COMMUNITY HEALTH SYSTEMS INC annual report, FY2011

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Community Health Systems, Inc. — 2011 Form 10-K

Reporting period: Fiscal year ended December 31, 2011. This is an annual report, not a Q4-only filing; selected fourth-quarter results are included below. The company operates hospitals and related healthcare businesses, with 131 hospitals in 29 states at year-end.

Financial and operating performance

  • Revenue: Net operating revenue was $13.63 billion, up 7.9% from 2010. Acquisitions and reimbursement-rate increases contributed to growth; same-store revenue increased 3.7%.
  • Profit: Operating income was $1.13 billion, with an 8.3% operating margin versus 8.9% in 2010. Continuing-operations income was $335.9 million, down from $355.2 million. Net income attributable to CHS was $201.9 million, down 27.9%; diluted EPS was $2.23 versus $3.01.
  • Q4 results: Revenue was $3.44 billion; continuing-operations income was $55.6 million; net income attributable to CHS was $30.9 million; diluted EPS was $0.35. The comparable 2010 quarter reported $3.31 billion revenue, $94.5 million continuing-operations income, $69.5 million attributable net income and $0.76 diluted EPS.
  • Cash flow: Operating cash flow was $1.26 billion, up from $1.19 billion. Investing activities used $1.20 billion and financing activities used $235.4 million. Cash and cash equivalents ended the year at $129.9 million.
  • Margins and adjusted EBITDA: Adjusted EBITDA, a non-GAAP measure, was $1.84 billion, or 13.5% of revenue, compared with 14.0% in 2010. Bad-debt provision was $1.72 billion, 12.6% of revenue versus 12.1%.
  • Debt and liquidity: Total debt was $8.85 billion; debt was 79% of total capitalization. Net working capital was $935 million. The $750 million revolving facility had $30 million drawn and $37.7 million reserved for letters of credit. Net interest expense was $644.4 million.
  • Volume: Same-store inpatient admissions fell 5.6% and adjusted admissions fell 0.7%; outpatient surgeries rose 4.0%. Management cited declines in women’s services, one-day inpatient stays and surgical admissions, partly offset by outpatient growth and higher inpatient acuity.

Material changes and unusual items

  • Four hospitals were acquired and three hospitals and a physician clinic were sold during 2011. Acquisitions, including hospitals acquired in 2010, contributed $538 million of the annual revenue increase; same-store revenue grew more slowly than consolidated revenue.
  • A $66.0 million pretax loss on early debt extinguishment arose from repurchasing $1.0 billion of 8.875% notes using proceeds from new 8% notes. The transaction reduced the 2011 reported earnings comparison.
  • Discontinued operations produced a $58.3 million net loss, including a $47.9 million impairment charge for hospitals sold. Management said that excluding the debt-extinguishment loss, continuing-operations income before noncontrolling interests increased 6.4%.
  • CHS recognized $63.4 million of HITECH electronic-health-record incentives as a reduction of operating expenses; $28.9 million had been received by year-end. The filing notes timing differences between incentive recognition and related implementation costs.

Outlook, risks and contingencies

  • Management forecast 2012 capital expenditures of approximately $800 million to $900 million, including replacement-hospital construction. No earnings or revenue guidance is provided in the filing.
  • Management said it expected operating cash flows, available borrowing capacity and continued access to capital markets to support operations and planned investment, and anticipated remaining in compliance with debt covenants. These are forward-looking statements, not assurances.
  • Debt maturities are concentrated: approximately $2.9 billion of term loans were scheduled to mature in 2014 and $1.78 billion of 8.875% notes in 2015. A February 2012 amendment extended $1.6 billion of term loans to 2017 at higher pricing; the remaining term loans were not extended at that time. About 82% of variable-rate debt was covered by swaps at year-end, but swap expirations increase rate exposure.
  • Material reimbursement and operating risks include Medicare and Medicaid payment reductions, managed-care pricing pressure, self-pay collection risk, wage and supply-cost inflation, nurse availability, and healthcare-reform uncertainty. Self-pay revenue rose to 12.0% of revenue from 11.5%; days revenue outstanding increased to 49 from 46, with management citing delayed Illinois Medicaid payments.
  • The filing describes ongoing government investigations and litigation concerning Medicare/Medicaid billing, emergency-department admission and observation practices, and other matters. These include a DOJ-intervened New Mexico False Claims Act case involving alleged improper payments of approximately $27.5 million for the period cited by the government, plus potential treble damages and penalties; a national investigation of inpatient billing; the Tenet lawsuit; and shareholder and derivative actions. CHS disputes the allegations and says it is cooperating or vigorously defending the matters. For several proceedings, the company says a loss or range of loss cannot be estimated.
  • Professional-liability claims reserves were $567.8 million at year-end. Goodwill was $4.26 billion; the company reported no impairment in its 2011 annual goodwill test.
  • The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management and the auditor reported effective internal control as of year-end.

Most important facts for investors to verify

  • Whether same-store volume trends, especially inpatient admissions, improve and outpatient growth continues to offset declines.
  • How much of reported revenue growth and cash generation is attributable to acquisitions, reimbursement changes, timing of working-capital payments, and EHR incentives.
  • The status, potential financial exposure and any settlements or developments in the billing investigations and related litigation; the filing does not provide a clear estimate of possible losses for several matters.
  • Debt refinancing progress, covenant headroom, interest costs and the capacity to fund the stated 2012 capital program alongside debt service.
  • Whether bad-debt expense, self-pay exposure and days revenue outstanding stabilize, and whether replacement-hospital projects and acquisition commitments remain within budget and schedule.