Community Health Systems, Inc. — 2013 Form 10-K
Reporting period: Year ended December 31, 2013. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures below are included for context. Unless noted, 2013 results cover the pre-HMA company. The HMA acquisition closed January 27, 2014.
Business context
CHS operated 135 owned or leased hospitals in 29 states, with 20,180 licensed beds, alongside home-care agencies and hospital-management services. Revenue depended on government programs, commercial payors and patients; Medicare and Medicaid together represented 34.6% of operating revenues before bad-debt provision.
Key financial results
| Metric | 2013 | 2012 |
|---|---|---|
| Net operating revenues | $12.998 billion | $13.029 billion |
| Income from operations | $899.8 million; 6.9% of revenue | $1.210 billion; 9.3% |
| Income from continuing operations | $217.3 million | $346.3 million |
| Net income attributable to CHS stockholders | $141.2 million; diluted EPS $1.51 | $265.6 million; diluted EPS $2.96 |
| Adjusted EBITDA | $1.725 billion; 13.3% of revenue | $1.978 billion; 15.2% |
| Cash from operating activities | $1.089 billion | $1.280 billion |
| Cash and cash equivalents at year-end | $373.4 million | $387.8 million |
| Total debt at year-end | $9.453 billion | $9.541 billion |
Net working capital was approximately $1.290 billion at year-end, versus $1.276 billion a year earlier. The $750 million revolving facility had $19.4 million reserved for letters of credit. The company reported $9.287 billion of long-term debt, plus $166.9 million of current maturities. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for cash flow or earnings.
Fourth-quarter 2013 net operating revenue was $3.231 billion, income from continuing operations was $52.3 million, net income attributable to CHS was $28.2 million, and diluted EPS was $0.30. Fourth-quarter 2012 attributable net income was $62.6 million.
Material changes versus 2012
- Annual net operating revenue slipped 0.2%; excluding the net $84.3 million benefit in 2012 from a Medicare settlement and related reimbursement adjustment, 2013 revenue increased $53.0 million. Same-store revenue decreased 0.2%.
- Same-store admissions fell 7.2% and adjusted admissions fell 4.6%; occupancy declined to 45.9% from 48.6%. Management cited lower volumes, physician turnover and other operating factors.
- Stockholder-attributable net income fell 46.8%, and adjusted EBITDA declined 12.8%. Operating costs excluding depreciation and amortization rose to 87.0% of revenue from 85.1%; salaries and benefits increased as a share of revenue.
- Operating cash flow declined $191.4 million. The filing cites the absence of the prior-year settlement cash receipt, higher accounts-receivable growth and payment timing, partly offset by greater HITECH incentive cash receipts.
- The bad-debt provision rose to $2.080 billion from $1.959 billion. Self-pay was 13.7% of operating revenue before bad-debt provision, versus 13.0% in 2012.
Outlook, significant items and risks
- HMA acquisition: CHS acquired HMA for approximately $7.6 billion, including assumption of approximately $3.7 billion of HMA debt. The transaction consideration included cash, CHS shares and contingent value rights linked to specified HMA legal matters. CHS expected integration, cost savings and operational benefits but warned that these benefits were uncertain. The acquisition increased financing needs and exposure to HMA investigations and litigation.
- Post-acquisition financing: At closing, CHS amended its credit facilities and issued $1.0 billion of 5.125% secured notes due 2021 and $3.0 billion of 6.875% unsecured notes due 2022. The filing states that debt maturities and cash obligations changed materially after the merger; year-end 2013 debt figures above are pre-merger.
- Legal contingency: CHS recorded $101.5 million of government settlement and related costs in 2013 for negotiations concerning short-stay admissions and matters involving its Laredo hospital. Negotiations were not final; CHS was also negotiating a corporate integrity agreement. Total accrued probable legal contingencies were $118.7 million at year-end. In the separate Baker False Claims Act case, the court denied summary-judgment motions and the company could not estimate a possible loss or range.
- Other risks: Ongoing government inquiries, reimbursement and regulatory changes, self-pay collections, declining patient volumes, physician retention, labor and supply costs, and substantial leverage. A 1% change in rates on unhedged variable-rate debt was estimated to change annual interest expense by about $25.5 million based on year-end exposure.
- Capital plans and liquidity: Management forecast 2014 capital expenditures of approximately $975 million to $1.150 billion, including replacement-hospital projects, and said operating cash flow and available financing should support planned needs. It expected covenant compliance and did not anticipate cash dividends in the foreseeable future. These statements predate the HMA merger and should be assessed against post-merger financing.
- Other unusual items: 2013 included a $20.1 million pretax long-lived-asset impairment at five smaller hospitals and $14.1 million of HMA acquisition expenses. HITECH incentives reduced operating expenses by $165.9 million, compared with $126.7 million in 2012.
Most important facts for investors to verify
- Post-HMA closing debt, interest burden, covenant headroom and liquidity, compared with the pre-merger balances reported here.
- Actual integration progress, realized synergies and any additional HMA legal or contingent liabilities.
- Trends in admissions, occupancy, same-store revenue, self-pay mix, bad-debt expense and days revenue outstanding; year-end DSO was 67 days versus a stated target range of 53–63.
- Final resolution and cash cost of the $101.5 million government matter, the related corporate integrity agreement, and the status of the Baker case and other investigations.
- Whether 2014 capital spending and replacement-hospital commitments were funded as planned, and whether reimbursement or HITECH incentives supported reported performance.
- The filing reports an unqualified audit opinion and effective internal control over financial reporting; investors should also review subsequent filings for updated results and risks.