Community Health Systems, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; comparisons are with the same 2019 periods. Unaudited results. The company operated 97 hospitals at quarter-end.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net operating revenues | $2.519 billion | $3.302 billion | $5.544 billion | $6.679 billion |
| Income (loss) from operations | $296 million | $111 million | $406 million | $301 million |
| Net income (loss) | $93 million | $(146) million | $126 million | $(246) million |
| Net income (loss) attributable to CHS stockholders | $70 million | $(167) million | $87 million | $(285) million |
| Basic and diluted EPS | $0.61 | $(1.47) | $0.76 | $(2.51) |
| Operating margin | 11.8% | 3.4% | 7.3% | 4.5% |
| Interest expense, net | $260 million | $265 million | $523 million | $522 million |
- Cash flow: First-half cash provided by operations was $1.710 billion, versus $265 million in 2019. This included approximately $1.2 billion in Medicare accelerated payments, which are repayable, as well as pandemic relief. Investing used $53 million; financing used $321 million. Cash ended at $1.552 billion, compared with $216 million at year-end 2019.
- Liquidity: Current assets were $4.413 billion and current liabilities $3.422 billion at June 30. The ABL borrowing base was $614 million; there were no ABL borrowings and $180 million of letters of credit. Management said it expected available resources to cover requirements for the next 12 months.
- Debt: Total debt was $13.136 billion, including $30 million of current maturities, versus $13.405 billion at December 31, 2019. The company issued $1.462 billion of 6.625% secured notes due 2025, refinancing 2021 notes and repurchasing some 2023 notes. The fixed-charge coverage covenant was not triggered at quarter-end.
Material changes and drivers
- Q2 revenue declined 23.7%; first-half revenue declined 17.0%. Same-store revenue fell 18.4% in Q2 and 10.9% for the first half. Management attributed the declines primarily to COVID-19-related reductions in elective procedures, physician visits and emergency-room volumes, along with hospital divestitures.
- Q2 consolidated inpatient admissions fell 23.6% and adjusted admissions fell 29.2%; same-store measures declined 18.1% and 24.2%, respectively. May and June volumes improved from April but remained below pre-pandemic levels.
- Reported operating results benefited from $448 million of Public Health and Social Services Emergency Fund (PHSSEF) payments recognized as a reduction of operating expenses. The company had received about $564 million of PHSSEF payments by June 30, with unrecognized amounts recorded as liabilities pending satisfaction of conditions.
- First-half net income included approximately $240 million of discrete tax benefits tied to CARES Act changes to deductible interest expense. Despite the tax benefit, the company recorded a $115 million pretax loss for the first half.
- Impairment and loss on sale of businesses totaled $56 million in the first half, including write-downs for hospitals under sale discussions or held for sale, partly offset by gains on completed sales. Goodwill was $4.225 billion at June 30.
Outlook, risks and unusual items
- Management could not quantify the full-year COVID-19 impact and expected pandemic developments to materially affect 2020 financial performance. Recovery in volumes and deferred-care demand was possible but not assured; renewed restrictions, patient reluctance, staffing or supply shortages, and weaker collections could further pressure results and liquidity.
- About $1.2 billion of Medicare accelerated payments were expected to begin being recouped in August 2020. These advances must be repaid; the filing describes interest-free terms for up to 12 months and a 10.25% annual rate on balances remaining after 12 months. The company did not expect additional accelerated payments. It also received approximately $109 million of PHSSEF distributions in July, not recognized in Q2.
- Management expected to complete five additional hospital divestitures for aggregate proceeds of approximately $430 million, generally during Q3 and Q4 2020, but cautioned completion and timing were not assured. Two other hospital sales closed July 1, with approximately $133 million of net proceeds received at preliminary closings on June 30.
- Legal matters include a $53 million shareholder-class settlement that received final court approval in June, a pending securities class action and other investigations and litigation. Management said pending matters were not expected to materially affect consolidated financial position or liquidity, while noting adverse outcomes could materially affect results or cash flows in a period. A separate insurance dispute relates to a $73 million judgment; the company said it could not estimate a possible loss or range.
- The company reported stockholders’ deficit of $2.052 billion. It also identified sensitivity in patient-accounting estimates: a 1% change in estimated contractual reimbursement or self-pay collections could materially affect reported earnings and receivables.
Most important facts for investors to verify
- How much PHSSEF funding ultimately qualifies for recognition, and whether any amounts must be repaid following audits or failure to meet program conditions.
- The timing and cash impact of Medicare accelerated-payment recoupments, alongside the company’s ability to sustain liquidity as relief-related cash flows unwind.
- Hospital volumes, same-store revenue trends, payor mix and collections, particularly as COVID-19 restrictions change.
- Progress, proceeds and timing of announced divestitures, and the implications for revenue, debt reduction and future impairment charges.
- Debt-market access, refinancing needs, covenant headroom and litigation or reimbursement exposures that could affect cash flows.
- The extent to which reported first-half earnings depended on pandemic relief, tax benefits and other unusual items rather than recurring operations.