Community Health Systems, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; amounts are in millions except per-share data. Community Health Systems operates acute-care hospitals and related healthcare services. It owned or leased 107 hospitals at quarter-end and continued a portfolio-rationalization and debt-reduction strategy.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net operating revenues | $3,302 | $3,562 | $6,679 | $7,251 |
| Income from operations | $111 | $37 | $301 | $250 |
| Operating margin | 3.4% | 1.0% | 4.5% | 3.4% |
| Net loss | $(146) | $(91) | $(246) | $(98) |
| Net loss attributable to CHS stockholders | $(167) | $(110) | $(285) | $(135) |
| Diluted loss per share | $(1.47) | $(0.97) | $(2.51) | $(1.20) |
| Net interest expense | $265 | $235 | $522 | $464 |
- For Q2, reported revenue fell 7.3%; for the first half, it fell 7.9%, primarily reflecting hospital divestitures. Same-store revenue rose 4.9% in Q2 and 4.0% for the first half.
- Same-store inpatient admissions increased 2.3% in Q2 and 1.1% for the first half; adjusted admissions rose 1.8% and 1.3%, respectively. Consolidated admissions declined, reflecting the smaller portfolio.
- Operating income improved, in part because impairment and disposal charges declined to $33 in Q2 from $174, and to $71 for the first half from $202. However, operating expenses excluding depreciation and impairment rose to 91.0% of revenue in Q2 from 89.1%, and to 89.8% for the first half from 88.9%.
- Higher interest rates increased interest expense; the six-month increase was partly offset by lower average debt. First-half results also included a $31 loss on early debt extinguishment, versus a $59 gain in 2018.
Cash flow, balance sheet and debt
- First-half operating cash flow was $265, versus $94 in 2018; investing cash outflow was $147, versus $241; financing cash outflow was $107, versus $208. Cash rose $11 from year-end to $207.
- Capital expenditures were $212 in the first half, including $206 of routine capital spending; purchases of property and equipment were lower than in 2018. Hospital disposition proceeds were $161.
- At June 30, cash was $207, current assets $3,484, current liabilities $2,503, and reported working capital approximately $981. Total debt was $13,599, including $206 of current maturities; long-term debt was $13,393. Stockholders’ deficit was $1,759.
- The ABL Facility had $723 outstanding. The revolving credit facility commitment was reduced to $385; the filing also reports $148 of letters of credit, and no revolver borrowings outstanding. Credit-facility covenant leverage was 4.96x against a 5.25x maximum at June 30; the company reported compliance.
- In March, CHS issued $1,601 of 8% senior secured notes due 2026 and used proceeds to repay its Term H loan and pay related fees. The company reported $700 of interest-rate swaps and said they covered approximately 96.8% of variable-rate debt.
Material developments, outlook and risks
- Seven hospitals were divested in the first half, representing approximately $620 of 2018 annual revenue; net proceeds were approximately $161, excluding proceeds received at a preliminary 2018 closing for two hospitals. Management said it intends to continue divestitures and expects proceeds to reduce debt and/or support facilities and local markets. Several further transactions remained pending or under negotiation; completion and timing were not assured.
- Q2 and first-half results included a $70 pre-tax increase in professional-liability claims estimates for claims incurred in 2016 and earlier, largely associated with divested hospitals. Management cited higher-than-expected settlement payments. The company is primarily self-insured for these claims.
- Other notable first-half items included a $17 after-tax reserve for a promissory note from a buyer of two former hospitals that filed for bankruptcy, and impairment/disposal charges. The filing’s MD&A describes $66 of after-tax impairment charges for the first half.
- Management stated that current cash, borrowing capacity, expected cash generation and capital-market access should fund operations and planned capital needs for the next 12 months. No specific earnings or revenue guidance was provided.
- Potential upside includes possible Medicare disproportionate-share hospital payments following the Supreme Court’s Allina decision; the amount and timing, if any, remained uncertain. Management said such payments could materially benefit results and operating cash flow in the period recognized or received.
- Key risks include substantial indebtedness and near-term maturities, refinancing and covenant compliance, reimbursement and healthcare-policy changes, managed-care pricing, patient collection estimates, labor and supply costs, goodwill impairment, and legal or regulatory proceedings. A 1% change in estimated contractual reimbursement percentages would change first-half net loss by an estimated $79 and receivables by $104, according to the filing.
- Legal matters include a securities class action certified on July 26, 2019, government inquiries and other litigation. Management said pending matters were not expected to materially affect financial position or liquidity, but adverse outcomes could materially affect results or cash flow in a particular period.
- ASC 842 lease adoption added approximately $673 of operating lease assets and liabilities at January 1, 2019. At June 30, reported operating lease liabilities were $612, including $133 current and $479 long-term.
Investor facts to verify
- Whether same-store growth and cost controls can offset revenue and volume declines from divestitures and continued portfolio changes.
- Cash generation, interest burden, debt maturities, refinancing options, ABL borrowing-base availability and covenant headroom.
- Further developments in professional-liability estimates, including claims tied to divested hospitals, and the collectability of the reserved promissory note.
- Status, proceeds and timing of pending or proposed hospital sales, and how any proceeds are applied.
- Potential reimbursement changes, including any DSH recovery, and the outcomes of significant litigation and government investigations.