Community Health Systems, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited results are compared with the corresponding 2021 periods. The company operates hospitals and other healthcare sites across 16 states.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net operating revenue | $2.934B | $3.007B | $6.044B | $6.020B |
| Income from operations | $119M | $314M | $389M | $638M |
| Net income (loss) attributable to CHS stockholders | $(326)M | $6M | $(327)M | $(58)M |
| EPS attributable to CHS stockholders | $(2.52) | $0.04 | $(2.54) | $(0.46) |
| Operating margin | 4.1% | 10.4% | 6.4% | 10.6% |
Costs and cash flow: Q2 operating costs excluding depreciation and impairment items were 91.4% of revenue, versus 85.1% a year earlier. For the first half, the comparable ratio was 89.2%, versus 84.5%. First-half operating cash flow was $154M, down from $280M; capital expenditures were $191M, and cash declined to $346M from $507M at year-end 2021. Cash interest paid was $410M, versus $304M.
Debt and liquidity: Total debt was approximately $12.2B, including $12.183B of long-term debt and $32M of current maturities. Cash less total debt implies approximate net debt of $11.9B. The $1.0B ABL facility had $894M of excess availability after $84M of letters of credit; there were no ABL borrowings. Net working capital was approximately $1.0B. Stockholders’ deficit was $1.656B.
Material changes versus prior periods
- Q2 revenue fell 2.4%; same-store revenue declined 2.6%. Inpatient admissions decreased 3.4% and adjusted admissions decreased 0.4%. Management cited lower volumes and acuity, reduced non-patient revenue and less favorable payor mix, partly offset by higher reimbursement rates.
- First-half revenue rose 0.4%; same-store revenue increased 0.6%. Inpatient admissions declined 2.5%, while adjusted admissions increased 0.8%.
- Higher wages and increased contract-labor rates and utilization pressured operating costs. Q2 salaries and benefits were 44.1% of revenue versus 42.1%; other operating expenses were 28.3% versus 23.8%.
- The first-half tax provision was $223M despite a pretax loss of $45M. Management attributed the higher provision in part to nondeductible interest and the IRC Section 163(j) interest-deduction limit.
- In February 2022, CHS issued $1.535B of 5.25% secured notes due 2030 and used the proceeds to redeem its 6.875% notes due 2025 and pay related costs.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no numerical earnings or revenue guidance. Management expects operating pressures from inflation, labor competition and supply-chain disruption may continue, and says cost measures may not fully offset them. It believes operating cash flows, ABL availability and capital-market access will support needs over the next 12 months and beyond, subject to risks.
- Relief funds: First-half pandemic relief funds reduced operating expenses by $55M, compared with $83M in 2021. The company received approximately $52M during the first half; approximately $11M of received funds remained unrecognized at quarter-end and could be returned or recognized later if conditions are met. Management does not expect relief at prior-pandemic levels going forward.
- Charity care: A policy change effective in Q1 increased accounts qualifying for charity care. The estimated value of charity services excluded from revenue was $409M in Q2 and $772M for the first half, compared with $215M and $444M, respectively, in 2021.
- Asset sale: The sale of AllianceHealth Seminole was completed July 1, 2022; preliminary closing proceeds were received June 30. A $6M first-half impairment related to a hospital subsequently sold.
- Impairment and contingencies: CHS concluded goodwill was not impaired at June 30 but cautioned that adverse changes in volumes, costs, market rates or valuation assumptions could lead to a material future charge. Recorded probable legal/regulatory contingency liabilities were $15M. Management said pending matters are not currently expected to materially affect financial position or liquidity, but an adverse outcome could materially affect results or cash flows in a particular period.
- Regulatory risk: A Supreme Court ruling concerning 340B reimbursement could lead to repayment exposure for non-340B hospitals if the eventual remedy applies budget neutrality; CHS hospitals do not participate in 340B. The filing also discusses uncertainty around Medicare DSH litigation and changing government reimbursement.
- Other risks: COVID-19 developments, labor shortages and inflation, payor mix and patient volumes, receivable collections, substantial debt and covenant compliance, healthcare reimbursement changes, legal proceedings and possible goodwill impairment.
Important facts for investors to verify
- Whether labor and other cost inflation continues to outpace reimbursement, and whether contract-labor use and rates moderate.
- Trends in admissions, adjusted admissions, acuity, same-store revenue and payor mix, including the impact of the expanded charity-care policy.
- Operating cash flow, cash balance, interest burden, ABL availability and compliance with debt covenants.
- How the $223M first-half tax provision affects future cash taxes and reported earnings.
- Developments in the 340B reimbursement remedy, Medicare DSH matters and other disclosed litigation or regulatory proceedings.
- Whether operating performance or market conditions trigger a goodwill impairment test or charge, and the outcome of the Seminole sale.