Community Health Systems, Inc. — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; the filing also reports fourth-quarter results. CHS operated 130 hospitals, including four rehabilitation or psychiatric facilities, across 29 states. Its strategy emphasizes hospital growth, operational improvements, physician recruitment and selective acquisitions.
Financial performance and liquidity
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net operating revenues | $12.987 billion | $12.108 billion | +7.3% |
| Income from operations | $1.115 billion | $1.069 billion | +4.3% |
| Income from continuing operations | $348.4 million | $304.8 million | +14.3% |
| Net income attributable to CHS | $280.0 million | $243.2 million | +15.1% |
| Diluted EPS | $3.01 | $2.66 | Up |
| Adjusted EBITDA | $1.770 billion | $1.671 billion | +5.9% |
| Cash from operating activities | $1.189 billion | $1.076 billion | +10.4% |
Operating margin was 8.6%, versus 8.8% in 2009; net margin attributable to CHS improved to 2.2% from 2.0%. Adjusted EBITDA margin eased to 13.6% from 13.8%. Net interest expense was $651.9 million, slightly above 2009. Reported quarterly data show fourth-quarter revenue of $3.403 billion, income from continuing operations of $92.2 million, CHS-attributable net income of $69.5 million and diluted EPS of $0.76; fourth-quarter 2009 comparables were $3.091 billion, $84.1 million, $65.1 million and $0.70, respectively.
Volume was mixed: consolidated admissions rose 0.1% and adjusted admissions rose 2.5%, largely reflecting acquisitions; same-store admissions fell 2.5% and same-store adjusted admissions fell 0.5%. Same-store revenue increased 3.9%, principally due to reimbursement and rate increases. Expenses excluding depreciation and amortization rose to 86.7% of revenue from 86.5%; bad debt provision was 12.2% of revenue, compared with 12.1%.
Operating cash flow increased, while investing cash outflow grew to $1.044 billion, principally reflecting higher property and equipment spending and no hospital-sale proceeds in 2010. Financing cash outflow was $189.8 million, including $114.0 million of share repurchases. Cash and equivalents were $299.2 million at year-end, down from $344.5 million; working capital was approximately $1.229 billion.
Total debt was $8.872 billion at year-end, compared with $8.911 billion in 2009; debt was approximately 80% of total capitalization. The $750 million revolving facility had $81.9 million reserved for letters of credit. Approximately $4.5 billion of term loans mature in 2014, $2.784 billion of senior notes are due in 2015, and $1.5 billion of extended term loans mature in 2017, subject to an earlier-maturity condition tied to refinancing the notes. Interest-rate swaps covered about 89% of variable-rate debt. The company reported covenant compliance and anticipated compliance going forward.
Changes, outlook and material matters
- CHS acquired five hospitals in 2010 and resumed a more active acquisition strategy. Acquisitions contributed to reported revenue growth; management attributed underlying improvement to rate and reimbursement increases, revenue initiatives and expense management.
- Management forecast 2011 capital expenditures of approximately $750–$850 million, including replacement hospitals. Three committed replacement facilities were estimated to cost $318.5 million in total; the Birmingham replacement project, estimated at $280 million, remained subject to an appeal of its certificate-of-need approval. The Valparaiso project was delayed and expected to finish in 2012.
- Management stated it expected operating cash flow and available credit to fund planned investment and believed liquidity was adequate. No specific earnings or revenue guidance was provided in the filing.
- CHS offered to acquire Tenet Healthcare for $6.00 per share, a proposed transaction valued at about $7.3 billion including assumed debt. Tenet rejected the offer; CHS later nominated a slate of directors. Completion and terms were uncertain.
- After year-end, CHS entered a definitive agreement to acquire Mercy Health Partners in Pennsylvania, subject to regulatory approvals and then expected to close in the second quarter of 2011. It also sold an Oregon physician clinic in February 2011 for $14.6 million.
- Healthcare reform could reduce Medicare and Medicaid reimbursement and increase costs, while expanding coverage could reduce self-pay bad debts. Management said the ultimate effects were uncertain. Government reimbursement, managed-care rate pressure, bad-debt collection, labor costs and acquisition integration remain material operating risks.
- Significant legal matters include a federal False Claims Act case concerning New Mexico Medicaid funding. DOJ previously cited approximately $27.5 million in alleged ineligible payments and stated it could seek treble damages and penalties; CHS is defending the case and said it could not estimate a loss or range. Other government inquiries include kyphoplasty billing, a Laredo hospital investigation, implantable defibrillator claims and Texas emergency-department procedures. A New Mexico uninsured-patient class action was also pending.
- Self-insured professional and general liability reserves were $489.2 million, up from $431.2 million. Goodwill was $4.2 billion; the latest annual impairment test indicated no impairment. The financial statements received an unqualified audit opinion, and the auditor also gave an unqualified opinion on internal control over financial reporting.
Most important facts for investors to verify
- Whether same-store volumes stabilize and revenue growth can offset reimbursement pressure and rising costs.
- Cash conversion and bad-debt trends, including self-pay exposure and collection assumptions.
- Debt refinancing plans ahead of the 2014–2015 maturities, covenant headroom and interest-rate exposure.
- Actual 2011 capital spending, replacement-hospital schedules, and returns on recent acquisitions.
- Developments, potential exposure and reserve adequacy in the New Mexico False Claims Act case and other investigations.
- Final regulatory and transaction outcomes for the proposed Mercy acquisition and the rejected Tenet offer.