Community Health Systems, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Amounts are in millions of dollars unless noted. Community Health Systems operates general acute-care hospitals and related outpatient businesses; it owned or leased 103 hospitals at quarter-end. The company continued its portfolio-rationalization and deleveraging strategy, completing 11 hospital divestitures during the first nine months.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net operating revenues | $3,246 | $3,451 | $9,925 | $10,702 |
| Income from operations | $184 | $74 | $486 | $324 |
| Operating margin | 5.7% | 2.1% | 4.9% | 3.0% |
| Net income (loss), consolidated | $2 | $(308) | $(244) | $(405) |
| Net loss attributable to CHS stockholders | $(17) | $(325) | $(302) | $(460) |
| Loss per share | $(0.15) | $(2.88) | $(2.66) | $(4.08) |
| Net cash from operating activities | Not presented quarterly | Not presented quarterly | $191 | $440 |
- Q3 revenue fell 5.9% year over year; nine-month revenue fell 7.3%. Same-store revenue, however, rose 4.1% in Q3 and 4.3% for the nine months, reflecting improved pricing and higher acuity and same-store volumes. Divestitures drove much of the consolidated revenue decline.
- Consolidated admissions fell 9.2% in Q3 and 11.4% year to date, while same-store inpatient admissions increased 2.4% and 1.7%, respectively. Same-store adjusted admissions rose 3.6% and 2.3%.
- Q3 operating results benefited from lower impairment expense: a net gain of $1 versus $112 of impairment and loss on sale in Q3 2018. Nine-month impairment and loss on sale was $70, down from $314.
- Interest expense was $259 in Q3 and $782 for the nine months, up from $256 and $720. Cash interest paid in the nine-month period increased to $810 from $637.
Balance sheet, liquidity and debt
- At September 30, cash was $157, current assets $3,382 and current liabilities $2,355; reported net working capital was approximately $1.0 billion. Stockholders’ deficit was $1,765.
- Total debt was $13,604, including $318 of current maturities; long-term debt was $13,286. The balance sheet also reported operating lease liabilities of $634 ($137 current and $497 long term).
- Cash declined by $39 during the first nine months, to $157. Operating cash flow was $191; investing cash outflow was $103 and financing cash outflow was $127. Investing cash flows included $363 of hospital and business disposition proceeds and $322 of property and equipment purchases.
- The company reported approximately $385 of availability under its revolving Credit Facility, with $145 of letters of credit outstanding and no revolving borrowings. A separate ABL borrowing base was $854, with $673 borrowed.
- CHS was in compliance with its Credit Facility covenant at quarter-end: first-lien net debt to defined consolidated EBITDA was approximately 5.02x against a 5.25x maximum. The maximum tightens to 5.00x beginning January 2020, then to 4.50x in July 2020 and 4.25x thereafter.
Changes, outlook and material items
- Management attributed the improved reported operating income and narrower net losses primarily to lower impairment charges and better same-store performance, partly offset by continued heavy interest costs and lower revenue from divested facilities.
- Q3 net income included a $74 tax benefit, including discrete tax benefits related to interest carryforwards and HMA legal matters. It also included legal-settlement costs and a professional-liability reserve estimate charge. For the first nine months, the company reported $70 of impairment and a $31 loss on early extinguishment of debt.
- Professional-liability estimates were revised upward following higher-than-expected claim settlements: the company recorded a $70 change in estimate in Q2 and an additional $20 in Q3, principally for claims from 2016 and earlier, including claims tied to divested hospitals.
- Management said internally generated cash, borrowing availability and expected cash flows should be sufficient to fund operations and planned investment over the next 12 months. It expects to continue pursuing divestitures and use proceeds to reduce debt and/or reinvest in facilities; completion and timing of potential sales are uncertain. No specific earnings or revenue guidance is provided.
- Subsequent events: Bluefield Regional Medical Center was sold effective October 1, 2019; an agreement was reached to sell three Virginia hospitals; and the company announced a proposed exchange of $2.632 billion of 6.875% notes for new notes due 2027 and 2028.
- Risks include substantial leverage, near-term debt maturities and tightening covenants; exposure to interest rates, reimbursement and healthcare-policy changes, labor and supply costs, patient collections, and possible further goodwill impairment. The company noted that a 1% change in estimated contractual reimbursement percentages would have changed nine-month net loss by approximately $83 and receivables by $104.
- Legal matters include a settled charity-care dispute with a $22 liability recorded, securities and other class actions, government inquiries and other litigation. Management said pending matters are not currently expected to materially affect consolidated financial position or liquidity, but adverse outcomes could materially affect results or cash flows in a period. Potential retroactive Medicare DSH payments following a court ruling remain uncertain and could provide a non-recurring benefit if awarded.
Most important facts for investors to verify
- Debt maturities, refinancing progress and headroom under the tightening first-lien leverage covenant, including the status and terms of the announced note exchange.
- Whether operating cash flow recovers from $191 year to date, given $810 of cash interest and elevated malpractice claim payments.
- Whether same-store revenue and volume growth can offset the revenue and earnings impact of continuing divestitures.
- Further developments in professional-liability reserves, legal proceedings and the company’s $4.5 billion goodwill balance and impairment assessment.
- Actual availability under the revolving and ABL facilities, including borrowing-base restrictions and letters of credit.