Community Health Systems, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative period is Q1 2012. Financial statements are unaudited. Amounts below are in U.S. dollars.
Business context and results
The company operated 135 hospitals at quarter-end, including 131 general acute care hospitals and four rehabilitation or psychiatric hospitals, as well as home-care and hospital-management businesses. In March 2013, it announced a strategic alliance with Cleveland Clinic focused on quality, cost reduction and potential collaboration.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Operating revenues before provision for bad debts | $3.800 billion | $3.783 billion |
| Provision for bad debts | $488.1 million | $486.5 million |
| Net operating revenues | $3.312 billion | $3.297 billion |
| Income from operations | $286.0 million | $349.1 million |
| Income from continuing operations, before noncontrolling interests | $96.3 million | $99.7 million |
| Net income attributable to CHS stockholders | $79.2 million | $75.5 million |
| Diluted earnings per share | $0.86 | $0.85 |
| Net cash from operating activities | $57.2 million | $187.3 million |
- Operating margin declined to 8.6% from 10.6%; operating costs excluding depreciation and amortization rose to 85.6% of net operating revenues from 84.1%.
- Salaries and benefits increased to $1.577 billion from $1.525 billion; depreciation and amortization rose to $192.2 million from $174.4 million. Net interest expense was $156.4 million versus $152.2 million.
- Capital expenditures for property and equipment were $112.9 million. Investing cash outflow was $186.4 million, while financing activities provided $26.5 million.
- At March 31, cash was $285.0 million; total debt was $9.538 billion, including $113.8 million of current maturities. The company reported $750 million of revolving-credit availability, with $37.8 million reserved for letters of credit, and net working capital of approximately $1.4 billion.
- Cash declined $102.8 million during the quarter. Operating cash flow was pressured by working-capital movements, including payment timing for accounts payable, accrued liabilities and taxes.
Material changes versus Q1 2012
- Net operating revenues increased 0.4% overall and 1.4% on a same-store basis. However, inpatient admissions fell 4.4% overall and 5.9% same-store; adjusted admissions declined 3.5% and 5.2%, respectively.
- Management attributed lower admissions partly to calendar and seasonal effects, fewer women’s-services and flu/respiratory admissions, and turnover among employed physicians. Revenue growth at hospitals owned in both periods reflected favorable payor mix, rate increases and state provider-assessment programs; acquired hospitals also contributed.
- Q1 2012 net revenues included approximately $101.8 million from an industry-wide Medicare settlement and an unfavorable $21.0 million adjustment to Medicare disproportionate-share reimbursements. Excluding their net $80.8 million effect, Q1 2013 net operating revenues increased approximately $95.5 million year over year.
- Q1 2012 included a $63.4 million pretax debt-extinguishment loss, compared with $1.3 million in Q1 2013. Despite lower reported operating income, stockholder-attributable net income increased 4.9%, partly reflecting lower income allocated to noncontrolling interests.
- Operating cash flow fell by $130.1 million year over year. Investing outflows were lower by $313.9 million, principally because Q1 2012 included hospital acquisitions.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management said it expected available cash, operating cash generation and borrowing capacity to support routine capital needs, acquisitions, working capital and investment over the next 12 months and into the foreseeable future.
- Management cited opportunities to grow within existing markets, acquisition synergies and operational-efficiency initiatives. It also expects healthcare reform to benefit revenues over time through expanded coverage, while noting reimbursement cuts, implementation uncertainty, state Medicaid expansion decisions and higher compliance or employee-benefit costs could offset benefits.
- The company had approximately $9.5 billion of total debt. Credit agreements and note indentures impose financial and operating covenants; the company cautioned that a covenant breach could trigger default and acceleration. Approximately 63% of variable-rate debt was covered by interest-rate swaps at quarter-end; swap expirations increase exposure to floating rates.
- Significant legal and regulatory matters include federal and state investigations and lawsuits concerning billing, admissions and emergency-department practices, as well as shareholder litigation. Management considered a negative outcome reasonably possible in the New Mexico False Claims Act case but could not estimate a loss or range. Accrued probable legal losses totaled $11.6 million at March 31, 2013.
- Other sensitivities are substantial: management estimated that a 1% change in contractual reimbursement assumptions could change quarterly net income by about $41 million, and a 1% change in estimated self-pay collection rates could change it by about $24.2 million.
- Cash received for HITECH electronic-health-record incentives was $45.1 million; $19.9 million was deferred because recognition criteria had not yet been met. The company recognized $20.9 million of such incentives in Q1, compared with $26.2 million a year earlier.
- The company committed to spend at least $75 million on a replacement hospital in York, Pennsylvania within five years of the 2012 acquisition. York construction was estimated at approximately $100 million; a proposed Birmingham replacement facility was estimated at approximately $280 million and remained subject to the approval process.
Important facts for investors to verify
- Whether admission declines, same-store volume trends and physician turnover persisted after the quarter, and how they affected revenue and margins.
- Whether the sharp reduction in operating cash flow was primarily timing-related and whether receivables collection and days revenue outstanding (60 days at quarter-end, versus 58 at year-end) improved.
- Debt maturities, refinancing requirements, covenant headroom and the availability and terms of the receivables facility and revolving credit.
- Developments, potential financial exposure and any settlement obligations in the government investigations and litigation; several matters had no estimable loss range.
- Actual reimbursement and bad-debt outcomes versus management’s sensitive estimates, and the timing and sustainability of EHR incentive recognition.
- Capital needs and approvals for the York and Birmingham replacement hospitals, and the economics and measurable outcomes of the Cleveland Clinic alliance.