Community Health Systems, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2017. Financial amounts are in millions except per-share data. The company operated 133 hospitals in continuing operations at quarter-end. Reported comparisons are materially affected by divestitures and the April 2016 Quorum Health Corporation (QHC) spin-off; same-store measures provide a more comparable view of continuing facilities.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenues before bad debts | $4,333 | $5,084 | $14,323 | $16,128 |
| Net operating revenues after bad debts | $3,666 | $4,380 | $12,295 | $13,969 |
| Operating income (loss) | $90 | $146 | $274 | $(935) |
| Net loss attributable to CHS stockholders | $(110) | $(79) | $(446) | $(1,500) |
| Basic and diluted loss per share | $(0.98) | $(0.71) | $(3.99) | $(13.55) |
| Cash from operating activities | Not provided for quarter | Not provided for quarter | $617 | $810 |
- Operating margin was 2.5% in Q3 2017 versus 3.3% in Q3 2016; for the nine-month periods it was 2.2% versus negative 6.7%. The 2016 nine-month result included substantial impairment charges.
- Bad-debt provision was $667 in Q3 and $2,028 for nine months, equal to 15.4% and 14.2% of pre-bad-debt operating revenues, respectively; comparative 2016 rates were 13.8% and 13.4%.
- At September 30, 2017, cash was $590, current assets $4,678 and current liabilities $2,277; reported net working capital was approximately $2.4 billion. Total debt was $13,941, including $40 current maturities; long-term debt was $13,901. Stockholders’ equity was $1,213.
- Nine-month investing cash flow was $1,191, including $1,666 in proceeds from hospital and ancillary-business dispositions. Financing cash flow used $1,456. Cash increased $352 from year-end 2016 to $590.
Changes versus prior periods
- Reported net operating revenues declined 16.3% in Q3 and 12.0% for nine months, principally reflecting divestitures and the QHC spin-off. Same-store net operating revenues fell 1.5% in Q3 and 0.3% for nine months.
- Same-store inpatient and adjusted admissions each declined 2.3% in Q3 and 1.9% for nine months. Management cited hurricane disruption, lower obstetrics volume, more observation days, fewer inpatient surgeries and lower readmissions among contributing factors.
- CHS recorded $363 of impairment and net disposal losses in the first nine months of 2017, versus $1,695 in 2016. The 2017 charge primarily related to hospitals held for sale; $320 after tax was identified in MD&A. Goodwill was $6,148 at quarter-end.
- Cash from operations declined $193 year over year. Management cited divested-hospital cash flows, payroll timing, reduced HITECH cash receipts and working-capital changes, partly offset by improved receivable collections and shareholder-derivative settlement proceeds.
- Interest expense was $238 in Q3, up $5, but $706 for nine months, down $24. Lower average debt reduced year-to-date expense, partly offset by higher interest rates.
Liquidity, debt, outlook and risks
- CHS issued $3.1 billion of 6.25% senior secured notes due 2023 in 2017 and used proceeds and asset-sale cash to refinance or repay existing debt, including the Term F and Term A facilities and 2018 secured notes. Total debt fell from $15,244 at year-end 2016 to $13,941 at September 30, 2017.
- The revolving facility had approximately $929 of commitments, with $63 in outstanding letters of credit; a $739 portion was extended to January 2021. The receivables facility had $532 outstanding against a $600 commitment. The filing reports secured net leverage of 3.80x against a 4.50x limit and interest coverage of 2.45x against a 1.75x minimum; CHS reported covenant compliance.
- Management said available cash, borrowing capacity and expected operating cash flows should fund capital needs and working capital over the next 12 months. It expects to continue portfolio rationalization and debt reduction. The company had completed divestitures of 30 hospitals associated with approximately $3.4 billion of 2016 revenue, receiving about $1.95 billion in gross proceeds plus working capital; further potential sales were under negotiation, with no assurance of completion or timing.
- Hurricanes Harvey and Irma caused an estimated $40 pre-tax impact from lost revenue and response costs, before potential insurance recoveries. Management said repair-related capital spending was not expected to materially affect capital resources.
- Key risks include high leverage and debt-service demands; covenant compliance and refinancing access; changes to Medicare, Medicaid and Affordable Care Act policies; payor reimbursement pressure; self-pay exposure and collections; labor and supply-cost inflation; further asset impairment; and execution and proceeds from planned divestitures.
- Legal matters include HMA-related government investigations and False Claims Act litigation, with the consolidated matter stayed through December 18, 2017; the related CVR legal liability was $256. The company also disclosed other investigations and lawsuits. Management said pending matters were not expected to materially affect financial position or liquidity, while noting adverse outcomes could materially affect results or cash flows in a period.
- Accounting outlook: CHS expected to adopt the new revenue standard on January 1, 2018 using the modified retrospective method. It did not expect a material prospective impact on results, but said a material reduction to reported patient receivables remained possible. Adoption of the new lease standard in 2019 was expected to significantly affect the balance sheet and results presentation. No formal earnings guidance is provided in the filing.
Important facts for investors to verify
- Separate ongoing same-store trends from the large revenue and volume declines caused by portfolio changes; confirm the continuing-hospital base after completed and pending sales.
- Track bad-debt rates, self-pay mix, days revenue outstanding and receivable collections; management estimated a 1% change in reimbursement assumptions could change nine-month net loss by about $76 and net receivables by $117.
- Review debt maturities, refinancing costs, revolving-facility availability and headroom under the tightening covenant thresholds; confirm proceeds from sales are applied to debt as planned.
- Assess whether hurricane losses are recovered through insurance and whether further impairment charges arise, particularly given the substantial goodwill balance and management’s disclosed valuation sensitivity.
- Follow HMA legal proceedings, CVR liability changes, and the potential receivables impact of adopting the 2018 revenue-recognition standard.