Community Health Systems, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. CHS operated 99 hospitals at quarter-end. Comparisons are with Q1 2019 unless otherwise noted. Amounts are in millions except per-share data.
Financial results and key metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net operating revenues | $3,025 | $3,376 |
| Income from operations | $110 | $189 |
| Operating margin | 3.6% | 5.6% |
| Net income (loss) | $34 | $(101) |
| Net income (loss) attributable to CHS stockholders | $18 | $(118) |
| Diluted EPS | $0.15 | $(1.04) |
| Net cash from operating activities | $57 | $133 |
| Cash and cash equivalents at quarter-end | $246 | $277 |
- Revenue fell 10.4%; same-store revenue declined 3.5%. Consolidated inpatient admissions decreased 13.3% and adjusted admissions 12.8%; same-store decreases were 5.2% and 4.8%, respectively.
- Operating costs and expenses were $2,915, including $45 of impairment and net loss on sale of businesses. Interest expense was $262, versus $257.
- The company reported a $183 income-tax benefit, primarily reflecting about $240 of discrete CARES Act-related tax benefits from releasing valuation allowances on interest carryforwards. Thus, the reported profit followed a $149 pretax loss; the tax benefit is a significant non-recurring factor.
- Net cash from operations decreased $76, primarily due to timing of interest payments. Cash interest paid was $264, compared with $189. Investing activities used $109; financing activities provided $82.
- Routine capital expenditures were $70 and replacement-hospital construction costs were $29.
- At March 31, total debt was $13,555, including $380 outstanding on the ABL Facility; current maturities were $30. Long-term debt was $13,525. Total liabilities were $17,079, and CHS stockholders’ deficit was $2,205.
- Net working capital was approximately $1.2 billion. The ABL borrowing base was $769; after $380 of borrowings and $150 of letters of credit, approximately $239 remained available. CHS was not subject to the ABL fixed-charge coverage covenant at quarter-end.
Material changes and unusual items
- Revenue and patient volumes were affected by COVID-19-related cancellations and deferrals beginning in March, as well as hospital divestitures. Three hospitals divested effective January 1, 2020 represented approximately $306 of 2019 annual revenue; CHS received approximately $240 in net proceeds.
- CHS issued $1,462 of 6.625% senior secured notes due 2025, using the proceeds primarily to refinance 2021 notes, repurchase approximately $426 of 2023 notes, and pay related costs. The refinancing produced a $4 early-extinguishment loss.
- The $45 net impairment and disposal charge included about $64 of impairment at hospitals being marketed for sale, partly offset by a $19 gain on three hospital sales.
- In April, after quarter-end, CHS received approximately $245 in provider relief funds that are not repayable if program conditions are met, and approximately $1.2 billion in Medicare accelerated payments that must be repaid through future Medicare payment recoupments. Neither was recognized in Q1 results.
Outlook, risks and contingencies
- Management expects COVID-19 developments to materially affect 2020 financial performance but cannot quantify the impact. It cited reduced elective procedures, office visits and emergency volumes; possible supply, staffing and cost pressures; weaker payer mix and collections; and uncertainty about when normal volumes may return. A recovery or backlog of deferred demand is not assured.
- Management stated it expects to fund operations and investment needs over the next 12 months using operating cash flows, available borrowing capacity, capital-market access, divestiture proceeds and government assistance. It cautioned that market disruption or prolonged pandemic impacts could weaken liquidity and access to capital.
- CHS expected to complete its portfolio-rationalization program by Q3 2020. Agreements covered seven additional hospital sales, with expected aggregate proceeds of approximately $400; completion and timing were not assured.
- The company remains highly leveraged and subject to debt covenants. Legal and regulatory outcomes may be material to results or cash flows in a particular period. A proposed $53 shareholder-class-action settlement was funded into escrow and awaited final court approval. A separate insurance dispute concerns coverage of a $73 judgment; CHS said the outcome and potential loss could not be estimated.
- Goodwill was approximately $4.3 billion. No impairment indicators were identified at March 31, but management warned that weaker volumes, market values or higher costs could lead to future impairment.
Important facts for investors to verify
- Whether post-quarter relief payments and Medicare advances, including their conditions and repayment schedule, sustain liquidity as intended.
- Subsequent patient-volume, revenue, payer-mix and collection trends, and whether deferred care returns.
- Progress and proceeds from the seven announced divestitures and the intended use of proceeds.
- Debt maturities, refinancing capacity, ABL availability and covenant headroom under changing operating conditions.
- Final approval and payment treatment of the $53 shareholder settlement, and developments in the $73 insurance-coverage dispute.