01—Abstract
Summary
Summary of the 10-K filed March 28, 2008. Cited figures are marked; the original filing is the authoritative source.
HCA Inc. (HCA) reported 2007 full-year results in its first 10-K following its November 2006 leveraged recapitalization by Bain Capital, KKR, Merrill Lynch Global Private Equity and Frist-family affiliates.
Revenues grew 5.4% to $26.858 billiona, driven by an 8.3% increase in revenue per equivalent admission that offset a 2.7% decline in equivalent admissions. Net income fell 15.7% to $874 million from $1.036 billion, though 2007 benefited from $471 million of gains on facility sales and a lower effective tax rate of 26.6%. Operating margin pressure was visible: the provision for doubtful accounts rose to 11.7% of revenues from 10.4%, driven by rising uninsured admissions (up 9.4% same-facility) and deteriorating collectibility.
The central investor issue is leverage. Total debt was $27.308 billionb at year-end, and interest expense more than doubled to $2.215 billion from $955 million, consuming a large share of operating cash flow. Operating cash flow fell to $1.396 billion from $1.845 billion, and free cash flow after $1.444 billion of capital expenditures was negative.
Stockholders' deficit was $10.538 billionc, and the company paid no dividends in 2007. Investors own 97.5% of the equity through Hercules Holding II, so public-market valuation references are not applicable, and the company is not publicly traded.
Offsetting positives include a 7.4% same-facility revenue increase, improved professional liability trends (provision falling to $163 milliond from $217 million), and a 2007 EBITDA result that exceeded the maximum PEP performance target. Key risks flagged in the filing include Medicaid supplemental payment exposure in Texas, a pending IRS dispute, a $12.250 billion Kansas nurse-understaffing class action, $725 million of auction rate securities in the insurance subsidiary that have failed auctions since February 2008, and concentration of 51% of revenues in Florida and Texas.
02—Key points
Key Highlights
- Revenues rose 5.4% to $26.858 billion, with same-facility revenues up 7.4% on an 8.1% increase in revenue per equivalent admission.
- Net income declined 15.7% to $874 million, though it included $471 million of gains on facility sales; the effective tax rate fell to 26.6% from 37.6%.
- Total long-term debt of $27.308 billion against interest expense of $2.215 billion (up from $955 million) reflects the post-Recapitalization capital structure; the average interest rate eased to 7.6%.
- Operating cash flow declined to $1.396 billion from $1.845 billion, largely due to higher interest payments; capital expenditures were $1.444 billion.
- The provision for doubtful accounts rose to 11.7% of revenues from 10.4%, reflecting growing uninsured volumes and collection pressure; the allowance covers about 89% of the $4.825 billion patient receivables balance.
- A stockholders' deficit of $10.538 billion and a 97.5% investor-controlled ownership structure mean there is no public equity market; the company paid no dividends in 2007.
- The insurance subsidiary holds $725 million of municipal auction rate securities and $20 million of preferred auction rate securities, with failed auctions since February 2008.
03—Questions
Frequently Asked Questions
Why did net income decline in 2007 despite revenue growth?
Net income fell to $874 million from $1.036 billion. Revenue growth of 5.4% was offset by higher interest expense (up $1.26 billion, following the Recapitalization), a higher provision for doubtful accounts (up to $3.13 billion), and a smaller gain from investment sales. Non-recurring items partly offset these pressures: 2007 included $471 million of facility-sale gains, while 2006 carried $442 million of Recapitalization transaction costs.
How leveraged is HCA and can it service its debt?
Total debt is $27.308 billion against a stockholders' deficit of $10.538 billion. Interest expense of $2.215 billion absorbed a large share of the roughly $2.6 billion of EBITDA-level earnings from operations (adjusted segment EBITDA was $4.592 billion), and operating cash flow of $1.396 billion did not cover capital spending plus interest comfortably. The filing states management believes operating cash flow and $2.5 billion of available revolver capacity will meet liquidity needs for the next twelve months, but covenant compliance and refinancing risk are material.
What is driving the rise in uninsured bad debt and what does it mean for investors?
Same-facility uninsured admissions rose 9.4% and uninsured emergency room visits rose 7.3% in 2007. The provision for doubtful accounts reached 11.7% of revenues. Management expects these trends to continue in 2008. Because uninsured collections are harder than government or insurer collections, sustained growth in the uninsured population would pressure margins and cash conversion.
What are the main regulatory and legal risks disclosed?
Key risks include a 2008 Medicaid rule that could significantly reduce federal Medicaid funding (estimated at $12.2 billion over five years in proposed form), Medicare DRG and documentation adjustments, a proposed ASC payment change, and the Texas Medicaid supplemental payment program, for which HCA recognized no net benefits after June 30, 2007 due to federal deferral. HCA also operates under a Corporate Integrity Agreement, faces a $12.250 billion Kansas class action on nurse understaffing, and is contesting IRS deficiencies for 2001 through 2004.
Who controls HCA and how are its shares valued?
Hercules Holding II, LLC, owned by Bain Capital, KKR, Merrill Lynch Global Private Equity and Frist-family affiliates, holds 97.5% of the common stock. HCA's shares are not registered for trading on any national exchange, so there is no public market price. Management valued the common stock at $60.97 per share at December 31, 2007, for internal purposes. The Sponsors also collect annual management fees, which were $16.85 million in 2007.
04—Continue