Community Health Systems, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; filed October 26, 2023. Unaudited consolidated financial statements. The company’s subsidiaries operated 76 affiliated hospitals and more than 1,000 other care sites across 15 states.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net operating revenues | $3.086B | $3.025B | $9.308B | $9.069B |
| Income from operations | $173M | $204M | $630M | $592M |
| Net income (loss), consolidated | $(52)M | Less than $1M income | $(70)M | $(267)M |
| Net loss attributable to CHS stockholders | $(91)M | $(42)M | $(180)M | $(369)M |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $120M | $291M |
Q3 revenue grew 2.0% year over year; same-store revenue increased 5.1%. Nine-month revenue grew 2.6%; same-store revenue increased 5.3%. Q3 consolidated inpatient admissions increased 0.5% and adjusted admissions 0.4%; same-store increases were 3.7% and 4.2%, respectively. For nine months, consolidated inpatient admissions rose 0.9% and adjusted admissions 2.4%; same-store increases were 4.4% and 6.1%.
Operating margin was approximately 5.6% in Q3 versus 6.7% a year earlier, and 6.8% for the first nine months versus 6.5%. Q3 operating costs excluding depreciation and impairment/sale items rose to 89.5% of revenue from 87.2%, reflecting, among other factors, higher outsourced medical specialist and supplemental-program costs. Salaries and supplies as a share of revenue improved. Parent-company net loss margin was 2.9% in Q3 versus 1.4%; for nine months it improved to 1.9% from 4.1%.
Net interest expense was $208M in Q3 and $621M for nine months, down from $217M and $652M, respectively. Prior-year comparisons included early debt-extinguishment gains of $78M in Q3 and $73M for nine months; there were none in 2023. Effective tax rates were unusual because pretax income was low: (57.6)% in Q3 and 600.0% for nine months in 2023. The filing attributes lower tax expense year over year primarily to lower nondeductible interest.
Cash, debt and liquidity
Cash and cash equivalents were $91M at September 30, 2023, versus $118M at year-end 2022. Nine-month operating cash flow fell to $120M from $291M; management cites, in part, payment of accumulated supplemental executive retirement plan benefits. Investing cash outflow was $206M, including $357M of property and equipment purchases and $123M of proceeds from hospital and ancillary-operation dispositions. Financing provided $59M, including $2.290B of ABL borrowings and $2.152B of long-term debt repayments.
Total debt was $11.842B, including $230M outstanding under the ABL Facility; approximately $22M of debt was due within 12 months. The ABL has a $1.0B maximum subject to borrowing-base limits, with approximately $679M additional borrowing capacity after letters of credit. The company was not subject to the ABL fixed-charge coverage test at quarter-end. Net working capital was approximately $1.1B, up from $896M at December 31, 2022. Total liabilities were $15.567B, and stockholders’ deficit was $1.222B.
Material changes, outlook and risks
- Operating revenue growth and higher same-store volumes were partly offset by divestitures, unfavorable payor mix, and continued cost pressures. The company reported no significant pandemic-relief payments in the period and does not expect significant future payments under related legislation.
- During the first nine months, CHS completed divestitures of three hospitals and sold a majority interest in one rehabilitation hospital. It reported approximately $207M in total net proceeds, including approximately $85M received at a preliminary closing in December 2022. Seven additional hospitals were under definitive sale agreements at quarter-end; completion and timing were not assured. Proceeds may support general corporate purposes, debt repayment or repurchases, and capital expenditures.
- Management stated that operating cash flows, ABL availability, expected capital-market access and potential disposition proceeds should fund operations and obligations for the next 12 months and foreseeable future. This is not quantified earnings guidance; the filing provides no specific revenue or profit forecast.
- Risks include substantial leverage and refinancing/covenant exposure; inflation, elevated rates and labor costs; ability to recruit or retain outsourced specialists; reimbursement and Medicaid changes; collection and payor-mix pressures; and execution of the multi-year technology and ERP redesign. Management warns that a 1% change in estimated contractual reimbursement could change nine-month net loss by about $97M and receivables by $125M.
- The company recorded a net $9M gain on impairment and business sales for the first nine months, including a $63M gain on three hospital sales offset by impairment charges. Goodwill was $3.943B; management notes adverse operating or market changes could trigger future impairment.
- Accrued probable legal contingencies rose to $43M from $11M at year-end. The Padilla securities class-action settlement received final court approval on October 13, 2023, after quarter-end. A separate retaliation case was scheduled for trial in February 2024; other disclosed matters remain pending. Management says pending matters are not currently expected to materially harm consolidated financial position or liquidity, but adverse outcomes could materially affect results or cash flows in a period.
Investor verification points
- Review cash conversion, receivables and collection trends: days revenue outstanding rose to 60 from 56 at year-end, and patient accounts receivable increased to $2.160B from $2.040B.
- Check debt maturities, borrowing-base availability, covenant triggers and the company’s ability to refinance or access capital markets.
- Track whether announced hospital sales close on expected terms and how proceeds affect debt and liquidity.
- Assess whether same-store volume growth can offset labor, specialist and other operating-cost pressures, and monitor reimbursement/payor-mix developments.
- Follow legal-case outcomes, the ERP modernization program and impairment assumptions; the filing identifies these as potential sources of material operating or financial impact.