Community Health Systems, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2020. The unaudited results are presented under U.S. GAAP. Community Health Systems (CHS) operated or leased 93 hospitals at quarter-end.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net operating revenues | $3.126 billion | $3.246 billion | $8.670 billion | $9.925 billion |
| Income from operations | $285 million | $184 million | $690 million | $486 million |
| Operating margin | 9.1% | 5.7% | 8.0% | 4.9% |
| Net income (loss) attributable to CHS stockholders | $112 million | $(17) million | $200 million | $(302) million |
| Diluted earnings (loss) per share | $0.97 | $(0.15) | $1.74 | $(2.66) |
- Revenue and volumes: Revenue declined 3.7% in Q3 and 12.6% year to date, reflecting COVID-19 impacts and hospital divestitures. Same-store revenue rose 2.9% in Q3 but fell 6.3% for the nine-month period. Consolidated adjusted admissions decreased 18.0% in Q3 and 20.0% year to date. Management said volumes had improved from March and April lows but remained below pre-pandemic levels.
- Cash flow: Operating cash flow was $2.102 billion for the first nine months, versus $191 million a year earlier. The increase was principally supported by $1.2 billion in Medicare accelerated payments and government relief receipts; it should not be viewed as recurring operating cash generation. Investing activities provided $9 million, while financing activities used $504 million. Cash at September 30 was $1.823 billion, compared with $216 million at year-end 2019.
- Margins and earnings items: The nine-month operating result included $448 million of pandemic relief recognized as a reduction of operating costs. Q3 recognized no additional relief funds. Nine-month earnings also included a $221 million income tax benefit, primarily related to CARES Act changes, and a $111 million gain on early debt extinguishment. Q3 included a $115 million debt-extinguishment gain.
- Debt and liquidity: Total debt was $12.879 billion, including $12.860 billion of long-term debt; cash less total debt was approximately $11.1 billion. Net interest expense was $257 million in Q3 and $779 million year to date. The company had $654 million of ABL borrowing-base availability, no ABL borrowings, and $151 million of letters of credit. Current assets of $4.692 billion exceeded current liabilities of $3.629 billion by about $1.1 billion. Stockholders’ deficit was $1.957 billion.
Material changes versus prior periods
- Q3 returned to reported profitability from a small prior-year loss attributable to CHS stockholders; nine-month results improved from a substantial prior-year loss to income. Relief funds, tax benefits, debt-repurchase gains, impairments, and portfolio changes materially affect comparisons.
- Hospital volumes remained significantly lower year over year. Same-store Q3 revenue increased despite lower admissions, which management attributed partly to changes in service and payer mix and higher revenue per adjusted admission.
- CHS issued $1.462 billion of 6.625% secured notes due 2025, using proceeds in part to refinance 2021 debt and repurchase 2023 notes. It also repurchased $261 million principal amount of notes in Q3. Approximately 100% of debt had fixed interest rates after the final interest-rate swap terminated in August.
- CHS completed divestitures of eight hospitals during the first nine months, with further hospital sales completed in October. Management described the sales as part of its portfolio-rationalization and deleveraging strategy.
Outlook, risks, and unusual items
- Outlook: The filing provides no quantified earnings or revenue guidance. Management expected COVID-19 to materially affect financial performance for the remainder of 2020 and potentially later periods, and expected planned divestitures to conclude during Q4, subject to completion. Management stated that available cash, borrowing capacity, expected cash flows, and capital-market access were expected to support needs over the next 12 months; this is subject to substantial uncertainty.
- COVID-19 and relief: CHS received approximately $719 million in Provider Relief Fund and state/local payments, net of amounts attributable to divested or held-for-sale entities, and had approximately $271 million of such relief unrecognized at September 30. HHS guidance changed in September and again on October 22, 2020; the amount of unrecognized relief that may qualify for recognition was not yet known. Previously recognized amounts could be changed or potentially require repayment depending on final guidance and compliance.
- Medicare advances: Approximately $1.1 billion remained outstanding at quarter-end and is repayable through future Medicare payment recoupments under amended terms. The company estimated that $873 million would have been classified as long-term if the terms effective October 1 had applied at quarter-end.
- Operating and financial risks: Risks include renewed procedure restrictions or COVID-19 surges, staffing and supply costs, weaker patient collections and payer mix, reimbursement or regulatory changes, high leverage and covenant compliance, and possible impairment of goodwill or other assets. Management identified no goodwill impairment indicators as of September 30, but noted future declines in volumes, stock or debt values, or higher costs could lead to impairment.
- Legal contingencies: CHS reported ongoing legal, regulatory, and governmental matters. Management did not expect pending matters to materially affect consolidated financial position or liquidity, but an adverse outcome could materially affect results or cash flows in a particular period. A $73 million judgment involving a subsidiary is subject to insurance-coverage litigation; the company could not estimate a loss or range of loss.
- Other unusual items: Nine-month impairment and net loss on business sales was $48 million, including impairments at hospitals held for sale or under potential sale discussions, partly offset by sale gains. CHS also closed Shands Lake Shore Regional Medical Center effective September 30.
Most important facts for investors to verify
- Whether HHS rules ultimately permit recognition and retention of the $271 million in unrecognized relief, and whether any previously recognized relief must be reversed or repaid.
- The timing and cash-flow impact of repayment of the approximately $1.1 billion Medicare advance balance.
- Whether hospital divestitures close as planned, their net proceeds, and how proceeds are applied to debt and capital needs.
- Whether patient volumes and collections continue to recover, and whether the Q3 same-store revenue improvement is sustainable.
- Debt maturities, refinancing access, covenant headroom, and the effect of continued high leverage on liquidity.
- Developments in material litigation and regulatory matters, including the insurance dispute associated with the $73 million judgment, and any resulting accruals or cash exposure.