Community Health Systems, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Unaudited results; amounts are in millions unless stated otherwise. HMA’s results are included from its January 27, 2014 acquisition date, so reported year-over-year comparisons are substantially affected by the merger.
Business context and results
CHS operated hospitals and related healthcare businesses, home care agencies, and hospital management services. The HMA acquisition added 71 hospitals; CHS reported 197 hospitals in continuing operations at quarter-end and 206 hospitals on a combined basis after the merger.
- Operating revenues before bad-debt provision were $4,900, up from $3,752. After a $705 bad-debt provision, net operating revenues were $4,195, up 28.1% from $3,274.
- HMA contributed approximately $1.1 billion of net operating revenues from the acquisition date through quarter-end. Net operating revenues from hospitals owned throughout both periods decreased $130 million; same-store net operating revenues declined 4.0%.
- Operating income was $175, versus $288; operating margin was 4.2%, versus 8.8%. Operating costs and expenses were $4,020, versus $2,986.
- Loss from continuing operations was $78, versus income of $98. Net loss attributable to CHS stockholders was $112, or $1.05 per basic share, versus net income of $79, or $0.87 per basic share.
- Interest expense was $224, versus $156. The quarter included a $73 pretax loss on early debt extinguishment and $24 of long-lived-asset impairment. Discontinued operations recorded a net loss of $20, including an $18 after-tax hospital impairment.
- Consolidated admissions increased 24.7% and adjusted admissions 28.4%, primarily due to HMA. Same-store admissions declined 8.1% and adjusted admissions 5.3%. Management cited severe winter weather, fewer flu-related admissions, short-stay trends and service closures.
Cash flow, debt and liquidity
- Operating cash flow was $65, versus $57. Investing cash outflow was $3,056, including $2,774 for acquisitions and $181 for property and equipment. Financing cash inflow was $3,231; cash increased $240 to $613.
- Total debt was $16,998 at March 31, compared with $9,453 at December 31, 2013; long-term debt was $16,799. Debt growth reflects HMA financing. CHS issued $1.0 billion of 5.125% senior secured notes due 2021 and $3.0 billion of 6.875% senior notes due 2022.
- Current assets were $5,627 and current liabilities $3,126; management reported working capital of approximately $2.5 billion. The $1.0 billion revolving facility had approximately $1.0 billion available, with $77 reserved for letters of credit. The Receivables Facility was increased to $700; $633 was drawn.
- Interest paid was $280. The reported ratio of earnings to fixed charges was 0.43x. Management said available cash, borrowing capacity and expected operating cash flows should fund requirements through the next 12 months and beyond.
Material changes, outlook and risks
- The HMA merger drove substantial revenue, asset and debt growth. Purchase accounting remained preliminary; HMA added approximately $3.9 billion of goodwill. CHS cited anticipated integration savings from centralizing support functions and eliminating duplicate corporate functions, but the pro forma results exclude anticipated synergies.
- Reported results included approximately $56 million of HMA merger and integration expenses. The company also recorded $42 million of accelerated software amortization and $24 million of software impairment after deciding to replace certain systems; it expected about $41 million of additional software amortization in Q2.
- Same-store volume and revenue weakness, higher operating costs relative to revenue, increased interest expense, and elevated leverage are material operating and financial concerns. Medicare and Medicaid reimbursement changes, managed-care pricing, patient collections, labor and supply costs, and HMA integration also pose risks.
- CHS was negotiating with the Department of Justice concerning short-stay admissions and related matters; it stated that a $102 million reserve was sufficient for specified government claims and related legal expenses, and was negotiating a corporate integrity agreement. Probable-contingency accruals totaled $169 million, including $42 million of acquired HMA liability related to CVR matters; outcomes and ultimate losses may differ from estimates. Other investigations and litigation, including HMA qui tam cases, remained unresolved.
- CHS decided to sell certain smaller hospitals and had agreements to sell two hospitals; the filing also discusses divestitures required as a condition of merger approval. No formal earnings guidance was provided. Management’s outlook included expected merger synergies and adequate near-term liquidity, both subject to execution and financing risks.
Key facts investors should verify
- How much of revenue growth and reported volume reflects HMA, and whether same-store volumes and revenue recover.
- Progress, cost and timing of HMA integration and realization of projected synergies.
- Debt service capacity, covenant compliance, floating-rate exposure and future refinancing needs.
- Bad-debt reserves, patient collections and the sensitivity of reimbursement estimates; management estimated a 1% change in contractual reimbursement assumptions could change quarterly net loss by about $66 million.
- Developments in DOJ investigations, HMA litigation, the corporate integrity agreement and the adequacy of legal and CVR-related reserves.
- Final HMA purchase-price allocation, planned hospital sales and the effect of software replacement and related charges.