Community Health Systems, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report; quarterly data show fourth-quarter revenue of $3.453 billion and a net loss attributable to CHS stockholders of $328 million.
Business context
CHS operates general acute-care hospitals and outpatient facilities. At year-end it owned or leased 113 hospitals with 18,227 licensed beds across 20 states. Its strategy emphasized divesting non-core facilities and using proceeds to reduce debt, while investing in selected markets and physician practices.
Financial and operating metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Net operating revenues | $14.155 billion | $15.353 billion |
| Income (loss) from operations | $208 million | $(1.878) billion |
| Net loss attributable to CHS stockholders | $(788) million | $(2.459) billion |
| Loss per share attributable to CHS stockholders | $(6.99) | $(22.00) |
| Adjusted EBITDA (non-GAAP) | $1.642 billion | $1.703 billion |
| Net cash from operating activities | $274 million | $773 million |
| Cash and cash equivalents at year-end | $196 million | $563 million |
| Total debt, net of issuance costs and discounts/premiums | $13.596 billion | $13.913 billion |
Adjusted EBITDA margin was 11.6%, versus 11.1% in 2017. GAAP operating margin was 1.5%, compared with negative 12.2%; 2018 operating results included $668 million of impairment and sale-related charges. Net interest expense was $976 million, up from $931 million. Year-end working capital was approximately $1.2 billion, down about $555 million; stockholders’ deficit was $1.535 billion.
Changes versus the prior year
- Reported revenue fell 7.8%, principally because of hospital divestitures. Same-store revenue increased 2.8% ($362 million), with higher pricing and acuity offsetting lower volume.
- Same-store admissions declined 1.3% and adjusted admissions declined 0.4%; consolidated admissions and adjusted admissions fell 15.0% and 15.3%, respectively, largely reflecting portfolio reductions.
- CHS divested 11 hospitals in 2018 for net proceeds of approximately $405 million, versus 30 hospitals and approximately $1.7 billion of proceeds in 2017. Three hospitals closed in 2018. Several additional sales closed in January 2019.
- The reported loss narrowed substantially, but comparisons are affected by 2017’s $2.123 billion impairment and a $591 million fourth-quarter 2017 estimate adjustment for contractual allowances and bad debts. 2018 included $668 million of impairment and sale-related charges, including impairments at facilities sold, held for sale, underperforming, or closed.
Liquidity, debt and cash flow
- Operating cash flow declined by $499 million to $274 million. The company cited the $266 million HMA settlement payment, higher interest payments, reduced collections from divested-hospital receivables, and lost cash flow from disposed facilities.
- Cash interest paid was $936 million. Cash used in investing activities was $245 million, compared with $1.069 billion provided in 2017; proceeds from hospital and ancillary-business dispositions were $405 million.
- At year-end, debt included approximately $13.6 billion on the balance sheet, including $698 million outstanding under the $1.0 billion asset-based lending facility. The filing separately reports approximately $10.7 billion of senior secured principal and $2.9 billion of senior unsecured principal.
- The credit-facility first-lien net leverage ratio was 4.84x against a 5.0x maximum at December 31, 2018; CHS reported covenant compliance. Approximately 64.6% of variable-rate debt was hedged with interest-rate swaps.
- Debt maturities and refinancing remain significant concerns: the filing lists $192 million of long-term debt principal due in 2019 and $5.379 billion in 2020–2022. It also describes a February 2019 credit amendment that changed leverage tests and reduced extended revolving commitments to $385 million.
Outlook, contingencies and notable items
- Management expected to spend approximately $475 million to $575 million on capital expenditures in 2019, including about $50 million for the La Porte, Indiana replacement hospital. Management stated it expected available liquidity and projected cash flows to support operations and investment over the following 12 months.
- CHS intended to pursue additional 2019 divestitures and use proceeds to reduce debt; completion, timing and sale terms were not assured. The filing notes that leverage, near-term maturities, debt covenants, and asset-sale restrictions could constrain financial flexibility.
- In September 2018, CHS reached a global resolution of HMA-related investigations and qui tam matters, paying $266 million in the fourth quarter. Its Corporate Integrity Agreement was amended and extended through 2021. The company said adverse outcomes in pending legal matters could materially affect results or cash flows in a particular period.
- Key risks include reimbursement and healthcare-policy changes, payor pricing and collection risk, labor and supply costs, competition and outpatient migration, malpractice exposure, cybersecurity, and further goodwill or asset impairments. The 2014 cyberattack and related government investigations are discussed; the related class-action settlement remained subject to a claims/opt-out process.
- CHS adopted ASC 606 in 2018, changing presentation of bad-debt and patient-revenue estimates; the company said adoption did not materially affect 2018 results. It adopted lease accounting in January 2019 and estimated recognition of $665 million to $715 million of right-of-use assets and operating lease liabilities.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Review the debt maturity schedule, refinancing capacity, post-year-end credit amendment, covenant headroom, and cash available at the operating subsidiaries.
- Reconcile reported revenue and loss trends with divestitures, the 2017 $591 million estimate change, and 2018 impairments; assess same-store volumes and collection performance.
- Confirm progress and net proceeds from announced or completed hospital sales, and whether proceeds reduce debt as intended.
- Track the HMA settlement/CIA obligations, other pending proceedings, and potential additional legal or malpractice costs.
- Assess 2019 capital spending, operating cash generation, patient receivable quality, and the effect of ASC 606 and lease-accounting presentation changes.