Community Health Systems, Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010; unaudited. Unless stated otherwise, dollar amounts are in millions. The company operated 126 general acute care hospitals, alongside home care and hospital management businesses.
Financial performance and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net operating revenue | $3,252.1 | $3,086.8 | $9,583.8 | $9,016.5 |
| Income from operations | $280.8 | $267.3 | $832.6 | $783.7 |
| Income from continuing operations | $84.9 | $75.4 | $256.2 | $220.7 |
| Net income attributable to CHS | $70.4 | $59.7 | $210.5 | $178.1 |
| Diluted EPS | $0.76 | $0.65 | $2.26 | $1.95 |
| Operating margin | 8.6% | 8.6% | 8.7% | 8.7% |
- Revenue increased 5.4% in Q3 and 6.3% year to date. Same-store revenue growth was 3.8% and 3.6%, respectively. Parent-attributable net income rose 17.9% in Q3 and 18.2% year to date.
- Q3 inpatient admissions fell 3.0% and adjusted admissions fell 0.2%; year-to-date inpatient admissions fell 0.5%, while adjusted admissions increased 1.7%. Same-store adjusted admissions declined 1.3% in Q3 and 0.7% year to date.
- Operating costs excluding depreciation and amortization were 86.7% of revenue in Q3, unchanged year over year, and 86.6% year to date versus 86.7%. Bad-debt provision was $403.1 million in Q3 and $1,162.6 million year to date; it represented 12.4% and 12.1% of revenue, respectively.
- Net interest expense was $164.0 million in Q3, up $2.2 million, and $486.3 million year to date, down $0.9 million. The company cited higher rates and lower capitalized interest as offsets to lower average debt.
- Operating cash flow was $898.4 million for nine months, versus $900.8 million. Investing cash outflow was $545.1 million and financing cash outflow was $130.1 million; cash rose $223.2 million to $567.7 million. Property and equipment purchases were $381.9 million; facility acquisitions and related equipment cost $67.5 million.
- At September 30, cash was $567.7 million, working capital approximately $1.4 billion, and total debt approximately $8.877 billion ($60.7 million current and $8,816.2 million long-term), versus $8.911 billion at year-end 2009. The current ratio was approximately 1.89. The $750 million revolving facility had $81.9 million reserved for letters of credit; the filing also describes potential additional receivables financing and term-loan capacity.
Material changes and notable items
- Management attributed revenue and earnings growth to revenue initiatives, reimbursement increases, acquired hospitals, physician recruiting, and expense management. Acquisitions contributed $46.9 million of Q3 revenue growth and $242.1 million year to date; comparable hospitals contributed the remainder.
- Volume pressures included a milder flu season, lower birth rates, fewer one-day stays, and service closures. Self-pay revenue increased to 11.8% of Q3 revenue from 11.3%; charity care was 4.3% versus 4.0%.
- In July, the company acquired Marion Regional Healthcare System for approximately $28.3 million in cash and assumed liabilities. After quarter-end, it acquired Forum Health for $121.2 million and Bluefield Regional Medical Center for approximately $33.6 million.
- CHS repurchased $107.9 million of shares during the nine months. A new program begun in September authorized up to 4 million shares or $100 million; $43.9 million remained available for permitted dividends and stock or note repurchases under the most restrictive debt-agreement test.
- Swap liabilities were $435.3 million at quarter-end, compared with $316.0 million at year-end 2009; accumulated other comprehensive loss increased to $288.7 million. Swaps covered approximately 89% of variable-rate debt, and management estimated $209.3 million of swap-related interest expense over the next 12 months assuming unchanged rates.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management said cash, borrowing capacity, and expected cash generation should support operations, acquisitions, capital spending, and working capital needs over the next 12 months and beyond. It was exploring financing alternatives, including a possible amendment and partial extension of the credit facility.
- Management identified healthcare reform as uncertain: expanded insurance coverage could reduce uninsured care and bad debt, while Medicare and Medicaid reimbursement reductions, new requirements, and higher employee-benefit costs could weigh on results. Medicare inpatient reimbursement was expected to decline a net 0.4% beginning October 1, 2010 under the cited rule and statutory changes.
- Key operating exposures include reimbursement and payer negotiations, collection of patient accounts, labor and supply-cost inflation, substantial debt and covenant compliance, and reliance on capital markets. A 1% change in contractual reimbursement estimates would change nine-month net income by approximately $28.0 million; a 1% change in estimated self-pay collections would change it by approximately $16.3 million.
- Pending matters include a federal False Claims Act case concerning New Mexico Medicaid payments (the government cited approximately $27.5 million in allegedly ineligible payments before seeking potential treble damages and penalties), investigations involving kyphoplasty billing and implantable defibrillator claims, and other government inquiries and litigation. CHS said it was defending or cooperating in these matters; the filing does not quantify a clear expected loss for them.
- Replacement-hospital commitments included facilities in Valparaiso, Indiana; Siloam Springs, Arkansas; and Barstow, California, with estimated combined construction costs of approximately $318.5 million. A proposed Birmingham replacement facility was estimated at $280 million and remained subject to an appeal of certificate-of-need approval.
- Management stated that disclosure controls were effective and there had been no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether revenue growth and expense control can offset continuing declines in same-store admissions and rising bad-debt exposure.
- Actual cash conversion, capital spending, acquisition costs, and the effect of post-quarter acquisitions on debt and operating results.
- Debt maturities, covenant headroom, usable revolver capacity, refinancing plans, and the future cash impact of interest-rate swaps.
- The financial and regulatory outcomes of the New Mexico False Claims Act case and the other government investigations.
- The net reimbursement and cost effects of healthcare reform and other Medicare, Medicaid, and payer changes.