Community Health Systems, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited consolidated results, compared with Q1 2020 unless otherwise noted. The company operated 85 hospitals at quarter-end.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 / prior balance |
|---|---|---|
| Net operating revenue | $3.013 billion | $3.025 billion |
| Income from operations | $326 million; 10.8% margin | $110 million; 3.6% margin |
| Net income (loss) | $(35) million consolidated; $(64) million attributable to CHS shareholders | $34 million consolidated; $18 million attributable to CHS shareholders |
| Basic and diluted EPS | $(0.51) | $0.15 |
| Net cash from operating activities | $101 million | $57 million |
| Cash capital expenditures | $105 million for property and equipment | $99 million |
| Cash and cash equivalents | $1.251 billion | $1.676 billion at December 31, 2020 |
| Total debt, net of issuance costs | $11.917 billion | $12.216 billion at December 31, 2020 |
| Net working capital | Approximately $1.4 billion | $1.7 billion at December 31, 2020 |
Revenue was down 0.4% overall, while same-store revenue rose 9.8% ($269 million). Same-store inpatient admissions fell 4.9% and adjusted admissions fell 7.2%; revenue per adjusted admission rose 18.3%. Consolidated admissions and adjusted admissions declined 14.0% and 15.8%, respectively, reflecting both divestitures and pandemic-related effects. Managed care and other third-party payors supplied 63.5% of revenue, Medicare 23.0%, Medicaid 13.0%, and self-pay 0.5%.
Operating cash flow increased primarily because of the timing and amount of interest payments: cash interest paid was $203 million versus $264 million. Investing cash flow was $(120) million; financing cash flow was $(406) million, including debt refinancing activity and $220 million of deferred financing and other debt-related costs. Cash declined $425 million during the quarter.
Material changes and unusual items
- Operating costs included an $82 million reduction from pandemic relief funds recognized in Q1 2021; none was recognized in Q1 2020. The company reported a $64 million after-tax benefit from these funds.
- A $71 million loss on early extinguishment of debt was recorded in Q1 2021, versus $4 million in Q1 2020. The company also recorded a $21 million net impairment and loss on sale of businesses, compared with $45 million in Q1 2020.
- Q1 2021 included a $69 million income tax provision despite $34 million of pretax income. The effective tax rate was 202.9%; Q1 2020 included a $183 million tax benefit, including approximately $240 million of discrete CARES Act-related tax benefits. These items make year-over-year net income comparisons unusually sensitive to taxes and special items.
- CHS refinanced several maturities: it issued $1.775 billion of 6.875% junior-priority secured notes due 2029 and $1.095 billion of 4.750% senior secured notes due 2031, using proceeds and cash to redeem earlier notes. It also redeemed approximately $126 million of 2022 notes with cash. Interest expense fell to $231 million from $262 million.
- Four hospitals were divested in Q1 2021; the company reported that they generated approximately $179 million of 2020 annual revenue. The AllianceHealth Midwest sale closed April 1, 2021, with proceeds received at a preliminary closing on March 31.
Outlook, risks and contingencies
Management said it expects internally generated cash flow, ABL borrowing capacity and continued capital-market access to be sufficient for operating needs, capital expenditures and other obligations over the next 12 months. It did not provide numerical earnings or revenue guidance. Management noted that COVID-19 continued to affect volumes and service and payor mix, and that its future financial impact remains uncertain.
- COVID-19 funding and repayment: CHS had received approximately $708 million cumulatively through the Public Health and Social Services Emergency Fund and state and local programs, and recognized $82 million in Q1 2021. Approximately $25 million received remained unrecognized at quarter-end; evolving HHS guidance could require repayment or change recognition. Separately, approximately $1.063 billion of Medicare accelerated payments remained outstanding ($546 million current and $517 million long-term); CMS began recouping payments in April 2021. Repayment and deferred payroll taxes are expected to pressure 2021 operating cash flow.
- Debt and liquidity: The company had $11.9 billion of debt, $20 million due within 12 months, and negative stockholders’ equity. The ABL Facility had a $633 million available borrowing base and no borrowings; $120 million of letters of credit had been issued. Debt covenants, refinancing access and high leverage remain important risks.
- Operating and reimbursement risks: Management cited labor and supply costs, staffing availability, patient volumes and collections, payor mix, changing Medicare/Medicaid reimbursement and regulation, and potential COVID-19 resurgence. It reported deterioration in collectability of uninsured patient accounts compared with pre-pandemic levels.
- Legal and other contingencies: The company is involved in government inquiries and litigation, including a Florida Low Income Pool investigation and insurance disputes concerning a $73 million judgment. Management did not expect pending matters to materially harm consolidated financial position or liquidity, but acknowledged an adverse outcome could materially affect results or cash flows in a particular period. Recorded probable contingency liabilities were $10 million.
- Other exposures: Off-balance-sheet arrangements included $120 million of letters of credit and approximately $12 million of maximum potential physician-recruiting guarantee payments above recorded liabilities. Management identified no goodwill impairment indicators at March 31, 2021, but future impairment remains possible.
Most important facts for investors to verify
- How much of the reported operating improvement is sustainable without pandemic relief funds, and how much reflects changes in service and payor mix rather than patient volume growth.
- The timing and cash impact of CMS recoupments, deferred payroll taxes, and any return or further recognition of provider relief funds.
- Debt maturities, refinancing terms, covenant headroom and actual ABL availability after letters of credit and other borrowing-base restrictions.
- Patient receivable collection trends, especially uninsured and patient-responsibility balances, and the assumptions behind revenue and receivable estimates.
- Developments in significant legal matters, reimbursement programs and the AllianceHealth Midwest disposition accounting.