Community Health Systems, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparisons are to the same 2021 periods unless stated otherwise. Dollar amounts are in millions except per-share data. The company operates affiliated hospitals and other healthcare sites through subsidiaries.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net operating revenue | $3,025 | $3,115 | $9,069 | $9,135 |
| Income from operations | $204 | $340 | $592 | $978 |
| Operating margin | 6.7% | 10.9% | 6.5% | 10.7% |
| Net income (loss) attributable to CHS stockholders | $(42) | $111 | $(369) | $52 |
| Basic earnings (loss) per share | $(0.32) | $0.87 | $(2.86) | $0.41 |
Q3 consolidated net income was reported as less than $1 million (rounded to zero); the parent-company-attributable result was a $42 million loss. Nine-month consolidated net loss was $267 million, including $102 million attributable to noncontrolling interests.
- Cash flow: Nine-month operating cash flow was $291 million, down from $400 million. Investing activities used $207 million, versus $313 million; financing activities used $291 million, versus $469 million. Cash declined to $300 million from $507 million at December 31, 2021. Cash interest paid was $614 million, compared with $572 million.
- Balance sheet and debt: At September 30, cash was $300 million, current assets $3.269 billion, current liabilities $2.383 billion, and total liabilities $16.092 billion. Debt totaled $11.964 billion, including $11.943 billion long-term debt; approximately $21 million was due within 12 months. Stockholders’ deficit was $1.694 billion.
- Borrowing availability: The ABL Facility had $852 million of excess availability after letters of credit; no borrowings were outstanding. The facility’s fixed-charge coverage test was not triggered.
- Capital spending: Property and equipment purchases were $284 million for the nine months. Routine capital expenditures, excluding replacement and new hospitals, were $231 million.
Material changes and operating trends
- Revenue fell 2.9% in Q3; same-store revenue declined 2.3%. Nine-month revenue was nearly flat, while same-store revenue increased 0.1%.
- Q3 consolidated inpatient admissions decreased 3.7%, but adjusted admissions increased 3.8%. Nine-month inpatient admissions decreased 2.9%, while adjusted admissions increased 1.8%.
- Operating costs excluding depreciation and impairment rose to 87.2% of revenue in Q3 from 84.7%, and to 88.5% for the nine months from 84.5%. Management cited wage inflation and higher contract-labor costs; supplies as a share of revenue declined.
- Interest expense was $217 million in Q3, broadly unchanged, and $652 million for the nine months, down from $666 million. The company recorded a $78 million Q3 gain from debt extinguishment and a $73 million gain for the nine months; the comparable 2021 nine-month period included a $79 million loss.
- The income-tax provision was $70 million in Q3 and $291 million for the nine months, producing unusually high effective tax rates of 100.0% and 1,212.5%, respectively. CHS attributed the increase primarily to nondeductible interest and the change in the IRC Section 163(j) interest-deduction limit.
Outlook, commentary, risks and unusual items
- Management did not provide numeric earnings or revenue guidance. It stated that operating cash flows, ABL availability and continued capital-market access were expected to fund capital needs, working capital and debt obligations over the next 12 months and beyond. This is subject to substantial risks, including access to financing and covenant compliance.
- Management cited inflation, a competitive labor market, supply-chain disruption, unfavorable payor mix, lower inpatient volumes and acuity, and COVID-19 uncertainty as pressures that could continue to materially affect results. Hurricane Ian disrupted Florida operations; the estimated Q3 revenue loss and incremental response costs were approximately $10 million pre-tax, before any insurance recovery, and the estimate could be updated.
- CHS recognized $171 million of pandemic relief funds as a reduction to operating costs in the first nine months, versus $102 million in 2021. It said it did not expect significant benefits from existing COVID-19 relief programs beginning in Q4 2022.
- Q3 included $47 million of impairment and disposal expense. During the quarter, CHS completed the closure of Shorepoint Health Venice and substantially ceased services at First Hospital Wyoming Valley, recording impairment charges of approximately $25 million and $18 million, respectively. A hospital sale agreement for Greenbrier Valley Medical Center was signed, and the facility was classified as held for sale.
- CHS issued $1.535 billion of 5.25% senior secured notes due 2030 in February to refinance notes due 2025. During Q3, it repurchased $267 million principal amount of notes in the open market. The market value of several debt issues was below carrying value.
- CHS received approximately $121 million in CoreTrust-related proceeds at a preliminary closing on September 30. The sale closed October 1; the proceeds were recorded as a liability at quarter-end, with most expected to be recognized in income in Q4.
- Management reported no material adverse effect on financial position or liquidity from pending legal matters based on current knowledge, but said an adverse outcome could materially affect results or cash flows in a particular period. Recorded probable-contingency liabilities were $17 million. A federal securities class-action motion to dismiss was denied in August 2022; other disclosed matters remain pending.
Important facts for investors to verify
- Whether labor and contract-staffing expense, patient volumes, acuity and payor mix improve or continue to pressure operating margins.
- Cash generation, cash balances, interest burden, debt maturities and access to refinancing or capital markets, given approximately $12.0 billion of debt.
- Whether expected CoreTrust proceeds are recognized as anticipated and whether other divestitures or closures generate proceeds or additional impairment charges.
- Potential changes to Medicare and Medicaid reimbursement, pandemic-relief funding and the possible financial effects of the 340B and Medicare DSH litigation issues described in the filing.
- Updates on hurricane-related costs and insurance recoveries, legal proceedings, and the assumptions supporting goodwill and receivables valuations.