Community Health Systems, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Financial amounts are in millions unless stated otherwise. CHS operated 118 hospitals at quarter-end. The company is pursuing hospital divestitures to rationalize its portfolio and reduce debt.
Financial performance
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net operating revenue | $3,451 | $3,666 | $10,702 | $12,295 |
| Income from operations | $74 | $90 | $324 | $274 |
| Operating margin | 2.1% | 2.5% | 3.0% | 2.2% |
| Net loss attributable to CHS stockholders | $(325) | $(110) | $(460) | $(446) |
| Loss per share | $(2.88) | $(0.98) | $(4.08) | $(3.99) |
- Q3 net operating revenue declined 5.9%; nine-month revenue declined 13.0%. Management attributed most of the non-same-store reduction to hospital divestitures. Same-store revenue rose 3.2% in Q3 and 2.6% for nine months, reflecting improved pricing and higher acuity, partly offset by lower admissions.
- Same-store inpatient admissions fell 2.3% in Q3 and 2.4% for nine months; adjusted admissions decreased 0.8% and 0.9%, respectively. Consolidated volume fell more sharply, reflecting portfolio changes.
- Operating costs excluding depreciation, amortization and impairment were 89.7% of revenue in Q3, versus 91.0% a year earlier; for nine months, 89.1% versus 89.4%. Staffing and benefit expense management helped, while nine-month other operating costs rose as a percentage of revenue, partly due to specialist fees, purchased services and information systems costs.
- Interest expense was $256 in Q3 and $720 for nine months, up from $238 and $706. Higher rates increased expense, partly offset by lower average debt. The company paid $637 of interest in the first nine months.
- Cash from operations was $440 for nine months, down from $617. Cash used in investing was $250, compared with $1,191 provided in 2017, primarily because 2017 included substantially more hospital-sale proceeds. Cash used in financing was $418; cash declined $228 to $335.
- At September 30, cash was $335; current assets were $3,724 and current liabilities $2,479. Net working capital was approximately $1.2 billion, down from $1.7 billion at year-end 2017.
- Total debt was $13,570, including $35 of current maturities; long-term debt was $13,535. Total debt was $13,913 at December 31, 2017. Stockholders’ deficit was $1,130.
Material changes, outlook and risks
- CHS amended its credit facility, established a $1.0 billion asset-based lending facility and completed debt exchanges and refinancing. At quarter-end, ABL borrowings were $538; stated additional borrowing availability under the revolving credit facility was approximately $425, including $86 of letters of credit. Credit-facility weighted-average interest was 6.5%, excluding swaps.
- Debt exchanges moved substantial 2019 and 2020 unsecured obligations into junior-priority notes due 2023 and 2024, with high stated coupons: 11% initially, then 9.875%, on the 2023 notes, and 8.125% on the 2024 notes. CHS also issued $1,033 of 8.625% secured notes due 2024 and used proceeds to repay the Term G loan.
- The company reported compliance with its credit-facility leverage covenant at 4.6x against a 5.0x maximum at September 30. The maximum tightens to 4.75x on January 1, 2019. The ABL facility has a springing maturity provision tied to certain earlier debt maturities.
- In September, CHS agreed to a $266 settlement, including interest, resolving DOJ and related HMA billing matters; payment was expected in Q4 2018. The corporate integrity agreement was extended through 2021. CHS anticipated no payment to CVR holders, subject to final calculation.
- Nine-month impairment and loss on sale charges were $314, including $225 for hospitals sold or held for sale, $29 for a promissory note tied to a buyer in bankruptcy, and $60 primarily for underperforming hospital assets. Management warned further impairment charges could occur.
- CHS completed nine hospital divestitures in 2018 for net proceeds of approximately $234. Five additional hospitals were under definitive sale agreements; further potential sales were being negotiated, with timing and completion uncertain. Management said sale proceeds are generally required to reduce debt.
- Management stated that operating cash generation, available borrowing capacity and capital-market access were expected to support operating needs and planned investment over the next 12 months. No specific earnings or revenue guidance was provided. Management also noted the planned January 2019 adoption of the lease standard is expected to significantly affect reported financial position and results; the amount was still under evaluation.
- Key risks include substantial debt and refinancing needs, covenant headroom, rising interest rates, reimbursement and healthcare-policy changes, patient receivable collection estimates, lower hospital volumes, further asset impairments, and the execution and proceeds of planned divestitures. A 1% change in estimated contractual reimbursement percentages would have changed nine-month net loss by approximately $84 and net receivables by $107; a 1% change in estimated collection percentage would have changed net loss by $54 and receivables by $70.
Most important facts for investors to verify
- Near-term debt maturities, refinancing capacity, covenant thresholds and actual availability under the revolving and ABL facilities.
- Whether the $266 HMA settlement was paid as expected, and the final CVR payment determination and CIA compliance obligations.
- Completion, timing and net proceeds of agreed and contemplated hospital sales, and the resulting operating scale and debt reduction.
- Hospital volume and same-store revenue trends, patient collections and reimbursement assumptions underlying reported revenue and receivables.
- Additional impairment exposure and the quantified balance-sheet impact of adopting the lease accounting standard.
Comparability note: CHS adopted ASC 606 on January 1, 2018. Most amounts previously presented as bad-debt provision were included as revenue reductions in 2018, so the revenue presentation differs from 2017; the filing says the adoption did not materially affect results of operations.