Community Health Systems, Inc. — 2014 Form 10-K
Reporting period: Year ended December 31, 2014; the filing also reports fourth-quarter results. Amounts are in U.S. dollars unless stated otherwise.
Business context
Community Health Systems operates acute-care hospitals and related healthcare businesses. At year-end, it reported 197 hospitals in continuing operations across 28 states, including 193 general acute-care hospitals and four rehabilitation or psychiatric hospitals, with 30,137 licensed beds. The January 27, 2014 acquisition of Health Management Associates (HMA), for approximately $7.3 billion including assumed debt, materially expanded the company.
Key financial metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Net operating revenues | $18.639 billion | $12.819 billion |
| Income from operations | $1.380 billion | $929 million |
| Income from continuing operations | $260 million | $242 million |
| Net income attributable to CHS shareholders | $92 million | $141 million |
| Diluted earnings per share | $0.82 | $1.51 |
| Adjusted EBITDA | $2.777 billion (14.9% of revenue) | $1.860 billion (14.5%) |
| Cash from operating activities | $1.615 billion | $1.089 billion |
| Cash used in investing activities | $4.351 billion | $991 million |
| Cash and cash equivalents at year-end | $509 million | $373 million |
| Total debt at year-end | $16.916 billion | $9.453 billion |
Operating margin was 7.4% in 2014 versus 7.3% in 2013; shareholder net income was approximately 0.5% of revenue versus 1.1%. Same-store revenue rose 1.2%, while same-store admissions fell 4.2% and adjusted admissions declined 0.9%. The company reported $2.0 billion of net working capital and $1.0 billion of unused revolving credit capacity, with $83 million reserved for letters of credit. Interest expense increased to $972 million from $613 million; cash interest paid was $831 million. The ratio of earnings to fixed charges fell to 1.29x from 1.51x.
Fourth quarter: Net operating revenues were $4.918 billion; income from continuing operations was $165 million; and net income attributable to CHS shareholders was $100 million. In fourth-quarter 2013, the corresponding figures were $3.192 billion, $62 million, and $28 million.
Material changes versus prior year
- Reported revenue rose 45.4%, largely because HMA and other acquired hospitals contributed approximately $5.7 billion of the increase; same-store revenue growth was only 1.2%.
- Same-store inpatient admissions declined 4.2%, although management cited improved payor mix and lower charity-care and self-pay discounts as support for same-store revenue.
- Shareholder net income fell 34.8% despite higher operating income. Higher interest and depreciation, debt-extinguishment costs, asset impairment and discontinued-operation losses weighed on earnings.
- Debt increased substantially to finance HMA. Investing outflows also rose sharply, principally because of acquisitions; operating cash flow increased, but included significant noncash adjustments and one-time items.
- Operating expenses excluding depreciation and amortization declined as a share of revenue, from 86.7% to 86.3%; salaries and benefits improved from 47.6% to 46.2% of revenue, while other operating expenses rose from 22.0% to 23.3%.
Outlook, commentary, risks and unusual items
- Outlook and investment: Management said it expected internally generated cash and available borrowing capacity to support operations and investment in 2015, and forecast capital expenditures of approximately $1.05–$1.25 billion. It expected to complete the Metro Health acquisition and at least one additional hospital acquisition in 2015. The filing provides no specific earnings or revenue guidance.
- HMA integration: Management cited integration synergies and operating efficiencies, but reported $69 million of 2014 HMA acquisition and integration expenses. HMA operations represented approximately 29% of 2014 revenue and 33% of year-end assets; those operations were excluded from management’s internal-control effectiveness assessment while integration continued.
- Significant 2014 charges: The company recorded a $73 million pretax loss from early debt extinguishment, $75 million of accelerated software amortization, $41 million of long-lived-asset impairment, and a $50 million after-tax impairment of hospitals held for sale. Discontinued operations produced a $57 million after-tax loss.
- Legal matters and compliance: CHS settled a New Mexico False Claims Act matter for $75 million, previously reserved. It also entered a five-year Corporate Integrity Agreement following a separate government settlement concerning short-stay admissions. HMA-related litigation and investigations remain relevant; the company recorded a $265 million fair-value liability for certain HMA legal matters covered by the contingent value rights (CVRs), in addition to other recorded liabilities. Some proceedings have uncertain outcomes and potential losses are not estimable.
- Cyber incident: A 2014 criminal cyberattack exposed certain nonmedical patient-identification data, including names, addresses, birthdates, telephone numbers and Social Security numbers. The company reported remediation expenses and multiple purported class actions; future costs and outcomes were uncertain.
- Reimbursement and operating risks: Government payment reductions, Medicaid expansion decisions, managed-care rate pressure, self-pay collections, value-based reimbursement, labor costs and regulatory scrutiny may affect results. Medicare and Medicaid represented 35.5% of operating revenues before bad-debt provision. Interest-rate sensitivity remains material despite swaps covering approximately 16.7% of variable-rate debt.
Most important facts for investors to verify
- Whether HMA integration delivers sustainable savings and whether same-store volumes stabilize after the reported admissions declines.
- Debt service, refinancing needs, covenant headroom and the company’s ability to fund its substantial 2015 capital program while maintaining liquidity.
- Developments and cash exposure in HMA-related matters, the CVR liability, the Corporate Integrity Agreement, and other government investigations or litigation.
- Updates on cyberattack remediation, related litigation and any further security incidents.
- Receivables quality, bad-debt assumptions and payor mix; management disclosed that a 1% change in estimated contractual reimbursement rates could change 2014 net income by about $70 million.
- Progress integrating HMA into financial reporting controls; the auditor’s unqualified opinion on controls excluded the acquired HMA operations.