Community Health Systems, Inc. — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012. This is an annual report, not a standalone fourth-quarter filing; selected Q4 figures are noted below. The company operated or leased 135 hospitals across 29 states, with 20,334 licensed beds.
Financial and operating performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net operating revenue | $13.029 billion | $11.906 billion |
| Income from operations | $1.210 billion | $1.134 billion |
| Income from continuing operations | $346.3 million | $335.9 million |
| Net income attributable to CHS | $265.6 million | $201.9 million |
| Diluted EPS | $2.96 | $2.23 |
| Adjusted EBITDA | $1.978 billion | $1.837 billion |
| Cash from operating activities | $1.280 billion | $1.262 billion |
- Revenue increased 9.4%; same-store revenue rose 4.6%. Same-store admissions declined 0.9%, while adjusted admissions increased 1.5%. Consolidated admissions and adjusted admissions rose 4.0% and 6.6%, respectively, including acquisitions.
- Operating margin was 9.3%, versus 9.5%; adjusted EBITDA margin was 15.2%, versus 15.4%. Parent-attributable net income margin was 2.0%, versus 1.7%.
- Net interest expense fell to $622.9 million from $644.4 million. Operating cash flow as a share of net operating revenue declined to 9.8% from 10.6%.
- Cash and cash equivalents were $387.8 million; net working capital was approximately $1.3 billion. Total debt was $9.541 billion, versus $8.847 billion. The company reported $750 million of revolving capacity, with $37.8 million reserved for letters of credit.
- Investing activities used $1.383 billion, including $768.8 million for property and equipment and $322.3 million for acquisitions. Debt was 77% of total capitalization, down from 78%.
- Q4 2012: Net operating revenue was $3.277 billion; income from continuing operations was $85.6 million; net income attributable to CHS was $62.6 million; diluted EPS was $0.69.
Material changes and unusual items
- FY 2012 parent-attributable net income rose 31.5%, but included significant nonrecurring items: a $115.5 million pretax loss on early debt extinguishment, a $10.0 million pretax long-lived asset impairment, and a net after-tax benefit of approximately $46.0 million from an industry-wide Medicare settlement and payment update. The company also recorded a $20.2 million after-tax charge for certain legal and regulatory matters.
- HITECH electronic health-record incentive reimbursement was $126.7 million, up from $63.4 million, and was recorded as a reduction of operating expenses.
- The company acquired four hospitals and a large physician practice in 2012. It completed three replacement hospitals and agreed to build another in York, Pennsylvania.
- Financing transactions extended approximately $6.0 billion of debt previously due in 2014–2015 to maturities ranging from 2016–2020. The company issued $2.2 billion of senior notes and $1.6 billion of senior secured notes; total debt nevertheless increased year over year.
Outlook, risks, and contingencies
- Management forecast 2013 capital expenditures of approximately $800–$900 million and said operating cash flow, available credit, and anticipated capital-market access should support investment and liquidity. It expected to remain compliant with debt covenants.
- Key risks include substantial leverage and covenant restrictions; Medicare and Medicaid reimbursement changes, including scheduled cuts and possible sequestration; rising self-pay exposure and collection risk; and labor, supply, competition, and acquisition-integration pressures.
- Federal and state investigations and lawsuits include Medicare/Medicaid billing and emergency-department practices, ICD claims, and the New Mexico False Claims Act matter. For the Baker case, management said a negative outcome was reasonably possible but could not estimate a loss range. Other investigations also had no clear loss estimate. The company had accrued $22.6 million for probable legal matters and stated it did not believe the aggregate outcome would be material.
- Management identified approximately $339.5 million of replacement-facility and other construction commitments in its obligations table, plus $348.6 million of open purchase orders. A separate broader set of acquisition-related commitments was $493.5 million, of which $254.0 million had been incurred.
- Auditors issued unqualified opinions on the financial statements and internal controls; management concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Underlying earnings and margins excluding settlement benefits, debt-extinguishment losses, legal charges, impairment, and EHR incentives.
- Same-store volume trends, especially inpatient admissions, and whether outpatient growth offsets inpatient softness.
- Self-pay collections, bad-debt allowance adequacy, and receivables trends; days revenue outstanding rose to 58 from 56.
- Debt maturity schedule, refinancing needs, covenant headroom, variable-rate exposure, and continued access to financing.
- Developments, potential financial exposure, and insurance coverage for ongoing investigations and litigation.
- Execution and funding of the $800–$900 million 2013 capital plan and committed replacement-hospital projects.