Community Health Systems, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; filed May 6, 2015. Amounts are in millions except per-share data and where noted. The company operated 197 hospitals in continuing operations at quarter-end.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Operating revenues before provision for bad debts | $5,646 | $4,875 |
| Provision for bad debts | $735 | $699 |
| Net operating revenues | $4,911 | $4,176 |
| Income from operations | $399 | $178 |
| Income (loss) from continuing operations | $112 | $(76) |
| Net income (loss) attributable to CHS stockholders | $79 | $(112) |
| Diluted earnings (loss) per share | $0.68 | $(1.05) |
| Net cash used in / provided by operating activities | $(61) | $65 |
- Operating margin on net operating revenues was 8.1%, versus 4.3% a year earlier. Net income attributable to CHS stockholders was 1.6% of net operating revenues, versus a 2.7% loss.
- Operating cash flow was negative despite the return to profitability. Cash declined to $222 from $509 at December 31, 2014. Investing cash outflow was $231, including $241 of property and equipment purchases; financing cash flow was $5.
- Total debt was $16,969, including $229 of current maturities; long-term debt was $16,740. Total liabilities were $22,439. The company reported $2.3 billion of net working capital and approximately $1.0 billion of remaining revolver availability, including the facility’s letter-of-credit arrangements. Earnings to fixed charges were 1.56x.
- Interest expense was $241, compared with $224; cash interest paid was $300, compared with $175. The company had $1.3 billion of effective interest-rate swaps and reported that a 1% rate change on uncovered variable-rate debt would change quarterly interest expense by approximately $17.
Changes versus the prior comparable period
- Net operating revenues rose 17.6%, but the comparison is affected by the HMA acquisition: Q1 2014 included HMA only from its January 27, 2014 closing. On a same-store basis, net operating revenues increased 5.2%, inpatient admissions 0.4%, and adjusted admissions 2.5%.
- Management attributed same-store revenue growth mainly to improved payor mix and lower charity-care and self-pay discounts. Consolidated admissions increased 15.7% and adjusted admissions 17.0%, largely reflecting the acquired HMA operations.
- Operating costs excluding depreciation and amortization declined to 85.9% of net operating revenues from 88.6%. Salaries and benefits fell to 46.0% of net operating revenues from 47.7%, which management linked to productivity and integration efficiencies. Supplies rose to 15.5% from 15.1%.
- Q1 2015 included an $8 debt-extinguishment loss and $8 of government settlement and related costs. Q1 2014 included a $73 debt-extinguishment loss, $42 of software-abandonment amortization, and $24 of long-lived-asset impairment, as well as substantially higher HMA acquisition and integration costs.
- Self-pay was 12.6% of operating revenues before bad debts, down from 14.5%. Days revenue outstanding increased to 66 days from 63 at year-end 2014, above the company’s stated 53–63-day target range.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided in the filing. Management said it expected available cash, borrowing capacity, and projected cash flows to fund the next 12 months, including necessary capital investment; it also cited continued HMA synergies and opportunities to improve operating efficiency.
- Four hospitals were divested during Q1 2015, including two divestitures required by the FTC in connection with the HMA merger. Discontinued operations generated a $13 after-tax loss, versus a $22 loss in Q1 2014. Two additional South Carolina hospitals were sold effective April 1, 2015, for approximately $4 in cash.
- Substantial indebtedness and floating-rate exposure remain central risks. Credit agreements include leverage and interest-coverage covenants and restrictions on additional debt, capital expenditures, asset sales, dividends, and repurchases. A covenant breach could accelerate debt and terminate credit availability.
- Legal and regulatory matters include HMA billing and physician-arrangement investigations and litigation, several matters with settlements agreed in principle, and ongoing government inquiries. A $256 liability was recorded for certain HMA legal matters tied to the CVR, in addition to $24 for previously accrued claims. Management said adverse outcomes could materially affect results or cash flows in a particular period, despite not expecting pending matters to materially harm financial position or liquidity overall.
- The company continued to face litigation and potential remediation costs relating to its 2014 cyberattack, which exposed patient identification information. Other risks include Medicare and Medicaid reimbursement changes, state Medicaid expansion decisions, managed-care pricing, bad-debt collection, labor and supply costs, and EHR meaningful-use requirements. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether operating cash flow improves and receivables collection returns toward management’s days-revenue-outstanding target.
- Debt maturities, borrowing availability, covenant headroom, interest costs, and the effectiveness and coverage of interest-rate hedges.
- Progress and financial outcomes of HMA integration, same-store performance, and remaining hospital divestitures.
- Developments, settlements, and potential cash exposure from HMA-related legal matters, other government investigations, and cyberattack litigation and remediation.
- Effects of reimbursement and Medicaid policy changes, EHR compliance and incentives, and the company’s ability to sustain lower self-pay exposure and operating costs.