Community Health Systems, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are to the same 2022 periods unless noted. The company operated 78 affiliated hospitals with approximately 13,000 beds across 15 states, plus more than 1,000 other care sites.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net operating revenues | $3.115 billion | $2.934 billion | $6.223 billion | $6.044 billion |
| Income (loss) from operations | $246 million | $119 million | $457 million | $389 million |
| Operating margin | 7.9% | 4.1% | 7.3% | 6.4% |
| Net income (loss) | $2 million | $(298) million | $(18) million | $(268) million |
| Net loss attributable to CHS shareholders | $(38) million | $(326) million | $(89) million | $(327) million |
| Loss per share, basic and diluted | $(0.29) | $(2.52) | $(0.68) | $(2.54) |
Revenue increased 6.2% in Q2 and 3.0% for the first half. Same-store revenue rose 9.2% and 5.3%, respectively. Q2 same-store inpatient admissions increased 4.8% and adjusted admissions 4.9%; first-half increases were 4.8% and 7.2%. Management attributed revenue growth principally to higher volumes, reimbursement rates, acuity and non-patient revenue. First-half same-store revenue per adjusted admission declined 1.8%.
Operating costs excluding depreciation, amortization and impairment/gains were 88.5% of revenue in Q2 versus 91.4% a year earlier; first-half ratio was 89.2% in both periods. Lower contract-labor utilization and revenue growth supported Q2 margins, partly offset by higher professional-liability and outsourced-specialist costs. Interest expense was $207 million in Q2 and $414 million for the first half. The Q2 provision for income taxes was $38 million despite $40 million of pretax income; the first-half provision was $65 million on $47 million pretax income. The filing reports unusually high effective tax rates of 95.0% and 138.3%, respectively.
Cash flow, debt and liquidity
- First-half operating cash flow was $91 million, down from $154 million. Cash interest paid was $385 million, versus $410 million.
- Investing cash outflow was $105 million, including $227 million of property and equipment purchases; hospital and other-operation disposition proceeds were $111 million.
- Financing cash inflow was $14 million. The company borrowed $1.527 billion under its ABL Facility and repaid $1.457 billion of long-term debt during the first half.
- At June 30, cash was $118 million and total debt was $11.758 billion, including $150 million outstanding on the ABL Facility. The company reported approximately $764 million of additional ABL borrowing capacity after outstanding letters of credit.
- Net working capital was approximately $1.1 billion, up from $896 million at December 31, 2022. Approximately $30 million of debt was due within the next 12 months. Stockholders’ deficit was $1.403 billion.
Material changes, outlook and risks
- Profitability improved significantly year over year, but the company remained loss-making for shareholders in both the quarter and first half. The Q2 consolidated net income of $2 million contrasts with the $38 million shareholder loss because $40 million was attributable to noncontrolling interests.
- First-half results included a $35 million net gain on impairment and sale of businesses, including a $62 million gain on two hospital sales partly offset by impairment charges. Other disclosed first-half items included technology-modernization costs, legal-related costs and restructuring charges. Q2 also included restructuring and technology costs.
- Two West Virginia hospitals were divested during the first half. The sale of Medical Center of South Arkansas closed July 1, 2023; agreements to sell six additional hospitals were disclosed, but completion and timing were uncertain. Proceeds from future divestitures may be used for general corporate purposes, debt repayment or capital expenditures.
- No numerical earnings or revenue guidance is provided. Management expects operating cash flows, ABL availability, access to capital markets and potential disposition proceeds to be sufficient for investment and obligations over the next 12 months and foreseeable future. This outlook depends on continued cash generation and financing access.
- Management cited inflation, elevated interest rates, labor-market challenges, contract staffing and outsourced-specialist costs, and possible deterioration in volumes, payor mix or collections. The company is highly leveraged and warns that covenant breaches could accelerate debt and terminate ABL commitments.
- Medicaid coverage disenrollments following the end of continuous enrollment, reimbursement changes, and proposed Medicare outpatient payment offsets related to the 340B program may affect results. The company expects no significant future COVID-19 relief payments.
- A third-party vendor breach potentially exposed personal and health information of approximately 1.2 million individuals. Notices were substantially completed; related expenses and litigation may continue, and some costs may not be insured. The company did not expect a material adverse effect at filing.
- A securities class action had a tentative settlement preliminarily approved; the final approval hearing was scheduled for October 2023. Other legal and government matters remain, and the filing cautions that adverse outcomes could affect a particular period’s results or cash flows.
- Goodwill was $4.054 billion. Management reported no impairment in its last annual test, but warned that weaker volumes, higher costs or interest rates and stock/debt valuation changes could lead to future impairment.
Important facts for investors to verify
- Whether operating cash flow improves and whether labor, specialist and other cost trends sustain the Q2 margin improvement.
- ABL borrowing availability, covenant headroom, refinancing access and the company’s ability to service approximately $11.8 billion of debt.
- Completion, timing and proceeds of announced hospital divestitures, and how proceeds are allocated.
- Actual effects of Medicare and Medicaid policy changes, including the proposed 340B-related payment offsets.
- Final settlement terms and any developments in the securities, healthcare and cybersecurity litigation, including uninsured breach-related costs.
- Changes in receivable collections and reimbursement estimates: management states a 1% change in estimated contractual reimbursement could change first-half net loss by approximately $97 million.