Why did net income fall in 2008 even though revenue grew?

Net income fell to $673 million from $874 million because 2007 included $471 million of gains on facility sales versus $97 million in 2008, the provision for doubtful accounts grew faster than revenue, and the effective tax rate rose to 28.5% from 26.6%. Interest expense dropped to $2.021 billion, which partly offset these pressures.

How leveraged is HCA and how is its debt structured?

Total debt was $26.989 billion at December 31, 2008, including $14.458 billion of first-lien senior secured debt, $5.700 billion of second-lien notes, and $6.831 billion of unsecured senior notes and debentures. Average interest rate was 6.9%, and about $5.055 billion was variable-rate, partly hedged with interest rate swaps. The company has a stockholders' deficit of $10.255 billion.

What are the main risks to HCA's revenue and collections?

Key risks include growth in uninsured patients during the economic downturn, deterioration in collectibility of patient-due accounts ($5.838 billion gross), Medicare bad debt challenges under the Battle Creek decision, potential Medicaid cuts (DRA 2005 cut about $4.8 billion over five years), pressure from managed care contracting, and the 1.5% cumulative Medicare documentation adjustment. Florida and Texas concentration amplifies state-level policy risk.

Is HCA's stock publicly traded, and who controls the company?

No. HCA's common stock is not traded on any exchange and was held by 631 holders of record as of February 25, 2009. Hercules Holding II, LLC, owned by Bain Capital, KKR, Merrill Lynch Global Private Equity and Frist family affiliates, owns 97.3% of the shares, giving the sponsors control over major corporate decisions. The company paid no dividends in 2007 or 2008.

What is HCA's near-term liquidity and debt maturity position?

Management believes operating cash flow, $1.858 billion of available revolving credit at year-end 2008 (rising to $2.038 billion by February 28, 2009), and debt market access will meet needs over the next twelve months. Senior secured credit facilities mature in 2012 and 2013, and contractual obligations including interest total about $41.1 billion, with $2.6 billion due within a year. Refinancing these maturities on acceptable terms is a stated risk.

HCA 10-K FY2008 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 4, 2009. Cited figures are marked; the original filing is the authoritative source.

HCA Inc. closed 2008 with 166 hospitals (plus 105 freestanding surgery centers) across 20 states and England, and reported revenues of $28.374 billion^a, up 5.6% year over year, driven by a 5.2% increase in revenue per equivalent admission.

Net income fell 23% to $673 million^b from $874 million, reflecting lower gains on facility sales, higher provisions for doubtful accounts (12.0% of revenue versus 11.7%), and a higher effective tax rate of 28.5%. Interest expense declined to $2.021 billion from $2.215 billion as average debt and rates came down, but leverage remains extreme: total debt was $26.989 billion, and stockholders' deficit was $(10.255) billion following the 2006 leveraged recapitalization. The key credit and operating concerns are the rising uninsured patient burden, with same-facility uninsured ER visits up 4.5% and admissions up 1.7%, and a receivables book of $5.838 billion in patient-due accounts whose allowance covers about 93%.

Management flagged weakening payer mix, Medicaid and Medicare reimbursement pressure (including the 1.5% cumulative documentation and coding adjustment and the TRICARE outpatient rule change), and the concentration of 51% of revenue in Florida and Texas. Cash from operations rose to $1.797 billion^c, but capital expenditures of $1.6 billion absorbed most of that, leaving limited free cash flow relative to debt service needs.

For investors, this is a highly levered, cash-generative hospital operator whose equity is held almost entirely by private sponsors (97.3%^d via Hercules Holding), so there is no public equity market and limited disclosure beyond SEC reporting. Returns depend on continued pricing gains and cost control to offset volume softness and rising bad debt, and on refinancing maturities of senior secured term loans in 2012 to 2013 on acceptable terms.

02—Key points

Key Highlights

Revenue grew 5.6% to $28.374 billion, driven by a 5.2% increase in revenue per equivalent admission, while admissions declined 0.7%.
Net income declined 23% to $673 million, with the effective tax rate rising to 28.5% and gains on facility sales falling to $97 million from $471 million.
Total debt was $26.989 billion at year-end 2008 following the 2006 Recapitalization, with a stockholders' deficit of $(10.255) billion.
Provision for doubtful accounts rose to 12.0% of revenue from 11.7%, with uninsured ER visits up 4.5% and uninsured admissions up 1.7% on a same-facility basis.
Florida and Texas generated about 51% of consolidated revenue, concentrating exposure to state Medicaid policy and hurricane risk.
Operating cash flow improved to $1.797 billion, but capital expenditures of $1.6 billion and interest payments of $1.979 billion absorbed most of it.
Company is privately held (97.3% owned by Hercules Holding), with no public trading market, and its Corporate Integrity Agreement with HHS-OIG expired January 24, 2009.

03—Questions

Frequently Asked Questions

Why did net income fall in 2008 even though revenue grew?
Net income fell to $673 million from $874 million because 2007 included $471 million of gains on facility sales versus $97 million in 2008, the provision for doubtful accounts grew faster than revenue, and the effective tax rate rose to 28.5% from 26.6%. Interest expense dropped to $2.021 billion, which partly offset these pressures.
How leveraged is HCA and how is its debt structured?
Total debt was $26.989 billion at December 31, 2008, including $14.458 billion of first-lien senior secured debt, $5.700 billion of second-lien notes, and $6.831 billion of unsecured senior notes and debentures. Average interest rate was 6.9%, and about $5.055 billion was variable-rate, partly hedged with interest rate swaps. The company has a stockholders' deficit of $10.255 billion.
What are the main risks to HCA's revenue and collections?
Key risks include growth in uninsured patients during the economic downturn, deterioration in collectibility of patient-due accounts ($5.838 billion gross), Medicare bad debt challenges under the Battle Creek decision, potential Medicaid cuts (DRA 2005 cut about $4.8 billion over five years), pressure from managed care contracting, and the 1.5% cumulative Medicare documentation adjustment. Florida and Texas concentration amplifies state-level policy risk.
Is HCA's stock publicly traded, and who controls the company?
No. HCA's common stock is not traded on any exchange and was held by 631 holders of record as of February 25, 2009. Hercules Holding II, LLC, owned by Bain Capital, KKR, Merrill Lynch Global Private Equity and Frist family affiliates, owns 97.3% of the shares, giving the sponsors control over major corporate decisions. The company paid no dividends in 2007 or 2008.
What is HCA's near-term liquidity and debt maturity position?
Management believes operating cash flow, $1.858 billion of available revolving credit at year-end 2008 (rising to $2.038 billion by February 28, 2009), and debt market access will meet needs over the next twelve months. Senior secured credit facilities mature in 2012 and 2013, and contractual obligations including interest total about $41.1 billion, with $2.6 billion due within a year. Refinancing these maturities on acceptable terms is a stated risk.

04—Continue

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