Community Health Systems, Inc. — 2019 Form 10-K
Reporting period: Year ended December 31, 2019; filed February 20, 2020. This is an annual report, not a standalone fourth-quarter filing. Dollar amounts below are in millions unless stated otherwise.
Business context
CHS operates hospitals and related outpatient businesses. At year-end it owned or leased 102 hospitals with 16,240 licensed beds across 18 states. Its strategy emphasized selling non-core facilities to reduce debt while investing in selected markets and services.
Financial and operating performance
| Metric | 2019 | 2018 | Change or context |
|---|---|---|---|
| Net operating revenues | $13,210 | $14,155 | Down 6.7%, mainly reflecting divestitures; same-store revenue rose 4.2% to $12,819. |
| Income from operations | $650 | $208 | Operating margin was 4.9%, versus 1.5%; 2019 included $138 of impairment and loss on sale. |
| Net loss attributable to CHS stockholders | $(675) | $(788) | Loss per share was $(5.93), versus $(6.99). |
| Adjusted EBITDA | $1,628 | $1,642 | Down slightly; margin increased to 12.3% from 11.6%. Non-GAAP measure. |
| Cash from operating activities | $385 | $274 | Up $111; cash interest paid was $1,011. |
| Cash from investing activities | $(2) | $(245) | Included $604 of divestiture proceeds and $438 of property and equipment purchases. |
| Cash from financing activities | $(363) | $(396) | Year-end cash was $216, versus $196. |
Margins and volumes: Same-store admissions increased 1.3% and adjusted admissions 2.2%; same-store revenue per adjusted admission increased 1.9%. Consolidated admissions and adjusted admissions fell 11.1% and 10.6%, respectively, largely reflecting facilities sold. Net inpatient revenue was 47.0% of revenue and outpatient 53.0%. Fourth-quarter revenue was $3,286; quarterly net loss attributable to CHS stockholders was $373, including a $346 loss from continuing operations.
Balance sheet and liquidity: Total assets were $15,609; total liabilities were $17,248; and stockholders’ deficit was $2,218. Long-term debt, net of issuance costs and premiums, was $13,385; total debt including current maturities was $13,405. The ABL facility had $273 drawn, a $860 borrowing base and $145 of letters of credit, leaving approximately $442 of borrowing availability after borrowing-base limits. Net working capital was reported at approximately $1.1 billion.
Material changes and unusual items
- CHS divested 12 hospitals during 2019, receiving approximately $335 in net proceeds, excluding proceeds for two hospitals that had preliminarily closed in 2018. Three additional hospital sales closed January 1, 2020, with approximately $240 in proceeds received at a preliminary closing on December 31, 2019.
- Debt refinancing and exchanges shifted maturities and included issuance of $2,101 of 8% secured notes due 2026 and exchange of approximately $2.4 billion of 2022 notes into notes due 2027 and 2028. CHS recorded a $54 loss on early extinguishment of debt.
- 2019 included a $90 change in estimate for professional liability claims relating to prior accident years, $93 of government and other legal settlement expense, and $138 of impairment and loss on sale. A proposed $53 shareholder-class settlement was accrued at year-end and remained subject to court approval; a separate $22 charity-care settlement was paid in 2019.
- A discrete tax expense of approximately $275 contributed to the 2019 tax provision of $160 despite a pretax loss. Goodwill was $4,328; the annual 2019 impairment test indicated no impairment, but management warned future declines in fair value could trigger a charge.
- Adoption of lease accounting standard ASC 842 added approximately $673 of operating lease liabilities and right-of-use assets at January 1, 2019. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Outlook, commentary and risks
- Management expected to continue portfolio rationalization through at least mid-2020 and use divestiture proceeds for debt reduction and/or reinvestment. It projected 2020 capital expenditures of approximately $400–$500, including about $65 for the La Porte, Indiana replacement hospital.
- Management stated that cash generation, available ABL capacity and continued capital-markets access were expected to fund operations and obligations over the next 12 months. This is forward-looking and depends on operating performance and financing access.
- Debt and refinancing risk are prominent: approximately $11.5 billion of senior secured and $1.9 billion of senior unsecured principal were outstanding at year-end. Scheduled maturities include substantial amounts in 2023 and 2024; covenants, subsidiary distribution restrictions and high interest expense constrain flexibility.
- Other principal risks include reimbursement and healthcare-policy changes, insurer pricing and consolidation, patient collections, labor and supply costs, malpractice claims, legal and government proceedings, compliance obligations under the Corporate Integrity Agreement through 2021, cyber incidents, and potential impairment. The filing also identified COVID-19 as a possible operational and supply-chain risk; it did not quantify an effect.
- The filing noted a potential, non-recurring positive cash-flow impact if CHS ultimately receives additional Medicare disproportionate-share hospital payments following litigation over prior payment policy; timing and amount were uncertain.
Important facts for investors to verify
- Progress and final proceeds from planned divestitures, and whether proceeds are applied to debt repayment or reinvestment.
- Debt maturities, refinancing terms, covenant headroom and actual ABL availability, including the effect of letters of credit and borrowing-base changes.
- Whether same-store revenue and volume gains can persist as the portfolio shrinks, and whether operating cash flow can cover interest and capital needs.
- Updates on the proposed $53 million shareholder settlement, other litigation and government inquiries, malpractice reserve development, and CIA compliance.
- Any subsequent effects of COVID-19, reimbursement changes, patient collection trends, and changes in the company’s impairment or tax-valuation assumptions.