Community Health Systems, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015. Amounts are in millions of dollars unless otherwise noted. CHS operated 194 hospitals in continuing operations at quarter-end. On April 29, 2016, it spun off 38 hospitals and Quorum Health Resources into Quorum Health Corporation (QHC), leaving CHS with 157 hospitals.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Operating revenues before bad-debt provision | $5,754 | $5,646; up 1.9% |
| Provision for bad debts | $755 (13.1% of operating revenues) | $735 (13.0%) |
| Net operating revenues | $4,999 | $4,911; up 1.8% |
| Income from operations | $294; 5.9% margin | $399; 8.1% margin |
| Continuing income before taxes | $63 | $168 |
| Income from continuing operations | $37 | $112 |
| Net income attributable to CHS stockholders | $11; diluted EPS $0.10 | $79; diluted EPS $0.68 |
| Operating cash flow | $294 | $(61) |
| Cash and cash equivalents | $181 | $184 at Dec. 31, 2015 |
| Total debt | $16,914; including $699 receivables-facility borrowings | $16,785 at Dec. 31, 2015 |
| Revolver availability | Approximately $666, including $68 reserved for letters of credit | As of March 31, 2016 |
Cash used in investing activities was $371, including $224 for property and equipment, $99 for facility acquisitions and $67 for other investments. Financing activities provided $74. Cash interest paid was $307. Current assets were $5,256 against current liabilities of $3,054; working capital was approximately $2.2 billion. The ratio of earnings to fixed charges was 1.17x. CHS reported compliance with its credit-facility covenants.
Changes versus the prior-year quarter
- Revenue grew modestly, but operating income fell $105 and attributable net income declined $68. Operating expenses excluding depreciation, amortization and impairment rose to 87.8% of net operating revenue from 85.9%.
- Management cited higher salaries and benefits, drug and implant costs, outsourced services, property taxes and contract labor. Inpatient admissions fell 2.6% overall and 2.0% same-store; adjusted admissions rose 0.7% overall and 1.3% same-store.
- Interest expense increased to $251 from $241. The 2015 comparison included an $8 debt-extinguishment loss and other unusual charges; Q1 2016 included $17 of long-lived-asset impairment, including $7 related to a planned hospital closure.
- Operating cash flow improved from cash use of $61 to cash provided of $294, principally from collections and payment timing. Investing cash use increased from $231 to $371, mainly reflecting acquisitions, lower divestiture proceeds and higher other investments.
Outlook, transactions and risks
- Management outlook: No specific earnings or revenue guidance is provided. Management said internally generated cash, available revolver capacity and expected capital-market access should fund operations, acquisitions and capital needs over the next 12 months. It expects to fund routine capital spending from operating cash flow.
- QHC separation and debt reduction: The post-quarter spin-off delivered approximately $1.2 billion in cash proceeds to CHS. CHS used approximately $194 million to repay Term F loans and announced a tender offer for up to $900 million of its 5.125% senior secured notes due 2018. Remaining proceeds were intended for debt repayment and transaction expenses.
- Portfolio actions: CHS expected to complete sales of ten additional hospitals and certain non-hospital operations, representing approximately $1.0 billion of 2015 annual revenue, in Q3 2016; completion and timing were not assured. It also agreed to sell its Las Vegas minority interests to UHS for $445 million, expected in Q2 2016.
- Debt and interest-rate exposure: Debt was $16.9 billion, with substantial interest costs and floating-rate exposure. Swaps covered approximately 43.5% of variable-rate debt; a 1% rate change on unhedged variable-rate debt was estimated to change quarterly interest expense by about $14 million.
- Reimbursement and collections: Medicare and Medicaid policy, supplemental-payment programs, payer-contract negotiations, Medicaid expansion decisions, bad debts and patient collection trends could affect results. Days revenue outstanding were 64 days, within the company’s stated 60–65-day target. Management estimated that a 1% change in contractual reimbursement assumptions could change quarterly net income by about $45 million.
- Legal and regulatory matters: The company faces ongoing government inquiries and HMA-related False Claims Act, Stark Law and Anti-Kickback matters. It recorded a $261 liability for certain HMA legal matters tied to the CVR arrangement; outcomes and potential losses in other matters were not estimable. Management did not expect pending matters to materially affect consolidated financial position or liquidity, but acknowledged an adverse outcome could materially affect results or cash flows in a period.
- Other unusual items and risks: The planned closure of McNairy Regional Hospital resulted in a $7 impairment charge. CHS disclosed continuing litigation and potential costs related to its 2014 cyberattack. The 2015 goodwill test found hospital-reporting-unit fair value only about 10% above carrying value, increasing impairment sensitivity to lower volumes, higher costs or a share-price decline.
Most important facts for investors to verify
- Whether the QHC spin-off proceeds and subsequent asset-sale proceeds reduce debt as intended, and the resulting post-spin-off debt, interest expense and liquidity.
- Whether operating costs stabilize and margins recover, given modest revenue growth, lower inpatient admissions and sharply lower Q1 earnings.
- Whether bad-debt provisions, receivable collections and days revenue outstanding remain manageable, including the quality of receivables supporting the $699 million facility.
- Progress, pricing and completion of planned hospital and investment divestitures, and the impact of the reduced hospital portfolio on future revenue and cash flow.
- Developments in HMA legal proceedings, other government investigations and cyberattack litigation, including any changes in recorded liabilities or indemnification obligations.