Community Health Systems, Inc. — Q1 2018 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2018. The company operated 127 hospitals at quarter-end and described its strategy as portfolio rationalization and deleveraging through asset sales. Financial amounts below are in millions unless noted.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Net operating revenues | $3,689 | $4,486 |
| Income from operations | $212; 5.7% margin | $71; 1.6% margin |
| Loss from continuing operations | $6 | $176 |
| Net loss attributable to CHS stockholders | $25; $0.22 per share | $199; $1.79 per share |
| Cash from operating activities | $106 | $242 |
| Cash and cash equivalents | $424 at March 31 | $563 at December 31, 2017 |
| Total debt | $13,892 | $13,913 at December 31, 2017 |
| Current assets / current liabilities | $3,993 / $2,263 | $4,068 / $2,356 at December 31, 2017 |
- Capital expenditures were $170; operating cash flow less property-and-equipment purchases was approximately negative $64.
- Net cash used in investing and financing activities was $177 and $68, respectively. Interest paid was $212.
- Working capital was approximately $1.7 billion. The company reported $650 million of revolving-facility availability at March 31, including $57 million of letters of credit.
- Credit Facility first-lien net debt to consolidated EBITDA was 4.47x, against a 5.25x maximum covenant at March 31; the company reported compliance.
Material changes versus the prior comparable period
- Revenue fell 17.8%, primarily reflecting the 2017 divestiture of 30 hospitals. Same-store revenue rose 1.6% ($57 million), supported by higher acuity and pricing; same-store adjusted admissions fell 1.9% and inpatient admissions fell 2.4%.
- Consolidated inpatient admissions declined 19.6% and adjusted admissions declined 20.8%, largely reflecting the smaller portfolio. Same-store revenue per adjusted admission increased 3.5%.
- Operating income improved to $212 million from $71 million. Impairment and loss on sale charges decreased to $28 million from $250 million; the prior-year quarter also included a $26 million after-tax gain from legal settlements, versus a $4 million after-tax charge in Q1 2018.
- Stockholder net loss narrowed to $25 million from $199 million, but operating cash flow declined by $136 million. Management cited weaker patient-account collections, legal and government settlement payments, divested-hospital cash flows and lower EHR incentive receipts.
- Interest expense was nearly unchanged at $228 million. Higher interest rates offset lower average debt; the filing says the rate increase added approximately $23 million of expense, offset by a similar reduction from lower average debt.
- ASC 606 adoption changed presentation: most amounts previously reported as bad-debt provision are now implicit price concessions deducted from 2018 net operating revenue. The company said adoption had no material impact on results, but presentation differs from prior periods.
Outlook, management commentary, risks and unusual items
- Outlook: No specific earnings or revenue guidance is provided. Management said it expects internally generated cash, borrowing capacity and capital-market access to support operations, capital investment and obligations for the next 12 months. It plans to pursue operating efficiencies and further divestitures.
- Debt and financing: The February and March 2018 Credit Facility amendments replaced and tightened leverage covenants over time, changed asset-sale proceeds requirements and permitted an ABL facility. After quarter-end, on April 3, CHS entered a $1.0 billion ABL facility, subject to borrowing-base capacity, repaid and terminated its $538 million receivables facility, and reduced revolving commitments under the Credit Facility to $425 million. The ABL includes a springing maturity provision tied to certain debt maturities.
- Divestitures: After quarter-end, Bayfront Health Dade City was sold for approximately $9 million. Agreements were signed for sales of Tennova Healthcare–Jamestown, Byrd Regional Hospital and Munroe Regional Medical Center. Other potential sales were under negotiation; completion, timing and proceeds were uncertain. Asset-sale proceeds may be required to repay debt.
- Legal and regulatory exposure: The company disclosed HMA Medicare/Medicaid billing qui tam matters, ongoing DOJ inquiries, an SEC investigation concerning accounts receivable and billing practices, and a shareholder securities case reinstated by the Sixth Circuit. It also described other litigation and investigations. Management said pending matters were not expected to materially affect financial position or liquidity, while cautioning that adverse outcomes could materially affect results or cash flows in a period.
- HMA contingent value rights: The estimated CVR-related legal liability was $259 million at March 31, up from $256 million at year-end. The CVRs have no finite payment date; amounts payable depend on resolution of specified HMA legal matters and could be reduced by losses.
- Impairment and estimates: Q1 included $28 million of impairment and disposal charges on hospitals held for sale. Goodwill was $4.7 billion, following a $1.419 billion goodwill impairment in Q4 2017. Further declines in market value, volumes or operating performance could trigger additional impairment.
- Other risks: The filing highlights substantial debt and upcoming maturities, covenant compliance, reimbursement and healthcare-law changes, Medicaid policy, payor negotiations, patient receivable collection, labor and supply costs, and potential asset-sale execution risks. The company expects the 2019 lease-accounting standard to have a significant balance-sheet and results impact; the amount was still being evaluated.
Important facts for investors to verify
- Reconcile the sharp reported revenue and volume declines with divestitures, same-store trends and the ASC 606 presentation change.
- Track cash conversion, receivable collections and days revenue outstanding, which rose to 58 days from 56 at year-end.
- Assess refinancing needs and maturity timing, covenant headroom as leverage limits tighten, and the ABL borrowing base and springing-maturity conditions.
- Confirm status, timing, net proceeds and debt-prepayment effects of announced and potential hospital sales.
- Monitor developments and potential exposure in HMA legal matters, the SEC investigation, shareholder litigation and the $259 million CVR-related liability.
- Evaluate the assumptions supporting hospital valuations and goodwill, and any further impairment charges.