Community Health Systems, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; unaudited. The company operated 135 hospitals at quarter-end, including 131 general acute-care hospitals. Financial amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenues before bad-debt provision | $3,696.7 | $3,395.8 | $11,226.6 | $10,183.7 |
| Bad-debt provision | $484.6 | $450.3 | $1,474.5 | $1,283.3 |
| Net operating revenues | $3,212.0 | $2,945.5 | $9,752.0 | $8,900.4 |
| Income from operations | $287.6 | $283.8 | $926.9 | $853.5 |
| Income from continuing operations | $58.8 | $95.8 | $260.6 | $280.3 |
| Net income attributable to CHS stockholders | $44.2 | $74.3 | $203.1 | $171.0 |
| Diluted EPS | $0.49 | $0.83 | $2.27 | $1.87 |
| Net cash provided by operating activities | Not reported by quarter | $777.9 | $820.2 | |
| Net cash used in investing activities | Not reported by quarter | $1,087.8 | $691.4 |
- Q3 net operating revenue increased 9.0%; same-store revenue rose 4.0%. Consolidated admissions rose 5.0% and adjusted admissions 6.3%, while same-store admissions declined 0.3%.
- Q3 operating margin was 9.0% versus 9.6%; continuing-operations margin was 1.8% versus 3.3%. For the first nine months, operating margin was 9.5% versus 9.6%, and net margin was 2.7% versus 2.5%.
- Nine-month net income attributable to stockholders increased 18.7%, but continuing-operations income fell 7.0%. Management reported $299.2 million of nine-month continuing-operations income before noncontrolling interests excluding identified one-time items, up 6.7% year over year.
- Cash from operations decreased $42.4 million year over year, with a larger cash use from receivables among the cited drivers. Investing outflows rose, including acquisition spending, capital expenditures and other investments. Cash and equivalents were $240.7 million at September 30, versus $129.9 million at year-end 2011.
- Working capital was approximately $1.2 billion. Total debt was $9.572 billion, up from $8.847 billion at December 31, 2011; long-term debt was $9.473 billion. The company reported $750 million of revolving-facility availability, with $37.7 million set aside for letters of credit.
- Interest expense was $158.6 million in Q3 and $462.3 million for nine months. Interest-rate swaps covered approximately 76% of variable-rate debt at quarter-end. The nine-month ratio of earnings to fixed charges was 1.66x.
Material changes and unusual items
- Q3 earnings were reduced by a $52.0 million pretax ($33.2 million after-tax) loss on early extinguishment of debt. The nine-month charge was $115.5 million pretax ($72.8 million after-tax).
- Nine-month revenues included approximately $101.8 million from a Medicare rural-floor settlement; an approximately $21.0 million unfavorable adjustment related to Medicare DSH calculations was also recorded. Management described the combined prior-period settlement/payment-update effect as a $42.8 million after-tax benefit.
- Nine-month results also included an $8.7 million after-tax charge to establish reserves for certain legal matters. Discontinued operations produced a $0.5 million loss in the first nine months of 2012, compared with a $55.8 million loss in 2011.
- The company issued $1.2 billion of 7.125% notes due 2020 and $1.6 billion of 5.125% secured notes due 2018, among other refinancing transactions. It redeemed all remaining 8.875% notes due 2015 and extended or refinanced maturities; management said approximately $6.0 billion of debt previously due in 2014–2015 was shifted to maturities from 2016 through 2020.
- Four hospitals and a large physician practice were acquired during the nine-month period. A replacement hospital in York, Pennsylvania is required under an acquisition agreement, with a minimum $75 million spend within five years.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management said cash generation, borrowing capacity and capital-market access should fund acquisitions, capital expenditures and working capital needs for the next 12 months and into the foreseeable future; it also cited continued opportunities for market growth and operating efficiencies.
- Management noted seasonal softness in hospital demand during summer and historically lower third-quarter revenue and earnings. Same-store inpatient admissions declined in both Q3 and the nine-month period, despite growth in adjusted admissions.
- Key risks include substantial debt and financial covenants; Medicare and Medicaid reimbursement changes and state Medicaid expansion decisions; patient receivable collectability and bad-debt estimates; labor and supply cost inflation; and managed-care contract negotiations. A 1% change in estimated government/managed-care contractual reimbursement rates would have changed nine-month net income by about $40.3 million; a 1% change in estimated self-pay collection rates would have changed it by about $22.9 million.
- The company disclosed multiple government investigations and False Claims Act matters involving billing, admissions, medical necessity and other practices, as well as securities and derivative shareholder litigation. It accrued $19.3 million for probable legal contingencies; it could not estimate possible losses for certain other matters. Management stated it was vigorously defending the matters.
- Medicare and Medicaid policy changes may affect reimbursement, while EHR incentives and related costs may cause period-to-period variability. The company had recognized $73.6 million of EHR incentives in the first nine months of 2012 and cautioned that facilities failing meaningful-use requirements could face payment penalties.
Important facts for investors to verify
- Whether same-store admissions and patient volumes stabilize, and how much reported growth reflects acquisitions versus existing facilities.
- Cash collection trends, bad-debt provision adequacy, days revenue outstanding (60 days at September 30 versus 56 at year-end), and self-pay exposure.
- Debt maturities, interest costs, covenant headroom and refinancing terms, including remaining 2014 term-loan maturities and revolving availability.
- Resolution and potential financial exposure from government investigations, False Claims Act cases and shareholder litigation beyond amounts accrued.
- Sustainability of reported earnings after the Medicare settlement benefit, debt-extinguishment losses, legal reserves and EHR incentives.