Community Health Systems, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. Amounts are in millions of dollars except per-share data, percentages, and where stated.
Business context
CHS operated 106 hospitals at quarter-end: 104 general acute care and two rehabilitation or psychiatric hospitals. The company continued its portfolio-rationalization and deleveraging strategy, completing seven hospital divestitures during the quarter. These hospitals generated approximately $620 million of 2018 revenue; total net proceeds were approximately $209 million, including proceeds received at a preliminary closing in December 2018. CHS also signed an agreement to sell Tennova Healthcare-Lebanon; completion was not assured.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Net operating revenues | $3,376 | $3,689 |
| Income from operations | $189 | $212 |
| Operating margin | 5.6% | 5.7% |
| Interest expense, net | $257 | $228 |
| Loss from early debt extinguishment | $31 | $4 |
| Net loss | $101 | $6 |
| Net loss attributable to CHS stockholders | $118; $1.04 per share | $25; $0.22 per share |
| Cash from operating activities | $133 | $106 |
| Cash and cash equivalents at quarter-end | $277 | $196 at Dec. 31, 2018 |
| Total debt, including current maturities | $13,590 | $13,596 at Dec. 31, 2018 |
| Working capital | Approximately $1.1 billion | $1.2 billion at Dec. 31, 2018 |
Operating cash flow less property-and-equipment purchases was approximately $12 million; this simple measure excludes other investing activity. Interest paid was $189 million, versus $212 million in Q1 2018. Investing activities provided $19 million, largely reflecting hospital-sale proceeds, compared with $177 million used in the prior-year quarter. Financing activities used $71 million.
Current debt maturities were $205 million. CHS reported approximately $385 million of additional borrowing availability under its revolving Credit Facility, subject to facility limitations; the filing also reports $120 million of letters of credit. Its separate ABL Facility had $723 million outstanding; the filing does not provide a clear amount of remaining ABL borrowing availability. Stockholders’ deficit was $1.6 billion.
Changes versus the prior period
- Revenue fell 8.5% overall, chiefly because of hospital divestitures. Same-store revenue increased 3.1%, or $100 million, attributed to improved pricing and higher acuity, partly offset by lower inpatient admissions.
- Consolidated inpatient admissions declined 13.4% and adjusted admissions 12.8%; on a same-store basis, inpatient admissions decreased 0.1% while adjusted admissions increased 0.8%.
- Despite lower total revenue, operating income declined to $189 million from $212 million; operating margin edged down to 5.6% from 5.7%. Salaries and benefits rose to 45.7% of revenue from 44.7%, primarily reflecting higher benefit costs.
- Interest expense increased $29 million, primarily due to higher interest rates and less capitalized interest, partly offset by lower average debt. The $31 million debt-extinguishment loss followed refinancing activity.
- Net loss attributable to CHS stockholders widened to $118 million from $25 million. Q1 2019 included after-tax charges of $29 million for impairments, $23 million for debt extinguishment, $4 million for government and legal settlements, and $1 million for CVR-related legal expenses.
Debt, outlook, risks, and unusual items
- On March 6, CHS issued $1.601 billion of 8% senior secured notes due 2026 and used the proceeds to repay its Term H Loan and pay related fees. The refinancing extended that borrowing’s maturity, but total debt remained approximately $13.6 billion and the new notes carry an 8% coupon.
- The Credit Facility amendment reduced revolving commitments to $385 million, tightened restrictions on restricted payments, and set maximum first-lien net-debt-to-EBITDA covenant levels of 5.25x through 2019, declining to 4.25x thereafter. CHS reported 4.98x at March 31 and compliance with its covenants.
- Management said it expected cash generation, borrowing capacity, access to capital markets, and other resources to fund operations and planned needs over the next 12 months. No specific revenue or earnings guidance was provided. The company planned further divestitures, but stated that transactions under negotiation might not close or might close on different timelines.
- CHS adopted ASC 842 lease accounting on January 1, recording approximately $673 million of operating lease assets and liabilities. Adoption materially affected the balance sheet but did not materially affect Q1 earnings or cash flows.
- The company recorded $38 million of impairment and disposal charges, including approximately $12 million related to previously closed hospitals. Management warned that further impairment charges could arise. Goodwill was approximately $4.6 billion; management noted that the hospital reporting unit’s prior impairment history leaves it exposed to further impairment if fair value declines.
- Key risks include substantial leverage and debt-service needs, refinancing and covenant compliance, reimbursement and healthcare-policy changes, labor and benefit costs, patient receivables and collections, divestiture execution, and legal, regulatory, and malpractice matters. Management stated pending matters were not expected to materially affect financial position or liquidity overall, while acknowledging that adverse outcomes could materially affect results or cash flows in a particular period.
- Management highlighted estimation sensitivity: a 1% change in estimated contractual reimbursement could change quarterly net loss by approximately $82 million and receivables by $108 million; a 1% change in estimated collection percentage could change net loss by $52 million and receivables by $69 million.
Important facts for investors to verify
- Whether planned divestitures close, their final proceeds, and how proceeds are applied to debt reduction or reinvestment.
- Debt maturities, refinancing terms and costs, usable revolver and ABL availability, and covenant headroom as thresholds tighten.
- Whether same-store revenue and adjusted-admission trends persist, and how divestitures affect reported results and operating cash generation.
- Receivable collectability and reimbursement estimates, including the filing’s stated sensitivity to small changes in key assumptions.
- Developments in impairment indicators, government investigations, litigation, and the $73 million judgment and related insurance-coverage dispute described in the filing.