Community Health Systems, Inc. — Q2 2013 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2013, compared with the same periods in 2012. The company operated 135 hospitals at quarter-end, alongside home-care agencies and hospital management services. Amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenues before bad-debt provision | $3,768.1 | $3,746.4 | $7,568.0 | $7,529.9 |
| Provision for bad debts | $531.7 | $503.5 | $1,019.8 | $989.9 |
| Net operating revenues | $3,236.4 | $3,243.0 | $6,548.1 | $6,540.0 |
| Income from operations | $210.6 | $290.1 | $496.6 | $639.2 |
| Income from continuing operations | $47.1 | $102.2 | $143.4 | $201.9 |
| Net income attributable to CHS stockholders | $29.8 | $83.4 | $108.9 | $158.8 |
| Diluted EPS | $0.32 | $0.93 | $1.17 | $1.78 |
| Operating margin on net operating revenues | 6.5% | 9.0% | 7.6% | 9.8% |
| Net cash provided by operating activities | — | $309.2 | $482.9 |
- Q2 net operating revenues declined 0.2%; parent-attributable net income fell 64.3%. For the first half, net operating revenues were nearly flat while parent-attributable net income fell 31.4%.
- Same-store admissions fell 5.7% in Q2 and 5.8% in the first half; adjusted admissions declined 2.6% and 3.9%, respectively. Self-pay was 13.9% of gross operating revenues before bad debts in Q2, versus 13.0% a year earlier.
- Cash and equivalents were $251.2 at June 30, down from $387.8 at year-end 2012. Current assets were $3,356.6 and current liabilities $1,986.9; reported working capital was approximately $1.4 billion.
- Total debt was $9,507.2, including $119.0 current maturities; long-term debt was $9,388.2. The company reported a $750 million revolving facility, with $19.4 million reserved for letters of credit. Receivables-facility borrowings were $483 million against a $500 million facility.
- First-half investing cash outflow was $437.8, including $295.0 of property and equipment purchases and $134.4 of increases in other investments. Financing cash outflow was $7.9. The fixed-charge coverage ratio was 1.60x.
Material changes and management commentary
- Management attributed Q2 weakness to lower volumes, unfavorable payor mix and higher-than-expected bad debts, particularly in May and June; it called this the company’s first significant earnings miss since Q3 2006. Management said it was intensifying focus on volume initiatives, core operations and expense control.
- Operating expenses excluding depreciation and amortization rose to 87.5% of net operating revenues in Q2 from 85.5%; salaries and benefits increased to 48.1% from 46.2%. Management cited lower volume, pay increases and higher orthopedic implant costs. Depreciation and amortization rose, partly due to EHR software and hardware.
- Q2 Medicare sequestration cuts reduced reimbursement by approximately $16 million. EHR incentive reimbursements reduced operating costs by $24.4 million in Q2 and $45.3 million in the first half; $50.2 million was deferred at June 30 pending satisfaction of recognition criteria.
- First-half 2012 included an $80.8 million net revenue benefit from a federal reimbursement settlement and an unfavorable Medicare DSH adjustment; the settlement benefit contributed to a $42.8 million after-tax benefit. The 2012 period also included a $63.4 million debt-extinguishment loss, versus $1.3 million in 2013.
- Operating cash flow declined $173.8 million year over year, mainly reflecting payment timing for accounts payable, accrued liabilities and income taxes, as well as lower net income. Management stated it expected operating cash flow, available borrowing capacity and capital-market access to fund operations and planned investment through the next 12 months and foreseeable future.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance is provided in the supplied filing text. Management noted that results are seasonal, with the third quarter historically weakest, and that routine capital spending is expected to be funded from operating cash flow.
- On July 29, 2013, after quarter-end, CHS agreed to acquire Health Management Associates for approximately $7.6 billion, including assumption of approximately $3.7 billion of debt. Consideration included cash, CHS shares and a contingent value right tied to certain HMA legal matters. Closing was expected by the end of Q1 2014, subject to approvals and other conditions; financing commitments were obtained, and CHS’s obligation was not subject to a financing condition.
- Significant legal and regulatory matters include government investigations into billing and admission practices, False Claims Act cases and shareholder litigation. For the Baker matter, management considered an adverse outcome reasonably possible but could not estimate a loss or range. Accrued probable legal losses across other matters were $14.0 million at June 30.
- Key risks include substantial leverage, covenant compliance and refinancing, reimbursement and regulatory changes, admissions and payor mix, self-pay collections, labor and supply costs, and legal claims. Interest-rate swaps covered approximately 61% of variable-rate debt; management noted swap expirations would increase exposure to floating rates. The company reported no material change in previously disclosed risk factors.
Investor verification priorities
- Review the drivers and sustainability of the admissions decline, increased bad-debt provision and deterioration in payor mix, including receivables aging and collection trends.
- Assess debt maturities, covenant headroom, revolving-facility availability, interest-rate exposure and the company’s ability to service debt.
- Evaluate the HMA transaction’s final terms, financing, regulatory and shareholder approvals, contingent value right exposure, integration requirements and potential dilution.
- Track outcomes and potential exposure from the disclosed government investigations and litigation, particularly matters for which losses cannot currently be estimated.
- Separate recurring operating performance from prior-period reimbursement settlements and EHR incentive reimbursements when comparing results.