Community Health Systems, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts are in millions of dollars unless stated otherwise. The company operated 119 hospitals at quarter-end and described its strategy as portfolio rationalization and deleveraging through asset sales.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net operating revenues | $3,562 | $4,144 | $7,251 | $8,629 |
| Income from operations | $37 | $113 | $250 | $183 |
| Operating margin | 1.0% | 2.7% | 3.4% | 2.1% |
| Interest expense, net | $235 | $239 | $464 | $468 |
| Net loss attributable to CHS stockholders | $(110) | $(137) | $(135) | $(335) |
| Basic and diluted loss per share | $(0.97) | $(1.22) | $(1.20) | $(3.01) |
- Revenue declined 14% in Q2 and 16% in the first half, primarily reflecting hospital divestitures. Same-store revenue increased 3.3% in Q2 and 2.5% in the first half, supported by higher acuity/pricing.
- Same-store admissions fell 2.1% in Q2 and 2.2% in the first half; same-store adjusted admissions fell 0.2% and 1.0%, respectively. Consolidated volumes fell more sharply, mainly due to divestitures.
- First-half operating cash flow was $94, down from $503; capital expenditures were $295. Investing cash outflow was $241, versus $596 of inflow in 2017, when disposition proceeds were substantially higher. Financing cash outflow was $208.
- Cash was $208 at June 30, down from $563 at year-end 2017. Current assets were $3,694 and current liabilities $2,062; reported net working capital was approximately $1.6 billion.
- Total debt was $13,714, including $41 of current maturities, versus $13,913 at year-end. Stockholders’ deficit was $803. Cash interest paid in the first half was $486.
Changes, financing, and unusual items
- Operating results improved year over year at the bottom line, but Q2 operating income and margin weakened. First-half net loss narrowed substantially, with lower impairments and a $59 debt-extinguishment gain contributing; the 2017 period included $330 of impairments and a $31 debt-extinguishment loss.
- Impairment and loss on sale charges were $174 in Q2 and $202 for the first half, mainly related to hospitals held for sale. The company warned that additional impairment may occur. It completed seven hospital divestitures in the first half for approximately $86 of net proceeds; five additional hospital sales were under definitive agreements at the time of filing.
- In June, CHS exchanged unsecured notes for $1,770 of 2023 junior-priority secured notes bearing 11% interest initially, and $1,355 of 2024 junior-priority secured notes bearing 8.125%. The exchanges extend maturities but introduce high-coupon debt. The company also established a $1.0 billion asset-based lending facility, subject to borrowing-base capacity; $538 was drawn at quarter-end. The Receivables Facility was repaid and terminated.
- At June 30, the first-lien net-debt-to-EBITDA covenant ratio was 4.91x against a 5.25x limit. The limit was scheduled to tighten to 5.0x on July 1, 2018, with further step-downs thereafter. The company reported covenant compliance and approximately $425 of additional Credit Facility borrowing availability, including $88 of letters of credit.
- After quarter-end, CHS issued $1,033 of 8.625% secured notes due 2024 and used proceeds to repay the Term G Loan and pay related costs. Management expected liquidity sources and cash generation to fund operations and capital needs over the next 12 months; this is not earnings guidance.
- ASC 606 was adopted January 1, 2018. Much of the amount previously shown as provision for bad debts is now reflected as implicit price concessions reducing revenue, so presentation differs from 2017; management said adoption had no material effect on results. The filing provides no clear numerical restatement of prior-period revenue on the new presentation.
Outlook, risks, and contingencies
- Management said it expects to continue divesting hospitals and other businesses to focus the portfolio and reduce debt, while pursuing operating efficiencies and investing in its markets. It cautioned that proposed and definitive sales may not close, and timing or assets sold may change.
- Management estimated 2018 cash interest at approximately $910. It also said it anticipated sufficient resources to invest in the business over the next 12 months. No specific full-year revenue, earnings, or cash-flow guidance was provided.
- Key risks include substantial leverage and debt maturities, tighter leverage covenants, refinancing and interest-rate exposure, payer reimbursement and healthcare-policy changes, patient receivable collection estimates, staffing and operating costs, and possible goodwill or asset impairment. A 1% change in estimated contractual reimbursement rates would have changed first-half net loss by about $87; a 1% change in estimated collection rates would have changed it by about $56.
- Significant legal matters include HMA-related federal billing investigations and litigation, an ongoing SEC investigation, shareholder and other lawsuits, and disputes with Quorum Health. The company said some outcomes and potential losses cannot be estimated; adverse outcomes could materially affect results or cash flows in a period.
- The company reported a $263 fair-value liability for HMA-related CVR legal matters and $21 for other probable contingencies at June 30. HMA legal proceedings remain unresolved; CVR payments depend on final losses and resolution.
Investor verification priorities
- Reconcile same-store operating trends against the continuing decline in total revenue and hospital volumes following divestitures.
- Review liquidity, ABL borrowing-base availability, debt maturities and interest costs, and covenant headroom as leverage limits tighten.
- Confirm whether announced hospital sales close, the proceeds received, and how proceeds are applied to debt under the amended facility.
- Track receivable collection performance and the assumptions behind contractual allowances and implicit price concessions.
- Monitor HMA/SEC and other legal proceedings, CVR liability estimates, and potential further impairment charges.