Community Health Systems, Inc. — Q3 2013 Form 10-Q
Business context and period. The unaudited filing covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. The company operated 135 hospitals and related healthcare businesses. Dollar amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenues before bad-debt provision | $3,766.8 | $3,696.7 | $11,334.8 | $11,226.6 |
| Bad-debt provision | $548.6 | $484.6 | $1,568.4 | $1,474.5 |
| Net operating revenues | $3,218.2 | $3,212.0 | $9,766.4 | $9,752.0 |
| Operating income | $167.7 | $287.6 | $664.3 | $926.9 |
| Consolidated net income | $21.6 | $58.8 | $165.0 | $260.2 |
| Net income attributable to CHS shareholders | $4.1 | $44.2 | $113.0 | $203.1 |
| Diluted EPS attributable to CHS shareholders | $0.04 | $0.49 | $1.21 | $2.27 |
| Net interest expense | $154.3 | $158.6 | $465.7 | $462.3 |
- Margins: Operating margin on net operating revenues was 5.2% in Q3 versus 9.0% a year earlier; for nine months it was 6.8% versus 9.5%. Q3 shareholder net margin was 0.1% versus 1.4%; nine-month margin was 1.2% versus 2.1%.
- Volumes: Q3 consolidated and same-store admissions declined 6.8%; adjusted admissions declined 3.9%. For nine months, consolidated admissions fell 5.4% and adjusted admissions 3.1%; same-store declines were 6.2% and 3.9%, respectively.
- Cash flow: Nine-month operating cash flow was $441.1, down from $777.9. Investing cash outflow was $684.8, versus $1,087.8; financing cash outflow was $0.5, versus $420.7 of inflow. Cash ended the period at $143.6, down from $387.8 at year-end 2012.
- Liquidity and debt: September 30 working capital was approximately $1,337. Total debt was $9,548.7, including $180.4 current maturities; long-term debt was $9,368.3. Revolver availability was approximately $663, including $19.3 reserved for letters of credit. The company reported a 1.46x ratio of earnings to fixed charges.
Material changes and key drivers
- Net operating revenues increased only 0.2% in Q3 and 0.1% for the nine-month period, while admissions and adjusted admissions declined. Management cited lower women’s-services, flu/respiratory and low-intensity cardiology admissions, as well as physician turnover and calendar effects.
- Q3 operating results included a $98.0 government settlement and related-cost reserve ($61.0 after tax). Higher bad-debt expense, lower volumes, wage increases, acquisition costs, state supplemental-program contributions and higher depreciation also weighed on results.
- Q3 2012 included a $52.0 pretax debt-extinguishment loss; the nine-month 2012 period included a $115.5 loss. Nine-month 2012 results also included a net $80.8 revenue benefit from prior-period Medicare settlement/payment items. These items affect year-over-year comparability.
- Electronic health-record incentive reimbursements reduced operating expenses by $65.0 in Q3 and $110.3 for nine months, versus $30.6 and $73.6 in 2012. Nine-month cash received for these incentives was $105.3; $52.6 was deferred at September 30 pending satisfaction of recognition criteria.
- Days revenue outstanding rose to 66 from 58 at year-end 2012, above management’s stated 53–63 day target range. Management attributed part of the increase to billing and collection delays during EHR system conversions and growth in state Medicaid supplemental programs.
Outlook, risks and contingencies
- No numerical earnings or revenue guidance is provided. Management said available cash, borrowing capacity and projected operating cash flows should support capital investment and liquidity needs over the next 12 months and beyond.
- CHS agreed to acquire Health Management Associates for approximately $7.6 billion, including assumption of approximately $3.7 billion of debt. The transaction was expected to close by the end of Q1 2014, subject to regulatory, shareholder and other conditions; separate financing commitments were obtained. Completion, integration, synergies, additional debt and HMA legal exposures remain risks.
- The $98.0 reserve relates to negotiations with the Department of Justice concerning Medicare short-stay admissions and the Laredo, Texas investigation; negotiations were not final. Accrued losses for these and other probable matters totaled $112.2 at September 30, versus $22.6 at year-end 2012.
- Other government investigations and litigation remain ongoing. For the Baker False Claims Act matter concerning New Mexico Medicaid funding, management said loss was reasonably possible but could not estimate a loss or range. Additional investigations and shareholder cases also remain unresolved.
- Substantial leverage, debt-service and covenant requirements, variable interest rates, reimbursement changes, bad-debt collection risk, labor and supply cost inflation, and potential legal or regulatory sanctions are significant risks. A 1% change in rates on variable-rate debt not covered by swaps would have changed Q3 interest expense by approximately $5.4.
- Management stated that the 2012 annual goodwill test indicated no impairment; the next annual test was planned for Q4 2013. It also noted some facilities could face future impairment if unfavorable volume or reimbursement trends persist.
Important facts for investors to verify
- Final DOJ settlement terms, the adequacy of the $98.0 reserve, and exposure excluded from that reserve.
- HMA merger approvals, financing terms, closing timing, integration costs and realized synergies.
- Whether admissions stabilize and bad-debt expense and days revenue outstanding improve.
- Debt maturities, covenant headroom, revolver availability, and cash-flow capacity to service debt and fund planned capital spending.
- The sustainability and timing of EHR incentive reimbursements and any Medicare/Medicaid reimbursement changes.