munity Health Systems(CYH) - 2020 Q3 - Quarterly Report

Part I. Financial Information Financial Statements Unaudited condensed consolidated financial statements for Community Health Systems, Inc. for the three and nine months ended September 30, 2020, and 2019 are presented Condensed Consolidated Statements of Income (Loss) Community Health Systems, Inc. reported significant improvements in net income for both the three and nine months ended September 30, 2020, driven by a gain on early debt extinguishment and pandemic relief funds Condensed Consolidated Statements of Income (Loss) (in millions) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net operating revenues | $3.1B | $3.2B | $8.7B | $9.9B | | Income from operations | $285M | $184M | $690M | $486M | | (Gain) loss from early extinguishment of debt | $(115)M | — | $(111)M | $31M | | Net income (loss) | $128M | $2M | $254M | $(244)M | | Net income (loss) attributable to CHS, Inc. stockholders | $112M | $(17)M | $200M | $(302)M | | Diluted EPS attributable to CHS, Inc. common stockholders | $0.97 | $(0.15) | $1.74 | $(2.66) | Condensed Consolidated Balance Sheets Total assets increased to $16.5 billion as of September 30, 2020, primarily due to a surge in cash, while total liabilities also rose, largely from Medicare accelerated payments Condensed Consolidated Balance Sheet Highlights (in millions) | Account | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $1.8B | $216M | | Total current assets | $4.7B | $3.4B | | Total assets | $16.5B | $15.6B | | Total current liabilities | $3.6B | $2.3B | | Long-term debt | $12.9B | $13.4B | | Total liabilities | $18.0B | $17.2B | | Total stockholders' deficit | $(1.96)B | $(2.14)B | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities surged to $2.1 billion for the nine months ended September 30, 2020, primarily due to Medicare accelerated payments and pandemic relief funds Cash Flow Summary (Nine Months Ended Sep 30, in millions) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $2.1B | $191M | | Net cash provided by (used in) investing activities | $9M | $(103)M | | Net cash used in financing activities | $(504)M | $(127)M | | Net change in cash and cash equivalents | $1.6B | $(39)M | | Cash and cash equivalents at end of period | $1.8B | $157M | Notes to Condensed Consolidated Financial Statements (Unaudited) Detailed notes explain accounting policies, the significant financial impact of COVID-19 including CARES Act funds and Medicare accelerated payments, acquisitions, divestitures, goodwill impairment, and long-term debt structure - During the nine months ended September 30, 2020, the company received approximately $719 million in payments from the Public Health and Social Services Emergency Fund (PHSSEF) and other programs. Of this, $448 million was recognized as a reduction in operating costs and expenses[40] - The company received approximately $1.2 billion in Medicare accelerated payments in April 2020. As of September 30, 2020, about $1.1 billion remains outstanding and is recorded in accrued liabilities[45][46] - During the nine months ended September 30, 2020, the company completed the divestiture of eight hospitals, receiving total net proceeds of approximately $393 million[179] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the material impact of the COVID-19 pandemic on patient volumes and operating results, alongside portfolio rationalization, government stimulus, and critical accounting policies Executive Overview The company continues its portfolio rationalization and deleveraging strategy, with COVID-19 materially affecting operations and patient volumes, despite a rise in net income for Q3 2020 - As of September 30, 2020, the company owned or leased 93 hospitals[169] - The COVID-19 pandemic led to a substantial reduction in elective surgeries, physician office visits, and emergency room volumes starting in March 2020. While volumes have improved from their lows, they have not returned to pre-pandemic levels[173] - During the nine months ended September 30, 2020, the company completed the divestiture of eight hospitals for total net proceeds of approximately $393 million[179] Legislative Overview This section details the impact of healthcare legislation, primarily the Affordable Care Act and recent COVID-19 relief measures like the CARES and PPPHCE Acts - The CARES and PPPHCE Acts authorized $175 billion in funding for healthcare providers through the PHSSEF. The company received approximately $719 million from these and other programs in the first nine months of 2020[213][214] - The company received approximately $1.2 billion in Medicare accelerated payments in April 2020, which must be repaid. Repayment terms were amended effective October 1, 2020, to begin one year after issuance[213][218] - HHS guidance on the use of PHSSEF funds, particularly the definition of 'lost revenues,' has evolved, creating uncertainty. An October 22, 2020 notice amended the definition in a manner more favorable to providers than a September 19, 2020 notice[214][215][217] Results of Operations Net operating revenues decreased for Q3 and the first nine months of 2020 due to divestitures and lower volumes, while net income significantly improved due to debt extinguishment gains and pandemic relief Operating Results Comparison (Three Months Ended Sep 30) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net Operating Revenues | $3.1B | $3.2B | | Same-Store Net Op. Rev. Change | +2.9% | +4.1% | | Consolidated Admissions Change | -13.0% | -9.2% | | Same-Store Admissions Change | -6.2% | +2.4% | | Net Income (Loss) Attributable to CHS | $112M | $(17)M | Operating Results Comparison (Nine Months Ended Sep 30) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net Operating Revenues | $8.7B | $9.9B | | Same-Store Net Op. Rev. Change | -6.3% | +4.3% | | Consolidated Admissions Change | -16.6% | -11.4% | | Same-Store Admissions Change | -9.8% | +1.7% | | Net Income (Loss) Attributable to CHS | $200M | $(302)M | Liquidity and Capital Resources Liquidity significantly improved due to a surge in net cash from operations, driven by Medicare accelerated payments and PHSSEF funds, with substantial available borrowing capacity - Net cash provided by operating activities increased by $1.9 billion for the nine months ended Sep 30, 2020, primarily due to CARES Act relief[256] CARES Act and Other Relief Funds (as of Sep 30, 2020) | Program | Amount Received/Deferred | | :--- | :--- | | PHSSEF & State/Local Programs | ~$719 million | | Medicare Accelerated Payments | ~$1.2 billion | | Deferred Social Security Taxes | ~$91 million | - In February 2020, the company issued $1.462 billion of 6⅝% Senior Secured Notes due 2025 to refinance existing debt. In Q3 2020, it extinguished an additional $261 million of notes through open market repurchases, resulting in a $115 million gain[273][275] Critical Accounting Policies This section outlines the company's most significant accounting policies, which require considerable judgment and estimation, including revenue recognition, patient accounts receivable, goodwill impairment, and professional liability claims - Revenue Recognition: Net operating revenues are recorded at an estimated transaction price, reduced by price concessions for contractual arrangements and patient discounts. The estimation of contractual allowances is a key assumption[292][295] - Patient Accounts Receivable: The company estimates implicit price concessions for self-pay accounts based on historical collection experience. As of September 30, 2020, days revenue outstanding was 53 days, down from 58 days at year-end 2019[298][304] - Goodwill: The company had $4.2 billion of goodwill as of September 30, 2020. No impairment was indicated as of the October 31, 2019 measurement date, but management notes an increased risk of future impairment due to reduced headroom from prior impairments and potential volatility from the COVID-19 pandemic[309][310][311] - Professional Liability Claims: The company is primarily self-insured for professional liability claims, with retentions up to $15 million per claim for policies effective June 1, 2018. It accrues for estimated losses based on historical data and actuarial projections[314][320] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk exposure is to interest rate changes on its variable-rate ABL Facility, though approximately 100% of its debt is fixed-rate as of September 30, 2020 - The company's last interest rate swap agreement terminated on August 30, 2020[335] - As of September 30, 2020, approximately 100% of the company's debt carries a fixed rate of interest[277] Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and procedures were effective, with no material changes in internal control over financial reporting during Q3 2020 - The CEO and CFO concluded that as of September 30, 2020, the company's disclosure controls and procedures were effective[337] - No material changes to internal control over financial reporting occurred during the three months ended September 30, 2020[338] Part II. Other Information Legal Proceedings The company is involved in various legal and regulatory proceedings, including shareholder litigation and government investigations, which are not expected to have a material adverse effect on its financial position - Shareholder Litigation: A securities class action (Caleb Padilla v. CHS) alleges misleading statements artificially inflated stock prices between February 2017 and February 2018. A motion to dismiss is pending[342] - Government Investigations: The DOJ is investigating the company's participation in the Florida Low Income Pool Program, having issued Civil Investigative Demands (CIDs) to eleven affiliated hospitals and the parent company[345] - Commercial Litigation: The company reached a settlement in the Zwick Partners, LP v. Quorum Health Corporation case related to the QHC spin-off, which is awaiting final court approval[346] Risk Factors This section supplements previously disclosed risk factors, focusing on the ongoing and future impacts of the COVID-19 pandemic, including reduced patient volumes, increased costs, and uncertainty regarding government relief programs - The COVID-19 pandemic is expected to continue to materially affect financial performance, with risks including reduced patient volumes, increased labor and supply costs, and potential workforce disruptions[358][367] - Broad economic factors from the pandemic, such as unemployment, may adversely affect payor mix and the ability to collect patient receivables[365] - There is a high degree of uncertainty regarding the implementation and impact of the CARES and PPPHCE Acts, and no assurance as to the total amount of assistance the company will ultimately recognize or receive[368][371] Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2020, the company withheld shares to satisfy tax obligations on vested restricted stock, with no open market repurchases, and maintained approximately $200 million in capacity for dividends or share repurchases - In Q3 2020, 3,263 shares were withheld to satisfy tax obligations on vested restricted stock; no open market repurchases were made[377] - As of September 30, 2020, the company had approximately $200 million of capacity to pay dividends or repurchase stock under its debt agreements[378]