Community Health Systems, Inc. — Q1 2012 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2012. The company operated 134 hospitals at quarter-end, including 130 general acute-care hospitals. It also operated home-care agencies and provided hospital management services. Comparative 2011 revenue presentation was restated to show bad-de debt provision as a reduction of revenue; adoption did not affect reported results.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net operating revenue | $3,297.0 million | $2,954.1 million | +11.6% |
| Income from operations | $349.1 million | $280.8 million | +24.3% |
| Operating margin | 10.6% | 9.5% | +1.1 percentage points |
| Continuing income, before noncontrolling interests | $99.7 million | $91.6 million | +8.9% |
| Net income attributable to CHS | $75.5 million | $61.3 million | +23.1% |
| Diluted EPS | $0.85 | $0.67 | +$0.18 |
| Net cash from operations | $187.3 million | $187.5 million | Approximately flat |
Operating costs excluding depreciation and amortization were 84.1% of net operating revenue, versus 85.1% a year earlier. Net income attributable to CHS was 2.3% of net operating revenue, compared with 2.1%. Interest expense declined to $152.2 million from $163.2 million. The company reported $500.3 million of investing cash outflow, including $248.4 million for acquisitions, $184.9 million for property and equipment, and $67.7 million for other investments. Financing activities provided $312.4 million; cash ended the quarter at $129.3 million.
At March 31, 2012, total debt was $9.319 billion, up from $8.847 billion at year-end. Current maturities were $75.4 million and long-term debt was $9.244 billion. Current assets of $3.100 billion exceeded current liabilities of $1.996 billion; management reported net working capital of approximately $1.1 billion. The company had $750 million available under its replacement revolving facility, with $37.7 million reserved for letters of credit. It reported compliance with financial covenants and a 1.75x ratio of earnings to fixed charges.
Material changes versus the prior period
- Same-store net operating revenue increased 4.3%; same-store admissions fell 2.3%, while adjusted admissions rose 2.5%. Company-wide admissions increased 3.2% and adjusted admissions 8.1%.
- Revenue growth also reflected acquisitions and a prior-period governmental reimbursement settlement. Acquired facilities contributed $134.4 million of the revenue increase; hospitals operated throughout both periods contributed $127.8 million.
- Q1 included approximately $101.8 million of revenue from an industry-wide Medicare settlement and an unfavorable $21.0 million adjustment to Medicare disproportionate-share calculations. Management cited a $42.8 million after-tax benefit from the settlement and payment update.
- Bad-debt provision increased to $486.5 million from $400.0 million. Self-pay represented 13.4% of gross operating revenues before bad debt, versus 12.2%.
- Income included an $8.7 million after-tax charge for legal reserves and a $39.5 million after-tax loss on early debt extinguishment. Excluding these and the settlement benefit, management said continuing income before noncontrolling interests increased 14.8% to $105.1 million from $91.6 million.
- Three hospitals and a physician practice were acquired during the quarter. The company also repurchased $850 million of 8.875% notes due 2015, issuing $1.0 billion of 8% notes due 2019 and amending or replacing credit facilities.
Outlook, risks, contingencies and unusual items
Management said available cash, borrowing capacity and expected cash generation should support acquisitions, capital expenditures and working capital for at least the next 12 months and into the foreseeable future. The filing provides no specific earnings or revenue guidance. Management cited continued acquisition opportunities, operating-efficiency initiatives and investment in hospital services.
Key risks include substantial leverage, debt-service and refinancing requirements, covenant compliance, floating interest rates, reimbursement reductions or delays, managed-care pricing pressure, patient collection risk, labor and supply inflation, and healthcare reform. Interest-rate swaps covered approximately 66% of variable-rate debt; management estimated that a 1% rate change on unhedged variable-rate debt would change quarterly interest expense by about $3.4 million. As swaps expire during 2012, exposure to variable rates may increase.
Healthcare reform’s impact remained uncertain, including Medicare and Medicaid payment changes and the Supreme Court’s pending review of the law. The company also described multiple government investigations and litigation involving Medicare/Medicaid billing, emergency-department processes and inpatient admissions. It said possible losses in certain matters could not be estimated; $21.3 million was accrued for other matters with probable losses. The Tenet suit was dismissed with prejudice in March 2012. Management stated that it was vigorously defending the remaining matters.
Most important facts for investors to verify
- Whether revenue growth and margin improvement persist after removing the reimbursement settlement, acquisitions and EHR incentives.
- Same-store admission trends, bad-debt expense, self-pay mix, receivables aging and cash collections.
- Debt maturities, refinancing progress, borrowing costs, covenant headroom and the effect of expiring interest-rate swaps.
- Developments in government investigations and litigation, including potential exposure beyond recorded reserves.
- Execution and returns from recent acquisitions, capital spending and replacement-hospital projects.