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 contained within these class action lawsuits are
without merit and intend to vigorously defend the litigation.
On June 27, 2006, the Company and each of the defendants
moved to dismiss the consolidated amended complaint. Oral
argument is expected to occur on December 8, 2006.
Shareholder
Derivative Lawsuits in Federal Court
In November 2005, two current shareholders each filed a
derivative lawsuit, purportedly on behalf of the Company, 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 of these lawsuits
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.
On January 23, 2006, the court consolidated these actions
as In re HCA Inc. Derivative Litigation, lead 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.
Shareholder
Derivative Lawsuit in State Court
On January 18, 2006, a current shareholder filed a
derivative lawsuit, purportedly on behalf of the Company, 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 to
the consolidated federal derivative litigation described above
in all material respects. 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.
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.
On January 13, 2006, the court stayed 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 us. On January 17,
2006, the magistrate judge (i) consolidated Thurmans
cause of action with all other future actions making the same
claims and arising out of the same operative facts,
(ii) appointed Thurman as lead plaintiff, and
(iii) appointed Thurmans attorneys as lead counsel
and liaison counsel. On January 26, 2006, the court
reassigned 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.
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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, our board of
directors and each of the Sponsors in the Chancery Court for
Davidson County, Tennessee. The complaints are substantially
similar and allege, among other things, that the Merger is the
product of a flawed process, that the consideration to be paid
to our shareholders in the Merger is unfair and inadequate, and
breach of fiduciary duty. 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 seek, 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.
Two cases making similar allegations and seeking similar relief
on behalf of a purported class of 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 these lawsuits are
without merit and plan to defend them vigorously.
On October 23, 2006, the Foundation for Seacoast Health
filed a lawsuit against us and one of our subsidiaries, 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 the asset
purchase agreement between the parties that allegedly are
triggered by the Merger. The complaint seeks, among other
relief, an injunction preventing completion of the Merger. We
believe this lawsuit is without merit and plan to defend it
vigorously. Additional lawsuits pertaining to the Merger could
be filed in the future.
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 $12.25 billion. A motion to dismiss this
action was granted on July 27, 2006, 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 Note 3
Income Taxes in the notes to 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.
Failure
to complete the proposed Merger could negatively affect
us.
On July 24, 2006, we entered into the Merger Agreement.
There is no assurance that the Merger Agreement and the Merger
will be approved by our stockholders, and there is no assurance
that the other conditions to the completion of the Merger will
be satisfied. In connection with the Merger, we will be subject
to several risks, including the following:
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the current market price of our common stock may reflect a
market assumption that the Merger will occur, and a failure to
complete the Merger could result in a decline in the market
price of our common stock;
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certain costs relating to the Merger, such as legal, accounting
and financial advisory fees, are payable by us whether or not
the Merger is completed;
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under certain circumstances, if the Merger is not completed, we
may be required to pay the buyer a termination fee of up to
$500 million or reimburse the buyer for its
out-of-pocket
expenses in connection with the Merger, up to $50 million
(although any termination fee payable would be net of reimbursed
expenses);
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there may be substantial disruption to our business and a
distraction of our management and employees from
day-to-day
operations, because matters related to the Merger may require
substantial commitments of their time and resources;
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uncertainty about the effect of the Merger may adversely affect
our relationships with our employees, physicians, suppliers and
other persons with whom we have business relationships; and
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we are aware of numerous lawsuits that have been filed against
us as a result of the announcement of the Merger and there may
be additional lawsuits filed against us relating to the Merger.
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Our
hospitals face competition for patients from other hospitals and
health care providers.
The health care business is highly competitive, and competition
among hospitals and other health care providers for patients has
intensified in recent years. Generally, other hospitals in the
local communities served by most of our hospitals provide
services similar to those offered by our hospitals. In 2005, the
Centers for Medicare and Medicaid Services (CMS)
began making public performance data related to ten quality
measures that hospitals submit in connection with their Medicare
reimbursement. On February 8, 2006, the Deficit Reduction
Act of 2005 (DEFRA 2005) was enacted by Congress and
expanded the number of quality measures that must be reported to
21, beginning with discharges occurring in the third quarter of
2006. If any of our hospitals achieve poor results (or results
that are lower than our competitors) on these 21 quality
measures, patient volumes could decline. In addition, DEFRA
2005 requires that CMS expand the number of quality measures in
future years. The additional quality measures and future trends
toward clinical transparency may have an unanticipated impact on
our competitive position and patient volumes.
In addition, the number of freestanding specialty hospitals,
surgery centers and diagnostic and imaging centers in the
geographic areas in which we operate has increased
significantly. As a result, most of our hospitals operate in a
highly competitive environment. Some of the hospitals that
compete with our hospitals are owned by governmental agencies or
not-for-profit
corporations supported by endowments, charitable contributions
and/or tax
revenues and can finance capital expenditures and operations on
a tax-exempt basis. Our hospitals are facing increasing
competition from physician-owned specialty hospitals and from
both our own and unaffiliated freestanding surgery centers for
market share in high margin services and for quality physicians
and personnel. If our ambulatory surgery centers are better able
to compete in this environment than our hospitals, our hospitals
may experience a decline in patient volume, even if those
patients use our ambulatory surgery centers. Further, if our
competitors are better able to attract patients, recruit
physicians, expand services or obtain favorable managed care
contracts at their facilities than our hospitals and ambulatory
surgery centers, we may experience an overall decline in patient
volume.
Section 507 of the Medicare Prescription Drug, Improvement,
and Modernization Act of 2003 (MMA) provided for an
18-month
moratorium on the establishment of new specialty hospitals. The
moratorium expired on June 8, 2005. However, the Department
of Health and Human Services (HHS) suspended
processing new provider enrollment applications for specialty
hospitals until January 2006, creating, in effect, a new
moratorium on specialty hospitals. DEFRA 2005 directed HHS to
extend this enrollment suspension until the earlier of six
months from the enactment of DEFRA 2005 or the release of a
report regarding physician owned specialty hospitals by HHS. On
August 8, 2006, HHS issued its final report, in which it
announced that it would resume processing and certifying
provider enrollment applications. As a result of the moratorium
being rescinded, we face additional competition from an
increased number of specialty hospitals, including hospitals
owned by physicians currently on staff at our hospitals. In
addition, HHS announced that it will require all hospitals to
disclose any physician ownership and certain financial
arrangements with physicians. HHS has not announced when it will
begin collecting this data, the specific data that hospitals
will be required to submit or which hospitals will be required
to provide information.
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Changes
in governmental programs may reduce our revenues or
profitability.
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 53% of our
admissions from the Medicare and Medicaid programs in 2005. 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. Such changes may also increase our
operating costs, which could reduce our profitability.
Effective January 1, 2007, as a result of DEFRA 2005,
reimbursement for Ambulatory Surgery Center (ASC)
overhead costs will be 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 8, 2006 CMS announced proposed
regulations that, if adopted, would change payment for
procedures performed in an ASC, effective January 1, 2008.
Under this proposal ASC payment groups would increase from
the current 9 clinically disparate payment groups to the 221
Ambulatory Procedure Classification groups (APCs) used under the
OPPS for these surgical services. CMS estimates that the rates
for procedures performed in an ASC setting would equal 62% of
the corresponding rates paid for the same procedures performed
in an outpatient hospital setting. Moreover, under the proposed
regulations, if CMS determines that a procedure is commonly
performed in a physicians office, the ASC reimbursement
for that procedure would be limited to the reimbursement
allowable under the Medicare Part B Physician Fee Schedule.
In addition, under this proposal, all surgical procedures, other
than those that pose a significant safety risk or generally
require an overnight stay, which would be listed by CMS, would
be payable as ASC procedures. This will expand the number of
procedures that Medicare will pay for if performed in an ASC.
CMS indicates in the regulations that it believes that the
volumes and service mix of procedures provided in ASCs would
change significantly in CY 2008 under the revised payment
system, but that it was not able to accurately project those
changes. If the proposal is adopted, 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 payors may adopt similar polices.
On August 1, 2006, CMS announced a final rule that refines
the diagnosis-related group (DRG) payment system.
CMS announced that it is considering additional changes
effective in federal fiscal year 2008. We cannot predict the
impact that any such changes, if finalized, would have on our
revenues. Other Medicare payment changes may also affect our
revenues. DRG rates are updated and DRG weights are recalibrated
each federal fiscal year. The index used to update the DRG rates
(the market basket) gives consideration to the
inflation experienced by hospitals and entities outside the
health care industry in purchasing goods and services. MMA, as
amended by DEFRA, provides for DRG increases using the full
market basket if data for certain patient care quality
indicators is submitted quarterly to CMS, and using the market
basket minus two percentage points if such data is not
submitted. 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.
Future realignments in the DRG system could also reduce the
margins we receive for certain specialties, including cardiology
and orthopedics. In fact, the greater popularity of specialty
hospitals in recent years has caused CMS to focus on payment
levels for such specialties. Any such change in the payments
received for specialty services could have an adverse effect on
our revenues and could require us to modify our strategy.
A number of states are experiencing budget problems and have
adopted, or are considering, legislation designed to reduce
their Medicaid expenditures. DEFRA 2005, signed into law on
February 8, 2006, includes Medicaid cuts of approximately
$4.8 billion over five years. In addition, proposed
regulatory changes, if implemented, would reduce federal
Medicaid funding by an additional $12.2 billion over five
years. 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. Hospital operating margins
have been, and may continue to be, under significant pressure
because of deterioration in pricing flexibility and payer mix,
and growth in operating expenses in excess of the increase in
PPS payments under the Medicare program. 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.
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We have
been the subject of governmental investigations, claims and
litigation.
Commencing in 1997, we became aware that we were the subject of
governmental investigations and litigation relating to our
business practices. The investigations were concluded through a
series of agreements executed in 2000 and 2003. In January 2001,
we entered into an eight-year Corporate Integrity Agreement
(CIA) with the OIG. Under the CIA, we have numerous
affirmative obligations, including the requirement that we
report potential violations of applicable federal health care
laws and regulations and have, pursuant to this obligation,
reported a number of potential violations of the Stark Law,
EMTALA and other laws, most of which we consider to be
non-violations or technical violations. Although no government
agency has taken any adverse action related to the CIA
disclosures, the government could determine that our reporting
and/or resolution of reported issues has been inadequate. If we
are found to be in violation of the CIA or any applicable health
care laws or regulations, we could be subject to repayment
requirements, substantial monetary fines, civil penalties,
exclusion from participation in the Medicare and Medicaid
programs and, for violation of certain laws and regulations,
criminal penalties. Any such sanctions or expenses could have a
material adverse effect on our financial position, results of
operations and liquidity.
In September 2005, we received a subpoena from the Office of the
United States Attorney for the Southern District of New York
seeking the production of documents. Also in September 2005, we
were informed that the SEC had issued a formal order of
investigation. Both the subpoena and the formal order of
investigation relate to trading in our securities. We are
cooperating fully with these investigations.
Subsequently, we and certain of our executive officers and
directors were named in various federal securities law class
actions and several shareholders have 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 we have been served with a shareholder demand letter
addressed to our Board of Directors. We cannot predict the
results of the investigations or any related lawsuits or the
effect that findings in such investigations or lawsuits adverse
to us may have on us.
On July 24, 2006, we announced that we had entered into the
Merger Agreement. In connection with the Merger, 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. Additional lawsuits
pertaining to the Merger could be filed in the future. While we
believe these lawsuits are without merit and plan to defend them
vigorously, adverse findings in these lawsuits may have an
adverse effect on our ability to consummate the Merger.
Health care companies are subject to numerous investigations by
various governmental agencies. Further, under the federal False
Claims Act, private parties have the right to bring qui tam, or
whistleblower, suits against companies that submit
false claims for payments to the government. Some states have
adopted similar state whistleblower and false claims provisions.
From time to time, companies doing business under federal health
care programs may be contacted by various government agencies in
connection with a government investigation either brought by the
government or by a private person under a qui tam action.
Because of the confidential nature of some government
investigations or a confidential seal under the federal False
Claims Act, we do not always know the particulars of the
allegations or concerns at the time the government notifies us
that an investigation is proceeding. Certain of our individual
facilities have received, and other facilities from time to time
may receive, government inquiries from federal and state
agencies. Depending on whether the underlying conduct in these
or future inquiries or investigations could be considered
systemic, their resolution could have a material adverse effect
on our financial position, results of operations and liquidity.
From time to time, government agencies and their agents, such as
the Medicare fiscal intermediaries and carriers, as well as OIG,
conduct audits of our health care operations. Private payers may
conduct similar postpayment audits, and we also perform internal
audits and monitoring. Depending on the nature of the conduct
found in such audits and whether the underlying conduct could be
considered systemic, the resolution of these audits could have a
material adverse effect on our financial position, results of
operations and liquidity.
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Our
facilities are heavily concentrated in Florida and Texas, which
makes us sensitive to regulatory, economic, environmental and
competitive changes in those states.
We operated 179 hospitals at September 30, 2006, and 75 of
those hospitals are located in Florida and Texas. Our Florida
and Texas facilities combined revenues represented
approximately 50% of our consolidated revenues for the nine
months ended September 30, 2006. This situation makes us
particularly sensitive to regulatory, economic, environmental
and competition changes in those states. Any material change in
the current payment programs or regulatory, economic,
environmental or competitive conditions in those states could
have a disproportionate effect on our overall business results.
In addition, our hospitals in Florida and Texas and other areas
across the Gulf Coast are located in hurricane-prone areas. In
the recent past, hurricanes have had a disruptive effect on the
operations of our hospitals in Florida, Texas and other coastal
states, and the patient populations in those states. Our
business activities could be harmed by a particularly active
hurricane season or even a single storm. In addition, the
premiums to renew our property insurance policy for 2006
increased significantly over premiums incurred in 2005. Our new
policy also includes an increase in the stated deductible and we
were not able to obtain coverage in the amounts we have had
under our previous policies. As a result of such increases in
premiums and deductibles, we expect that our cash flows and
profitability will be adversely affected. In addition, the
property insurance we obtain may not be adequate to cover losses
from future hurricanes or other natural disasters.
(a) List of Exhibits:
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Exhibit 12
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Statement re: Computation of Ratio
of Earnings to Fixed Charges.
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Exhibit 31.1
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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 31.2
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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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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HCA 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: October 30, 2006
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