Community Health Systems, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual report, not a standalone fourth-quarter filing; fourth-quarter figures are included where available. Financial amounts are in U.S. dollars.
Business context
CHS operated 194 hospitals in continuing operations across 28 states, with 29,853 licensed beds, alongside home-care and hospice agencies and hospital management services. The 2015 results include the Health Management Associates (HMA) hospitals acquired in January 2014. CHS announced a planned spin-off of 38 hospitals and Quorum Health Resources into Quorum Health Corporation (QHC).
Financial and operating highlights
| Metric | 2015 | 2014 |
|---|---|---|
| Net operating revenue | $19.437 billion | $18.639 billion |
| Income from operations | $1.337 billion | $1.339 billion |
| Operating margin | 6.9% | 7.2% |
| Income from continuing operations | $295 million | $260 million |
| Net income attributable to CHS shareholders | $158 million | $92 million |
| Diluted EPS, net income | $1.37 | $0.82 |
| Adjusted EBITDA (non-GAAP) | $2.670 billion | $2.777 billion |
| Operating cash flow | $921 million | $1.615 billion |
| Cash and cash equivalents at year-end | $184 million | $509 million |
Revenue grew 4.3%, while operating income was nearly flat and operating margin declined. Shareholder net income rose, partly reflecting lower discontinued-operation losses and fewer certain prior-year charges. Adjusted EBITDA declined about 3.9%; it is a non-GAAP measure and should not be treated as a substitute for cash flow or GAAP earnings.
Same-store revenue increased 2.4%; same-store admissions fell 1.8%, while adjusted admissions rose 0.3%. Consolidated admissions and adjusted admissions increased 1.7% and 3.5%, respectively, with the broader hospital base contributing to the difference. Outpatient revenue was 57.2% of net patient revenue before bad debts.
The provision for bad debts rose to $3.127 billion, or 13.9% of revenue before bad debts, from $2.922 billion, or 13.6%. A $169 million fourth-quarter estimate change reflected weaker self-pay collections and deteriorating receivable trends. Days revenue outstanding increased to 63 from 60 days. Fourth-quarter 2015 revenue was $4.798 billion; continuing operations recorded a $40 million loss, and shareholder net income was a loss of $83 million, or diluted EPS of $(0.73).
Debt, liquidity and investment
Year-end total debt was $17.051 billion, including $229 million of current maturities; cash was $184 million. The filing cites approximately $10.5 billion of senior secured and $6.6 billion of senior unsecured principal. Interest expense was $973 million, and cash interest paid was $925 million. Debt was 81% of total capitalization. The company reported $841 million of additional revolving-facility availability, including the effect of outstanding letters of credit, and stated it was compliant with debt covenants at year-end. Working capital was approximately $2.1 billion.
Operating cash flow fell by $694 million year over year, largely due to payment timing, compensation liabilities, legal settlements, interest and lower HITECH incentive receipts. Investing cash outflow was $1.051 billion, including $953 million of property and equipment purchases; financing cash outflow was $195 million. Capital expenditures were $830 million for routine capital and $123 million for replacement-hospital construction. The filing’s extracted 2016 capital-spending forecast contains inconsistent units, so the forecast value is unclear from this text.
Material changes, outlook and risks
- Portfolio changes: CHS divested multiple hospitals during 2015, including two required by the FTC in connection with the HMA merger. It expected the QHC spin-off to close in the first half of 2016, subject to regulatory, tax, registration, transition and Board conditions; completion was not assured.
- Management outlook: Management expected internally generated cash and available credit to fund operations and planned investment over the following 12 months, anticipated covenant compliance, and cited opportunities to improve efficiencies and benefit from HMA synergies. These are forward-looking statements, not guarantees.
- Reimbursement and collections: Government and commercial payor rate changes, Medicaid expansion decisions, higher patient deductibles, self-pay collectability, ICD-10 billing delays and value-based payment models could pressure revenue, cash conversion and receivables.
- Leverage and interest rates: Substantial debt service, restrictive covenants and variable-rate borrowings constrain financial flexibility. A 1% rate change on remaining unhedged variable debt was estimated to affect annual interest expense by about $53 million; swaps covered approximately 37.9% of variable-rate debt.
- Legal and compliance matters: The company disclosed ongoing HMA billing-related qui tam litigation and government investigations, other legal proceedings, and a five-year Corporate Integrity Agreement (CIA). Management said pending matters were not expected to materially affect consolidated financial position or liquidity, but adverse outcomes could materially affect results or cash flow in a period. The filing did not provide a clear loss estimate for several matters.
- Cybersecurity: A 2014 cyberattack exposed non-medical patient identifying information. Remediation continued, and related class actions and potential further expenses or inquiries remained unresolved.
- Asset values: No goodwill impairment was indicated in the fourth-quarter 2015 annual test, but hospital-operations goodwill had only about $1 billion of estimated fair-value headroom. CHS recorded $68 million of long-lived-asset impairment in 2015.
- Unusual items and reporting: The fourth-quarter bad-debt estimate change was material. The company also recorded debt-extinguishment losses, spin-off expenses, impairment charges and fair-value adjustments. Deloitte issued an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- Whether self-pay collections, bad-debt provision and days revenue outstanding improved after the $169 million fourth-quarter adjustment.
- Cash generation and liquidity after debt interest, required maturities, capital spending and legal payments; confirm revolver availability and covenant headroom.
- Progress and final terms of the QHC spin-off, including tax treatment, transferred liabilities and effects on remaining CHS operations.
- Developments and potential financial exposure from HMA-related litigation, government investigations, the CIA and cyberattack-related claims.
- Whether same-store volume, operating margins and HMA integration synergies support management’s stated outlook; also confirm the 2016 capital-spending forecast from the original filing because the extracted units are inconsistent.