Community Health Systems, Inc. — Q1 2022 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2022. Community Health Systems operated 83 hospitals, including 81 general acute care hospitals and two stand-alone rehabilitation or psychiatric hospitals. Results are not necessarily indicative of the full year.
Key financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net operating revenues | $3.111 billion | $3.013 billion |
| Income from operations | $270 million | $326 million |
| Operating margin | 8.7% | 10.8% |
| Net income (loss), consolidated | $30 million | $(35) million |
| Net loss attributable to CHS stockholders | $(1) million | $(64) million |
| Basic and diluted loss per share | $(0.01) | $(0.51) |
| Net cash provided by operating activities | $101 million | $101 million |
- Revenue increased 3.3%; same-store revenue rose 3.8%, or $113 million. Adjusted admissions increased 2.2% overall and 3.2% same-store, while inpatient admissions declined 1.7% overall and 0.3% same-store.
- Operating costs and expenses excluding depreciation, amortization and impairment increased to 87.0% of revenue from 83.9%. Contract labor utilization and rates drove higher other operating expense; wage inflation also affected labor costs. Salaries and benefits as a share of revenue declined to 42.6% from 43.2%.
- Interest expense was $217 million, down from $231 million; cash interest paid rose to $242 million from $203 million. The quarter included a $5 million pretax debt-extinguishment loss and a $6 million impairment charge for a hospital held for sale.
- Cash and cash equivalents were $460 million at March 31, versus $507 million at year-end. Current assets were $3.488 billion and current liabilities $2.347 billion; management reported net working capital of approximately $1.1 billion.
- Total debt was approximately $12.197 billion, including $43 million of current maturities; long-term debt was $12.154 billion. Total liabilities were $16.082 billion and stockholders’ deficit was $1.312 billion.
- Investing cash outflow was $121 million, including $97 million of property and equipment purchases. Financing cash outflow was $27 million; cash declined by $47 million during the quarter.
Material changes versus the prior period
- Consolidated net income improved to $30 million from a $35 million loss, while the loss attributable to CHS stockholders narrowed to $1 million from $64 million. The comparison reflects lower debt-extinguishment losses and a lower tax provision, partly offset by reduced operating income and less pandemic-relief recognition.
- Operating income fell $56 million despite revenue growth, as operating costs rose faster than revenue. Pandemic relief funds reduced operating costs by $47 million, compared with $82 million in Q1 2021.
- On February 4, 2022, CHS issued $1.535 billion of 5.25% senior secured notes due 2030 and used proceeds to redeem its 6.875% notes due 2025 and pay related costs. The filing reports total debt of $12.197 billion at quarter-end.
- Charity-care policy changes increased estimated charity services, at standard charges, to $363 million from $229 million; estimated costs were $41 million versus $26 million. These services are excluded from net operating revenue.
Outlook, risks and contingencies
- No quantitative earnings or revenue guidance is provided. Management said operating cash flows, available ABL borrowing capacity and anticipated capital-market access should fund operations, capital expenditures and working capital for the next 12 months and foreseeable future.
- The COVID-19 surge during the quarter was the largest to date for the company and adversely affected revenue, labor expense and length of stay. Management expects pandemic developments to continue affecting results, but cannot quantify future effects.
- Inflation, supply disruptions and a highly competitive labor market increased costs. The company cautioned it may not fully offset these pressures. Other key risks include reimbursement changes, patient volumes and payor mix, receivable collectability, substantial indebtedness and covenant compliance, and legal and regulatory matters.
- The $1.0 billion ABL Facility had $897 million of excess availability after $103 million reserved for letters of credit; there were no borrowings outstanding. Its fixed-charge coverage test was not triggered at quarter-end. Approximately $43 million of debt was due within 12 months.
- Cumulative pandemic-relief receipts were approximately $805 million through March 31, 2022; $42 million was received in the quarter. Recognition depends on meeting program conditions, and some unrecognized amounts may have to be returned. The filing notes uncertainty about future relief and the public health emergency declaration then in effect.
- A definitive agreement was signed to sell AllianceHealth Seminole, with completion expected in the second half of 2022. Recorded probable legal-contingency liabilities were $18 million at quarter-end. Management said pending matters were not expected to materially harm financial position or liquidity, but an adverse outcome could materially affect a period’s results or cash flows.
Important facts for investors to verify
- Whether revenue and adjusted-admission trends persist and whether contract-labor and inflationary costs ease enough to restore operating margins.
- Cash generation, interest burden, debt refinancing needs and continued access to the ABL Facility and capital markets.
- Receivable collection assumptions and sensitivity: management estimated that a 1% change in contractual reimbursement assumptions could change quarterly net income by approximately $87 million, and a 1% change in self-pay collection assumptions by $41 million.
- Recognition or repayment of pandemic-relief funds, and the timing and proceeds of the AllianceHealth Seminole sale.
- Developments in Medicaid and Medicare reimbursement, including the potential outcome of litigation concerning Medicare disproportionate-share payments, as well as material legal proceedings and regulatory investigations.