Business Context and Reporting Period
Company: Community Health Systems, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2009
Business Overview: The Company is the largest publicly traded operator of hospitals in the United States by number of facilities and net operating revenues. It operates 122 general acute care hospitals, home care agencies, and provides management services through Quorum Health Resources, LLC. The Company operates in non-urban and selected urban markets.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2009 |
Three Months Ended June 30, 2008 |
Six Months Ended June 30, 2009 |
Six Months Ended June 30, 2008 |
|---|---|---|---|---|
| Net Operating Revenues | $3,016,961 | $2,673,153 | $5,929,710 | $5,383,508 |
| Income from Operations | $261,403 | $228,445 | $516,441 | $469,710 |
| Net Income (Total) | $73,990 | $55,144 | $146,890 | $123,880 |
| Net Income Attributable to CHS | $59,435 | $47,893 | $118,350 | $108,020 |
| Diluted EPS (Attributable to CHS) | $0.65 | $0.50 | $1.31 | $1.14 |
| Cash from Operating Activities | N/A | N/A | $544,407 | $416,783 |
| Cash and Cash Equivalents (End of Period) | $268,825 | N/A | $268,825 | N/A |
| Total Debt (Current + Long-term) | $8,940,544 | N/A | $8,940,544 | N/A |
Note: Total Debt calculated as Current maturities of long-term debt ($56,734) plus Long-term debt ($8,883,810) as of June 30, 2009.
Material Changes vs. Prior Period
- Revenue Growth: Net operating revenues increased 12.9% for the three months and 10.1% for the six months ended June 30, 2009, compared to the prior year. Growth was driven by acquisitions (including Triad Hospitals synergies), increased surgeries, and strong outpatient growth.
- Profitability: Income from continuing operations before taxes increased 30.5% for the three months and 25.6% for the six months. Net income attributable to CHS increased 24.1% (three months) and 9.6% (six months).
- Expense Trends:
- Bad Debts: Provision for bad debts increased significantly (27% for three months, 21% for six months) as a percentage of revenue, attributed to increased self-pay revenues and economic conditions affecting patient ability to pay.
- Salaries: Salaries and benefits as a percentage of revenue decreased slightly (0.5% for three months, 0.1% for six months) due to cost control measures.
- Interest Expense: Net interest expense increased due to higher average outstanding debt and interest rates, partially offset by decreased capitalized interest.
- Acquisitions and Divestitures: The Company acquired Wyoming Valley Health Care System, the remaining interest in MCSA L.L.C., and Siloam Springs Memorial Hospital. It sold its interest in Presbyterian Hospital of Denton (classified as discontinued operations).
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management anticipates continued growth in substantially all markets. They believe internally generated cash flows and available borrowing capacity ($750 million revolving credit facility) are sufficient to finance operations and acquisitions for the next 12 months.
- Unusual Items:
- Discontinued Operations: Results for a hospital previously held for sale were restated to include it in continuing operations. The sale of Presbyterian Hospital of Denton resulted in a gain recorded in discontinued operations.
- Debt Extinguishment: The Company repurchased $121.5 million of senior notes, resulting in a net gain of $2.7 million. Conversely, mandatory prepayments on term loans resulted in a loss of $1.4 million.
- Risks and Contingencies:
- Legal Proceedings: The Company is defending a qui tam lawsuit (U.S. ex rel. Baker) regarding Medicaid claims in New Mexico, where the government intervened on June 30, 2009. Other investigations include billing practices for kyphoplasty procedures and class actions regarding uninsured patient billing.
- Reimbursement: Significant revenue reliance on Medicare (27.5%) and Medicaid (8.7%). Legislative changes or payment rate reductions could materially impact results.
- Debt Covenants: The Company is subject to restrictive covenants regarding leverage ratios and interest coverage. Breach could result in default.
Investor Verification Checklist
- Bad Debt Reserves: Verify the adequacy of the allowance for doubtful accounts given the rising self-pay percentage and economic downturn.
- Debt Capacity: Confirm compliance with leverage and interest coverage covenants under the Credit Facility and Senior Notes indenture.
- Legal Exposure: Monitor the status of the U.S. ex rel. Baker False Claims Act litigation and potential financial impact.
- Acquisition Integration: Assess the realization of synergies from the Triad acquisition and recent smaller acquisitions.
- Interest Rate Risk: Review the effectiveness of interest rate swap agreements in hedging variable rate debt exposure.