Community Health Systems, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Although the request specifies 2016 Q4, this is an annual filing; fourth-quarter figures are noted separately below. Unless stated otherwise, financial amounts are in millions of dollars.
Business context
CHS operated 155 hospitals in continuing operations, with 26,222 licensed beds, across 21 states at year-end. The company provides inpatient and outpatient hospital services and affiliated care. During 2016 it spun off 38 hospitals and Quorum Health Resources into Quorum Health Corporation (QHC), acquired interests in three hospitals, and continued a portfolio rationalization and deleveraging strategy.
Financial and operating results
| Metric | 2016 | 2015 | Change or context |
|---|---|---|---|
| Net operating revenues | $18,438 | $19,437 | Down 5.1%; same-store revenue rose 1.4% to $17,481 |
| Operating income (loss) | $(860) | $1,337 | Includes $1,919 of impairment and loss on sale, net |
| Net income (loss) attributable to CHS stockholders | $(1,721) | $158 | 2016 diluted loss per share: $(15.54) |
| Adjusted EBITDA | $2,225 | $2,670 | Down 16.7%; margin declined to 12.1% from 13.7%. Non-GAAP measure. |
| Cash from operating activities | $1,137 | $921 | Up $216 |
| Cash and cash equivalents | $238 | $184 | At December 31 |
| Total debt | $15,244 | $16,785 | At December 31; excludes other obligations such as operating leases |
Other operating indicators: same-store admissions fell 1.9% and adjusted admissions fell 0.5%; same-store revenue per adjusted admission rose 1.9%. Bad-debt provision declined to $2,837, or 13.3% of operating revenues before bad debts, from $3,127, or 13.9%. Medicare and Medicaid represented 34.4% of operating revenues before bad debts; self-pay represented 12.2%.
Fourth quarter: Net operating revenues were $4,469 versus $4,798 in Q4 2015. Net loss attributable to CHS stockholders was $220, or $(1.99) per share, versus a loss of $83, or $(0.73) per share, in Q4 2015.
Material changes and unusual items
- The April 2016 QHC spin-off removed 38 hospitals from CHS. The filing records a $713 non-cash dividend for distributed net assets; CHS also received approximately $1.2 billion from QHC and used proceeds, along with other divestiture proceeds, to repay debt.
- CHS recorded a $1,395 goodwill impairment and additional impairments related to underperforming and held-for-sale hospitals. Total impairment and gain/loss on sale of businesses, net, was $1,919. The annual year-end goodwill test indicated no additional impairment, but the hospital reporting unit’s fair value cushion was less than 1% of carrying value.
- Other notable transactions included a $403 cash sale of Las Vegas joint-venture interests, generating a $94 gain, and the sale of an 80% interest in the home-care division for $128, generating a $91 gain. A sale-leaseback of medical office buildings produced $159 of proceeds but was recorded as a financing obligation.
- Consolidated admissions declined 8.8% and adjusted admissions 8.4%, substantially reflecting portfolio changes; same-store measures provide a more comparable view.
Liquidity, debt and outlook
- Year-end current assets were $4,666 and current liabilities $2,887; reported net working capital was approximately $1.8 billion. The filing cites approximately $1.0 billion of revolving-facility borrowing availability, with $55 million of letters of credit outstanding.
- CHS paid $930 in interest during 2016. It reported covenant compliance at year-end: secured net leverage ratio of 3.96x against a 4.50x maximum, and interest coverage of 2.43x against a 2.00x minimum. The filing notes tighter covenant thresholds beginning in 2018.
- Debt maturities are concentrated in 2018–2021; the filing identifies substantial scheduled obligations beginning in 2018 and senior secured notes due in 2018. Variable-rate exposure remains: a 1 percentage-point change on unhedged variable debt was estimated to affect annual interest expense by approximately $46.
- Management expected 2017 capital expenditures of approximately $625–$775 and stated that operating cash flow, available borrowing capacity and capital-market access were expected to fund the next 12 months. Management also anticipated compliance with debt covenants during 2017.
- CHS had definitive agreements or non-binding letters of intent to sell 25 hospitals, including eight covered by an agreement signed February 16, 2017. These facilities generated approximately $3.0 billion of 2016 revenue; estimated potential net proceeds were approximately $1.5 billion if all sales closed. Completion, timing and proceeds were not assured.
- With advisors, CHS was exploring strategic alternatives, including discussions with financial sponsors; no transaction was assured. Its stockholder rights agreement could dilute an acquirer at a 15% ownership threshold and was scheduled to expire April 1, 2017.
Risks, contingencies and other disclosures
- High leverage and refinancing needs are central risks. The filing reports approximately $8.8 billion of senior secured and $6.4 billion of senior unsecured principal in its risk discussion, alongside significant maturities in 2018–2019. Debt covenants restrict additional borrowing, distributions and asset sales.
- Regulatory and reimbursement uncertainty includes potential changes to the Affordable Care Act, Medicare and Medicaid rates, supplemental payment programs and value-based reimbursement. CHS also faces collection risk from patient deductibles, co-payments and self-pay balances.
- Legal matters include ongoing HMA-related federal billing investigations and False Claims Act litigation, an SEC investigation concerning HMA accounting and receivables, and other government inquiries. The company’s five-year Corporate Integrity Agreement requires monitoring and reporting; noncompliance may lead to penalties or exclusion from federal healthcare programs. Management said pending matters were not expected to materially affect financial position or liquidity, while acknowledging an adverse outcome could materially affect a period’s results or cash flows.
- The company disclosed a 2014 cyberattack involving non-medical patient identification information and related litigation and remediation costs. Professional and general liability claims are substantially self-insured; the estimated liability was $788 at year-end.
- Management reported effective disclosure controls and internal control over financial reporting. Deloitte issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether announced hospital divestitures close, at what timing and proceeds, and how much debt is repaid with the proceeds.
- Near-term refinancing and maturity plans, covenant headroom, revolver availability and the effect of interest-rate changes.
- Underlying operating trends, especially same-store volumes, revenue per adjusted admission, labor and supply costs, and bad-debt collections.
- Whether further goodwill or asset impairments arise, given the limited fair-value cushion reported for the hospital reporting unit.
- Developments in HMA-related investigations and litigation, the SEC inquiry, and compliance with the Corporate Integrity Agreement.
- Any outcome of the strategic-alternatives process and changes to healthcare policy or reimbursement affecting CHS markets.