Community Health Systems, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The company operates acute-care hospitals and outpatient facilities; it owned or leased 84 hospitals at quarter-end. Results are unaudited.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net operating revenues | $3.115 billion | $3.126 billion | $9.135 billion | $8.670 billion |
| Income from operations | $340 million | $285 million | $978 million | $690 million |
| Operating margin | 10.9% | 9.1% | 10.7% | 8.0% |
| Net income | $144 million | $128 million | $146 million | $254 million |
| Net income attributable to CHS stockholders | $111 million | $112 million | $52 million | $200 million |
| Diluted EPS | $0.85 | $0.97 | $0.40 | $1.74 |
| Net cash from operating activities | Not stated for quarter | Not stated for quarter | $400 million | $2.102 billion |
- Q3 operating costs and expenses were $2.775 billion, including $19 million of pandemic relief recognized as a reduction of expenses. Nine-month relief recognized was $102 million, versus $448 million in 2020.
- Nine-month capital expenditures were $334 million. Operating cash flow less purchases of property and equipment was approximately $66 million.
- At September 30, cash was $1.294 billion; total debt was $12.011 billion, including current maturities of $35 million. Net debt was approximately $10.717 billion. Stockholders’ deficit was $1.493 billion.
- Working capital was approximately $1.1 billion. The ABL facility had $728 million of excess availability and no borrowings outstanding.
Changes versus comparable periods
- Q3 revenue was nearly flat year over year, while same-store revenue rose 7.1% ($205 million), reflecting higher volume and acuity. Consolidated inpatient admissions fell 5.5% and adjusted admissions fell 3.4%; same-store measures increased 2.8% and 4.7%, respectively. Divestitures reduced non-same-store revenue.
- For the first nine months, revenue grew 5.4%; same-store revenue increased 14.8% ($1.2 billion). Consolidated admissions and adjusted admissions declined 5.5% and 2.4%, while same-store measures rose 4.3% and 7.3%.
- Operating margins improved in both periods, supported by lower operating expenses as a share of revenue and reduced interest expense. Interest expense fell to $216 million in Q3 from $257 million and to $666 million for nine months from $779 million.
- Nine-month parent-attributable income fell to $52 million from $200 million. The 2020 comparison benefited from a $240 million discrete tax benefit and a debt-extinguishment gain; 2021 included a $79 million debt-extinguishment loss. Q3 2021 included a $26 million pre-tax gain on the sale of the company’s Macon Healthcare investment.
- Operating cash flow declined by $1.702 billion year over year, mainly because 2020 included Medicare accelerated payments and pandemic relief receipts. The company repaid $814 million of outstanding Medicare accelerated payments in October 2021, after quarter-end.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management said it expects available cash, operating cash flows, ABL capacity and capital-market access to support operations and planned investment over the next 12 months.
- Management noted that COVID-19 continued to affect patient volumes, service and payor mix, labor and supply costs, and collections. It highlighted possible staffing shortages, supply disruptions and weaker collection of uninsured patient balances. The company said deterioration in uninsured receivables could increase working-capital needs.
- Provider relief funding remains subject to evolving HHS interpretation, use and reporting requirements; unrecognized amounts may need to be returned, and previously recognized amounts could be reversed. Only $6 million of such funds remained unrecognized or unrefunded at September 30.
- The company had deferred approximately $146 million of employer Social Security taxes, with $73 million due by each of December 2021 and December 2022. The October repayment of Medicare advances and these tax payments affect cash flows.
- Debt refinancing replaced several nearer-term notes with new secured notes due 2029, 2030 and 2031. Nine-month cash interest paid was $572 million. The company cautioned that covenant breaches could accelerate debt obligations; the ABL fixed-charge coverage test was not triggered at quarter-end.
- Other exposures include reimbursement and regulatory changes, potential Medicare sequestration reductions, litigation and audits, malpractice claims, and possible future asset impairment. Management reported $10 million accrued for probable contingencies and said pending matters could nevertheless materially affect results or cash flows in a particular period. A QHC litigation-trust complaint filed October 25, 2021 alleges claims related to the 2016 spin-off; CHS said it would defend the case.
- After quarter-end, Tyler Memorial Hospital became a campus offering emergency and outpatient services, reducing the reported portfolio to 83 hospitals effective October 1.
Important facts for investors to verify
- Whether same-store revenue and volume trends continue, and how labor, pharmaceutical and other supply costs affect margins.
- Collection trends, including days revenue outstanding, which increased to 56 days from 52 at year-end, and the collectability of self-pay balances.
- Debt service, refinancing terms, covenant headroom and liquidity after the October 2021 repayment of $814 million of Medicare advances.
- Eligibility and compliance for pandemic relief funds, including any future recognition or repayment obligations.
- Developments in significant litigation, government investigations, reimbursement policy and potential Medicare sequestration cuts.
- The sensitivity of estimates: management estimated that a 1% change in contractual reimbursement assumptions could change nine-month net income by about $88 million and receivables by $113 million; a 1% change in expected collections could change net income by $42 million and receivables by $54 million.