10-Q 1 g27343e10vq.htm FORM 10-Q e10vq
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
     
(Mark One)    
     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the quarterly period ended June 30, 2011
 
or
     
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the transition period from          to          
 
Commission file number 1-11239
 
HCA Holdings, Inc.
(Exact name of registrant as specified in its charter)
 
     
Delaware   27-3865930
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
     
One Park Plaza
Nashville, Tennessee
(Address of principal executive offices)
  37203
(Zip Code)
 
(615) 344-9551
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
(Do not check if a smaller reporting company)
 
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 issuer’s classes of common stock as of the latest practicable date.
 
     
Class of Common Stock   Outstanding at July 31, 2011
 
Voting common stock, $.01 par value   517,179,600 shares
 


 

 
HCA HOLDINGS, INC.
Form 10-Q
June 30, 2011
 
                 
        Page of
        Form 10-Q
 
  Part I.     Financial Information        
  Item 1.     Financial Statements (Unaudited):        
        Condensed Consolidated Income Statements — for the quarters and six months ended June 30, 2011 and 2010     3  
        Condensed Consolidated Balance Sheets — June 30, 2011 and December 31, 2010     4  
        Condensed Consolidated Statements of Cash Flows — for the six months ended June 30, 2011 and 2010     5  
        Notes to Condensed Consolidated Financial Statements     6  
  Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations     29  
  Item 3.     Quantitative and Qualitative Disclosures About Market Risk     49  
  Item 4.     Controls and Procedures     49  
             
  Part II.     Other Information        
  Item 1.     Legal Proceedings     49  
  Item 1A.     Risk Factors     50  
  Item 6.     Exhibits     52  
Signatures     53  
 EX-2.1
 EX-10.1
 EX-31.1
 EX-31.2
 EX-32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT


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HCA HOLDINGS, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
Unaudited

(Dollars in millions, except per share amounts)
 
                                 
    Quarter     Six Months  
    2011     2010     2011     2010  
 
Revenues
  $ 8,063     $ 7,756     $ 16,118     $ 15,300  
                                 
Salaries and benefits
    3,320       3,076       6,615       6,148  
Supplies
    1,295       1,251       2,570       2,451  
Other operating expenses
    1,326       1,226       2,648       2,428  
Provision for doubtful accounts
    775       788       1,424       1,352  
Equity in earnings of affiliates
    (73 )     (75 )     (149 )     (143 )
Depreciation and amortization
    358       355       716       710  
Interest expense
    520       530       1,053       1,046  
Losses on sales of facilities
                1        
Impairments of long-lived assets
          91             109  
Loss on retirement of debt
    75             75        
Termination of management agreement
                181        
                                 
      7,596       7,242       15,134       14,101  
                                 
Income before income taxes
    467       514       984       1,199  
Provision for income taxes
    147       136       330       345  
                                 
Net income
    320       378       654       854  
Net income attributable to noncontrolling interests
    91       85       185       173  
                                 
Net income attributable to HCA Holdings, Inc. 
  $ 229     $ 293     $ 469     $ 681  
                                 
Per share data:
                               
Basic earnings per share
  $ 0.44     $ 0.69     $ 0.98     $ 1.60  
Diluted earnings per share
  $ 0.43     $ 0.67     $ 0.94     $ 1.56  
Shares used in earnings per share calculations (in thousands):
                               
Basic
    516,448       426,329       480,525       426,340  
Diluted
    538,557       437,104       500,463       436,392  
 
See accompanying notes.


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HCA HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(Dollars in millions)
 
                 
    June 30,
    December 31,
 
    2011     2010  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 539     $ 411  
Accounts receivable, less allowance for doubtful accounts of $3,955 and $3,939
    3,946       3,832  
Inventories
    887       897  
Deferred income taxes
    894       931  
Other
    625       848  
                 
      6,891       6,919  
                 
Property and equipment, at cost
    26,338       25,641  
Accumulated depreciation
    (14,754 )     (14,289 )
                 
      11,584       11,352  
                 
Investments of insurance subsidiary
    515       642  
Investments in and advances to affiliates
    843       869  
Goodwill
    2,719       2,693  
Deferred loan costs
    332       374  
Other
    993       1,003  
                 
    $ 23,877     $ 23,852  
                 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
               
Accounts payable
  $ 1,297     $ 1,537  
Accrued salaries
    1,009       895  
Other accrued expenses
    1,283       1,245  
Long-term debt due within one year
    689       592  
                 
      4,278       4,269  
                 
Long-term debt
    24,631       27,633  
Professional liability risks
    987       995  
Income taxes and other liabilities
    1,515       1,608  
                 
Equity securities with contingent redemption rights
          141  
                 
Stockholders’ deficit:
               
Common stock $0.01 par; authorized 1,800,000,000 shares; outstanding 517,094,100 shares in 2011 and 427,458,800 shares in 2010
    5       4  
Capital in excess of par value
    3,072       386  
Accumulated other comprehensive loss
    (339 )     (428 )
Retained deficit
    (11,419 )     (11,888 )
                 
Stockholders’ deficit attributable to HCA Holdings, Inc. 
    (8,681 )     (11,926 )
Noncontrolling interests
    1,147       1,132  
                 
      (7,534 )     (10,794 )
                 
    $ 23,877     $ 23,852  
                 
 
See accompanying notes.


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HCA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
Unaudited
(Dollars in millions)
 
                 
    2011     2010  
 
Cash flows from operating activities:
               
Net income
  $ 654     $ 854  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Changes in operating assets and liabilities
    (1,576 )     (1,698 )
Provision for doubtful accounts
    1,424       1,352  
Depreciation and amortization
    716       710  
Income taxes
    317       (111 )
Losses on sales of facilities
    1        
Impairments of long-lived assets
          109  
Loss on retirement of debt
    75        
Amortization of deferred loan costs
    39       40  
Share-based compensation
    16       16  
Other
          23  
                 
Net cash provided by operating activities
    1,666       1,295  
                 
Cash flows from investing activities:
               
Purchase of property and equipment
    (776 )     (536 )
Acquisition of hospitals and health care entities
    (168 )     (31 )
Disposition of hospitals and health care entities
    54       25  
Change in investments
    76       502  
Other
    2       (11 )
                 
Net cash used in investing activities
    (812 )     (51 )
                 
Cash flows from financing activities:
               
Issuance of long-term debt
          1,387  
Net change in revolving credit facilities
    (1,524 )     1,329  
Repayment of long-term debt
    (1,508 )     (1,529 )
Distributions to noncontrolling interests
    (185 )     (176 )
Distributions to stockholders
    (30 )     (2,251 )
Payment of debt issuance costs
    (12 )     (25 )
Issuance of common stock
    2,506        
Income tax benefits
    49       56  
Other
    (22 )     3  
                 
Net cash used in financing activities
    (726 )     (1,206 )
                 
Change in cash and cash equivalents
    128       38  
Cash and cash equivalents at beginning of period
    411       312  
                 
Cash and cash equivalents at end of period
  $ 539     $ 350  
                 
Interest payments
  $ 1,043     $ 973  
Income tax (refunds) payments, net
  $ (36 )   $ 400  
 
See accompanying notes.


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HCA HOLDINGS, INC.
 
 
NOTE 1 — INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Reporting Entity
 
On November 17, 2006, HCA Inc. completed its merger with Hercules Acquisition Corporation, pursuant to which the Company was acquired by Hercules Holding II, LLC, a Delaware limited liability company owned by a private investor group comprised of affiliates of Bain Capital Partners, Kohlberg Kravis Roberts & Co., BAML Capital Partners (formerly Merrill Lynch Global Private Equity) (each a “Sponsor”), affiliates of Citigroup Inc. and Bank of America Corporation (the “Sponsor Assignees”) and affiliates of HCA founder, Dr. Thomas F. Frist Jr., (the “Frist Entities,” and together with the Sponsors and the Sponsor Assignees, the “Investors”) and by members of management and certain other investors.
 
On November 22, 2010, HCA Inc. reorganized by creating a new holding company structure (the “Corporate Reorganization”). HCA Holdings, Inc. became the new parent company, and HCA Inc. is a wholly-owned direct subsidiary of HCA Holdings, Inc. As part of the Corporate Reorganization, HCA Inc.’s outstanding shares of capital stock were automatically converted, on a share for share basis, into identical shares of our common stock. Immediately following the Corporate Reorganization, our amended and restated certificate of incorporation, amended and restated bylaws, executive officers and board of directors were the same as HCA Inc.’s in effect immediately prior to the Corporate Reorganization, and the rights, privileges and interests of HCA Inc.’s stockholders remained the same with respect to us as the new holding company.
 
During February 2011, our Board of Directors approved an increase in the number of our authorized shares to 1,800,000,000 shares of common stock and a 4.505-to-one split of our issued and outstanding common shares. All common share and per common share amounts in these condensed consolidated financial statements and notes to condensed consolidated financial statements reflect the 4.505-to-one split. During March 2011, we completed the initial public offering of 87,719,300 shares of our common stock at a price of $30.00 per share (before deducting underwriter discounts, commissions and other related offering expenses). Certain of our stockholders also sold 57,410,700 shares of our common stock in this offering. We did not receive any proceeds from the shares sold by the selling stockholders. Our common stock is now traded on the New York Stock Exchange (symbol “HCA”).
 
The Investors have provided management and advisory services to the Company pursuant to a management agreement among HCA Inc. and the Investors executed in connection with the Investors’ acquisition of HCA Inc. in November 2006. The management agreement was terminated pursuant to its terms upon completion of the initial public offering of our common stock, and the Company paid the Investors a final fee of $181 million. The management agreement also provided that the Company pay a 1% fee in connection with certain financing, acquisition, divestiture and change of control transactions. The Company paid the Investors a fee of $26 million related to the initial public offering of our common stock, and this fee was recorded as a cost of the stock offering.
 
HCA Holdings, Inc. is a holding company whose affiliates own and operate hospitals and related health care entities. The term “affiliates” includes direct and indirect subsidiaries of HCA Holdings, Inc. and partnerships and joint ventures in which such subsidiaries are partners. At June 30, 2011, these affiliates owned and operated 157 hospitals, 98 freestanding surgery centers and facilities which provided extensive outpatient and ancillary services. Affiliates of HCA Holdings, Inc. are also partners in joint ventures that own and operate seven hospitals and 13 freestanding surgery centers, which are accounted for using the equity method. HCA Holdings, Inc.’s facilities are located in 20 states and England. The terms “Company,” “HCA,” “we,” “our” or “us,” as used herein and unless otherwise stated or indicated by context, refer to HCA Inc. and its affiliates prior to the Corporate Reorganization and to HCA Holdings, Inc. and its affiliates after the Corporate Reorganization. The terms “facilities” or “hospitals” refer to entities owned and operated by affiliates of HCA and the term “employees” refers to employees of affiliates of HCA.


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HCA HOLDINGS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 1 — INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal and recurring nature.
 
The majority of our expenses are “cost of revenue” items. Costs that could be classified as general and administrative would include our corporate office costs, which were $55 million and $44 million for the quarters ended June 30, 2011 and 2010, respectively, and $109 million and $84 million for the six months ended June 30, 2011 and 2010, respectively. Operating results for the quarter and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. 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, 2010.
 
Certain prior year amounts have been reclassified to conform to the current year presentation.
 
NOTE 2 — INCOME TAXES
 
At June 30, 2011, we were contesting, before the Internal Revenue Service (“IRS”) Appeals Division, certain claimed deficiencies and adjustments proposed by the IRS Examination Division in connection with its audit of HCA Inc.’s 2005 and 2006 federal income tax returns. The disputed items include the timing of recognition of certain patient service revenues, the deductibility of certain debt retirement costs and our method for calculating the tax allowance for doubtful accounts. In addition, eight taxable periods of HCA Inc. and its predecessors ended in 1997 through 2004, for which the primary remaining issue is the computation of the tax allowance for doubtful accounts, were pending before the IRS Examination Division as of June 30, 2011. The IRS Examination Division began an audit of HCA Inc.’s 2007, 2008 and 2009 federal income tax returns in 2010.
 
Our liability for unrecognized tax benefits was $399 million, including accrued interest of $91 million, as of June 30, 2011 ($413 million and $115 million, respectively, as of December 31, 2010). Unrecognized tax benefits of $198 million ($190 million as of December 31, 2010) would affect the effective rate, if recognized. The liability for unrecognized tax benefits does not reflect deferred tax assets of $55 million ($63 million as of December 31, 2010) related to deductible interest and state income taxes or a refundable deposit of $82 million ($82 million as of December 31, 2010), which is recorded in noncurrent assets. The provision for income taxes reflects $2 million and $59 million ($1 million and $37 million, net of tax) in reductions in interest expense related to taxing authority examinations for the quarters ended June 30, 2011 and 2010, respectively, and $26 million and $74 million ($16 million and $47 million, respectively, net of tax) reductions in interest expense related to taxing authority examinations for the six months ended June 30, 2011 and 2010, respectively.
 
Depending on the resolution of the IRS disputes, the completion of examinations by federal, state or international taxing authorities, or the expiration of statutes of limitation for specific taxing jurisdictions, we believe it is reasonably possible our liability for unrecognized tax benefits may significantly increase or decline within the next 12 months. However, we are currently unable to estimate the range of any possible change.


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HCA HOLDINGS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 3 — 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 restricted share units, computed using the treasury stock method.
 
The following table sets forth the computation of basic and diluted earnings per share for the quarters and six months ended June 30, 2011 and 2010 (dollars in millions, except per share amounts, and shares in thousands):
 
                                 
    Quarter     Six Months  
    2011     2010     2011     2010  
 
Net income attributable to HCA Holdings, Inc. 
  $ 229     $ 293     $ 469     $ 681  
                                 
Weighted average common shares outstanding
    516,448       426,329       480,525       426,340  
Effect of dilutive securities
    22,109       10,775       19,938       10,052  
                                 
Shares used for diluted earnings per share
    538,557       437,104       500,463       436,392  
                                 
Earnings per share:
                               
Basic earnings per share
  $ 0.44     $ 0.69     $ 0.98     $ 1.60  
Diluted earnings per share
  $ 0.43     $ 0.67     $ 0.94     $ 1.56  
 
NOTE 4 — INVESTMENTS OF INSURANCE SUBSIDIARY
 
A summary of our insurance subsidiary’s investments at June 30, 2011 and December 31, 2010 follows (dollars in millions):
 
                                 
    June 30, 2011  
          Unrealized
       
    Amortized
    Amounts     Fair
 
    Cost     Gains     Losses     Value  
 
Debt securities:
                               
States and municipalities
  $ 305     $ 12     $ (1 )   $ 316  
Auction rate securities
    152             (3 )     149  
Asset-backed securities
    23                   23  
Money market funds
    229                   229  
                                 
      709       12       (4 )     717  
Equity securities
    8       1       (1 )     8  
                                 
    $ 717     $ 13     $ (5 )     725  
                                 
Amounts classified as current assets
                            (210 )
                                 
Investment carrying value
                          $ 515  
                                 
 


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HCA HOLDINGS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 4 — INVESTMENTS OF INSURANCE SUBSIDIARY (continued)
 
                                 
    December 31, 2010  
          Unrealized
       
    Amortized
    Amounts     Fair
 
    Cost     Gains     Losses     Value  
 
Debt securities:
                               
States and municipalities
  $ 312     $ 12     $ (1 )   $ 323  
Auction rate securities
    251             (1 )     250  
Asset-backed securities
    26       1       (1 )     26  
Money market funds
    135                   135  
                                 
      724       13       (3 )     734  
Equity securities
    8       1       (1 )     8  
                                 
    $ 732     $ 14     $ (4 )     742  
                                 
Amounts classified as current assets
                            (100 )
                                 
Investment carrying value
                          $ 642  
                                 
 
At June 30, 2011 and December 31, 2010, the investments of our insurance subsidiary were classified as “available-for-sale.” Changes in temporary unrealized gains and losses are recorded as adjustments to other comprehensive income. At June 30, 2011 and December 31, 2010, $19 million and $92 million, respectively, of our investments were subject to restrictions included in insurance bond collateralization and assumed reinsurance contracts.
 
Scheduled maturities of investments in debt securities at June 30, 2011 were as follows (dollars in millions):
 
                 
    Amortized
    Fair
 
    Cost     Value  
 
Due in one year or less
  $ 249     $ 250  
Due after one year through five years
    139       147  
Due after five years through ten years
    122       124  
Due after ten years
    24       24  
                 
      534       545  
Auction rate securities
    152       149  
Asset-backed securities
    23       23  
                 
    $ 709     $ 717  
                 
 
The average expected maturity of the investments in debt securities at June 30, 2011 was 2.6 years, compared to the average scheduled maturity of 8.6 years. Expected and scheduled maturities may differ because the issuers of certain securities have the right to call, prepay or otherwise redeem such obligations prior to the scheduled maturity date. The average expected maturities for our auction rate and asset-backed securities were derived from valuation models of expected cash flows and involved management’s judgment. At June 30, 2011, the average expected maturities for our auction rate and asset-backed securities were 4.4 years and 5.1 years, respectively, compared to average scheduled maturities of 25.2 years and 25.1 years, respectively.

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HCA HOLDINGS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 5 — LONG-TERM DEBT
 
A summary of long-term debt at June 30, 2011 and December 31, 2010, including related interest rates at June 30, 2011, follows (dollars in millions):
 
                 
    June 30,
    December 31,
 
    2011     2010  
 
Senior secured asset-based revolving credit facility (effective interest rate of 1.4%)
  $ 1,080     $ 1,875  
Senior secured revolving credit facility
          729  
Senior secured term loan facilities (effective interest rate of 7.4%)
    7,541       7,530  
Senior secured first lien notes (effective interest rate of 8.4%)
    4,078       4,075  
Other senior secured debt (effective interest rate of 7.1%)
    304       322  
                 
First lien debt
    13,003       14,531  
                 
Senior secured cash-pay notes (effective interest rate of 9.7%)
    3,396       4,501  
Senior secured toggle notes (effective interest rate of 10.0%)
    1,578       1,578  
                 
Second lien debt
    4,974       6,079  
                 
Senior unsecured notes (effective interest rate of 7.1%)
    7,343       7,615  
                 
Total debt (average life of 6.5 years, rates averaging 7.7%)
    25,320       28,225  
Less amounts due within one year
    689       592  
                 
    $ 24,631     $ 27,633  
                 
 
During March 2011, pending permanent application, we used the net proceeds of $2.506 billion from the initial public offering of our common stock to reduce amounts outstanding under our revolving credit facilities.
 
On May 4, 2011, we completed amendments to our senior secured credit agreement and senior secured asset-based revolving credit agreement, as well as extensions of certain of our term loans. The amendments extend approximately $594 million of our term loan A-1 facility with a final maturity of November 2012 to a final maturity of May 2016 and approximately $2.373 billion of our term loan A-1 and term loan B-1 facilities with final maturities of November 2012 and November 2013, respectively, to a final maturity of May 2018.
 
On June 2, 2011, we redeemed all $1.000 billion aggregate principal amount of our 91/8% Senior Secured Notes due 2014, at a redemption price of 104.563% of the principal amount, and $108 million aggregate principal amount of our 97/8% Senior Secured Notes due 2017, at a redemption price of 109.875% of the principal amount. The pretax loss on retirement of debt related to these redemptions was $75 million.
 
NOTE 6 — FINANCIAL INSTRUMENTS
 
Interest Rate Swap Agreements
 
We have entered into interest rate swap agreements to manage our exposure to fluctuations in interest rates. These swap agreements involve the exchange of fixed and variable rate interest payments between two parties based on common notional principal amounts and maturity dates. Pay-fixed interest rate swaps effectively convert LIBOR indexed variable rate obligations to fixed interest rate obligations. Pay-variable interest rate swaps effectively convert fixed interest rate obligations to LIBOR indexed variable rate obligations. The interest payments under these agreements are settled on a net basis. The net interest payments, based on the notional amounts in these agreements, generally match the timing of the related liabilities, for the interest rate swap agreements which have been designated as cash flow hedges. The notional amounts of the swap agreements represent amounts used to


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HCA HOLDINGS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 6 — FINANCIAL INSTRUMENTS (continued)
 

Interest Rate Swap Agreements (continued)
 
calculate the exchange of cash flows and are not our assets or liabilities. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions.
 
The following table sets forth our interest rate swap agreements, which have been designated as cash flow hedges, at June 30, 2011 (dollars in millions):
 
                         
    Notional
          Fair
 
    Amount     Maturity Date     Value  
 
Pay-fixed interest rate swaps
  $ 7,100       November 2011     $ (125 )
Pay-fixed interest rate swaps (starting November 2011)
    500       December 2014       2  
Pay-fixed interest rate swaps (starting November 2011)
    3,000       December 2016       (195 )
Pay-fixed interest rate swaps (starting November 2011)
    1,000       December 2017       11  
 
Certain of our interest rate swaps are not designated as hedges, and changes in fair value are recognized in results of operations. The following table sets forth our interest rate swap agreements, which were not designated as hedges, at June 30, 2011 (dollars in millions):
 
                         
    Notional
      Fair
    Amount   Maturity Date   Value
 
Pay-fixed interest rate swap
  $ 900       November 2011     $ (15 )
Pay-variable interest rate swap
    900       November 2011       2  
 
During the next 12 months, we estimate $214 million will be reclassified from other comprehensive income (“OCI”) to interest expense.
 
Cross Currency Swaps
 
The Company and certain subsidiaries have incurred obligations and entered into various intercompany transactions where such obligations are denominated in currencies, other than the functional currencies of the parties executing the trade. In order to mitigate the currency exposure risks and better match the cash flows of our obligations and intercompany transactions with cash flows from operations, we entered into various cross currency swaps. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions.
 
Certain of our cross currency swaps are not designated as hedges, and changes in fair value are recognized in results of operations. The following table sets forth our cross currency swap agreement, which was not designated as a hedge, at June 30, 2011 (amounts in millions):
 
                         
    Notional
      Fair
    Amount   Maturity Date   Value
 
Euro — United States Dollar currency swap
    351 Euro       December 2011     $ 78  
 
Derivatives — Results of Operations
 
The following tables present the effect on our results of operations of our interest rate and cross currency swaps for the quarter ended June 30, 2011 (dollars in millions):
 
                         
        Location of Loss
  Amount of Loss
    Amount of Loss
  Reclassified from
  Reclassified from
    Recognized in OCI on
  Accumulated OCI
  Accumulated OCI
Derivatives in Cash Flow Hedging Relationships   Derivatives, Net of Tax   into Operations   into Operations
 
Interest rate swaps
  $ 49       Interest expense     $ 186  


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HCA HOLDINGS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 6 — FINANCIAL INSTRUMENTS (continued)
 

Derivatives — Results of Operations (continued)
 
                 
    Location of Gain
  Amount of Gain
    Recognized in
  Recognized in
    Operations on
  Operations on
Derivatives Not Designated as Hedging Instruments   Derivatives   Derivatives
 
Cross currency swap
    Other operating expenses     $ 39  
 
Credit-risk-related Contingent Features
 
We have agreements with each of our derivative counterparties that contain a provision where we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness. As of June 30, 2011, we have not been required to post any collateral related to these agreements. If we had breached these provisions at June 30, 2011, we would have been required to settle our obligations under the agreements at their aggregate, estimated termination value of $263 million.
 
NOTE 7 — ASSETS AND LIABILITIES MEASURED AT FAIR VALUE
 
Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”) defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements.
 
ASC 820 emphasizes fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
 
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
 
Cash Traded Investments
 
Our cash traded investments are generally classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Certain types of cash traded instruments are classified within Level 3 of the fair value hierarchy because they trade infrequently and therefore have little or no price transparency. Such instruments include auction rate securities (“ARS”) and limited partnership investments. The transaction price is initially used as the best estimate of fair value.


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HCA HOLDINGS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 7 — ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (continued)
 

Cash Traded Investments (continued)
 
Our wholly-owned insurance subsidiary had investments in tax-exempt ARS, which are backed by student loans substantially guaranteed by the federal government, of $149 million ($152 million par value) at June 30, 2011. We do not currently intend to attempt to sell the ARS as the liquidity needs of our insurance subsidiary are expected to be met by other investments in its investment portfolio. During 2010 and the first six months of 2011, certain issuers and their broker/dealers redeemed or repurchased $150 million and $99 million, respectively, of our ARS at par value. The valuation of these securities involved management’s judgment, after consideration of market factors and the absence of market transparency, market liquidity and observable inputs. Our valuation models derived a fair market value compared to tax-equivalent yields of other student loan backed variable rate securities of similar credit worthiness and similar effective maturities.
 
Derivative Financial Instruments
 
We have entered into interest rate and cross currency swap agreements to manage our exposure to fluctuations in interest rates and foreign currency risks. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates and implied volatilities. To comply with the provisions of ASC 820, we incorporate credit valuation adjustments to reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.
 
Although we determined the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. We assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and at June 30, 2011 and December 31, 2010, we determined the credit valuation adjustments were not significant to the overall valuation of our derivatives.


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HCA HOLDINGS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 7 — ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (continued)
 
Fair Value Summary
 
The following table summarizes our assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall (dollars in millions):
 
                                 
    June 30, 2011  
          Fair Value Measurements Using  
          Quoted Prices in
             
          Active Markets for
             
          Identical Assets
    Significant Other
    Significant
 
          and Liabilities
    Observable Inputs
    Unobservable Inputs
 
    Fair Value     (Level 1)     (Level 2)     (Level 3)  
 
Assets:
                               
Investments of insurance subsidiary:
                               
Debt securities:
                               
States and municipalities
  $ 316     $     $ 316     $  
Auction rate securities
    149                   149  
Asset-backed securities
    23             23        
Money market funds
    229       229              
                                 
      717       229       339       149  
Equity securities
    8       2       4       2  
                                 
Investments of insurance subsidiary
    725       231       343       151  
Less amounts classified as current assets
    (210 )     (210 )            
                                 
    $ 515     $ 21     $ 343     $ 151  
                                 
Cross currency swap (Other assets)
  $ 78     $     $ 78     $  
Liabilities:
                               
Interest rate swaps (Income taxes and other liabilities)
  $ 320     $     $ 320     $  


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HCA HOLDINGS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 7 — ASSETS AND LIABILITIES MEASURED AT FAIR VALUE (continued)
 

Fair Value Summary (continued)
 
                                 
    December 31, 2010  
          Fair Value Measurements Using  
          Quoted Prices in
             
          Active Markets for
             
          Identical Assets
    Significant Other
    Significant
 
          and Liabilities
    Observable Inputs
    Unobservable Inputs
 
    Fair Value     (Level 1)     (Level 2)     (Level 3)  
 
Assets:
                               
Investments of insurance subsidiary:
                               
Debt securities:
                               
States and municipalities
  $ 323     $     $ 323     $  
Auction rate securities
    250                   250  
Asset-backed securities
    26             26        
Money market funds
    135       135              
                                 
      734       135       349       250  
Equity securities
    8       2       5       1  
                                 
Investments of insurance subsidiary
    742       137       354       251  
Less amounts classified as current assets
    (100 )     (100 )            
                                 
    $ 642     $ 37     $ 354     $ 251  
                                 
Cross currency swap (Other assets)
  $ 39     $     $ 39     $  
Liabilities:
                               
Interest rate swaps (Income taxes and other liabilities)
  $ 426     $     $ 426     $  
 
The following table summarizes the activity related to the auction rate and equity securities investments of our insurance subsidiary, which have fair value measurements based on significant unobservable inputs (Level 3), during the six months ended June 30, 2011 (dollars in millions):
 
         
Asset balances at December 31, 2010
  $ 251  
Unrealized losses included in other comprehensive income
    (1 )
Settlements
    (99 )
         
Asset balances at June 30, 2011
  $ 151  
         
 
The estimated fair value of our long-term debt was $26.060 billion and $28.738 billion at June 30, 2011 and December 31, 2010, respectively, compared to carrying amounts aggregating $25.320 billion and $28.225 billion, respectively. The estimates of fair value are generally based upon the quoted market prices or quoted market prices for similar issues of long-term debt with the same maturities.


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HCA HOLDINGS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 8 — CONTINGENCIES
 
We operate in a highly regulated and litigious industry. As a result, various lawsuits, claims and legal and regulatory proceedings have been and can be expected to be instituted or asserted against us. The resolution of any such lawsuits, claims or legal and regulatory proceedings could have a material, adverse effect on our results of operations or financial position in a given period.
 
Health care companies are subject to numerous investigations by various governmental agencies. 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, or improperly retain overpayments from, the government. Some states have adopted similar state whistleblower and false claims provisions. Certain of our individual facilities have received government inquiries from federal and state agencies and our facilities may receive such inquiries in future periods. Depending on whether the underlying conduct in these or future inquiries or investigations could be considered systemic, their resolution could have a material, adverse effect on our results of operations or financial position.
 
We are subject to claims and suits arising in the ordinary course of business, including claims for personal injuries or wrongful restriction of, or interference with, physicians’ staff privileges. In certain of these actions the claimants may seek punitive damages against us which may not be covered by insurance. It is management’s 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.
 
The Civil Division of the Department of Justice (“DOJ”) has contacted the Company in connection with its nationwide review of whether, in certain cases, hospital charges to the federal government relating to implantable cardio-defibrillators (“ICDs”) met the Centers for Medicare & Medicaid Services criteria. In connection with this nationwide review, the DOJ has indicated that it will be reviewing certain ICD billing and medical records at 95 HCA hospitals; the review covers the period from October 2003 to the present. The review could potentially give rise to claims against the Company under the federal False Claims Act or other statutes, regulations or laws. At this time, we cannot predict what effect, if any, this review or any resulting claims could have on the Company.
 
NOTE 9 — COMPREHENSIVE INCOME AND CAPITAL STRUCTURE
 
The components of comprehensive income, net of related taxes, for the quarters and six months ended June 30, 2011 and 2010 are only attributable to HCA Holdings, Inc. and are as follows (dollars in millions):
 
                                 
    Quarter     Six Months  
    2011     2010     2011     2010  
 
Net income attributable to HCA Holdings, Inc. 
  $ 229     $ 293     $ 469     $ 681  
Change in fair value of derivative instruments
    2       (14 )     69       (26 )
Change in fair value of available-for-sale securities
          (8 )     (1 )     (7 )
Foreign currency translation adjustments
          (6 )     14       (27 )
Defined benefit plans
    3       2       7       5  
                                 
Comprehensive income
  $ 234     $ 267     $ 558     $ 626  
                                 


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HCA HOLDINGS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 9 — COMPREHENSIVE INCOME AND CAPITAL STRUCTURE (continued)
 
The components of accumulated other comprehensive loss, net of related taxes, are as follows (dollars in millions):
 
                 
    June 30,
    December 31,
 
    2011     2010  
 
Change in fair value of derivative instruments
  $ (203 )   $ (272 )
Change in fair value of available-for-sale securities
    5       6  
Foreign currency translation adjustments
    (5 )     (19 )
Defined benefit plans
    (136 )     (143 )
                 
Accumulated other comprehensive loss
  $ (339 )   $ (428 )
                 
 
The changes in stockholders’ deficit, including changes in stockholders’ deficit attributable to HCA Holdings, Inc. and changes in equity attributable to noncontrolling interests are as follows (dollars in millions):
 
                                                         
    Equity (Deficit) Attributable to HCA Holdings, Inc.              
                Capital in
    Accumulated
          Equity
       
    Common Stock     Excess of
    Other
          Attributable to
       
    Shares
    Par
    Par
    Comprehensive
    Retained
    Noncontrolling
       
    (000)     Value     Value     Loss     Deficit     Interests     Total  
 
Balances, December 31, 2010
    427,459     $ 4     $ 386     $ (428 )   $ (11,888 )   $ 1,132     $ (10,794 )
Net income
                            469       185       654  
Other comprehensive income
                      89                   89  
Issuance of common stock
    87,719       1       2,505                         2,506  
Distributions
                                  (185 )     (185 )
Share-based benefit plans
    1,916             18                         18  
Reclassification of certain equity securities with contingent redemption rights
                141                         141  
Other
                22                   15       37  
                                                         
Balances, June 30, 2011
    517,094     $ 5     $ 3,072     $ (339 )   $ (11,419 )   $ 1,147     $ (7,534 )
                                                         
 
During February 2011, our Board of Directors approved an increase in the number of our authorized shares to 1,800,000,000 shares of common stock and a 4.505-to-one split of our issued and outstanding commons shares. During March 2011, we completed the initial public offering of 87,719,300 shares of our common stock at a price of $30.00 per share and realized net proceeds (after costs of the offering) of $2.506 billion.
 
Prior to the consummation of the initial public offering of our common stock, certain employees could elect to have the Company redeem their common stock and vested options in the event of death or permanent disability, pursuant to the terms of their management stockholder agreements. The consummation of the initial public offering of our common stock effectively terminated the contingent redemption rights and the applicable amounts have been reclassified to stockholders’ equity.
 
NOTE 10 — SEGMENT AND GEOGRAPHIC INFORMATION
 
We operate in one line of business, which is operating hospitals and related health care entities. During the quarters ended June 30, 2011 and 2010, 23.2% and 23.5%, respectively, of our revenues related to patients participating in the fee-for-service Medicare program. During each of the six months ended June 30, 2011 and 2010, 24.0% of our revenues related to patients participating in the fee-for-service Medicare program.


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HCA HOLDINGS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 10 — SEGMENT AND GEOGRAPHIC INFORMATION (continued)
 
Our operations are structured into three geographically organized groups: the National, Southwest and Central Groups. During February 2011, we reorganized our operational groups and have restated the prior period amounts to reflect this reorganization. The National Group includes 65 consolidating hospitals located in Florida, South Carolina, southern Georgia, Alaska, California, Nevada, Utah and Idaho, The Southwest Group includes 39 consolidating hospitals located in Texas, Oklahoma and the Wichita, Kansas market, and the Central Group includes 47 consolidating hospitals located in Louisiana, Indiana, Kentucky, Tennessee, Virginia, New Hampshire, northern Georgia and the Kansas City market. We also operate six consolidating hospitals in England, and these facilities are included in the Corporate and other Group.
 
Adjusted segment EBITDA is defined as income before depreciation and amortization, interest expense, losses on sales of facilities, impairments of long-lived assets, loss on retirement of debt, termination of management agreement, income taxes and net income attributable to noncontrolling interests. We use adjusted segment EBITDA as an analytical indicator for purposes of allocating resources to geographic areas and assessing their performance. Adjusted segment EBITDA is commonly used as an analytical indicator within the health care industry, and also serves as a measure of leverage capacity and debt service ability. Adjusted segment EBITDA should not be considered as a measure of financial performance under generally accepted accounting principles, and the items excluded from adjusted segment EBITDA are significant components in understanding and assessing financial performance. Because adjusted segment EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, adjusted segment EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. The geographic distributions of our revenues, equity in earnings of affiliates, adjusted segment EBITDA, and depreciation and amortization for the quarters and six months ended June 30, 2011 and 2010 are summarized in the following table (dollars in millions):
 
                                 
    Quarter     Six Months  
    2011     2010     2011     2010  
 
Revenues:
                               
National Group
  $ 3,448     $ 3,292     $ 6,903     $ 6,495  
Southwest Group
    2,445       2,384       4,880       4,722  
Central Group
    1,885       1,836       3,764       3,600  
Corporate and other
    285       244       571       483  
                                 
    $ 8,063     $ 7,756     $ 16,118     $ 15,300  
                                 
Equity in earnings of affiliates:
                               
National Group
  $ (1 )   $ (1 )   $ (2 )   $ (2 )
Southwest Group
    (73 )     (74 )     (148 )     (140 )
Central Group
                      (1 )
Corporate and other
    1             1        
                                 
    $ (73 )   $ (75 )   $ (149 )   $ (143 )
                                 
Adjusted segment EBITDA:
                               
National Group
  $ 576     $ 602     $ 1,248     $ 1,264  
Southwest Group
    567       568       1,162       1,135  
Central Group
    318       324       651       667  
Corporate and other
    (41 )     (4 )     (51 )     (2 )
                                 
    $ 1,420     $ 1,490     $ 3,010     $ 3,064  
                                 


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HCA HOLDINGS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 10 — SEGMENT AND GEOGRAPHIC INFORMATION (continued)
 
                                 
    Quarter     Six Months  
    2011     2010     2011     2010  
 
Depreciation and amortization:
                               
National Group
  $ 127     $ 128     $ 252     $ 256  
Southwest Group
    110       106       221       213  
Central Group
    89       90       177       178  
Corporate and other
    32       31       66       63  
                                 
    $ 358     $ 355     $ 716     $ 710  
                                 
Adjusted segment EBITDA
  $ 1,420     $ 1,490     $ 3,010     $ 3,064  
Depreciation and amortization
    358       355       716       710  
Interest expense
    520       530       1,053       1,046  
Losses on sales of facilities
                1        
Impairments of long-lived assets
          91             109  
Loss on retirement of debt
    75             75        
Termination of management agreement
                181        
                                 
Income before income taxes
  $ 467     $ 514     $ 984     $ 1,199  
                                 
 
NOTE 11 — ACQUISITIONS, DISPOSITIONS AND IMPAIRMENTS OF LONG-LIVED ASSETS
 
During the six months ended June 30, 2011, we paid $136 million to acquire a hospital in the National Group and $32 million to acquire other nonhospital health care entities. During the six months ended June 30, 2010, we paid $31 million to acquire nonhospital health care entities.
 
During the six months ended June 30, 2011, we received proceeds of $54 million and recognized a net pretax loss of $1 million related to the sales of a hospital facility and our investment in a hospital joint venture. During the six months ended June 30, 2010, we received proceeds of $25 million related to sales of real estate investments, and the proceeds were equal to the carrying amounts.
 
During the quarter ended June 30, 2010, we recorded impairments of long-lived assets of $91 million, comprised of impairment charges of $56 million related to revised, reduced projections of future expected cash flows for a hospital facility in our Central Group and $35 million for capitalized engineering and design costs in our Corporate and other Group related to certain building safety requirements (California earthquake standards) that have been revised, to adjust the carrying values to estimated fair value. During the six months ended June 30, 2010, we recorded impairments of long-lived assets of $109 million, including the second quarter 2010 charges of $91 million and the first quarter 2010 impairment charges of $18 million to adjust the carrying values of real estate and other investments in our National, Southwest and Corporate and other Groups to estimated fair value. There were no impairments of long-lived assets for the quarter or six months ended June 30, 2011.
 
NOTE 12 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
 
On November 22, 2010, HCA Inc. reorganized by creating a new holding company structure. HCA Holdings, Inc. became the new parent company, and HCA Inc. is now HCA Holdings, Inc.’s wholly-owned direct subsidiary. On November 23, 2010, HCA Holdings, Inc. issued $1.525 billion aggregate principal amount of 73/4% senior unsecured notes due 2021. These notes are senior unsecured obligations and are not guaranteed by any of our subsidiaries.
 
Our senior secured credit facilities and senior secured notes are fully and unconditionally guaranteed by substantially all existing and future, direct and indirect, wholly-owned material domestic subsidiaries that are “Unrestricted Subsidiaries” under our Indenture dated December 16, 1993 (except for certain special purpose subsidiaries that only guarantee and pledge their assets under our senior secured asset-based revolving credit facility).

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HCA HOLDINGS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 12 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)
 
Our summarized condensed consolidating balance sheets at June 30, 2011 and December 31, 2010, condensed consolidating statements of income for the quarters and six months ended June 30, 2011 and 2010 and condensed consolidating statements of cash flows for the six months ended June 30, 2011 and 2010, segregating HCA Holdings, Inc. issuer, HCA Inc. issuer, the subsidiary guarantors, the subsidiary non-guarantors and eliminations, follow:
 
HCA HOLDINGS, INC.
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE QUARTER ENDED JUNE 30, 2011
(Dollars in millions)
 
                                                 
    HCA
                Subsidiary
             
    Holdings, Inc.
    HCA Inc.
    Subsidiary
    Non-
          Condensed
 
    Issuer     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  
 
Revenues
  $     $     $ 4,515     $ 3,548     $     $ 8,063  
                                                 
Salaries and benefits
                1,872       1,448             3,320  
Supplies
                720       575             1,295  
Other operating expenses
          2       686       638             1,326  
Provision for doubtful accounts
                457       318             775  
Equity in earnings of affiliates
    (246 )           (30 )     (43 )     246       (73 )
Depreciation and amortization
                194       164             358  
Interest expense
    30       741       (153 )     (98 )           520  
Loss on retirement of debt
          75                         75  
Management fees
                (129 )     129              
                                                 
      (216 )     818       3,617       3,131       246       7,596  
                                                 
Income (loss) before income taxes
    216       (818 )     898       417       (246 )     467  
Provision for income taxes
    (13 )     (323 )     347       136             147  
                                                 
Net income (loss)
    229       (495 )     551       281       (246 )     320  
Net income attributable to noncontrolling interests
                18       73             91  
                                                 
Net income (loss) attributable to HCA Holdings, Inc. 
  $ 229     $ (495 )   $ 533     $ 208     $ (246 )   $ 229  
                                                 


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HCA HOLDINGS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 12 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)
 
HCA HOLDINGS, INC.
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE QUARTER ENDED JUNE 30, 2010
(Dollars in millions)
 
                                         
                Subsidiary
             
    HCA Inc.
    Subsidiary
    Non-
          Condensed
 
    Issuer     Guarantors     Guarantors     Eliminations     Consolidated  
 
Revenues
  $     $ 4,479     $ 3,277     $     $ 7,756  
                                         
Salaries and benefits
          1,809       1,267             3,076  
Supplies
          724       527             1,251  
Other operating expenses
    1       665       560             1,226  
Provision for doubtful accounts
          499       289             788  
Equity in earnings of affiliates
    (745 )     (28 )     (47 )     745       (75 )
Depreciation and amortization
          197       158             355  
Interest expense
    668       (122 )     (16 )           530  
Impairments of long-lived assets
          38       53             91  
Management fees
          (120 )     120              
                                         
      (76 )     3,662       2,911       745       7,242  
                                         
Income before income taxes
    76       817       366       (745 )     514  
Provision for income taxes
    (217 )     259       94             136  
                                         
Net income
    293       558       272       (745 )     378  
Net income attributable to noncontrolling interests
          14       71             85  
                                         
Net income attributable to HCA Holdings, Inc. 
  $ 293     $ 544     $ 201     $ (745 )   $ 293  
                                         


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HCA HOLDINGS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 12 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)
 
HCA HOLDINGS, INC.
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 2011
(Dollars in millions)
 
                                                 
    HCA
                Subsidiary
             
    Holdings, Inc.
    HCA Inc.
    Subsidiary
    Non-
          Condensed
 
    Issuer     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  
 
Revenues
  $     $     $ 9,093     $ 7,025     $     $ 16,118  
                                                 
Salaries and benefits
                3,768       2,847             6,615  
Supplies
                1,431       1,139             2,570  
Other operating expenses
          4       1,367       1,277             2,648  
Provision for doubtful accounts
                874       550             1,424  
Equity in earnings of affiliates
    (504 )           (60 )     (89 )     504       (149 )
Depreciation and amortization
                389       327             716  
Interest expense
    60       1,432       (316 )     (123 )           1,053  
Losses (gains) on sales of facilities
                16       (15 )           1  
Loss on retirement of debt
          75                         75  
Termination of management agreement
          181                         181  
Management fees
                (253 )     253              
                                                 
      (444 )     1,692       7,216       6,166       504       15,134  
                                                 
Income (loss) before income taxes
    444       (1,692 )     1,877       859       (504 )     984  
Provision for income taxes
    (25 )     (698 )     762       291             330  
                                                 
Net income (loss)
    469       (994 )     1,115       568       (504 )     654  
Net income attributable to noncontrolling interests
                31       154             185  
                                                 
Net income (loss) attributable to HCA Holdings, Inc. 
  $ 469     $ (994 )   $ 1,084     $ 414     $ (504 )   $ 469  
                                                 


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HCA HOLDINGS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 12 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)
 
HCA HOLDINGS, INC.
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 2010
(Dollars in millions)
 
                                         
                Subsidiary
             
    HCA Inc.
    Subsidiary
    Non-
          Condensed
 
    Issuer     Guarantors     Guarantors     Eliminations     Consolidated  
 
Revenues
  $     $ 8,853     $ 6,447     $     $ 15,300  
                                         
Salaries and benefits
          3,635       2,513             6,148  
Supplies
          1,414       1,037             2,451  
Other operating expenses
    3       1,303       1,122             2,428  
Provision for doubtful accounts
          857       495             1,352  
Equity in earnings of affiliates
    (1,556 )     (55 )     (88 )     1,556       (143 )
Depreciation and amortization
          392       318             710  
Interest expense
    1,316       (237 )     (33 )           1,046  
Impairments of long-lived assets
          53       56             109  
Management fees
          (238 )     238              
                                         
      (237 )     7,124       5,658       1,556       14,101  
                                         
Income before income taxes
    237       1,729       789       (1,556 )     1,199  
Provision for income taxes
    (444 )     572       217             345  
                                         
Net income
    681       1,157       572       (1,556 )     854  
Net income attributable to noncontrolling interests
          29       144             173  
                                         
Net income attributable to HCA Holdings, Inc. 
  $ 681     $ 1,128     $ 428     $ (1,556 )   $ 681  
                                         


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HCA HOLDINGS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 12 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)
 
HCA HOLDINGS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2011
(Dollars in millions)
 
                                                 
    HCA
                Subsidiary
             
    Holdings, Inc.
    HCA Inc.
    Subsidiary
    Non-
          Condensed
 
    Issuer     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  
 
ASSETS
                                               
Current assets:
                                               
Cash and cash equivalents
  $     $     $ 131     $ 408     $     $ 539  
Accounts receivable, net
                2,235       1,711             3,946  
Inventories
                545       342             887  
Deferred income taxes
    894                               894  
Other
                182       443             625  
                                                 
      894             3,093       2,904             6,891  
                                                 
Property and equipment, net
                6,953       4,631             11,584  
Investments of insurance subsidiary
                      515             515  
Investments in and advances to affiliates
                222       621             843  
Goodwill
                1,609       1,110             2,719  
Deferred loan costs
    23       309                         332  
Investments in and advances to subsidiaries
    14,786                         (14,786 )      
Other
    668       92       29       204             993  
                                                 
    $ 16,371     $ 401     $ 11,906     $ 9,985     $ (14,786 )   $ 23,877  
                                                 
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
                                               
Current liabilities:
                                               
Accounts payable
  $     $     $ 751     $ 546     $     $ 1,297  
Accrued salaries
                628       381             1,009  
Other accrued expenses
    50       271       318       644             1,283  
Long-term debt due within one year
          651       14       24             689  
                                                 
      50       922       1,711       1,595             4,278  
                                                 
Long-term debt
    1,525       22,437       82       587             24,631  
Intercompany balances
    23,040       (11,785 )     (13,775 )     2,520              
Professional liability risks
                      987             987  
Income taxes and other liabilities
    437       334       535       209             1,515  
                                                 
      25,052       11,908       (11,447 )     5,898             31,411  
Stockholders’ (deficit) equity attributable to HCA Holdings, Inc. 
    (8,681 )     (11,507 )     23,251       3,042       (14,786 )     (8,681 )
Noncontrolling interests
                102       1,045             1,147  
                                                 
      (8,681 )     (11,507 )     23,353       4,087       (14,786 )     (7,534 )
                                                 
    $ 16,371     $ 401     $ 11,906     $ 9,985     $ (14,786 )   $ 23,877  
                                                 


24


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HCA HOLDINGS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 12 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)
 
HCA HOLDINGS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2010
(Dollars in millions)
 
                                                 
    HCA
                Subsidiary
             
    Holdings, Inc.
    HCA Inc.
    Subsidiary
    Non-
          Condensed
 
    Issuer     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  
 
ASSETS
                                               
Current assets:
                                               
Cash and cash equivalents
  $ 6     $     $ 156     $ 249     $     $ 411  
Accounts receivable, net
                2,214       1,618             3,832  
Inventories
                547       350             897  
Deferred income taxes
    931                               931  
Other
    202             223       423             848  
                                                 
      1,139             3,140       2,640             6,919  
                                                 
Property and equipment, net
                6,817       4,535             11,352  
Investments of insurance subsidiary
                      642             642  
Investments in and advances to affiliates
                248       621             869  
Goodwill
                1,635       1,058             2,693  
Deferred loan costs
    23       351                         374  
Investments in and advances to subsidiaries
    14,282                         (14,282 )      
Other
    776       39       21       167             1,003  
                                                 
    $ 16,220     $ 390     $ 11,861     $ 9,663     $ (14,282 )   $ 23,852  
                                                 
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
                                               
Current liabilities:
                                               
Accounts payable
  $     $     $ 919     $ 618     $     $ 1,537  
Accrued salaries
                556       339             895  
Other accrued expenses
    12       296       328       609             1,245  
Long-term debt due within one year
          554       12       26             592  
                                                 
      12       850       1,815       1,592             4,269  
                                                 
Long-term debt
    1,525       25,758       95       255             27,633  
Intercompany balances
    25,985       (16,130 )     (12,833 )     2,978              
Professional liability risks
                      995             995  
Income taxes and other liabilities
    483       425       505       195             1,608  
                                                 
      28,005       10,903       (10,418 )     6,015             34,505  
Equity securities with contingent redemption rights
    141                               141  
Stockholders’ (deficit) equity attributable to HCA Holdings, Inc. 
    (11,926 )     (10,513 )     22,167       2,628       (14,282 )     (11,926 )
Noncontrolling interests
                112       1,020             1,132  
                                                 
      (11,926 )     (10,513 )     22,279       3,648       (14,282 )     (10,794 )
                                                 
    $ 16,220     $ 390     $ 11,861     $ 9,663     $ (14,282 )   $ 23,852  
                                                 


25


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HCA HOLDINGS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 12 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)
 
HCA HOLDINGS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2011
(Dollars in millions)
 
                                                 
    HCA
                Subsidiary
             
    Holdings, Inc.
    HCA Inc.
    Subsidiary
    Non-
          Condensed
 
    Issuer     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  
 
Cash flows from operating activities:
                                               
Net income
  $ 469     $ (994 )   $ 1,115     $ 568     $ (504 )   $ 654  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                                               
Changes in operating assets and liabilities
    4       (24 )     (916 )     (640 )           (1,576 )
Provision for doubtful accounts
                874       550             1,424  
Depreciation and amortization
                389       327             716  
Income taxes
    317                               317  
Losses (gains) on sales of facilities
                15       (14 )           1  
Loss on retirement of debt
          75                         75  
Amortization of deferred loan costs
          39                         39  
Share-based compensation
    16                               16  
Equity in earnings of affiliates
    (504 )                       504        
Other
          6             (6 )            
                                                 
Net cash provided by (used in) operating activities
    302       (898 )     1,477       785             1,666  
                                                 
Cash flows from investing activities:
                                               
Purchase of property and equipment
                (389 )     (387 )           (776 )
Acquisition of hospitals and health care entities
                (136 )     (32 )           (168 )
Disposition of hospitals and health care entities
                1       53             54  
Change in investments
                24       52             76  
Other
                      2             2  
                                                 
Net cash used in investing activities
                (500 )     (312 )           (812 )
                                                 
Cash flows from financing activities:
                                               
Net change in revolving bank credit facilities
          (1,524 )                       (1,524 )
Repayment of long-term debt
          (1,456 )     (6 )     (46 )           (1,508 )
Distributions to noncontrolling interests
                (41 )     (144 )           (185 )
Distributions to stockholders
    (30 )                             (30 )
Changes in intercompany balances with affiliates, net
    (2,805 )     3,890       (955 )     (130 )            
Payment of debt issuance costs
          (12 )                       (12 )
Issuances of common stock
    2,506                               2,506  
Income tax benefits
    49                               49  
Other
    (28 )                 6             (22 )
                                                 
Net cash (used in) provided by financing activities
    (308 )     898       (1,002 )     (314 )           (726 )
                                                 
Change in cash and cash equivalents
    (6 )           (25 )     159             128  
Cash and cash equivalents at beginning of period
    6             156       249             411  
                                                 
Cash and cash equivalents at end of period
  $     $     $ 131     $ 408     $     $ 539  
                                                 


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HCA HOLDINGS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 12 — SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)
 
HCA HOLDINGS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2010
(Dollars in millions)
 
                                                 
                Subsidiary
                   
    HCA Inc.
    Subsidiary
    Non-
          Condensed
       
    Issuer     Guarantors     Guarantors     Eliminations     Consolidated        
 
Cash flows from operating activities:
                                               
Net income
  $ 681     $ 1,157     $ 572     $ (1,556 )   $ 854          
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
                                               
Changes in operating assets and liabilities
    31       (1,057 )     (672 )           (1,698 )        
Provision for doubtful accounts
          857       495             1,352          
Depreciation and amortization
          392       318             710          
Income taxes
    (111 )                       (111 )        
Impairments of long-lived assets
          48       61             109          
Amortization of deferred loan costs
    40                         40          
Share-based compensation
    16                         16          
Equity in earnings of affiliates
    (1,556 )                 1,556                
Other
    23                         23          
                                                 
Net cash (used in) provided by operating activities
    (876 )     1,397       774             1,295          
                                                 
Cash flows from investing activities:
                                               
Purchase of property and equipment
          (225 )     (311 )           (536 )        
Acquisition of hospitals and health care entities
          (21 )     (10 )           (31 )        
Disposition of hospitals and health care entities
          24       1             25          
Change in investments
          10       492             502          
Other
          (1 )     (10 )           (11 )        
                                                 
Net cash (used in) provided by investing activities
          (213 )     162             (51 )        
                                                 
Cash flows from financing activities:
                                               
Issuance of long-term debt
    1,387                         1,387          
Net change in revolving credit facilities
    1,329                         1,329          
Repayment of long-term debt
    (1,508 )     (11 )     (10 )           (1,529 )        
Distributions to noncontrolling interests
          (41 )     (135 )           (176 )        
Distributions to stockholders
    (2,251 )                       (2,251 )        
Changes in intercompany balances with affiliates, net
    1,893       (1,119 )     (774 )                    
Payment of debt issuance costs
    (25 )                       (25 )        
Income tax benefits
    56                         56          
Other
    (5 )           8             3          
                                                 
Net cash provided by (used in) financing activities
    876       (1,171 )     (911 )           (1,206 )        
                                                 
Change in cash and cash equivalents
          13       25             38          
Cash and cash equivalents at beginning of period
          95       217             312          
                                                 
Cash and cash equivalents at end of period
  $     $ 108     $ 242     $     $ 350          
                                                 


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HCA HOLDINGS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 13 — SUBSEQUENT EVENTS
 
On August 1, 2011, we issued $5.000 billion aggregate principal amount of notes, comprised of $3.000 billion of 61/2% senior secured first lien notes due 2020 and $2.000 billion of 71/2% senior unsecured notes due 2022. After the payment of related fees and expenses, we intend to use the net proceeds from these debt issuances to redeem all of our outstanding $1.578 billion 95/8%/103/8% second lien toggle notes due 2016 and all of our outstanding $3.200 billion 91/4% second lien notes due 2016. The pretax debt retirement charge related to these redemptions is expected to be approximately $396 million.
 
On August 2, 2011, we entered into a definitive Membership Interest Purchase Agreement with The Colorado Health Foundation for the purchase (or redemption) of the Foundation’s remaining ownership interest in HCA-HealthONE LLC for $1.45 billion. Subject to regulatory review, the transaction is expected to close in the third quarter of 2011. We intend to fund the purchase price at the closing of the acquisition through amounts available under our revolving credit facility.


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Forward-Looking Statements
 
This quarterly report on Form 10-Q includes certain disclosures which contain “forward-looking statements.” Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words like “may,” “believe,” “will,” “expect,” “project,” “estimate,” “anticipate,” “plan,” “initiative” or “continue.” These forward-looking statements are based on our current plans and expectations and are subject to a number of known and unknown uncertainties and risks, many of which are beyond our control, which could significantly affect current plans and expectations and our future financial position and results of operations. These factors include, but are not limited to, (1) the impact of our substantial indebtedness and the ability to refinance such indebtedness on acceptable terms, (2) the effects related to the enactment and implementation of the Budget Control Act of 2011 (“BCA”) and the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “Health Reform Law”), the possible enactment of additional federal or state health care reforms and possible changes to the Health Reform Law and other federal, state or local laws or regulations affecting the health care industry, (3) increases in the amount and risk of collectibility of uninsured accounts and deductibles and copayment amounts for insured accounts, (4) the ability to achieve operating and financial targets, and attain expected levels of patient volumes and control the costs of providing services, (5) possible changes in the Medicare, Medicaid and other state programs, including Medicaid supplemental payments pursuant to upper payment limit (“UPL”) programs, that may impact reimbursements to health care providers and insurers, (6) the highly competitive nature of the health care business, (7) changes in revenue mix, including potential declines in the population covered under managed care agreements and the ability to enter into and renew managed care provider agreements on acceptable terms, (8) the efforts of insurers, health care providers and others to contain health care costs, (9) the outcome of our continuing efforts to monitor, maintain and comply with appropriate laws, regulations, policies and procedures, (10) increases in wages and the ability to attract and retain qualified management and personnel, including affiliated physicians, nurses and medical and technical support personnel, (11) the availability and terms of capital to fund the expansion of our business and improvements to our existing facilities, (12) changes in accounting practices, (13) changes in general economic conditions nationally and regionally in our markets, (14) future divestitures which may result in charges and possible impairments of long-lived assets, (15) changes in business strategy or development plans, (16) delays in receiving payments for services provided, (17) the outcome of pending and any future tax audits, appeals and litigation associated with our tax positions, (18) potential adverse impact of known and unknown government investigations, litigation and other claims that may be made against us, (19) our ability to demonstrate meaningful use of certified electronic health record technology and recognize revenues for the related Medicare or Medicaid incentive payments, and (20) other risk factors described in our annual report on Form 10-K for the year ended December 31, 2010 and our other filings with the Securities and Exchange Commission. 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 or on behalf of HCA. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report, which forward-looking statements reflect management’s views only as of the date of this report. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise.
 
Health Care Reform
 
As enacted, the Health Reform Law will change how health care services are covered, delivered and reimbursed through expanded coverage of uninsured individuals, reduced growth in Medicare program spending, reductions in Medicare and Medicaid Disproportionate Share Hospital payments, and the establishment of programs in which reimbursement is tied to quality and integration. In addition, the Health Reform Law reforms certain aspects of health insurance, expands existing efforts to tie Medicare and Medicaid payments to performance and quality, and contains provisions intended to strengthen fraud and abuse enforcement.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Second Quarter 2011 Operations Summary
 
Net income attributable to HCA Holdings, Inc. totaled $229 million, or $0.43 per diluted share, for the quarter ended June 30, 2011, compared to $293 million, or $0.67 per diluted share, for the quarter ended June 30, 2010. Revenues increased to $8.063 billion in the second quarter of 2011 from $7.756 billion in the second quarter of 2010. Second quarter 2011 results include a loss on retirement of debt of $75 million, or $0.08 per diluted share. Second quarter 2010 results include impairments of long-lived assets of $91 million, or $0.13 per diluted share. All “per diluted share” disclosures are based upon amounts net of the applicable income taxes. Shares used for diluted earnings per share were 538.6 million shares for the quarter ended June 30, 2011 and 437.1 million shares for the quarter ended June 30, 2010. During March 2011, we completed the initial public offering of 87,719,300 shares of our common stock.
 
Revenues increased 4.0% on a consolidated basis and increased 2.4% on a same facility basis for the quarter ended June 30, 2011, compared to the quarter ended June 30, 2010. The increase in consolidated revenues can be attributed primarily to the combined impact of a 0.5% increase in revenue per equivalent admission and a 3.4% increase in equivalent admissions. The same facility revenues increase resulted primarily from the combined impact of a 0.5% increase in same facility revenue per equivalent admission and a 1.9% increase in same facility equivalent admissions. We experienced a shift in service mix from more complex surgical cases to less acute medical cases, resulting in lower than anticipated revenue growth for the quarter ended June 30, 2011. Revenues for the second quarter of 2011 included $39 million of Medicaid incentive revenues related to certain of our hospitals completing attestations to their adoption or implementation of certified electronic health record technology.
 
During the quarter ended June 30, 2011, consolidated admissions and same facility admissions increased 3.2% and 1.8%, respectively, compared to the quarter ended June 30, 2010. Inpatient surgeries declined 1.3% on a consolidated basis and 1.5% on a same facility basis during the quarter ended June 30, 2011, compared to the quarter ended June 30, 2010. Outpatient surgeries increased 0.3% on a consolidated basis and declined 0.6% on a same facility basis during the quarter ended June 30, 2011, compared to the quarter ended June 30, 2010. Emergency department visits increased 5.3% on a consolidated basis and 4.5% on a same facility basis during the quarter ended June 30, 2011, compared to the quarter ended June 30, 2010.
 
For the quarter ended June 30, 2011, the provision for doubtful accounts declined $13 million to 9.6% of revenues from 10.2% of revenues for the quarter ended June 30, 2010. The self-pay revenue deductions for charity care and uninsured discounts increased $58 million and $270 million, respectively, during the second quarter of 2011, compared to the second quarter of 2010. The sum of the provision for doubtful accounts, uninsured discounts and charity care, as a percentage of the sum of revenues, uninsured discounts and charity care, was 27.6% for the second quarter of 2011, compared to 26.1% for the second quarter of 2010. Same facility uninsured admissions increased 10.6% and same facility uninsured emergency room visits increased 3.7% for the quarter ended June 30, 2011, compared to the quarter ended June 30, 2010.
 
Interest expense declined $10 million to $520 million for the quarter ended June 30, 2011 from $530 million for the quarter ended June 30, 2010. The decline in interest expense was due to a decline in the average debt balance.
 
Cash flows from operating activities increased $312 million from $436 million for the second quarter of 2010 to $748 million for the second quarter of 2011. The increase related primarily to lower income tax payments during the second quarter of 2011.
 
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,


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Results of Operations (continued)
 

Revenue/Volume Trends (continued)
 
fixed per diem rates or discounts from gross charges. We do not pursue collection of amounts related to patients who meet our guidelines to qualify for charity care; therefore, they are not reported in revenues. We provide discounts to uninsured patients who do not qualify for Medicaid or charity care. These discounts are similar to those provided to many local managed care plans. After the discounts are applied, we are still unable to collect a significant portion of uninsured patients’ accounts, and we record significant provisions for doubtful accounts (based upon our a historical collection experience) related to uninsured patients in the period the services are provided.
 
Revenues increased 4.0% from $7.756 billion in the second quarter of 2010 to $8.063 billion in the second quarter of 2011. Revenues are recorded during the period the health care services are provided, based upon the estimated amounts due from the patients and third-party payers. Third-party payers include federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies and employers. Estimates of contractual allowances under managed care health plans are based upon the payment terms specified in the related contractual agreements. Revenues related to uninsured patients and copayment and deductible amounts for patients who have health care coverage may have discounts applied (uninsured discounts and contractual discounts). We also record a provision for doubtful accounts related to uninsured accounts to record the net self pay accounts receivable at the estimated amounts we expect to collect. Our revenues from our third party payers and the uninsured for quarters and six months ended June 30, 2011 and 2010 are summarized in the following tables (dollars in millions):
 
                                 
    Quarter  
    2011     Ratio     2010     Ratio  
 
Medicare
  $ 1,871       23.2 %   $ 1,824       23.5 %
Managed Medicare
    584       7.3       549       7.1  
Medicaid
    479       5.9       511       6.6  
Managed Medicaid
    316       3.9       281       3.6  
Managed care and other insurers
    3,916       48.6       3,733       48.2  
International (managed care and other insurers)
    233       2.9       193       2.5  
                                 
      7,399       91.8       7,091       91.5  
Uninsured
    492       6.1       523       6.7  
Other
    172       2.1       142       1.8  
                                 
Revenues
  $ 8,063       100.0 %   $ 7,756       100.0 %
                                 
 
                                 
    Six Months  
    2011     Ratio     2010     Ratio  
 
Medicare
  $ 3,871       24.0 %   $ 3,675       24.0 %
Managed Medicare
    1,196       7.4       1,099       7.2  
Medicaid
    987       6.1       989       6.5  
Managed Medicaid
    635       3.9       578       3.8  
Managed care and other insurers
    7,772       48.2       7,445       48.7  
International (managed care and other insurers)
    466       2.9       382       2.5  
                                 
      14,927       92.5       14,168       92.7  
Uninsured
    882       5.5       870       5.7  
Other
    309       2.0       262       1.6  
                                 
Revenues
  $ 16,118       100.0 %   $ 15,300       100.0 %
                                 
 
Consolidated and same facility revenue per equivalent admission each increased 0.5% in the second quarter of 2011, compared to the second quarter of 2010. Consolidated and same facility equivalent admissions increased 3.4% and 1.9%, respectively, in the second quarter of 2011, compared to the second quarter of 2010. Consolidated and same facility admissions increased 3.2% and 1.8%, respectively, in the second quarter of 2011, compared to the


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Results of Operations (continued)
 

Revenue/Volume Trends (continued)
 
second quarter of 2010. Consolidated and same facility outpatient surgeries increased 0.3% and declined 0.6%, respectively, in the second quarter of 2011, compared to the second quarter of 2010. Consolidated and same facility inpatient surgeries declined 1.3% and 1.5%, respectively, in the second quarter of 2011, compared to the second quarter of 2010. Consolidated and same facility emergency department visits increased 5.3% and 4.5%, respectively, in the second quarter of 2011, compared to the second quarter of 2010.
 
To quantify the total impact of and trends related to uninsured accounts, we believe it is beneficial to view the uninsured revenue deductions and provision for doubtful accounts in combination, rather than each separately. A summary of these amounts for the quarters and six months ended June 30, 2011 and 2010 follows (dollars in millions):
 
                                                                 
    Quarter     Six Months  
    2011     Ratio     2010     Ratio     2011     Ratio     2010     Ratio  
 
Provision for doubtful accounts
  $ 775       28 %   $ 788       32 %   $ 1,424       27 %   $ 1,352       29 %
Uninsured discounts
    1,342       48       1,072       44       2,615       49       2,107       46  
Charity care
    657       24       599       24       1,292       24       1,144       25  
                                                                 
Totals
  $ 2,774       100 %   $ 2,459       100 %   $ 5,331       100 %   $ 4,603       100 %
                                                                 
 
Same facility uninsured admissions increased by 2,756 admissions, or 10.6%, in the second quarter of 2011, compared to the second quarter of 2010. Same facility uninsured admissions increased by 4.7% in the first quarter of 2011, compared to the first quarter of 2010. Same facility uninsured admissions in 2010, compared to 2009, increased 8.9% in the fourth quarter of 2010, increased 3.9% in the third quarter of 2010, increased 2.1% in the second quarter of 2010 and increased 6.8% in the first quarter of 2010.
 
The approximate percentages of our admissions related to Medicare, managed Medicare, Medicaid, managed Medicaid, managed care and other insurers and the uninsured for the quarters and six months ended June 30, 2011 and 2010 are set forth in the following table.
 
                                 
    Quarter     Six Months  
    2011     2010     2011     2010  
 
Medicare
    35 %     34 %     35 %     35 %
Managed Medicare
    11       10       11       10  
Medicaid
    9       9       9       9  
Managed Medicaid
    7       7       7       7  
Managed care and other insurers
    31       33       31       32  
Uninsured
    7       7       7       7  
                                 
      100 %     100 %     100 %     100 %
                                 


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Results of Operations (continued)
 

Revenue/Volume Trends (continued)
 
The approximate percentages of our inpatient revenues related to Medicare, managed Medicare, Medicaid, managed Medicaid, managed care and other insurers and the uninsured for the quarters and six months ended June 30, 2011 and 2010 are set forth in the following table.
 
                                 
    Quarter     Six Months  
    2011     2010     2011     2010  
 
Medicare
    31 %     31 %     32 %     32 %
Managed Medicare
    9       9       9       9  
Medicaid
    9       9       9       9  
Managed Medicaid
    4       4       4       4  
Managed care and other insurers
    44       43       44       43  
Uninsured
    3       4       2       3  
                                 
      100 %     100 %     100 %     100 %
                                 
 
At June 30, 2011, we had 75 hospitals in the states of Texas and Florida. During the second quarter of 2011, 57% of our admissions and 51% of our revenues were generated by these hospitals. Uninsured admissions in Texas and Florida represented 64% of our uninsured admissions during the second quarter of 2011.
 
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. We provide indigent care services in several communities in the state of Texas, in affiliation with other hospitals. The state of Texas has been involved in efforts to increase the indigent care provided by private hospitals. Additional indigent care provided by private hospitals allows public hospital districts or counties in Texas to have funds available that were previously devoted to indigent care. The public hospital districts or counties are under no contractual or legal obligation to provide such indigent care. The public hospital districts or counties have elected to transfer some portion of these available funds to the state’s Medicaid program. Such action is at the sole discretion of the public hospital districts or counties. It is anticipated that these contributions to the state will be matched with federal Medicaid funds. The state then may make supplemental payments to hospitals in the state for Medicaid services rendered. Hospitals receiving Medicaid supplemental payments may include those that are providing additional indigent care services. Such payments must be within the federal UPL established by federal regulation. Our Texas Medicaid revenues included $134 million and $167 million during the second quarters of 2011 and 2010, respectively, and $301 million and $336 million during the first six months of 2011 and 2010, respectively, of Medicaid supplemental payments pursuant to UPL programs. In addition, we receive supplemental payments in several other states. We are aware these supplemental payment programs are currently being reviewed by certain state agencies and some states have made waiver requests to the Centers for Medicare & Medicaid Services (“CMS”) to replace their existing supplemental payment programs. It is possible these reviews and waiver requests will result in the restructuring of such supplemental payment programs and could result in the payment programs being reduced or eliminated. Because deliberations about these programs are ongoing, we are unable to estimate the financial impact the program structure modifications, if any, may have on our results of operations.
 
The American Recovery and Reinvestment Act of 2009 provides for Medicare and Medicaid incentive payments beginning in 2011 for eligible hospitals and professionals that adopt and meaningfully use certified electronic health record (“EHR”) technology. We will recognize revenues related to the Medicare or Medicaid incentive payments as we are able to complete attestations as to our eligible hospitals adopting, implementing or demonstrating meaningful use of certified EHR technology. We recognized $39 million of revenues related to Medicaid incentive programs in certain states during the second quarter of 2011 and expect to recognize revenues for additional state programs during the third and fourth quarters of 2011. We estimate that during 2011 the amount


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Results of Operations (continued)
 

Revenue/Volume Trends (continued)
 
of Medicare and Medicaid incentive payments realizable (and revenues recognized) will be in the range of $290 million to $340 million. We estimate that approximately 80% of our total expected incentive payments for 2011 relate to Medicare incentives, and we expect to recognize the applicable revenues primarily during the fourth quarter of 2011. Actual incentive payments could vary from these estimates due to certain factors such as availability of federal funding for both Medicare and Medicaid incentive payments, timing of the approval of state Medicaid incentive payment plans by CMS and our ability to implement and demonstrate meaningful use of certified EHR technology. We have incurred and will continue to incur both capital costs and operating expenses in order to implement our certified EHR technology and meet meaningful use requirements. These expenses are ongoing and are projected to continue over all stages of implementation of meaningful use. The timing of recognizing the expenses will not correlate with the receipt of the incentive payments and the recognition of revenues. We estimate that operating expenses to implement our certified EHR technology and meet meaningful use will be in the range of $100 million to $125 million for 2011. Actual operating expenses could vary from these estimates. For the second quarter and first six months of 2011, we incurred $24 million and $44 million, respectively, of operating expenses to implement our certified EHR technology and meet meaningful use. There can be no assurance that we will be able to demonstrate meaningful use of certified EHR technology, and the failure to do so could have a material, adverse effect on our results of operations.


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ITEM 2. MANAGEMENT’S 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 from operations for the quarters and six months ended June 30, 2011 and 2010 (dollars in millions):
 
                                 
    Quarter  
    2011     2010  
    Amount     Ratio     Amount     Ratio  
 
Revenues
  $ 8,063       100.0     $ 7,756       100.0  
                                 
Salaries and benefits
    3,320       41.2       3,076       39.6  
Supplies
    1,295       16.1       1,251       16.1  
Other operating expenses
    1,326       16.4       1,226       15.9  
Provision for doubtful accounts
    775       9.6       788       10.2  
Equity in earnings of affiliates
    (73 )     (0.9 )     (75 )     (1.0 )
Depreciation and amortization
    358       4.5       355       4.6  
Interest expense
    520       6.4       530       6.8  
Impairments of long-lived assets
                91       1.2  
Loss on retirement of debt
    75       0.9              
                                 
      7,596       94.2       7,242       93.4  
                                 
Income before income taxes
    467       5.8       514       6.6  
Provision for income taxes
    147       1.8       136       1.7  
                                 
Net income
    320       4.0       378       4.9  
Net income attributable to noncontrolling interests
    91       1.2       85       1.1  
                                 
Net income attributable to HCA Holdings, Inc. 
  $ 229       2.8     $ 293       3.8  
                                 
% changes from prior year:
                               
Revenues
    4.0 %             3.7 %        
Income before income taxes
    (9.2 )             (2.2 )        
Net income attributable to HCA Holdings, Inc. 
    (21.5 )             3.4          
Admissions(a)
    3.2               (0.6 )        
Equivalent admissions(b)
    3.4               1.3          
Revenue per equivalent admission
    0.5               2.3          
Same facility % changes from prior year(c):
                               
Revenues
    2.4               3.8          
Admissions(a)
    1.8               (0.3 )        
Equivalent admissions(b)
    1.9               1.6          
Revenue per equivalent admission
    0.5               2.2          
 


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Results of Operations (continued)
 

Operating Results Summary (continued)
 
                                 
    Six Months  
    2011     2010  
    Amount     Ratio     Amount     Ratio  
 
Revenues
  $ 16,118       100.0     $ 15,300       100.0  
                                 
Salaries and benefits
    6,615       41.0       6,148       40.2  
Supplies
    2,570       15.9       2,451       16.0  
Other operating expenses
    2,648       16.5       2,428       15.9  
Provision for doubtful accounts
    1,424       8.8       1,352       8.8  
Equity in earnings of affiliates
    (149 )     (0.9 )     (143 )     (0.9 )
Depreciation and amortization
    716       4.5       710       4.7  
Interest expense
    1,053       6.5       1,046       6.8  
Losses on sales of facilities
    1                    
Impairments of long-lived assets
                109       0.7  
Loss on retirement of debt
    75       0.5              
Termination of management agreement
    181       1.1              
                                 
      15,134       93.9       14,101       92.2  
                                 
Income before income taxes
    984       6.1       1,199       7.8  
Provision for income taxes
    330       2.0       345       2.2  
                                 
Net income
    654       4.1       854       5.6  
Net income attributable to noncontrolling interests
    185       1.2       173       1.1  
                                 
Net income attributable to HCA Holdings, Inc. 
  $ 469       2.9     $ 681       4.5  
                                 
% changes from prior year:
                               
Revenues
    5.3 %             2.6 %        
Income before income taxes
    (18.0 )             4.7          
Net income attributable to HCA Holdings, Inc. 
    (31.1 )             6.0          
Admissions(a)
    2.6               0.1          
Equivalent admissions(b)
    3.6               1.1          
Revenue per equivalent admission
    1.7               1.5          
Same facility % changes from prior year(c):
                               
Revenues
    4.1               2.7          
Admissions(a)
    1.7               0.3          
Equivalent admissions(b)
    2.6               1.3          
Revenue per equivalent admission
    1.5               1.3          
 
 
(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 revenues and gross outpatient revenues and then dividing the resulting amount by gross inpatient revenues. The equivalent admissions computation “equates” outpatient revenues 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.

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ITEM 2. MANAGEMENT’S 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 on a Cash Revenues Basis
(Dollars in millions)
 
The results from operations presented on a cash revenues basis for the quarters and six months ended June 30, 2011 and 2010 follow:
 
                                                 
    Quarter  
    2011     2010  
          Non-GAAP % of
    GAAP % of
          Non-GAAP % of
    GAAP % of
 
          Cash Revenues
    Revenues
          Cash Revenues
    Revenues
 
    Amount     Ratios(b)     Ratios(b)     Amount     Ratios(b)     Ratios(b)  
 
Revenues
  $ 8,063               100.0     $ 7,756               100.0  
Provision for doubtful accounts
    775                       788                  
                                                 
Cash revenues(a)
    7,288       100.0               6,968       100.0          
                                                 
Salaries and benefits
    3,320       45.5       41.2       3,076       44.1       39.6  
Supplies
    1,295       17.8       16.1       1,251       17.9       16.1  
Other operating expenses
    1,326       18.2       16.4       1,226       17.7       15.9  
% changes from prior year:
                                               
Revenues
    4.0 %                     3.7 %                
Cash revenues
    4.6                       5.3                  
Revenue per equivalent admission
    0.5                       2.3                  
Cash revenue per equivalent admission
    1.1                       4.0                  
 
                                                 
    Six Months  
    2011     2010  
          Non-GAAP % of
    GAAP % of
          Non-GAAP % of
    GAAP % of
 
          Cash Revenues
    Revenues
          Cash Revenues
    Revenues
 
    Amount     Ratios(b)     Ratios(b)     Amount     Ratios(b)     Ratios(b)  
 
Revenues
  $ 16,118               100.0     $ 15,300               100.0  
Provision for doubtful accounts
    1,424                       1,352                  
                                                 
Cash revenues(a)
    14,694       100.0               13,948       100.0          
                                                 
Salaries and benefits
    6,615       45.0       41.0       6,148       44.1       40.2  
Supplies
    2,570       17.5       15.9       2,451       17.6       16.0  
Other operating expenses
    2,648       18.0       16.5       2,428       17.3       15.9  
% changes from prior year:
                                               
Revenues
    5.3 %                     2.6 %                
Cash revenues
    5.3                       5.3                  
Revenue per equivalent admission
    1.7                       1.5                  
Cash revenue per equivalent admission
    1.7                       4.2                  
 
 
(a) Cash revenues is defined as reported revenues less the provision for doubtful accounts. We use cash revenues as an analytical indicator for purposes of assessing the effect of uninsured patient volumes, adjusted for the effect of both the revenue deductions related to uninsured accounts (charity care and uninsured discounts) and the provision for doubtful accounts (which relates primarily to uninsured accounts), on our revenues and certain operating expenses, as a percentage of cash revenues. During the second quarter and first six months of 2011, uninsured discounts increased $270 million and $508 million, respectively, charity care increased $58 million and $148 million, respectively, and the provision for doubtful accounts declined $13 million and increased $72 million, respectively, compared to the same periods for 2010. Cash revenues is commonly used as an analytical indicator within the health care industry. Cash revenues should not be considered as a measure of financial performance under generally accepted accounting principles (“GAAP”). Because cash revenues is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, cash revenues, as presented, may not be comparable to other similarly titled measures of other health care companies.
 
(b) Salaries and benefits, supplies and other operating expenses, as a percentage of cash revenues (a non-GAAP financial measure), present the impact on these ratios due to the adjustment of deducting the provision for doubtful accounts from reported revenues and results in these ratios being 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 certain operating expense categories as a percentage of cash revenues. Management finds this information useful to evaluate certain expense category trends without the influence of whether adjustments related to revenues for uninsured accounts are recorded as revenue adjustments (charity care and uninsured discounts) or operating expenses (provision for doubtful accounts), and thus the expense category trends are generally analyzed as a percentage of cash revenues. These non-GAAP financial measures should not be considered alternatives to GAAP financial measures. We believe this supplemental information provides management and the users of our financial statements with useful information for period-to-period comparisons. Investors are encouraged to use GAAP measures when evaluating our overall financial performance.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Results of Operations (continued)
 
 
Quarters Ended June 30, 2011 and 2010
 
Net income attributable to HCA Holdings, Inc. totaled $229 million, or $0.43 per diluted share, for the second quarter of 2011 compared to $293 million, or $0.67 per diluted share, for the second quarter of 2010. Second quarter 2011 results include a loss on retirement of debt of $75 million, or $0.08 per diluted share. Second quarter 2010 results include impairments of long-lived assets of $91 million, or $0.13 per diluted share. (All “per diluted share” disclosures are based upon amounts net of the applicable income taxes.) Shares used for diluted earnings per share were 538.6 million shares for the quarter ended June 30, 2011 and 437.1 million shares for the quarter ended June 30, 2010.
 
Revenues increased 4.0% due to the combined impact of revenue per equivalent admission growth of 0.5% and an increase of 3.4% in equivalent admissions for the second quarter of 2011 compared to the second quarter of 2010. Cash revenues (reported revenues less the provision for doubtful accounts) increased 4.6% for the second quarter of 2011 compared to the second quarter of 2010. Revenues for the second quarter of 2011 included $39 million of Medicaid incentive revenues related to certain of our hospitals completing attestations to their adoption or implementation of certified electronic health record technology.
 
For the second quarter of 2011, consolidated and same facility admissions increased 3.2% and 1.8%, respectively, compared to the second quarter of 2010. Consolidated and same facility outpatient surgical volumes increased 0.3% and declined 0.6%, respectively, during the second quarter of 2011, compared to the second quarter of 2010. Consolidated and same facility inpatient surgeries declined 1.3% and 1.5%, respectively, in the second quarter of 2011, compared to the second quarter of 2010. Consolidated and same facility emergency department visits increased 5.3% and 4.5%, respectively, during the quarter ended June 30, 2011, compared to the quarter ended June 30, 2010.
 
Salaries and benefits, as a percentage of revenues, were 41.2% in the second quarter of 2011 and 39.6% in the second quarter of 2010. Salaries and benefits, as a percentage of cash revenues, were 45.5% in the second quarter of 2011 and 44.1% in the second quarter of 2010. Salaries and benefits per equivalent admission increased 4.4% in the second quarter of 2011 compared to the second quarter of 2010. Same facility labor rate increases averaged 2.7% for the second quarter of 2011 compared to the second quarter of 2010.
 
Supplies, as a percentage of revenues, were 16.1% in each of the second quarters of 2011 and 2010. Supplies, as a percentage of cash revenues, were 17.8% in the second quarter of 2011 and 17.9% in the second quarter of 2010. Supply cost per equivalent admission increased 0.1% in the second quarter of 2011 compared to the second quarter of 2010. Supply costs per equivalent admission increased 1.5% for pharmacy supplies, 3.4% for blood products and 3.4% for general medical and surgical items and declined 2.1% for medical devices in the second quarter of 2011 compared to the second quarter of 2010.
 
Other operating expenses, as a percentage of revenues, increased to 16.4% in the second quarter of 2011 from 15.9% in the second quarter of 2010. Other operating expenses, as a percentage of cash revenues, increased to 18.2% in the second quarter of 2011 from 17.7% in the second quarter of 2010. 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 $79 million and $91 million of indigent care costs in certain Texas markets during the second quarters of 2011 and 2010, respectively. Provisions for losses related to professional liability risks were $60 million and $55 million for the second quarters of 2011 and 2010, respectively.
 
Provision for doubtful accounts declined $13 million from $788 million in the second quarter of 2010 to $775 million in the second quarter of 2011, and as a percentage of revenues, declined to 9.6% in the second quarter of 2011 from 10.2% in the second quarter of 2010. The provision for doubtful accounts and the allowance for doubtful accounts relate primarily to uninsured amounts due directly from patients. The combined self-pay revenue deductions for charity care and uninsured discounts increased $58 million and $270 million, respectively, during the


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Table of Contents

 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Results of Operations (continued)
 

Quarters Ended June 30, 2011 and 2010 (continued)
 
second quarter of 2011, compared to the second quarter of 2010. The sum of the provision for doubtful accounts, uninsured discounts and charity care, as a percentage of the sum of revenues, uninsured discounts and charity care, was 27.6% for the second quarter of 2011, compared to 26.1% for the second quarter of 2010. To quantify the total impact of and trends related to uninsured accounts, we believe it is beneficial to review the related revenue deductions and the provision for doubtful accounts in combination, rather than separately. At June 30, 2011, our allowance for doubtful accounts represented approximately 93% of the $4.248 billion total patient due accounts receivable balance. The patient due accounts receivable balance represents the estimated uninsured portion of our accounts receivable.
 
Equity in earnings of affiliates was $73 million and $75 million in the second quarters of 2011 and 2010, respectively. Equity in earnings of affiliates relates primarily to our Denver, Colorado market joint venture.
 
Depreciation and amortization increased $3 million, from $355 million in the second quarter of 2010 to $358 million in the second quarter of 2011.
 
Interest expense declined from $530 million in the second quarter of 2010 to $520 million in the second quarter of 2011 due primarily to a decline in the average debt balance. Our average debt balance was $25.437 billion for the second quarter of 2011 compared to $26.966 billion for the second quarter of 2010. The average effective interest rate for our long term debt increased from 7.9% for the quarter ended June 30, 2010 to 8.2% for the quarter ended June 30, 2011.
 
During the second quarter of 2010, we recorded impairments of long-lived assets of $91 million, comprised of impairment charges of $56 million for a hospital facility and $35 million for capitalized engineering and design costs related to certain building safety requirements (California earthquake standards) that have been revised, to adjust the carrying values to estimated fair value. There were no impairments of long-lived assets during the second quarter of 2011.
 
During the second quarter of 2011, we recorded a loss on retirement of debt of $75 million related to the redemptions of all $1.000 billion aggregate principal amount of our 91/8% Senior Secured Notes due 2014, at a redemption price of 104.563% of the principal amount, and $108 million aggregate principal amount of our 97/8% Senior Secured Notes due 2017, at a redemption price of 109.875% of the principal amount.
 
The effective tax rates were 39.1% and 31.8% for the second quarters of 2011 and 2010, respectively. The effective tax rate computations exclude net income attributable to noncontrolling interests as it relates to consolidated partnerships. Our provision for income taxes for the second quarter of 2010 was reduced by $37 million related to reductions in interest expense related to taxing authority examinations. Excluding the effect of this adjustment, the effective tax rate for the second quarter of 2010 would have been 40.5%.
 
Net income attributable to noncontrolling interests increased from $85 million for the second quarter of 2010 to $91 million for the second quarter of 2011.
 
Six Months Ended June 30, 2011 and 2010
 
Net income attributable to HCA Holdings, Inc. totaled $469 million, or $0.94 per diluted share, in the six months ended June 30, 2011 compared to $681 million, or $1.56 per diluted share, in the six months ended June 30, 2010. A large component of the $212 million decline in net income attributable to HCA Holdings, Inc. in the six months ended June 30, 2011, compared to the six months ended June 30, 2010, relates to the termination of management agreement charge of $181 million (pretax), or $149 million (net of taxes) and $0.30 per diluted share, in the six months ended June 30, 2011. Revenues increased 5.3% due to the combined impact of revenue per equivalent admission growth of 1.7% and an increase of 3.6% in equivalent admissions for the first six months of


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Results of Operations (continued)
 

Six Months Ended June 30, 2011 and 2010 (continued)
 
2011 compared to the first six months of 2010. Cash revenues (reported revenues less the provision for doubtful accounts) increased 5.3% in the six months ended June 30, 2011 compared to the six months ended June 30, 2010.
 
For the first six months of 2011, consolidated and same facility admissions increased 2.6% and 1.7%, respectively, compared to the first six months of 2010. Consolidated and same facility outpatient surgical volumes increased 0.7% and 0.1%, respectively, during the first six months of 2011, compared to the first six months of 2010. Consolidated and same facility inpatient surgeries declined 1.8% and 2.0%, respectively, in the first six months of 2011, compared to the first six months of 2010. Consolidated and same facility emergency department visits increased 8.4% and 7.8%, respectively, during the six months ended June 30, 2011, compared to the six months ended June 30, 2010.
 
Salaries and benefits, as a percentage of revenues, were 41.0% in the first six months of 2011 and 40.2% in the first six months of 2010. Salaries and benefits, as a percentage of cash revenues, were 45.0% in the first six months of 2011 and 44.1% in the first six months of 2010. Salaries and benefits per equivalent admission increased 3.9% in the first six months of 2011 compared to the first six months of 2010. Same facility labor rate increases averaged 2.8% for the first six months of 2011 compared to the first six months of 2010.
 
Supplies, as a percentage of revenues, were 15.9% in the first six months of 2011 and 16.0% in the first six months of 2010. Supplies, as a percentage of cash revenues, were 17.5% in first six months of 2011 and 17.6% in the first six months of 2010. Supply cost per equivalent admission increased 1.3% in the first six months of 2011 compared to the first six months of 2010. Supply costs per equivalent admission increased 1.0% for pharmacy supplies, 0.8% for blood products and 4.4% for general medical and surgical items and declined 1.5% for medical devices in the first six months of 2011 compared to the first six months of 2010.
 
Other operating expenses, as a percentage of revenues, increased to 16.5% in the first six months of 2011 from 15.9% in the first six months of 2010. Other operating expenses, as a percentage of cash revenues, increased to 18.0% in the first six months of 2011 from 17.3% in the first six months of 2010. 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 $170 million and $181 million of indigent care costs in certain Texas markets during the first six months of 2011 and 2010, respectively. Provisions for losses related to professional liability risks were $121 million and $111 million for the first six months of 2011 and 2010, respectively.
 
Provision for doubtful accounts increased $72 million from $1.352 billion in the first six months of 2010 to $1.424 billion in the first six months of 2011, and as a percentage of revenues, remained 8.8% in each of the first six months of 2011 and 2010. The provision for doubtful accounts and the allowance for doubtful accounts relate primarily to uninsured amounts due directly from patients. The combined self-pay revenue deductions for charity care and uninsured discounts increased $148 million and $508 million, respectively, during the first six months of 2011, compared to the first six months of 2010. The sum of the provision for doubtful accounts, uninsured discounts and charity care, as a percentage of the sum of revenues, uninsured discounts and charity care, was 26.6% for the first six months of 2011, compared to 24.8% for the first six months of 2010. To quantify the total impact of and trends related to uninsured accounts, we believe it is beneficial to review the related revenue deductions and the provision for doubtful accounts in combination, rather than separately. At June 30, 2011, our allowance for doubtful accounts represented approximately 93% of the $4.248 billion total patient due accounts receivable balance. The patient due accounts receivable balance represents the estimated uninsured portion of our accounts receivable.
 
Equity in earnings of affiliates was $149 million and $143 million in the first six months of 2011 and 2010, respectively. Equity in earnings of affiliates relates primarily to our Denver, Colorado market joint venture.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Results of Operations (continued)
 

Six Months Ended June 30, 2011 and 2010 (continued)
 
Depreciation and amortization increased $6 million, from $710 million in the first six months of 2010 to $716 million in the first six months of 2011.
 
Interest expense increased from $1.046 billion in the first six months of 2010 to $1.053 billion in the first six months of 2011 due primarily to an increase in the average effective interest rate. Our average debt balance was $26.544 billion for the first six months of 2011 compared to $26.609 billion for the first six months of 2010. The average effective interest rate for our long term debt increased from 7.9% for the first six months of 2010 to 8.0% for the first six months of 2011.
 
During the first six months of 2011, we recorded net losses on sales of facilities of $1 million. During the first six months of 2010, no gains or losses on sales of facilities were recognized.
 
During the first six months of 2010, we recorded impairments of long-lived assets of $109 million, including impairment charges of $56 million for a hospital facility and $35 million for capitalized engineering and design costs related to certain building safety requirements (California earthquake standards) that have been revised, to adjust the carrying values to estimated fair value. There were no impairments of long-lived assets during the first six months of 2011.
 
During the first six months of 2011, we recorded a loss on retirement of debt of $75 million related to the redemptions of all $1.000 billion aggregate principal amount of our 91/8% Senior Secured Notes due 2014, at a redemption price of 104.563% of the principal amount, and $108 million aggregate principal amount of our 97/8% Senior Secured Notes due 2017, at a redemption price of 109.875% of the principal amount.
 
Our Investors have provided management and advisory services to the Company, pursuant to a management agreement among HCA and the Investors executed in connection with the Investors’ acquisition of HCA in November 2006. In March 2011, the management agreement was terminated pursuant to its terms upon completion of the initial public offering of our common stock, and the Investors were paid a final fee of $181 million.
 
The effective tax rates were 41.3% and 33.7% for the first six months of 2011 and 2010, respectively. The effective tax rate computations exclude net income attributable to noncontrolling interests as it relates to consolidated partnerships. Our provision for income taxes for the first six months of 2011 and 2010 was increased by $16 million and reduced by $47 million, respectively, related to adjustments to our liability for unrecognized tax benefits, including reductions in interest expense related to taxing authority examinations. Our provision for income taxes for the first six months of 2010 declined by $47 million related to reductions in interest expense related to taxing authority examinations. Excluding the effect of these adjustments, the effective tax rates for the first six months of 2011 and 2010 would have been 39.3% and 38.2%, respectively.
 
Net income attributable to noncontrolling interests increased from $173 million for the first six months of 2010 to $185 million for the first six months of 2011.
 
Liquidity and Capital Resources
 
Cash provided by operating activities totaled $1.666 billion in the first six months of 2011 compared to $1.295 billion in the first six months of 2010. The $371 million increase in cash provided by operating activities in the first six months of 2011 compared to the first six months of 2010 related primarily to the combined impact of positive cash flows from changes in working capital items and income tax payments (refunds) exceeding the decline in net income, which was primarily due to the termination of management agreement charge. The combined interest payments and net tax payments (refunds) in the first six months of 2011 and 2010 were $1.007 billion and $1.373 billion, respectively. Working capital totaled $2.613 billion at June 30, 2011 and $2.650 billion at December 31, 2010.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Liquidity and Capital Resources (continued)
 
Cash used in investing activities was $812 million in the first six months of 2011 compared to $51 million in the first six months of 2010. Excluding acquisitions, capital expenditures were $776 million in the first six months of 2011 and $536 million in the first six months of 2010. We expended $136 million for the acquisition of a hospital facility and $32 million to acquire nonhospital health care facilities during the first six months of 2011. We paid $31 million for acquisitions of nonhospital health care facilities during the first six months of 2010. Capital expenditures are expected to approximate $1.6 billion in 2011. At June 30, 2011, there were projects under construction which had estimated additional costs to complete and equip over the next five years of approximately $1.710 billion. We expect to finance capital expenditures with internally generated and borrowed funds. We received $54 million and $25 million from sales of hospitals and health care entities during the first six months of 2011 and 2010, respectively. We received net cash flows from our investments of $76 million and $502 million in the first six months of 2011 and 2010, respectively. During the first six months of 2010, we liquidated certain investments of the insurance subsidiary in order to distribute $500 million of excess capital to the Company.
 
Cash used in financing activities totaled $726 million during the first six months of 2011 compared to $1.206 billion during the first six months of 2010. During the first six months of 2011, net cash flows used in financing activities included reductions in net borrowings of $3.032 billion, net proceeds of $2.506 billion related to the issuance of common stock in conjunction with our initial public offering, distributions to noncontrolling interests of $185 million, distributions to stockholders of $30 million, payments of debt issuance costs of $12 million and receipts of $49 million of income tax benefits for certain items (primarily related to our stock options). During the first six months of 2010, cash flows used in financing activities included payment of cash distributions to stockholders of $2.251 billion ($4.99 per common share), increases in net borrowings of $1.187 billion, payments of debt issuance costs of $25 million, distributions to noncontrolling interests of $176 million and receipts of $56 million of income tax benefits million for certain items (primarily distributions to holders of our stock options).
 
We are a highly leveraged company with significant debt service requirements. Our debt totaled $25.320 billion at June 30, 2011. Our interest expense was $1.053 billion for the first six months of 2011 and $1.046 billion for the first six months of 2010. The increase in interest expense is due primarily to an increase in the average effective interest rate.
 
In addition to cash flows from operations, available sources of capital include amounts available under our senior secured credit facilities ($2.854 billion and $3.024 billion available as of June 30, 2011 and July 31, 2011, respectively) and anticipated access to public and private debt markets.
 
On May 4, 2011, we completed amendments to our senior secured credit agreement and senior secured asset-based revolving credit agreement, as well as extensions of certain of our term loans. The amendments extend approximately $594 million of our term loan A facility with a final maturity of November 2012 to a final maturity of May 2016 and approximately $2.373 billion of our term loan A and term loan B-1 facilities with final maturities of November 2012 and November 2013, respectively, to a final maturity of May 2018.
 
On June 2, 2011, we redeemed all $1.000 billion aggregate principal amount of our 91/8% Senior Secured Notes due 2014, at a redemption price of 104.563% of the principal amount, and $108 million aggregate principal amount of our 97/8% Senior Secured Notes due 2017, at a redemption price of 109.875% of the principal amount. The pretax loss on retirement of debt related to these redemptions was $75 million.
 
On August 1, 2011, we issued $5.000 billion aggregate principal amount of notes, comprised of $3.000 billion of 61/2% senior secured first lien notes due 2020 and $2.000 billion of 71/2% senior unsecured notes due 2022. After the payment of related fees and expenses, we intend to use the net proceeds from these debt issuances to redeem all of our outstanding $1.578 billion 95/8%/103/8% second lien toggle notes due 2016 and all of our outstanding $3.200 billion 91/4% second lien notes due 2016. The pretax debt retirement charge related to these redemptions is expected to be approximately $396 million.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Liquidity and Capital Resources (continued)
 
Investments of our professional liability insurance subsidiary, to maintain statutory equity and pay claims, totaled $725 million and $742 million at June 30, 2011 and December 31, 2010, respectively. The insurance subsidiary maintained net reserves for professional liability risks of $423 million and $452 million at June 30, 2011 and December 31, 2010, respectively. Our facilities are insured by our wholly-owned insurance subsidiary for losses up to $50 million per occurrence; however, this coverage is subject to a $5 million per occurrence self-insured retention. Net reserves for the self-insured professional liability risks retained were $818 million and $796 million at June 30, 2011 and December 31, 2010, respectively. Claims payments, net of reinsurance recoveries, during the next 12 months are expected to approximate $275 million. We estimate that approximately $180 million of the expected net claim payments during the next 12 months will relate to claims in the self-insured retention.
 
Management believes that cash flows from operations, amounts available under our senior secured credit facilities and our anticipated access to public and private debt markets will be sufficient to meet expected liquidity needs during the next 12 months.
 
Market Risk
 
We are 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 $717 million and $8 million, respectively, at June 30, 2011. These investments are carried at fair value, with changes in unrealized gains and losses being recorded as adjustments to other comprehensive income. At June 30, 2011, we had a net unrealized gain of $8 million on the insurance subsidiary’s investment securities.
 
We are exposed to market risk related to market illiquidity. Liquidity of the investments in debt and equity securities of our wholly-owned insurance subsidiary could be impaired by the inability to access the capital markets. Should the wholly-owned insurance subsidiary require significant amounts of cash in excess of normal cash requirements to pay claims and other expenses on short notice, we may have difficulty selling these investments in a timely manner or be forced to sell them at a price less than what we might otherwise have been able to in a normal market environment. At June 30, 2011, our wholly-owned insurance subsidiary had invested $149 million ($152 million par value) in tax-exempt student loan auction rate securities that continue to experience market illiquidity. It is uncertain if auction-related market liquidity will resume for these securities. We may be required to recognize other-than-temporary impairments on these long-term investments in future periods should issuers default on interest payments or should the fair market valuations of the securities deteriorate due to ratings downgrades or other issue specific factors.
 
We are also exposed to market risk related to changes in interest rates, and we periodically enter into interest rate swap agreements to manage our exposure to these fluctuations. Our interest rate swap agreements involve the exchange of fixed and variable rate interest payments between two parties, based on common notional principal amounts and maturity dates. The notional amounts of the swap agreements represent balances used to calculate the exchange of cash flows and are not our assets or liabilities. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions. The interest payments under these agreements are settled on a net basis. These derivatives have been recognized in the financial statements at their respective fair values. Changes in the fair value of these derivatives, which are designated as cash flow hedges, are included in other comprehensive income, and changes in the fair value of derivatives which have not been designated as hedges are recorded in operations.
 
With respect to our interest-bearing liabilities, approximately $1.524 billion of long-term debt at June 30, 2011 was subject to variable rates of interest, while the remaining balance in long-term debt of $23.796 billion at June 30, 2011 was subject to fixed rates of interest. Both the general level of interest rates and, for the senior secured credit facilities, our leverage affect our variable interest rates. Our variable debt is comprised primarily of amounts outstanding under the senior secured credit facilities. Borrowings under the senior secured credit facilities bear interest at a rate equal to an applicable margin plus, at our option, either (a) a base rate determined by reference to


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Liquidity and Capital Resources (continued)
 

Market Risk (continued)
 
the higher of (1) the federal funds rate plus 0.50% and (2) the prime rate of Bank of America or (b) a LIBOR rate for the currency of such borrowing for the relevant interest period. The applicable margin for borrowings under the senior secured credit facilities may fluctuate according to a leverage ratio. The average effective interest rate for our long-term debt increased from 7.9% for the six months ended June 30, 2010 to 8.0% for the six months ended June 30, 2011.
 
The estimated fair value of our total long-term debt was $26.060 billion at June 30, 2011. 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 $15 million. To mitigate the impact of fluctuations in interest rates, we generally target a portion of our debt portfolio to be maintained at fixed rates.
 
Our international operations and foreign currency denominated loans expose us to market risks associated with foreign currencies. In order to mitigate the currency exposure related to foreign currency denominated debt service obligations, we have entered into cross currency swap agreements. A cross currency swap is an agreement between two parties to exchange a stream of principal and interest payments in one currency for a stream of principal and interest payments in another currency over a specified period. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions.
 
Pending IRS Disputes
 
At June 30, 2011, we were contesting, before the IRS Appeals Division, certain claimed deficiencies and adjustments proposed by the IRS Examination Division in connection with its audit of HCA Inc.’s 2005 and 2006 federal income tax returns. The disputed items include the timing of recognition of certain patient service revenues, the deductibility of certain debt retirement costs and our method for calculating the tax allowance for doubtful accounts. In addition, eight taxable periods of HCA Inc. and its predecessors ended in 1997 through 2004, for which the primary remaining issue is the computation of the tax allowance for doubtful accounts, were pending before the IRS Examination Division as of June 30, 2011. The IRS Examination Division began an audit of HCA Inc.’s 2007, 2008 and 2009 federal income tax returns in 2010.
 
Management believes that HCA, its predecessors, subsidiaries and affiliates properly reported taxable income and paid taxes in accordance with applicable laws and agreements established with the IRS and that final resolution of these disputes will not have a material, adverse effect on our results of operations or financial position. However, if payments due upon final resolution of these issues exceed our recorded estimates, such resolutions could have a material, adverse effect on our results of operations or financial position.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Operating Data
 
                 
    2011     2010  
 
CONSOLIDATING
               
Number of hospitals in operation at:
               
March 31
    156       154