Community Health Systems, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. The filing is unaudited.
Business context
CHS operated 143 hospitals in continuing operations at June 30, 2017, alongside two hospitals classified in discontinued operations. Management was pursuing portfolio rationalization and debt reduction through hospital and business sales. Comparisons with 2016 are affected by the April 2016 spin-off of 38 hospitals and Quorum Health Resources into Quorum Health Corporation (QHC), as well as subsequent divestitures.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Operating revenues before bad-debt provision | $4.823 billion, down 8.8% | $9.991 billion, down 9.5% |
| Net operating revenues after bad-debt provision | $4.144 billion, down 9.7% | $8.629 billion, down 10.0% |
| Income (loss) from operations | $113 million; 2.7% of net operating revenues | $183 million; 2.1% of net operating revenues |
| Net loss attributable to CHS stockholders | $137 million; loss per share $1.22 | $335 million; loss per share $3.01 |
| Operating cash flow | $503 million for the six months, versus $632 million in 2016 |
Interest expense was $239 million in Q2 and $468 million for the first half, compared with $246 million and $496 million, respectively, in 2016. The first-half cash-flow statement reported $596 million from investing activities, including $921 million in proceeds from hospital and ancillary-business dispositions, and $569 million used in financing activities. Capital expenditures for property and equipment were $274 million for the half year.
At June 30, cash was $768 million, total current assets $5.055 billion and current liabilities $2.378 billion; reported working capital was approximately $2.7 billion. Total debt was $14.748 billion, including $14.702 billion of long-term debt. The company reported $929 million of revolving-facility commitments, with $71 million in letters of credit. It was in compliance with its credit covenants: secured net leverage ratio 3.82x against a 4.50x limit, and interest coverage 2.36x against a 1.75x minimum. The interest coverage minimum rises to 2.00x in 2018.
Material changes versus prior periods
- Same-store net operating revenue decreased 0.7% in Q2 and increased 0.1% for the first half. Same-store admissions and adjusted admissions each fell 2.5% in Q2 and 1.8% in the first half. Consolidated volume declines were larger, reflecting divestitures and the QHC spin-off.
- Bad-debt provision was 14.1% of pre-provision operating revenue in Q2 and 13.6% for the half, versus 13.2% in both 2016 periods. Management cited higher patient co-pays and deductibles.
- The Q2 2017 operating results included an $80 million impairment charge; first-half impairment and loss on sales totaled $330 million, including approximately $357 million of goodwill allocated to hospital disposal groups. By comparison, the 2016 periods included a substantial goodwill and long-lived-asset impairment, reported as $1.6 billion in Q2 and $1.656 billion for the half.
- First-half cash from operations fell $129 million year over year, with management citing divestitures, payroll timing, lower HITECH incentive receipts and working-capital changes; improved patient collections and shareholder-derivative settlement proceeds partly offset the decline.
- CHS issued $3.1 billion of 6.25% secured notes due 2023 and used proceeds in part to refinance or repay nearer-term debt. The 2018 secured notes were fully retired. Debt repayments and disposition proceeds reduced total debt modestly from year-end, while the refinancing shifted maturities.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided. Management said it expected available cash, operating cash generation and borrowing capacity to support investment and requirements over the next 12 months.
- CHS reported completing 20 of 30 targeted hospital divestitures since April 1, 2017; the remaining ten were under definitive agreements and were expected to close by September 30, subject to execution and timing risks. The 30 hospitals generated approximately $3.4 billion of 2016 net operating revenue; estimated gross proceeds plus working capital were approximately $1.95 billion if all sales closed on expected terms. Management was also pursuing potential sales of hospitals with at least $1.5 billion of annual revenue.
- Subsequent to quarter-end, several transactions closed or were preliminarily closed, and CHS reported paying approximately $343 million against the Credit Facility on July 7 using divestiture proceeds. Other sales remained subject to definitive agreements and closing.
- Significant uncertainties include substantial leverage and debt service, covenant compliance, reimbursement and healthcare-policy changes, patient collection risk, declining admissions, labor and supply costs, and the completion and proceeds of planned divestitures. Management noted the hospital reporting unit had limited goodwill fair-value headroom, increasing the risk of future impairment.
- Legal and regulatory matters include HMA-related Medicare/Medicaid billing and physician-relationship investigations and litigation, an ongoing SEC investigation, and other claims. The HMA CVR-related legal liability was $260 million at June 30; the company stated adverse outcomes could materially affect results or cash flows in a reporting period. A separate charity-care class action settlement was expected to be funded in Q3 2017.
- Other notable items: first-half results included a $40 million net gain from settlement of a shareholder derivative action; early debt extinguishment losses were $31 million for the half. Management expects HITECH incentive reimbursements to continue declining. Adoption of the new revenue-recognition standard was planned for January 1, 2018 using the full retrospective approach; the quantitative impact was not yet estimable. The new lease standard, expected in 2019, was anticipated to have a significant balance-sheet and results impact.
Important facts for investors to verify
- How much of the revenue and volume decline reflects divestitures versus underlying same-store performance, and whether trends in admissions and bad-debt provision continue.
- Actual closing dates, net proceeds and debt repayments for the remaining hospital sales, including any changes to the announced portfolio-sale estimates.
- Debt balances, borrowing availability and covenant headroom after subsequent repayments, and the company’s ability to meet the higher interest-coverage requirement effective in 2018.
- Any developments in HMA-related investigations, the CVR liability, other litigation and the SEC investigation, including potential cash costs or changes in accruals.
- Results of the 2017 goodwill impairment assessment and the quantified effects of upcoming revenue-recognition and lease-accounting changes when available.