Community Health Systems, Inc. — Q3 2011 Form 10-Q
Business context and period. The unaudited report covers the three and nine months ended September 30, 2011, compared with the same periods in 2010. CHS operated 131 hospitals, including one classified as held for sale, alongside home-care agencies and hospital management services. Results are not necessarily indicative of the full year.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net operating revenue | $3.436bn | $3.160bn | $10.224bn | $9.309bn |
| Operating income | $283.8m | $284.7m | $853.5m | $836.3m |
| Income from continuing operations | $95.8m | $88.0m | $280.3m | $260.7m |
| Net income attributable to CHS | $74.3m | $70.4m | $171.0m | $210.5m |
| Diluted EPS, net income | $0.83 | $0.76 | $1.87 | $2.26 |
| Operating margin | 8.3% | 9.0% | 8.3% | 9.0% |
| Operating cash flow | Not provided separately | Not provided separately | $820.2m | $898.4m |
- Revenue and volume: Revenue grew 8.7% in Q3 and 9.8% year to date. Same-store revenue increased 3.8% and 5.0%, respectively. Consolidated adjusted admissions rose 4.9% and 5.0%, but same-store admissions fell 7.0% and 5.2%; same-store adjusted admissions declined 1.1% and 0.5%.
- Cost and profitability: Operating costs excluding depreciation and amortization were 87.0% of revenue in both 2011 periods, versus 86.3% in 2010. Bad-debt provision rose to $450.3m in Q3 and $1.283bn year to date, reflecting increased self-pay mix. Supplies as a share of revenue improved; salaries and benefits and bad debts increased as shares of revenue.
- Cash flow and investment: Nine-month operating cash flow declined to $820.2m. Investing cash outflow was $691.4m, including $532.8m of property and equipment purchases and $209.5m for acquisitions, partly offset by $172.6m of disposition proceeds. Financing cash outflow was $161.6m; cash decreased by $32.9m to $266.3m.
- Debt and liquidity: At September 30, total debt was approximately $8.83bn, including $8.77bn long-term debt and $61.1m current maturities. Cash was $266.3m; working capital was approximately $1.133bn. The revolving facility was $750m, with $38m reserved for letters of credit. CHS reported compliance with financial covenants and said it expected available resources to fund requirements for at least the next 12 months.
Material changes and unusual items
- Nine-month net income attributable to CHS fell 18.7%, principally due to $55.8m of after-tax discontinued-operations losses, including a $47.9m impairment charge and sale-related losses. Continuing-operations income attributable to common stockholders increased to $226.8m from $214.9m.
- CHS recognized approximately $40.2m of HITECH electronic-health-record incentives in the three- and nine-month periods. A $6.9m tax benefit in Q3 related to IRS resolutions also aided earnings.
- Q3 revenue growth reflected acquisitions, reimbursement and rate increases, provider-assessment programs, and HITECH incentives, alongside higher outpatient activity and lower inpatient admissions. The May acquisition of Mercy Health Partners was for total consideration of approximately $161m; the October acquisition of Tomball Regional Hospital was a subsequent event.
- CHS sold two Oklahoma hospitals on September 1 for approximately $154m, against net assets with a carrying amount of approximately $193m. A remaining hospital sale closed October 22. The company also repurchased 3.47m shares during the first nine months for $85.8m.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance is provided. Management said it expected liquidity to support investment and operations, and cited growth opportunities, physician recruiting, acquisition synergies, and efficiency efforts. The Moses Taylor Health Care System acquisition was expected to close in Q1 2012, subject to regulatory approvals.
- Management identified reimbursement changes under healthcare reform, Medicare and Medicaid exposure, managed-care rate pressure, labor and supply inflation, self-pay collections, and acquisition integration as risks. Medicare inpatient payment changes produced a stated net 1.1% rate increase beginning October 1, 2011.
- Government inquiries and litigation include investigations of Medicare/Medicaid billing and admission practices, a national audit of certain Medicare claims, the Tenet lawsuit, False Claims Act matters, and shareholder class and derivative actions. Management said it was cooperating or vigorously defending; for several matters it could not estimate a possible loss or range.
- Debt maturities include approximately $4.5bn of term loans due July 2014, with $1.5bn of term loans extended to January 2017 subject to an acceleration provision, and 8.875% senior notes due July 2015. Interest-rate swaps covered approximately 90% of variable-rate debt; management estimated about $156.3m of swap-related interest expense over the next 12 months, assuming unchanged rates.
Investor verification priorities
- Assess whether same-store admission declines and the rising self-pay share continue, and how they affect bad-debt expense and cash collections.
- Review the amount and timing of any financial, regulatory, or operational impact from the coordinated billing investigations and related litigation; the filing does not provide a loss estimate for key matters.
- Reconcile reported revenue growth for acquisitions, HITECH incentives, and provider-assessment programs, and evaluate the sustainability of those contributors.
- Monitor debt maturities, refinancing needs, covenant headroom, revolving-facility availability, and interest-rate exposure.
- Track acquisition integration, capital spending on replacement hospitals, and the completed and pending hospital dispositions, including the October Tomball acquisition.