Community Health Systems, Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017; filed February 28, 2018. Unless stated otherwise, financial figures are in U.S. dollars and millions. The filing also reports fourth-quarter results, with substantial impairment and receivables-estimate charges.
Business context
CHS operates general acute-care hospitals and related outpatient businesses, primarily in non-urban and selected urban markets. At year-end, continuing operations included 125 hospitals with 20,850 licensed beds across 19 states. The company is pursuing portfolio rationalization and debt reduction through asset sales; in 2017 it divested 30 hospitals for approximately $1.7 billion in net proceeds. Comparisons are affected by those sales and the 2016 spin-off of 38 hospitals to Quorum Health Corporation (QHC).
Financial and operating highlights
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Operating revenues before provision for bad debts | $18.398 billion | $21.275 billion |
| Provision for bad debts | $3.045 billion | $2.837 billion |
| Net operating revenues | $15.353 billion | $18.438 billion |
| Operating income (loss) | $(1.878) billion | $(0.860) billion |
| Net loss attributable to CHS stockholders | $(2.459) billion; $(22.00) per share | $(1.721) billion; $(15.54) per share |
| Adjusted EBITDA (non-GAAP) | $1.703 billion; 11.1% of net operating revenues | $2.225 billion; 12.1% |
| Cash from operating activities | $773 million | $1.137 billion |
- Reported net operating revenues fell 16.7%, principally reflecting divestitures and the QHC spin-off. Same-store net operating revenues increased 0.2%; same-store admissions declined 1.9% and adjusted admissions declined 1.7%.
- The bad-debt provision rose to 16.6% of operating revenues before bad debts, from 13.3%. In Q4, CHS recorded a $591 million downward revenue estimate adjustment: $197 million in additional contractual allowances and $394 million in bad-debt provision. The filing says the adjustment followed updated patient-account collection analysis undertaken in connection with adopting the new revenue standard.
- Impairment and net loss on sale of businesses totaled $2.123 billion, including a $1.419 billion non-cash goodwill impairment and charges related to underperforming and held-for-sale hospitals. Goodwill stood at $4.723 billion at year-end, down from $6.521 billion.
- Interest expense was $931 million, versus $962 million. Cash interest paid was $852 million. The company reported a $40 million loss on early extinguishment of debt.
Liquidity, debt and capital
- Year-end cash was $563 million; current assets were $4.068 billion and current liabilities $2.356 billion. Net working capital was approximately $1.7 billion.
- Balance-sheet total debt was $13.913 billion, including capital leases and other debt; long-term debt was $13.880 billion. The filing separately cites approximately $7.5 billion of senior secured and $6.4 billion of senior unsecured principal indebtedness.
- Investing activities provided $1.069 billion, largely due to hospital-sale proceeds. Financing activities used $1.517 billion, including debt repayments. Routine capital expenditures were $558 million, with $6 million of replacement-hospital construction costs.
- At December 31, 2017, CHS reported compliance with credit-facility covenants, with a secured net leverage ratio of 4.08x against a 4.50x limit and interest coverage of 2.10x against a 1.75x minimum. On February 26, 2018, the facility was amended: the interest-coverage covenant was removed, a first-lien leverage covenant replaced the prior leverage test, and revolving commitments totaled approximately $840 million. The amendment also tightened application of asset-sale proceeds to debt repayment.
Outlook, risks and unusual items
- Management expected 2018 capital expenditures of approximately $475 million to $575 million and said it anticipated funding routine capital needs from operating cash flows. CHS provided no clear earnings or revenue guidance in the supplied filing text.
- CHS intended to pursue additional divestitures. Potential sales under discussion represented approximately $2.0 billion of annual revenue and mid-single-digit Adjusted EBITDA margins; completion, timing and proceeds were uncertain. Two additional sale agreements were signed after year-end.
- Management identified substantial leverage, refinancing and maturity risk. Approximately $7.659 billion of scheduled debt maturities fell in 2019–2021 and $6.113 billion in 2022–2023, before interest and other obligations. The filing warns that refinancing may not be available on acceptable terms and that covenant breaches could trigger defaults.
- Other key risks include reimbursement and health-policy changes, higher patient deductibles and self-pay collection risk, declining inpatient volumes, labor and supply costs, competition, further asset impairments, cyber incidents, and regulatory scrutiny. Medicare and Medicaid represented 33.1% of operating revenues before bad debts; self-pay represented 12.6%.
- Legal and regulatory matters include HMA-related False Claims Act and billing litigation, government investigations, shareholder litigation and other claims. Management did not believe pending matters would materially harm consolidated financial position or liquidity, but acknowledged an adverse outcome could materially affect results or cash flows in a period. The HMA-related CVR liability was valued at $256 million; ultimate CVR payments depend on resolution of covered matters.
- The 2017 Tax Act produced a provisional $32 million tax expense; CHS said its accounting remained incomplete. The revenue-recognition standard was adopted January 1, 2018; management did not expect a material prospective effect on results, but the 2017 estimate adjustment was recorded before adoption.
Important facts for investors to verify
- Whether ongoing divestitures produce the expected proceeds and debt reduction, and how the smaller hospital portfolio affects future revenue and EBITDA.
- Whether patient-account collections and bad-debt estimates stabilize after the $591 million Q4 adjustment; review receivables, collection trends and the transition to the new revenue standard.
- Debt refinancing capacity, upcoming maturities, covenant headroom and compliance with the amended credit facility’s leverage tests.
- Future impairment exposure, given the year-end goodwill balance and the filing’s sensitivity to market value, volumes, interest rates and operating costs.
- Developments in HMA-related litigation, government inquiries, the Corporate Integrity Agreement and other contingencies.
- Whether 2018 capital spending and operating cash flow support investment needs while servicing debt. Deloitte issued an unqualified opinion on the financial statements, and management and Deloitte reported effective internal control over financial reporting as of year-end.