Community Health Systems, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods. The company operated or leased 134 hospitals at quarter-end. Unless stated otherwise, dollar amounts below are in millions.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenues before bad-debt provision | $3,746 | $3,434 | $7,530 | $6,788 |
| Bad-debt provision | $503 | $433 | $990 | $833 |
| Net operating revenues | $3,243 | $3,001 | $6,540 | $5,955 |
| Income from operations | $290 | $289 | $639 | $570 |
| Income from continuing operations, before noncontrolling interests | $102 | $93 | $202 | $184 |
| Net income attributable to CHS | $83 | $35 | $159 | $97 |
| Diluted EPS attributable to CHS | $0.93 | $0.39 | $1.78 | $1.05 |
| Net cash from operating activities | — | $483 | $585 |
- Net operating revenue increased 8.1% in Q2 and 9.8% for the six-month period. Same-store net operating revenue rose 4.5% and 4.4%, respectively; acquisitions contributed materially to reported growth.
- Operating margin was 9.0% in Q2 versus 9.6%; for the six months it was 9.8% versus 9.6%. Continuing-operations margin was 3.2% in Q2 versus 3.1%, and 3.1% for both six-month periods.
- Q2 admissions rose 3.0% overall but fell 2.0% same-store; adjusted admissions increased 5.7% overall and 0.5% same-store. For six months, overall admissions rose 3.1%, while same-store admissions fell 2.2%; adjusted admissions increased 6.9% overall and 1.5% same-store.
- Interest expense declined to $152 million in Q2 and $304 million for six months, from $163 million and $326 million. Lower rates and increased capitalized interest were partly offset by higher average debt.
- Six-month operating cash flow fell by $102 million year over year, chiefly reflecting weaker cash conversion from receivables and other working-capital movements. Investing used $791 million, including $245 million for acquisitions, $386 million for property and equipment, and $162 million for other investments. Cash declined by $15 million to $115 million.
Balance sheet, liquidity and debt
- At June 30, cash was $115 million, current assets $3.0 billion, and current liabilities $1.9 billion. Management reported net working capital of approximately $1.1 billion, up from $935 million at year-end 2011.
- Total debt was $9.33 billion, including $9.24 billion long-term debt, versus $8.85 billion total debt at December 31, 2011. Long-term debt included $5.97 billion under the credit facility, $931 million of 8.875% notes due 2015, $2.02 billion of 8% notes due 2019, and $300 million under a receivables facility.
- The replacement revolver was $750 million; $5 million was drawn and $37.7 million reserved for letters of credit. The filing describes approximately $750 million of facility availability; after those uses, undrawn capacity was approximately $707 million. CHS said it complied with its financial covenants at quarter-end.
- About 60% of variable-rate debt was covered by interest-rate swaps. The filing notes that swaps expire over time and estimates a 1% rate change on unhedged variable debt would affect six-month interest expense by approximately $9.9 million.
Material changes, outlook and risks
- Six-month earnings included an estimated $42.8 million after-tax benefit from prior-period Medicare payment updates and an industry-wide settlement, an $8.7 million after-tax legal-reserve charge, and a $39.5 million after-tax debt-extinguishment loss. Management reported adjusted continuing-operations income of $207.3 million, up 12.4% year over year, excluding these items.
- The settlement included $101.8 million of revenue related to historical Medicare underpayments and an unfavorable $21 million adjustment tied to updated Medicare SSI ratios. HITECH electronic-health-record incentives reduced operating expenses by $43.0 million for six months; related cash receipts were $28.8 million.
- During the period, CHS refinanced or extended portions of its debt and issued an additional $1.0 billion of 8% notes due 2019, using proceeds in part to repurchase 8.875% notes due 2015. After quarter-end, it issued $1.2 billion of 7.125% notes due 2020 and tendered for and planned to redeem remaining 8.875% notes due 2015. These transactions were intended to extend note maturities; completion and final amounts should be checked against subsequent disclosures.
- Acquisitions during the first half included hospitals in Pennsylvania and Illinois and a physician practice in Texas. A Pennsylvania health system acquisition closed July 1, 2012; CHS also committed to spend at least $75 million on a replacement hospital there within five years.
- Management said available cash, borrowing capacity, expected cash generation and market access should support acquisitions, capital spending and working capital for at least the next 12 months and into the foreseeable future. No specific earnings or revenue guidance was provided.
- Key operating risks include high leverage and debt service, lower or delayed Medicare and Medicaid reimbursement, managed-care rate pressure, rising labor and supply costs, bad-debt exposure, and execution and integration of acquisitions. Management also highlighted uncertainty about state Medicaid expansion following the Supreme Court ruling.
- Legal exposure includes government investigations and False Claims Act matters concerning Medicaid funding, emergency-department practices and inpatient billing, as well as shareholder litigation. For a New Mexico False Claims Act matter, management said a negative outcome was reasonably possible but it could not estimate a loss or range. Separately, $20.4 million was accrued for other probable legal losses; management did not expect those matters individually to be material.
- Self-pay was 13.0% of Q2 and 13.2% of six-month gross operating revenues before bad debts, up from 12.1% in both comparable 2011 periods. Days revenue outstanding increased to 58 days from 56 at year-end; management’s target range was 53–63 days.
Investor verification points
- Check the sustainability of revenue and earnings growth apart from acquisitions, prior-period reimbursement items and EHR incentives, particularly given declining same-store admissions.
- Monitor receivables, bad-debt provisions, self-pay mix, collection performance and days revenue outstanding.
- Verify the completion and economics of the post-quarter debt tender and refinancing, and assess leverage, interest-rate exposure, maturities and covenant headroom.
- Track developments and potential financial consequences in government investigations, False Claims Act cases and shareholder litigation; the filing provides no estimable loss range for certain matters.
- Assess the effects of Medicare and Medicaid reimbursement changes, state decisions on Medicaid expansion, provider-assessment costs and required replacement-hospital spending.