Community Health Systems, Inc. — 2015 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; filed November 3, 2015. Unless noted, amounts are in millions. The company operated 195 hospitals in continuing operations, including 191 general acute care hospitals. Results include the acquired HMA business; comparisons also reflect hospital divestitures and differing ownership periods.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenues before bad-debt provision | $5,580 | $5,538 | $16,840 | $15,920 |
| Net operating revenues, after bad-debt provision | $4,846 | $4,780 | $14,639 | $13,721 |
| Income from operations | $351 | $370 | $1,196 | $901 |
| Income from continuing operations | $83 | $94 | $335 | $95 |
| Net income (loss) attributable to CHS stockholders | $52 | $62 | $241 | $(8) |
| Diluted EPS | $0.44 | $0.54 | $2.08 | $(0.07) |
| Net cash from operating activities | Not provided quarterly | Not provided quarterly | $615 | $639 |
- Q3 net operating revenue rose 1.4%; income from operations fell 5.1%, and stockholder-attributable net income fell 16.1%. Operating margin was 7.2% versus 7.7%; continuing-operations margin was 1.7% versus 2.0%.
- Nine-month net operating revenue rose 6.7%; stockholder-attributable earnings improved from an $8 loss to $241 income. Operating margin increased to 8.2% from 6.6%; continuing-operations margin increased to 2.3% from 0.7%.
- Nine-month interest expense was $723, compared with $728; cash interest paid increased to $752 from $661. Capital expenditures for property and equipment were $696, versus $560.
- At September 30, cash was $186 (down from $509 at December 31, 2014); current assets were $5,552 and current liabilities $3,154. Management reported net working capital of approximately $2.4 billion. Total debt was $16,887, including $240 of current maturities; long-term debt was $16,647.
- Operating cash flow of $615 was below the prior-year $639. Investing used $777, while financing used $161; cash declined $323 during the nine months.
Material changes and operating trends
- For Q3, same-store net operating revenue increased 1.2%, while same-store inpatient admissions declined 2.1% and adjusted admissions rose 0.1%. Consolidated inpatient admissions declined 1.9% and adjusted admissions increased 0.2%.
- For nine months, same-store revenue increased 2.8%; same-store inpatient admissions declined 1.3% and adjusted admissions rose 0.8%. Consolidated admissions increased 3.5% and adjusted admissions 5.2%, with acquisition-period effects contributing to the consolidated growth.
- Management attributed revenue gains mainly to favorable payor mix and lower charity-care and self-pay discounts. Q3 costs were pressured by lower productivity, increased employed-physician costs, drug costs and ICD-10 implementation. Nine-month expense ratios improved with HMA integration, productivity gains and reduced acquisition/integration costs.
- Self-pay was 12.8% of pre-bad-debt revenue in Q3, down from 13.1%; for nine months it was 12.5%, down from 13.4%. The bad-debt provision was $734 in Q3 versus $758 and $2,201 for nine months versus $2,199.
Outlook, risks and unusual items
- No formal earnings or revenue guidance is provided. Management said operating cash flow, available credit and continued capital-market access should fund operations and investment needs over the next 12 months, and cited anticipated growth and further HMA synergies.
- CHS planned to spin off 38 hospitals and Quorum Health Resources into Quorum Health Corporation, targeting Q1 2016. Completion remained subject to regulatory and tax matters, registration effectiveness, transition agreements, market conditions and Board approval; timing, tax-free treatment and completion were not assured.
- Debt refinancing replaced the Term D facility with Term G and H loans. The company reported covenant compliance at quarter-end and approximately $944 of revolving-facility availability, with $83 reserved for letters of credit. The $615 receivables-facility balance is supported by eligible patient receivables; billing delays could affect collateral quality and potentially require repayment.
- Interest-rate swaps covered approximately 38.6% of variable-rate debt. A 1% rate change on uncovered variable debt was estimated to affect nine-month interest expense by approximately $48. Nine-month earnings included a $16 debt-extinguishment loss; the comparable 2014 period included $73.
- Q3 results included $6 after-tax costs for the planned spin-off. Nine-month results also included $6 of long-lived-asset impairment and $27 of discontinued-operations losses. In 2014, results were affected by a $77 government-settlement charge, HMA integration costs, and software impairment and accelerated amortization.
- Significant legal and regulatory matters include HMA billing and physician-relationship investigations and litigation, including DOJ-intervened qui tam cases; the company said the principal consolidated case was stayed until January 25, 2016. A $263 fair-value liability for HMA legal matters was recorded in other long-term liabilities; outcomes remain uncertain. The company also disclosed shareholder litigation, other government inquiries and litigation relating to its 2014 cyberattack.
- Key risks include government reimbursement and policy changes, collections and receivable quality, labor and supply costs, substantial debt and covenant compliance, litigation and investigations, and successful execution and tax treatment of the proposed spin-off. Days revenue outstanding rose to 70 from 63 at year-end, above the stated 60–65 target, which management linked to ICD-10 billing delays and delayed supplemental-program payments.
Important facts for investors to verify
- Whether volume, payor mix and collection performance improve, including progress on days revenue outstanding and the effects of ICD-10 billing.
- Debt maturities, refinancing terms, interest-rate exposure, revolving availability and compliance with financial covenants.
- Developments, accruals and potential cash exposure in HMA-related legal matters and other government investigations.
- Spin-off completion timing, approvals, tax treatment, transition arrangements and the liabilities allocated or retained by CHS.
- How much reported earnings growth reflects ongoing operations versus acquisition comparability, divestitures, settlements, refinancing and other unusual items.