Community Health Systems, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Community Health Systems operates hospitals and other care sites through subsidiaries. At quarter-end, affiliates owned or leased 79 hospitals with approximately 13,000 beds and operated more than 1,000 other care sites.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net operating revenues | $3.108 billion | $3.111 billion |
| Income from operations | $210 million | $270 million |
| Operating margin | 6.8% | 8.7% |
| Net income (loss), consolidated | $(20) million | $30 million |
| Net loss attributable to CHS stockholders | $(51) million | $(1) million |
| Basic and diluted loss per share | $(0.40) | $(0.01) |
| Net cash from operating activities | $5 million | $101 million |
Revenue was nearly flat year over year. Same-store revenue increased 1.7% ($51 million), while revenue from businesses outside the same-store comparison declined $54 million. Consolidated inpatient admissions rose 1.2% and adjusted admissions rose 5.8%; same-store increases were 4.8% and 9.4%, respectively. Same-store net revenue per adjusted admission fell 7.1%.
Operating expenses excluding depreciation, amortization and the net impairment/sale line increased to 89.7% of revenue from 87.0%. Salaries and benefits rose to 43.9% of revenue from 42.6%, which management attributed primarily to wage inflation and competitive labor conditions. Interest expense was $207 million, down from $217 million. The $26 million tax provision on only $6 million of pretax income produced a 433.3% effective tax rate; management cited higher nondeductible interest and lower pretax income.
Cash flow, debt and liquidity
- Operating cash flow fell to $5 million from $101 million. Property and equipment purchases were $122 million, versus $97 million; operating cash flow less these purchases was approximately negative $117 million.
- Cash and cash equivalents were $144 million at March 31, compared with $118 million at year-end. Working capital was approximately $982 million, up from $896 million.
- Total debt was approximately $11.735 billion, including $39 million of current maturities. Long-term debt was $11.696 billion. Cash interest paid was $197 million.
- The ABL Facility had $125 million drawn and approximately $792 million of additional borrowing capacity, net of outstanding letters of credit. The company was not subject to the facility’s fixed-charge coverage test at quarter-end.
- Total stockholders’ deficit was $1.352 billion. Management said operating cash flows, ABL availability and expected capital-market access should support needs for the next 12 months and foreseeable future, while cautioning that economic and market conditions could constrain access.
Material changes, outlook and risks
- Profitability weakened despite improved admissions: operating income declined $60 million and consolidated results shifted from income to loss. The prior-year period included $47 million of pandemic relief funds as an expense reduction; no such funds were recorded in Q1 2023.
- Q1 2023 results included a $22 million net gain on impairment and sale of businesses, principally a $25 million hospital-sale gain partly offset by $3 million of impairment charges. Management also identified an $8 million after-tax charge for legal and government matters and a $1 million after-tax restructuring charge. Q1 2022 included a $5 million debt-extinguishment loss and $6 million impairment expense.
- CHS completed the Greenbrier Valley Medical Center divestiture effective January 1, 2023. Plateau Medical Center’s sale closed April 1, with approximately $92 million of proceeds received at a preliminary closing on March 31. Agreements were also pending for Lake Norman and Davis Regional hospitals, Lutheran Rehabilitation Hospital, and Medical Center of South Arkansas. Completion and timing are not assured; proceeds may be used for general corporate purposes, debt reduction or capital expenditures.
- No numerical earnings or revenue guidance was provided. Management cited inflation, elevated interest rates, labor-market pressures and supply disruptions, and said cost controls may not fully offset these pressures. Capital spending and operational efficiency remain priorities.
- Risks include substantial debt and covenant compliance, reimbursement and payor-mix changes, receivable collection, labor costs, possible goodwill impairment and legal contingencies. Management noted that the end of continuous Medicaid enrollment and the scheduled end of the federal COVID-19 public health emergency could affect coverage or operations. A potential remedy to the 340B reimbursement ruling could require non-340B hospitals such as CHS’s to repay prior payments if budget neutrality applies.
- A third-party vendor security breach potentially affected approximately one million individuals’ personal or health information. CHS reported no impact on its information systems or material care interruption, but incurred and may continue to incur costs; related class-action suits are pending. Management said it did not then expect a material adverse effect.
- Management considered pending legal matters not likely to materially affect consolidated financial position or liquidity, but said an adverse outcome could materially affect results or cash flows in a particular period. A securities class action had a tentative settlement subject to court approval; other proceedings remain pending.
Important facts for investors to verify
- Whether operating cash flow recovers and labor-cost pressure eases, given the sharp year-over-year decline in quarterly operating cash generation.
- Debt maturities, interest burden, ABL availability and covenant headroom, including access to refinancing or capital markets.
- Progress, proceeds and use of funds from announced hospital divestitures, and any associated changes in revenue and operating performance.
- Potential effects of Medicaid disenrollment, Medicare reimbursement policy—including the 340B remedy—and changes in payor mix or collections.
- Updates on the vendor breach, related litigation, securities-class-action settlement, and other legal or regulatory contingencies.