10-Q

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

Commission file number 001-15925

COMMUNITY HEALTH SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware    13-3893191

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer

Identification Number)

4000 Meridian Boulevard

Franklin, Tennessee

  

37067

(Zip Code)

(Address of principal executive offices)     

615-465-7000

(Registrant’s telephone number)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☑    No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ☑    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

Large accelerated filer ☑

  Accelerated filer ☐    Smaller reporting company ☐
 

Non-accelerated filer ☐(Do not check if a smaller reporting company)

   Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐    No ☑

As of April 26, 2018, there were outstanding 116,296,706 shares of the Registrant’s Common Stock, $0.01 par value.

 

 

 


Community Health Systems, Inc.

Form 10-Q

For the Three Months Ended March 31, 2018

 

Part I.   Financial Information    Page
    Item 1.    Financial Statements:     
         Condensed Consolidated Statements of Loss - Three Months Ended March 31, 2018 and March 31, 2017
  (Unaudited)
   2
         Condensed Consolidated Statements of Comprehensive Loss - Three Months Ended March 31, 2018 and
  March 31, 2017 (Unaudited)
   3
         Condensed Consolidated Balance Sheets - March 31, 2018 and December 31, 2017 (Unaudited)    4
         Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2018 and March 31,
  2017 (Unaudited)
   5
         Notes to Condensed Consolidated Financial Statements (Unaudited)    6
    Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    46
    Item 3.    Quantitative and Qualitative Disclosures about Market Risk    70
    Item 4.    Controls and Procedures    70
Part II.   Other Information   
    Item 1.    Legal Proceedings    71
    Item 1A.    Risk Factors    75
    Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    76
    Item 3.    Defaults Upon Senior Securities    76
    Item 4.    Mine Safety Disclosures    76
    Item 5.    Other Information    76
    Item 6.    Exhibits    77
Signatures    79


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF LOSS

(In millions, except share and per share data)

(Unaudited)

 

     Three Months Ended
March 31,
 
     2018     2017  

Operating revenues (net of contractual allowances and discounts)

     $ 5,168

Provision for bad debts

       682
    

 

 

 

Net operating revenues (see Note 1)

   $ 3,689     4,486

Operating costs and expenses:

    

Salaries and benefits

     1,648     2,061

Supplies

     616     749

Other operating expenses

     911     1,057

Government and other legal settlements and related costs

     5     (41

Electronic health records incentive reimbursement

     (1     (6

Rent

     89     109

Depreciation and amortization

     181     236

Impairment and (gain) loss on sale of businesses, net

     28     250
  

 

 

   

 

 

 

Total operating costs and expenses

     3,477     4,415
  

 

 

   

 

 

 

Income from operations

     212     71

Interest expense, net

     228     229

Loss from early extinguishment of debt

     4     21

Equity in earnings of unconsolidated affiliates

     (7     (3
  

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (13     (176

(Benefit from) provision for income taxes

     (7     -  
  

 

 

   

 

 

 

Loss from continuing operations

     (6     (176
  

 

 

   

 

 

 

Discontinued operations, net of taxes:

    

Loss from operations of entities sold or held for sale

     -       (1
  

 

 

   

 

 

 

Loss from discontinued operations, net of taxes

     -       (1
  

 

 

   

 

 

 

Net loss

     (6     (177

Less: Net income attributable to noncontrolling interests

     19     22
  

 

 

   

 

 

 

Net loss attributable to Community Health Systems, Inc. stockholders

   $ (25   $ (199
  

 

 

   

 

 

 

Basic loss per share attributable to Community Health Systems, Inc. common stockholders:

    

Continuing operations

   $ (0.22   $ (1.78

Discontinued operations

     -       (0.01
  

 

 

   

 

 

 

Net loss

   $ (0.22   $ (1.79
  

 

 

   

 

 

 

Diluted loss per share attributable to Community Health Systems, Inc. common stockholders:

    

Continuing operations

   $ (0.22   $ (1.78

Discontinued operations

     -       (0.01
  

 

 

   

 

 

 

Net loss

   $ (0.22   $ (1.79
  

 

 

   

 

 

 

Weighted-average number of shares outstanding:

    

Basic

     112,291,496     111,252,331
  

 

 

   

 

 

 

Diluted

             112,291,496             111,252,331
  

 

 

   

 

 

 
See accompanying notes to the condensed consolidated financial statements.  

 

2


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In millions)

(Unaudited)

     Three Months Ended
March 31,
 
     2018     2017  

Net loss

   $ (6   $ (177

Other comprehensive income (loss), net of income taxes:

    

Net change in fair value of interest rate swaps, net of tax

     18     5

Net change in fair value of available-for-sale securities, net of tax

     (2     3

Amortization and recognition of unrecognized pension cost, net of tax

     1     -  
  

 

 

   

 

 

 

Other comprehensive income

     17     8
  

 

 

   

 

 

 

Comprehensive income (loss)

     11     (169

Less: Comprehensive income attributable to noncontrolling interests

     19     22
  

 

 

   

 

 

 

Comprehensive loss attributable to Community Health Systems, Inc. stockholders

   $             (8   $             (191
  

 

 

   

 

 

 
See accompanying notes to the condensed consolidated financial statements.  

 

3


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

(Unaudited)

     March 31, 2018     December 31, 2017  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 424     $ 563  

Patient accounts receivable (see Note 1)

     2,453       2,384  

Supplies

     442       444  

Prepaid income taxes

     17       17  

Prepaid expenses and taxes

     208       198  

Other current assets

     449       462  
  

 

 

   

 

 

 

Total current assets

     3,993       4,068  
  

 

 

   

 

 

 

Property and equipment

     11,402       11,497  

Less accumulated depreciation and amortization

     (4,431     (4,445
  

 

 

   

 

 

 

Property and equipment, net

     6,971       7,052  
  

 

 

   

 

 

 

Goodwill

     4,704       4,723  
  

 

 

   

 

 

 

Deferred income taxes

     64       62  
  

 

 

   

 

 

 

Other assets, net

     1,579       1,545  
  

 

 

   

 

 

 

Total assets

   $ 17,311     $ 17,450  
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ DEFICIT     

Current liabilities:

    

Current maturities of long-term debt

   $ 37     $ 33  

Accounts payable

     892       967  

Accrued liabilities:

    

Employee compensation

     668       685  

Accrued interest

     231       229  

Other

     435       442  
  

 

 

   

 

 

 

Total current liabilities

     2,263       2,356  
  

 

 

   

 

 

 

Long-term debt

     13,855       13,880  
  

 

 

   

 

 

 

Deferred income taxes

     19       19  
  

 

 

   

 

 

 

Other long-term liabilities

     1,352       1,360  
  

 

 

   

 

 

 

Total liabilities

     17,489       17,615  
  

 

 

   

 

 

 

Redeemable noncontrolling interests in equity of consolidated subsidiaries

     523       527  
  

 

 

   

 

 

 

STOCKHOLDERS’ DEFICIT

    

Community Health Systems, Inc. stockholders’ deficit:

    

Preferred stock, $.01 par value per share, 100,000,000 shares authorized; none issued

     -       -  

Common stock, $.01 par value per share, 300,000,000 shares authorized; 116,301,706 shares issued and outstanding at March 31, 2018, and 114,651,004 shares issued and outstanding at December 31, 2017

     1       1  

Additional paid-in capital

     2,014       2,014  

Accumulated other comprehensive loss

     (16     (21

Accumulated deficit

     (2,774     (2,761
  

 

 

   

 

 

 

Total Community Health Systems, Inc. stockholders’ deficit

     (775     (767

Noncontrolling interests in equity of consolidated subsidiaries

     74       75  
  

 

 

   

 

 

 

Total stockholders deficit

     (701     (692
  

 

 

   

 

 

 

Total liabilities and stockholders deficit

   $ 17,311     $ 17,450  
  

 

 

   

 

 

 
See accompanying notes to the condensed consolidated financial statements.  

 

4


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

     Three Months Ended
March 31,
 
     2018     2017  

Cash flows from operating activities:

    

Net loss

   $ (6   $ (177

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation and amortization

     181       236  

Government and other legal settlements and related costs

     5       (1

Stock-based compensation expense

     4       9  

Impairment and (gain) loss on sale of businesses, net

     28       250  

Loss from early extinguishment of debt

     4       21  

Other non-cash expenses, net

     12       8  

Changes in operating assets and liabilities, net of effects of acquisitions and divestitures:

    

Patient accounts receivable

     (66     11  

Supplies, prepaid expenses and other current assets

     (21     (67

Accounts payable, accrued liabilities and income taxes

     (33     (14

Other

     (2     (34
  

 

 

   

 

 

 

Net cash provided by operating activities

     106       242  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions of facilities and other related businesses

     (8     (2

Purchases of property and equipment

     (170     (146

Proceeds from disposition of hospitals and other ancillary operations

     11       -  

Proceeds from sale of property and equipment

     3       -  

Purchases of available-for-sale securities and equity securities

     (19     (12

Proceeds from sales of available-for-sale securities and equity securities

     34       26  

Increase in other investments

     (28     (37
  

 

 

   

 

 

 

Net cash used in investing activities

     (177     (171
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Repurchase of restricted stock shares for payroll tax withholding requirements

     (1     (5

Deferred financing costs and other debt-related costs

     (11     (40

Proceeds from noncontrolling investors in joint ventures

     -       5  

Redemption of noncontrolling investments in joint ventures

     (3     (4

Distributions to noncontrolling investors in joint ventures

     (23     (28

Borrowings under credit agreements

     10       610  

Issuance of long-term debt

     -       2,200  

Proceeds from receivables facility

     49       26  

Repayments of long-term indebtedness

     (89     (2,826
  

 

 

   

 

 

 

Net cash used in financing activities

     (68     (62
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (139     9  

Cash and cash equivalents at beginning of period

     563       238  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 424     $ 247  
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Interest payments

   $             (212)     $             (279)  
  

 

 

   

 

 

 

Income tax (payments) refunds, net

   $ -     $ -  
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

5


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The unaudited condensed consolidated financial statements of Community Health Systems, Inc. (the “Parent” or “Parent Company”) and its subsidiaries (the “Company”) as of March 31, 2018 and December 31, 2017 and for the three-month periods ended March 31, 2018 and 2017, have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for such periods. All intercompany transactions and balances have been eliminated. The results of operations for the three months ended March 31, 2018, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2018. Certain information and disclosures normally included in the notes to condensed consolidated financial statements have been condensed or omitted as permitted by the rules and regulations of the Securities and Exchange Commission (the “SEC”). The Company believes the disclosures are adequate to make the information presented not misleading. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2017, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2018 (“2017 Form 10-K”).

Noncontrolling interests in less-than-wholly-owned consolidated subsidiaries of the Parent are presented as a component of total equity on the condensed consolidated balance sheets to distinguish between the interests of the Parent Company and the interests of the noncontrolling owners. Noncontrolling interests that are redeemable or may become redeemable at a fixed or determinable price at the option of the holder or upon the occurrence of an event outside of the control of the Company are presented in mezzanine equity on the condensed consolidated balance sheets.

Throughout these notes to the condensed consolidated financial statements, Community Health Systems, Inc., and its consolidated subsidiaries are referred to on a collective basis as the “Company.” This drafting style is not meant to indicate that the publicly traded Parent or any particular subsidiary of the Parent owns or operates any asset, business, or property. The hospitals, operations and businesses described in this filing are owned and operated by distinct and indirect subsidiaries of Community Health Systems, Inc.

Revenue Recognition. On January 1, 2018, the Company adopted the new revenue recognition accounting standard issued by the Financial Accounting Standards Board (“FASB”) and codified in the FASB Accounting Standards Codification (“ASC”) as topic 606 (“ASC 606”). The revenue recognition standard in ASC 606 outlines a single comprehensive model for recognizing revenue as performance obligations, defined in a contract with a customer as goods or services transferred to the customer in exchange for consideration, are satisfied. The standard also requires expanded disclosures regarding the Company’s revenue recognition policies and significant judgments employed in the determination of revenue.

The Company applied the modified retrospective approach to all contracts when adopting ASC 606. As a result, at the adoption of ASC 606 the majority of what was previously classified as the provision for bad debts in the statement of operations is now reflected as implicit price concessions (as defined in ASC 606) and therefore included as a reduction to net operating revenues in 2018. For changes in credit issues not assessed at the date of service, the Company will prospectively recognize those amounts in other operating expenses on the statement of operations. For periods prior to the adoption of ASC 606, the provision for bad debts has been presented consistent with the previous revenue recognition standards that required it to be presented separately as a component of net operating revenues. Additionally, upon adoption of Topic 606 the allowance for doubtful accounts of approximately $3.9 billion as of January 1, 2018 was reclassified as a component of net patient accounts receivable. Other than these changes in presentation on the condensed consolidated statement of operations and condensed consolidated balance sheet, the adoption of ASC 606 did not have a material impact on the consolidated results of operations for the three months ended March 31, 2018, and the Company does not expect it to have a material impact on its consolidated results of operations for the remainder of 2018 and on a prospective basis.

As part of the adoption of ASC 606, the Company elected two of the available practical expedients provided for in the standard. First, the Company did not adjust the transaction price for any financing components as those were deemed to be insignificant. Additionally, the Company expensed all incremental customer contract acquisition costs as incurred as such costs are not material and would be amortized over a period less than one year.

Net Operating Revenues

Upon the adoption of ASC 606, net operating revenues are recorded at the transaction price estimated by the Company to reflect the total consideration due from patients and third-party payors in exchange for providing goods and services in patient care. These services are considered to be a single performance obligation and have a duration of less than one year. Revenues are recorded as

 

6


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

these goods and services are provided. The transaction price, which involves significant estimates, is determined based on the Company’s standard charges for the goods and services provided, with a reduction recorded for price concessions related to third party contractual arrangements as well as patient discounts and other patient price concessions. During the three months ended March 31, 2018, the impact of changes to the inputs used to determine the transaction price was considered immaterial to the current period.

Currently, several states utilize supplemental reimbursement programs for the purpose of providing reimbursement to providers to offset a portion of the cost of providing care to Medicaid and indigent patients. These programs are designed with input from the Centers for Medicare & Medicaid Services and are funded with a combination of state and federal resources, including, in certain instances, fees or taxes levied on the providers. Under these supplemental programs, the Company recognizes revenue and related expenses in the period in which amounts are estimable and collection is reasonably assured. Reimbursement under these programs is reflected in net operating revenues and fees, taxes or other program-related costs are reflected in other operating expenses.

The Company’s net operating revenues during the three months ended March 31, 2018 and 2017 have been presented in the table based on an allocation of the estimated transaction price with the patient between the primary patient classification of insurance coverage (in millions):

 

     Three Months Ended  
     March 31,  
     2018      2017  

Medicare

   $ 1,033      $ 1,234  

Medicaid

     459        587  

Managed Care and other third-party payors

     2,117        2,528  

Self-pay

     80        137  
  

 

 

    

 

 

 

Total

   $             3,689      $             4,486  
  

 

 

    

 

 

 

Patient Accounts Receivable

Patient accounts receivable are recorded at net realizable value based on certain assumptions determined by each payor. For third-party payors including Medicare, Medicaid, and Managed Care, the net realizable value is based on the estimated contractual reimbursement percentage, which is based on current contract prices or historical paid claims data by payor. For self-pay accounts receivable, which includes patients who are uninsured and the patient responsibility portion for patients with insurance, the net realizable value is determined using estimates of historical collection experience without regard to aging category. These estimates are adjusted for estimated conversions of patient responsibility portions, expected recoveries and any anticipated changes in trends.

Patient accounts receivable can be impacted by the effectiveness of the Company’s collection efforts. Additionally, significant changes in payor mix, business office operations, economic conditions or trends in federal and state governmental healthcare coverage could affect the net realizable value of accounts receivable. The Company also continually reviews the net realizable value of accounts receivable by monitoring historical cash collections as a percentage of trailing net operating revenues, as well as by analyzing current period net revenue and admissions by payor classification, aged accounts receivable by payor, days revenue outstanding, the composition of self-pay receivables between pure self-pay patients and the patient responsibility portion of third-party insured receivables and the impact of recent acquisitions and dispositions.

Final settlements for some payors and programs are subject to adjustment based on administrative review and audit by third parties. As a result of these final settlements, the Company has recorded amounts due to third-party payors of $149 million and $156 million as of March 31, 2018 and December 31, 2017, respectively, and these amounts are included in Accrued liabilities-other in the accompanying condensed consolidated balance sheets. Amounts due from third-party payors were $159 million and $153 million as of March 31, 2018 and December 31, 2017, respectively, and are included in other current assets in the accompanying condensed consolidated balance sheets. Substantially all Medicare and Medicaid cost reports are final settled through 2014.

 

7


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

Charity Care

In the ordinary course of business, the Company renders services to patients who were financially unable to pay for hospital care. The Company’s policy is to not pursue collections for such amounts; therefore, the related charges for those patients who are financially unable to pay and that otherwise do not qualify for reimbursement from a governmental program are not reported in net operating revenues, and are thus classified as charity care. The Company determines amounts that qualify for charity care primarily based on the patient’s household income relative to the federal poverty level guidelines, as established by the federal government.

These charity care services are estimated to be $114 million and $115 million for the three months ended March 31, 2018 and 2017, respectively, representing the value (at the Company’s standard charges) of these charity care services that are excluded from net operating revenues. The estimated cost incurred by the Company to provide these charity care services to patients who are unable to pay was approximately $14 million for both of the three-month periods ended March 31, 2018 and 2017. The estimated cost of these charity care services was determined using a ratio of cost to gross charges and applying that ratio to the gross charges associated with providing care to charity patients for the period.

Accounting for the Impairment or Disposal of Long-Lived Assets. During the three months ended March 31, 2018, the Company recorded a total combined impairment charge and loss on disposal of approximately $28 million to reduce the carrying value of certain hospitals that have been deemed held for sale based on the difference between the carrying value of the hospital disposal groups compared to estimated fair value less costs to sell. Included in the carrying value of the hospital disposal groups at March 31, 2018 is a net allocation of approximately $25 million of goodwill allocated from the hospital operations reporting unit goodwill based on a calculation of the disposal groups’ relative fair value compared to the total reporting unit. The Company will continue to evaluate the potential for further impairment of the long-lived assets of underperforming hospitals as well as evaluating offers for potential sale. Based on such analysis, additional impairment charges may be recorded in the future.

During the three months ended March 31, 2017, the Company recorded a total impairment charge of approximately $250 million to reduce the carrying value of certain hospitals that were deemed held for sale based on the difference between the carrying value of the hospital disposal groups compared to estimated fair value less costs to sell. Included in the carrying value of the hospital disposal groups is a net allocation of approximately $192 million of goodwill allocated from the hospital operations reporting unit goodwill based on a calculation of the disposal groups’ relative fair value compared to the total reporting unit.

New Accounting Pronouncements. In January 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-01, which amends the measurement, presentation and disclosure requirements for equity investments, other than those accounted for under the equity method or that require consolidation of the investee. The ASU eliminates the classification of equity investments as available-for-sale with any changes in fair value of such investments recognized in other comprehensive income, and requires entities to measure equity investments at fair value, with any changes in fair value recognized in net income. This ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. To adopt this ASU, companies must record a cumulative-effect adjustment to beginning retained earnings at the beginning of the period of adoption. The Company adopted this ASU on January 1, 2018, and the adoption of this ASU did not have a material impact on its consolidated results of operations or financial position. Upon adoption, the Company recorded a reclassification of $6 million from accumulated other comprehensive loss as a decrease to accumulated deficit.

In February 2016, the FASB issued ASU 2016-02, which amends the accounting for leases, requiring lessees to recognize most leases on their balance sheet with a right-of-use asset and a corresponding lease liability. Leases will be classified as either finance or operating leases, which will impact the expense recognition of such leases over the lease term. The ASU also modifies the lease classification criteria for lessors and eliminates some of the real estate leasing guidance previously applied for certain leasing transactions. This ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company expects to adopt this ASU on January 1, 2019. Because of the number of leases the Company utilizes to support its operations, the adoption of this ASU is expected to have a significant impact on the Company’s consolidated financial position and results of operations. The Company has organized an implementation group of cross-functional departmental management to ensure the completeness of its lease information, analyze the appropriate classification of current leases under the new standard, and develop new processes to execute, approve and classify leases on an ongoing basis. The Company has also engaged outside experts to assist in the development of this plan, as well as the identification and selection of software tools and processes to maintain lease information critical to applying the new standard. Management is currently evaluating the extent of this anticipated impact on the Company’s consolidated financial position and results of operations, and the quantitative and qualitative factors that will impact the Company as part of the adoption of this ASU, as well as any changes to its leasing strategy that may occur because of the changes to the accounting and recognition of leases.

 

8


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

In March 2017, the FASB issued ASU 2017-07, which changes the presentation of the components of net periodic benefit cost for sponsors of defined benefit plans for pensions. Under the changes in this ASU, the service cost component of net periodic benefit cost will be reported in the same income statement line as other employee compensation costs arising from services during the reporting period. The other components of net periodic benefit cost will be presented separately in a line item outside of operating income. This ASU is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The Company adopted this ASU on January 1, 2018, and the adoption of this ASU did not have a material impact on the Company’s consolidated financial position or results of operations.

In August 2017, the FASB issued ASU 2017-12, which was issued to amend hedge accounting recognition and disclosure requirements to improve transparency and simplify the application of hedge accounting for certain hedging instruments. The amendments in this ASU that will have an impact on the Company include simplification of the periodic hedge effectiveness assessment, elimination of the benchmark interest rate concept for interest rate swaps, and enhancement of the ability to use the critical-terms match method for its cash flow hedges of forecasted interest payments. This ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company early adopted this ASU on January 1, 2018, and the adoption of this ASU did not have a material impact on the Company’s consolidated financial position or results of operations.

In February 2018, the FASB issued ASU 2018-02, which was issued to allow a reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects in accumulated other comprehensive income resulting from the enactment of the comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) and corresponding accounting treatment recorded in the fourth quarter of 2017. The ASU is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period for reporting periods for which financial statements have not yet been issued. The Company early adopted this ASU on January 1, 2018, and the Company has elected to reclassify $6 million from accumulated other comprehensive loss as a decrease to accumulated deficit for these stranded tax effects. The stranded tax effects included in this adjustment solely relate to the reduction of the federal corporate tax rate as a result of the Tax Act. The Company’s accounting policy on releasing the income tax effects of amounts from Accumulated other comprehensive loss has been to apply such amounts on a portfolio basis.

2. ACCOUNTING FOR STOCK-BASED COMPENSATION

Stock-based compensation awards have been granted under the Community Health Systems, Inc. Amended and Restated 2000 Stock Option and Award Plan, amended and restated as of March 20, 2013 (the “2000 Plan”), and the Community Health Systems, Inc. Amended and Restated 2009 Stock Option and Award Plan, amended and restated as of March 16, 2016 (the “2009 Plan”). In addition, at the annual meeting of stockholders to be held on May 15, 2018 (the “2018 Annual Meeting”), the Company’s stockholders will be voting on whether or not to approve the further amendment and restatement of the 2009 Plan (the “Amended 2009 Plan”) which was approved by the Board on March 14, 2018, subject to stockholder approval at the 2018 Annual Meeting.

The 2000 Plan allowed for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code (the “IRC”), as well as stock options which do not so qualify, stock appreciation rights, restricted stock, restricted stock units, performance-based shares or units and other share awards. Prior to being amended in 2009, the 2000 Plan also allowed for the grant of phantom stock. Persons eligible to receive grants under the 2000 Plan include the Company’s directors, officers, employees and consultants. All options granted under the 2000 Plan have been “nonqualified” stock options for tax purposes. Generally, vesting of these granted options occurs in one-third increments on each of the first three anniversaries of the award date. Options granted prior to 2005 have a 10-year contractual term, options granted in 2005 through 2007 have an eight-year contractual term and options granted in 2008 through 2011 have a 10-year contractual term. The Company has not granted stock option awards under the 2000 Plan since 2011. Pursuant to the amendment and restatement of the 2000 Plan dated March 20, 2013, no further grants will be awarded under the 2000 Plan.

The 2009 Plan provides (and, if approved by the Company’s stockholders at the 2018 Annual Meeting, the Amended 2009 Plan will provide) for the grant of incentive stock options intended to qualify under Section 422 of the IRC and for the grant of stock options which do not so qualify, stock appreciation rights, restricted stock, restricted stock units, performance-based shares or units and other share awards. Persons eligible to receive grants under the 2009 Plan include the Company’s directors, officers, employees and consultants. To date, all options granted under the 2009 Plan have been “nonqualified” stock options for tax purposes. Generally, vesting of these granted options occurs in one-third increments on each of the first three anniversaries of the award date. Options granted in 2011 or later have a 10-year contractual term. As of March 31, 2018, 1,527,880 shares of unissued common stock were reserved for future grants under the 2009 Plan. In addition, if the Amended 2009 Plan is approved by the Company’s stockholders at

 

9


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

the 2018 Annual Meeting, then 7,000,000 additional shares of unissued common stock would be reserved for future grants under the Amended 2009 Plan.

The exercise price of all options granted under the 2000 Plan and the 2009 Plan has been equal to the fair value of the Company’s common stock on the option grant date.

The following table reflects the impact of total compensation expense related to stock-based equity plans on the reported operating results for the respective periods (in millions):

 

     Three Months Ended
March 31,
 
     2018     2017  

Effect on loss from continuing operations before income taxes

   $ (4   $ (9
  

 

 

   

 

 

 

Effect on net loss

   $ (3   $ (6
  

 

 

   

 

 

 

At March 31, 2018, $21 million of unrecognized stock-based compensation expense related to outstanding unvested restricted stock and restricted stock units (the terms of which are summarized below) was expected to be recognized over a weighted-average period of 24 months. There is no expense to be recognized related to stock options. There were no modifications to awards during the three months ended March 31, 2018 and 2017.

Options outstanding and exercisable under the 2000 Plan and the 2009 Plan as of March 31, 2018, and changes during the three-month period following December 31, 2017, were as follows (in millions, except share and per share data):

 

     Shares     Weighted-
Average
Exercise Price
     Weighted-
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Value as of
March 31,
2018
 

Exercisable at December 31, 2017

             1,115,667     $ 31.56        

Granted

     -       -        

Exercised

     -       -        

Forfeited and cancelled

     (383,666     32.19        
  

 

 

         

Outstanding at March 31, 2018

     732,001     $ 31.23        2.6 years      $ -  
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at March 31, 2018

     732,001     $ 31.23        2.6 years      $ -  
  

 

 

   

 

 

    

 

 

    

 

 

 

No stock options were granted during the three months ended March 31, 2018 and 2017. The aggregate intrinsic value (calculated as the number of in-the-money stock options multiplied by the difference between the Company’s closing stock price on the last trading day of the reporting period ($3.96) and the exercise price of the respective stock options) in the table above represents the amount that would have been received by the option holders had all option holders exercised their options on March 31, 2018. This amount changes based on the market value of the Company’s common stock. There were no options exercised during the three months ended March 31, 2018 and 2017. The aggregate intrinsic value of options vested and expected to vest approximates that of the outstanding options.

The Company has also awarded restricted stock under the 2000 Plan and the 2009 Plan to employees of certain subsidiaries. The restrictions on these shares generally lapse in one-third increments on each of the first three anniversaries of the award date. Certain of the restricted stock awards granted to the Company’s senior executives contain a performance objective that must be met in addition to any time-based vesting requirements. If the performance objective is not attained, the awards will be forfeited in their entirety. For such performance-based awards granted prior to 2017, once the performance objective has been attained, restrictions will lapse in one-third increments on each of the first three anniversaries of the award date. For performance-based awards granted beginning in March 2017, the performance objective is measured cumulatively over a three-year period. With respect to these performance-based awards granted beginning in March 2017, if the performance criteria are met at the end of three years, then the restricted stock award will vest in full. Additionally, for these awards, based on the level of achievement for the performance criteria, the number of shares to be

 

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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

issued in connection with the vesting of the award can be adjusted to decrease or increase the number of shares specified in the original award. Notwithstanding the above-mentioned performance objectives and vesting requirements, the restrictions with respect to restricted stock granted under the 2000 Plan and the 2009 Plan will lapse earlier in the event of death, disability or termination of employment by the Company for any reason other than for cause of the holder of the restricted stock, or change in control of the Company. Restricted stock awards subject to performance standards that have not yet been satisfied are not considered outstanding for purposes of determining earnings per share until the performance objectives have been satisfied.

Restricted stock outstanding under the 2000 Plan and the 2009 Plan as of March 31, 2018, and changes during the three-month period following December 31, 2017, were as follows:

 

     Shares     Weighted-
Average Grant
Date Fair Value
 

Unvested at December 31, 2017

                 2,643,919     $ 16.17  

Granted

     1,911,000       4.58  

Vested

     (981,326     25.73  

Forfeited

     (88,673     13.24  
  

 

 

   

Unvested at March 31, 2018

     3,484,920       7.20  
  

 

 

   

Restricted stock units (“RSUs”) have been granted to the Company’s outside directors under the 2000 Plan and the 2009 Plan. On March 1, 2017, each of the Company’s then-serving outside directors who were expected to stand for re-election at the 2017 Annual Meeting of Stockholders received a grant under the 2009 Plan of 18,498 RSUs. On March 1, 2018, each of the Company’s outside directors received a grant under the 2009 Plan of 37,118 RSUs. Each of the 2017 and 2018 grants had a grant date fair value of approximately $170,000. Vesting of these RSUs occurs in one-third increments on each of the first three anniversaries of the award date or upon the director’s earlier cessation of service on the board, other than for cause.

RSUs outstanding under the 2000 Plan and the 2009 Plan as of March 31, 2018, and changes during the three-month period following December 31, 2017, were as follows:

 

     Shares     Weighted-
Average Grant
Date Fair Value
 

Unvested at December 31, 2017

     172,078     $ 12.78  

Granted

                 296,944       4.58  

Vested

     (71,116     15.51  

Forfeited

     -       -  
  

 

 

   

Unvested at March 31, 2018

     397,906       6.17  
  

 

 

   

3. COST OF REVENUE

Substantially all of the Company’s operating costs and expenses are “cost of revenue” items. Operating costs that could be classified as general and administrative by the Company would include the Company’s corporate office costs at its Franklin, Tennessee office, which were $51 million and $52 million for the three months ended March 31, 2018 and 2017, respectively. Included in these corporate office costs is stock-based compensation of $4 million and $9 million for the three months ended March 31, 2018 and 2017, respectively.

4. USE OF ESTIMATES

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates under different assumptions or conditions.

 

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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

5. ACQUISITIONS AND DIVESTITURES

Acquisitions

The Company accounts for all transactions that represent business combinations using the acquisition method of accounting, where the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquired entity are recognized and measured at their fair values on the date the Company obtains control in the acquiree. Such fair values that are not finalized for reporting periods following the acquisition date are estimated and recorded as provisional amounts. Adjustments to these provisional amounts during the measurement period (defined as the date through which all information required to identify and measure the consideration transferred, the assets acquired, the liabilities assumed and any noncontrolling interests has been obtained, limited to one year from the acquisition date) are recorded when identified. Goodwill is determined as the excess of the fair value of the consideration conveyed in the acquisition over the fair value of the net assets acquired.

During the three months ended March 31, 2018, one or more subsidiaries of the Company paid approximately $8 million to acquire the operating assets and related businesses of certain physician practices, clinics and other ancillary businesses that operate within the communities served by the Company’s affiliated hospitals. In connection with these acquisitions, during the three months ended March 31, 2018, the Company allocated approximately $2 million of the consideration paid to property and equipment and net working capital and the remainder, approximately $6 million consisting of intangible assets that do not qualify for separate recognition, to goodwill. No hospitals were acquired in 2017 or during the three months ended March 31, 2018.

Acquisition and integration expenses related to prospective and closed acquisitions included in other operating expenses on the condensed consolidated statements of loss was less than $1 million during both of the three-month periods ended March 31, 2018 and 2017.

 

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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

Divestitures

During the three months ended March 31, 2018, the Company did not complete any divestitures. The following table provides a summary of hospitals included in continuing operations that the Company divested during the year ended December 31, 2017:

 

Hospital

   Buyer   City, State    Licensed

Beds

   Effective Date  
2017 Divestitures:                     

Highlands Regional Medical Center

   HCA Holdings, Inc. (“HCA”)   Sebring, FL    126      November 1, 2017  

Merit Health Northwest Mississippi

   Curae Health, Inc.   Clarksdale, MS    181      November 1, 2017  

Weatherford Regional Medical Center

   HCA   Weatherford, TX    103      October 1, 2017  

Brandywine Hospital

   Reading Health System   Coatesville, PA    169      October 1, 2017  

Chestnut Hill Hospital

   Reading Health System   Philadelphia, PA    148      October 1, 2017  

Jennersville Hospital

   Reading Health System   West Grove, PA    63      October 1, 2017  

Phoenixville Hospital

   Reading Health System   Phoenixville, PA    151      October 1, 2017  

Pottstown Memorial Medical Center

   Reading Health System   Pottstown, PA    232      October 1, 2017  

Yakima Regional Medical and Cardiac Center

   Regional Health   Yakima, WA    214      September 1, 2017  

Toppenish Community Hospital

   Regional Health   Toppenish, WA    63      September 1, 2017  

Memorial Hospital of York

   PinnacleHealth System   York, PA    100      July 1, 2017  

Lancaster Regional Medical Center

   PinnacleHealth System   Lancaster, PA    214      July 1, 2017  

Heart of Lancaster Regional Medical Center

   PinnacleHealth System   Lititz, PA    148      July 1, 2017  

Carlisle Regional Medical Center

   PinnacleHealth System   Carlisle, PA    165      July 1, 2017  

Tomball Regional Medical Center

   HCA   Tomball, TX    350      July 1, 2017  

South Texas Regional Medical Center

   HCA   Jourdanton, TX    67      July 1, 2017  

Deaconess Hospital

   MultiCare Health System   Spokane, WA    388      July 1, 2017  

Valley Hospital

   MultiCare Health System   Spokane Valley, WA    123      July 1, 2017  

Lake Area Medical Center

   CHRISTUS Health   Lake Charles, LA    88      June 30, 2017  

Easton Hospital

   Steward Health, Inc.   Easton, PA    196      May 1, 2017  

Sharon Regional Health System

   Steward Health, Inc.   Sharon, PA    258      May 1, 2017  

Northside Medical Center

   Steward Health, Inc.   Youngstown, OH    355      May 1, 2017  

Trumbull Memorial Hospital

   Steward Health, Inc.   Warren, OH    311      May 1, 2017  

Hillside Rehabilitation Hospital

   Steward Health, Inc.   Warren, OH    69      May 1, 2017  

Wuesthoff Health System – Rockledge

   Steward Health, Inc.   Rockledge, FL    298      May 1, 2017  

Wuesthoff Health System – Melbourne

   Steward Health, Inc.   Melbourne, FL    119      May 1, 2017  

Sebastian River Medical Center

   Steward Health, Inc.   Sebastian, FL    154      May 1, 2017  

Stringfellow Memorial Hospital

   The Health Care Authority
of the City of Anniston
  Anniston, AL    125      May 1, 2017  

Merit Health Gilmore Memorial

   Curae Health, Inc.   Amory, MS    95      May 1, 2017  

Merit Health Batesville

   Curae Health, Inc.   Batesville, MS    112      May 1, 2017  

A discontinued operation in U.S. GAAP is a disposal that represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. Additional disclosures are required for significant components of the entity that are disposed of or are held for sale but do not qualify as discontinued operations. The divestitures above do not meet the criteria for reporting as discontinued operations and are included in continuing operations for the three months ended March 31, 2018 and 2017.

On May 1, 2017, one or more subsidiaries of the Company sold AllianceHealth Pryor (52 licensed beds) in Pryor, Oklahoma, and its associated assets to Ardent Health Services Inc. for approximately $1 million in cash. This hospital has been reported in the condensed consolidated statements of loss in discontinued operations.

 

13


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

Net operating revenues and loss from discontinued operations reported for the three months ended March 31, 2017 are as follows (in millions):

 

           Three Months Ended       
March 31, 2017
 

Net operating revenues

   $ 25  
  

 

 

 

Loss from operations of entities sold or held for sale before income taxes

     (2

Impairment of hospitals sold or held for sale

     -  

Loss on sale, net

     -  
  

 

 

 

Loss from discontinued operations, before taxes

     (2

Income tax benefit

     (1
  

 

 

 

Loss from discontinued operations, net of taxes

   $ (1
  

 

 

 

The following table discloses amounts included in the condensed consolidated balance sheet for the hospitals classified as held for sale as of March 31, 2018 and December 31, 2017 (in millions):

 

     March 31, 2018      December 31, 2017  

Other current assets

   $ 16      $ 8  

Other assets, net

     66        12  

Accrued liabilities

     5        2  

6. INCOME TAXES

The total amount of unrecognized benefit that would impact the effective tax rate, if recognized, was approximately $7 million as of March 31, 2018. A total of approximately $4 million of interest and penalties is included in the amount of the liability for uncertain tax positions at March 31, 2018. It is the Company’s policy to recognize interest and penalties related to unrecognized benefits in its condensed consolidated statements of loss as income tax expense.

It is possible the amount of unrecognized tax benefit could change in the next 12 months as a result of a lapse of the statute of limitations and settlements with taxing authorities; however, the Company does not anticipate the change will have a material impact on the Company’s condensed consolidated results of operations or condensed consolidated financial position.

The Company, or one of its subsidiaries, files income tax returns in the United States federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to state income tax examinations for years prior to 2014. The Company’s federal income tax returns for the 2009, 2010, 2014 and 2015 tax years are currently under examination by the Internal Revenue Service. The Company believes the results of these examinations will not be material to its consolidated results of operations or consolidated financial position. The Company has extended the federal statute of limitations through December 31, 2018 for Community Health Systems, Inc. for the tax periods ended December 31, 2007, 2008, 2009 and 2010, and through September 6, 2019 for the tax period ended December 31, 2014.

The Company’s effective tax rates were 53.8% and 0.1% for the three months ended March 31, 2018 and 2017, respectively. This increase in the Company’s effective tax rate for the three months ended March 31, 2018, when compared to the three months ended March 31, 2017, was primarily due to the release of a state valuation allowance of approximately $15 million as a result of an enacted tax law change partially offset by approximately $4 million of tax expense recognized on the tax deficiency from stock compensation expense for restricted stock vesting during the three months ended March 31, 2018. Additionally, the rate was impacted by a reduction in the amount of the non-deductible goodwill written off as part of the impairment and gain (loss) on sale of businesses for the three months ended March 31, 2018, compared to the three months ended March 31, 2017, and a disproportionate substantial increase in income from continuing operations before income taxes, when compared to the decrease in net income attributable to noncontrolling interest for those same periods, which is not tax affected in the Company’s condensed consolidated financial statements.

Cash paid for income taxes, net of refunds received, resulted in a net refund of less than $1 million and net cash paid of less than $1 million during the three months ended March 31, 2018 and 2017, respectively.

 

14


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

On December 22, 2017, the U.S. government enacted the Tax Act, which makes broad and complex changes to the U.S. tax code which impacted 2017, including a permanent reduction in the U.S. federal corporate tax rate from 35% to 21% (“Rate Reduction”).

The Tax Act also puts into place new tax laws that will apply prospectively, which include, but are not limited to (1) creating a new limitation on deductible interest expense; (2) changing rules related to uses and limitations of net operating loss carryforwards: and (3) modifying the rules governing the deductibility of certain executive compensation.

In December 2017, the SEC staff issued Staff Accounting Bulletin (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act’s enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

The Company has not completed the accounting for the income tax effects of the Tax Act. At December 31, 2017, the Company recorded a discrete net tax expense of $32 million primarily related to provisional amounts under SAB 118 for the remeasurement of U.S. deferred tax assets and liabilities due to Rate Reduction. No changes were recorded to this provisional estimate during the three months ended March 31, 2018. However, this estimate may differ from the final accounting as supplemental legislation, regulatory guidance or evolving technical interpretations become available.

At March 31, 2018, the Company was not able to reasonably estimate and, therefore, has not recorded a provisional amount for the Tax Act’s impact on certain state valuation allowances. The Company will record a provisional amount in the first reporting period in which a reasonable estimate can be determined. Such timing will depend upon the Company’s ability to obtain, prepare and analyze the necessary information to determine whether a valuation allowance needs to be recognized.

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The changes in the carrying amount of goodwill for the three months ended March 31, 2018 are as follows (in millions):

 

Balance as of December 31, 2017

  

Goodwill

   $ 7,537  

Accumulated impairment losses

     (2,814
  

 

 

 
     4,723  
  

 

 

 

Goodwill acquired as part of acquisitions during current year

     6  

Goodwill allocated to hospitals held for sale

     (25
  

 

 

 

Balance as of March 31, 2018

  

Goodwill

     7,518  

Accumulated impairment losses

     (2,814
  

 

 

 
     $            4,704  
  

 

 

 

Goodwill is allocated to each identified reporting unit, which is defined as an operating segment or one level below the operating segment (referred to as a component of the entity). Management has determined that the Company’s operating segments meet the criteria to be classified as reporting units. At March 31, 2018, the Company had approximately $4.7 billion of goodwill recorded.

Goodwill is evaluated for impairment annually and when an event occurs or circumstances change that, more likely than not, reduce the fair value of the reporting unit below its carrying value. During 2017, the Company adopted ASU 2017-04, which allows a company to record a goodwill impairment when the reporting unit’s carrying value exceeds the fair value determined in step one. Previously, the Company performed its annual goodwill evaluation during the fourth quarter as of September 30, 2017, with an updated evaluation as of November 30, 2017 due to the identification of certain impairment indicators. With the elimination of the

 

15


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

time-intensive step two calculation to determine the implied value of goodwill, the Company has considered the additional benefits of performing the annual goodwill evaluation later in the fourth quarter to coincide with the timing of the next fiscal year’s budgeting and financial projection process. Based on these considerations, the Company has elected to change the annual goodwill impairment measurement date to October 31. The next annual goodwill evaluation will be performed during the fourth quarter of 2018 with an October 31, 2018 measurement date, or sooner if the Company identifies certain indicators of impairment.

The Company estimates the fair value of the related reporting units using both a discounted cash flow model as well as a market multiple model. The cash flow forecasts are adjusted by an appropriate discount rate based on the Company’s estimate of a market participant’s weighted-average cost of capital. These models are both based on the Company’s best estimate of future revenues and operating costs and are reconciled to the Company’s consolidated market capitalization, with consideration of the amount a potential acquirer would be required to pay, in the form of a control premium, in order to gain sufficient ownership to set policies, direct operations and control management decisions.

During the three months ended December 31, 2017, the Company identified certain indicators of impairment occurring following its annual goodwill evaluation that required an interim goodwill impairment evaluation, which was performed as of November 30, 2017. Those indicators were primarily a further decline in the Company’s market capitalization and fair value of the Company’s long-term debt during November 2017. The Company performed an estimated calculation of fair value in step one of the impairment test at November 30, 2017, which indicated that the carrying value of the hospital operations reporting unit exceeded its fair value. As a result of this evaluation and the early adoption of ASU 2017-04, the Company recorded a non-cash impairment charge of $1.419 billion to goodwill during the three months ended December 31, 2017.

The reduction in the Company’s fair value and the resulting goodwill impairment charge recorded during 2017 reduced the carrying value of the Company’s hospital operations reporting unit to an amount equal to its estimated fair value. This increases the risk that future declines in fair value could result in goodwill impairment. The determination of fair value in the Company’s goodwill impairment analysis is based on an estimate of fair value for each reporting unit utilizing known and estimated inputs at the evaluation date. Some of those inputs include, but are not limited to, the most recent price of the Company’s common stock or fair value of long-term debt, estimates of future revenue and expense growth, estimated market multiples, expected capital expenditures, income tax rates, and costs of invested capital. Future estimates of fair value could be adversely affected if the actual outcome of one or more of these assumptions changes materially in the future, including further decline in the Company’s stock price or fair value of long-term debt, lower than expected hospital volumes, higher market interest rates or increased operating costs. Such changes impacting the calculation of fair value could result in a material impairment charge in the future.

The determination of fair value of the Company’s hospital operations reporting unit as part of its goodwill impairment measurement represents a Level 3 fair value measurement in the fair value hierarchy due to its use of internal projections and unobservable measurement inputs.

These impairment charges do not have an impact on the calculation of the Company’s financial covenants under the Company’s Credit Facility.

Intangible Assets

No intangible assets other than goodwill were acquired during the three months ended March 31, 2018. The gross carrying amount of the Company’s other intangible assets subject to amortization was $18 million at both March 31, 2018 and December 31, 2017, and the net carrying amount was $10 million at both March 31, 2018 and December 31, 2017. The carrying amount of the Company’s other intangible assets not subject to amortization was $77 million and $79 million at March 31, 2018 and December 31, 2017, respectively. Other intangible assets are included in other assets, net on the Company’s condensed consolidated balance sheets. Substantially all of the Company’s intangible assets are contract-based intangible assets related to operating licenses, management contracts, tradenames, or non-compete agreements entered into in connection with prior acquisitions.

The weighted-average remaining amortization period for the intangible assets subject to amortization is approximately six years. There are no expected residual values related to these intangible assets. Amortization expense on these intangible assets was less than $1 million and $2 million during the three months ended March 31, 2018 and 2017, respectively. Amortization expense on intangible assets is estimated to be $2 million for the remainder of 2018, $2 million in 2019, $1 million in 2020, $1 million in 2021, $1 million in 2022, $1 million in 2023 and $2 million thereafter.

 

16


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

The gross carrying amount of capitalized software for internal use was approximately $1.2 billion at March 31, 2018 and December 31, 2017, and the net carrying amount was approximately $404 million and $416 million at March 31, 2018 and December 31, 2017, respectively. The estimated amortization period for capitalized internal-use software is generally three years, except for capitalized costs related to significant system conversions, which is generally eight to ten years. There is no expected residual value for capitalized internal-use software. At March 31, 2018, there was approximately $37 million of capitalized costs for internal-use software that is currently in the development stage and will begin amortization once the software project is complete and ready for its intended use. Amortization expense on capitalized internal-use software was $36 million and $49 million during the three months ended March 31, 2018 and 2017, respectively. Amortization expense on capitalized internal-use software is estimated to be $114 million for the remainder of 2018, $108 million in 2019, $74 million in 2020, $48 million in 2021, $33 million in 2022, $17 million in 2023 and $10 million thereafter.

 

17


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

8. EARNINGS PER SHARE

The following table sets forth the components of the numerator and denominator for the computation of basic and diluted (loss) earnings per share for loss from continuing operations, discontinued operations and net loss attributable to Community Health Systems, Inc. common stockholders (in millions, except share data):

 

    Three Months Ended
March 31,
 
    2018     2017  

Numerator:

   

Loss from continuing operations, net of taxes

  $                              (6   $                         (176

Less: Income from continuing operations attributable to noncontrolling interests, net of taxes

    19       22  
 

 

 

   

 

 

 

Loss from continuing operations attributable to Community Health Systems, Inc. common stockholders — basic and diluted

  $                           (25   $                         (198
 

 

 

   

 

 

 
   

Loss from discontinued operations, net of taxes

  $                                -     $                             (1

Less: Loss from discontinued operations attributable to noncontrolling interests, net of taxes

    -       -  
 

 

 

   

 

 

 

Loss from discontinued operations attributable to Community Health Systems, Inc. common stockholders — basic and diluted

  $                                -     $                             (1
 

 

 

   

 

 

 

Denominator:

   

Weighted-average number of shares outstanding — basic

    112,291,496       111,252,331  

Effect of dilutive securities:

   

Restricted stock awards

    -       -  

Employee stock options

    -       -  

Other equity-based awards

    -       -  
 

 

 

   

 

 

 

Weighted-average number of shares outstanding — diluted

                112,291,496                   111,252,331  
 

 

 

   

 

 

 

The Company generated a loss from continuing operations attributable to Community Health Systems, Inc. common stockholders for the three months ended March 31, 2018 and 2017, so the effect of dilutive securities is not considered because their effect would be antidilutive. If the Company had generated income from continuing operations, the effect of restricted stock awards on the diluted shares calculation would have been an increase of 73,361 shares and 78,773 shares during the three months ended March 31, 2018 and 2017, respectively.

 

    Three Months Ended
March 31,
 
    2018      2017  

Dilutive securities outstanding not included in the computation of earnings per share because their effect is antidilutive:

    

Employee stock options and restricted stock awards

                        1,920,349                            3,507,729  
 

 

 

    

 

 

 

 

18


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

9. STOCKHOLDERS’ DEFICIT

Authorized capital shares of the Company include 400,000,000 shares of capital stock consisting of 300,000,000 shares of common stock and 100,000,000 shares of preferred stock. Each of the aforementioned classes of capital stock has a par value of $0.01 per share. Shares of preferred stock, none of which were outstanding as of March 31, 2018, may be issued in one or more series having such rights, preferences and other provisions as determined by the Board of Directors without approval by the holders of common stock.

On November 6, 2015, the Company adopted an open market repurchase program for up to 10,000,000 shares of the Company’s common stock, not to exceed $300 million in repurchases. The repurchase program will expire on the earlier of November 5, 2018, when the maximum number of shares has been repurchased, or when the maximum dollar amount has been expended. During the year ended December 31, 2015, the Company repurchased and retired 532,188 shares at a weighted-average price of $27.31 per share, which is the cumulative number of shares repurchased and retired under this program. No shares were repurchased under this program during the years ended December 31, 2016 and 2017. In addition, no shares were repurchased under this program during the three months ended March 31, 2018.

The Company is a holding company which operates through its subsidiaries. The Company’s Credit Facility and the indentures governing the senior and senior secured notes contain various covenants under which the assets of the subsidiaries of the Company are subject to certain restrictions relating to, among other matters, dividends and distributions, as referenced in the paragraph below.

With the exception of a special cash dividend of $0.25 per share paid by the Company in December 2012, historically, the Company has not paid any cash dividends. Subject to certain exceptions, the Company’s Credit Facility limits the ability of the Company’s subsidiaries to pay dividends and make distributions to the Company, and limits the Company’s ability to pay dividends and/or repurchase stock, to an amount not to exceed $200 million in the aggregate plus an additional $25 million in any particular year plus the aggregate amount of proceeds from the exercise of stock options. The indentures governing the senior and senior secured notes also restrict the Company’s subsidiaries from, among other matters, paying dividends and making distributions to the Company, which thereby limits the Company’s ability to pay dividends and/or repurchase stock. As of March 31, 2018, under the most restrictive test in these agreements (and subject to certain exceptions), the Company has approximately $318 million remaining available with which to pay permitted dividends and/or repurchase shares of stock or its senior and senior secured notes.

 

19


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

The following schedule presents the reconciliation of the carrying amount of total equity, equity attributable to the Company, and equity attributable to the noncontrolling interests for the three-month period ended March 31, 2018 (in millions):

 

                  Community Health Systems, Inc. Stockholders              
     Redeemable
Noncontrolling
Interest
           Common
Stock
     Additional
Paid-In
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Accumulated
Deficit
    Noncontrolling
Interest
    Total
Stockholders’
Deficit
 

Balance, December 31, 2017

   $ 527      $ 1    $ 2,014   $ (21   $ (2,761   $ 75   $ (692

Comprehensive income (loss)

     13        -        -       17     (25     6     (2

Adoption of new accounting standards

     -          -        -       (12     12     -       -  

Distributions to noncontrolling interests

     (17        -        -       -       -       (6     (6

Purchase of subsidiary shares from noncontrolling interests

     (1        -        (2     -       -       -       (2

Other reclassifications of noncontrolling interests

     1        -        -       -       -       (1     (1

Cancellation of restricted stock for tax withholdings on vested shares

     -          -        (2     -       -       -       (2

Share-based compensation

     -          -        4     -       -       -       4
  

 

 

      

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2018

   $ 523      $ 1    $ 2,014   $ (16 )    $ (2,774 )    $ 74   $ (701 ) 
  

 

 

      

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following schedule discloses the effects of changes in the Company’s ownership interest in its less-than-wholly-owned subsidiaries on Community Health Systems, Inc. stockholders’ deficit (in millions):

 

     Three Months Ended
March 31, 2018
 

Net loss attributable to Community Health Systems, Inc. stockholders

   $ (25

Transfers from the noncontrolling interests:

  

Net decrease in Community Health Systems, Inc. paid-in-capital for purchase of subsidiary partnership interests

     (2
  

 

 

 

Net transfers from the noncontrolling interests

     (2
  

 

 

 

Change to Community Health Systems, Inc. stockholders’ deficit from net loss attributable to Community Health Systems, Inc. stockholders and transfers to noncontrolling interests

   $ (27
  

 

 

 

 

20


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

10. LONG-TERM DEBT

Long-term debt, net of unamortized debt issuance costs and discounts or premiums, consists of the following (in millions):

 

         March 31,    
2018
    December 31,
2017
 

Credit Facility:

    

Term G Loan

   $ 1,037     $ 1,037  

Term H Loan

     1,903       1,903  

8% Senior Notes due 2019

     1,925       1,925  

7 18% Senior Notes due 2020

     1,200       1,200  

5 18% Senior Secured Notes due 2021

     1,000       1,000  

6 78% Senior Notes due 2022

     3,000       3,000  

6 14% Senior Secured Notes due 2023

     3,100       3,100  

Receivables Facility

     538       565  

Capital lease obligations

     301       304  

Other

     52       48  

Less: Unamortized deferred debt issuance costs and note premium

     (164     (169
  

 

 

   

 

 

 

Total debt

     13,892       13,913  

Less: Current maturities

     (37     (33
  

 

 

   

 

 

 

Total long-term debt

   $ 13,855     $ 13,880  
  

 

 

   

 

 

 

Credit Facility

The Company’s wholly-owned subsidiary, CHS/Community Health Systems, Inc. (“CHS”), has senior secured financing under a credit facility with a syndicate of financial institutions led by Credit Suisse, as administrative agent and collateral agent (the “Credit Facility”), which at December 31, 2017 included (i) a revolving credit facility with commitments through January 27, 2019 of approximately $929 million, of which a $739 million portion represented extended commitments maturing January 27, 2021 (the “Revolving Facility”), (ii) a Term G facility due 2019 (the “Term G Facility”), and (iii) a Term H facility due 2021 (the “Term H Facility). The Revolving Facility includes a subfacility for letters of credit.

The loans under the Credit Facility bear interest on the outstanding unpaid principal amount at a rate equal to an applicable percentage plus, at CHS’ option, either (a) an Alternate Base Rate (as defined) determined by reference to the greater of (1) the Prime Rate (as defined) announced by Credit Suisse or (2) the NYFRB Rate (as defined) plus 0.50% or (3) the adjusted London Interbank Offered Rate (“LIBOR”) on such day for a three-month interest period commencing on the second business day after such day plus 1% or (b) LIBOR. In addition, the margin in respect of the Revolving Facility will be subject to adjustment determined by reference to a leverage-based pricing grid. Loans in respect of the Revolving Facility currently accrue interest at a rate per annum equal to LIBOR plus 2.50%, in the case of LIBOR borrowings, and Alternate Base Rate plus 1.50%, in the case of Alternate Base Rate borrowings. Prior to the Credit Facility amendment discussed below, the Term G Loan and Term H Loan accrued interest at a rate per annum equal to LIBOR plus 2.75% and 3.00%, respectively, in the case of LIBOR borrowings, and Alternate Base Rate plus 1.75% and 2.00%, respectively, in the case of Alternate Base Rate borrowings. The Term G Loan and the Term H Loan are subject to a 1.00% LIBOR floor and a 2.00% Alternate Base Rate floor.

Under the Term H Facility, CHS is required to make amortization payments in aggregate amounts equal to 1% of the original principal amount of the Term H Facility each year. After December 31, 2016, no additional amortization payments were required to be made under the Term G Facility.

The term loan facility must be prepaid in an amount equal to (1) 100% of the net cash proceeds of certain asset sales and dispositions by the Company and its subsidiaries, subject to certain exceptions and reinvestment rights (as further described below), (2) 100% of the net cash proceeds of issuances of certain debt obligations or receivables-based financing by the Company and its subsidiaries, subject to certain exceptions, and (3) 75%, subject to reduction to a lower percentage based on the Company’s first lien net leverage ratio (as defined in the Credit Facility generally as the ratio of first lien net debt on the date of determination to the Company’s consolidated EBITDA, as defined, for the four quarters most recently ended prior to such date), of excess cash flow (as

 

21


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

defined) for any year, subject to certain exceptions. Voluntary prepayments and commitment reductions are permitted in whole or in part, without any premium or penalty, subject to minimum prepayment or reduction requirements.

The borrower under the Credit Facility is CHS. All of the obligations under the Credit Facility are unconditionally guaranteed by the Company and certain of its existing and subsequently acquired or organized domestic subsidiaries. All obligations under the Credit Facility and the related guarantees are secured by a perfected first priority lien or security interest in substantially all of the assets of the Company, CHS and each subsidiary guarantor, including equity interests held by the Company, CHS or any subsidiary guarantor, but excluding, among others, the equity interests of non-significant subsidiaries, syndication subsidiaries, securitization subsidiaries and joint venture subsidiaries, and subject to the ABL Facility as described in Note 15. Such assets constitute substantially the same assets, subject to certain exceptions, that secure CHS’ obligations under the 2021 Senior Secured Notes (as defined below) and the 6 14% Senior Secured Notes.

CHS has agreed to pay letter of credit fees equal to the applicable percentage then in effect with respect to LIBOR borrowings under the Revolving Facility times the maximum aggregate amount available to be drawn under all letters of credit outstanding under the subfacility for letters of credit. The issuer of any letter of credit issued under the subfacility for letters of credit will also receive a customary fronting fee and other customary processing charges. CHS is obligated to pay commitment fees of 0.50% per annum (subject to adjustment based upon the Company’s leverage ratio) on the unused portion of the Revolving Facility.

The Credit Facility contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting the Company’s and its subsidiaries’ ability, subject to certain exceptions, to, among other things (1) declare dividends, make distributions or redeem or repurchase capital stock, (2) prepay, redeem or repurchase other debt, (3) incur liens or grant negative pledges, (4) make loans and investments and enter into acquisitions and joint ventures, (5) incur additional indebtedness or provide certain guarantees, (6) make capital expenditures, (7) engage in mergers, acquisitions and asset sales, (8) conduct transactions with affiliates, (9) alter the nature of the Company’s businesses, (10) grant certain guarantees with respect to physician practices, (11) engage in sale and leaseback transactions or (12) change the Company’s fiscal year. The Company is also required to comply with specified financial covenants (consisting of a first lien net debt to consolidated EBITDA leverage ratio) and various affirmative covenants. Under the Credit Facility, the first lien net debt to consolidated EBITDA ratio is calculated as the ratio of total first lien debt, less unrestricted cash and cash equivalents, to consolidated EBITDA, as defined in the Credit Facility. The calculation of consolidated EBITDA as defined in the Credit Facility is a trailing 12-month calculation that begins with net income attributable to the Company, with certain pro forma adjustments to consider the impact of material acquisitions or divestitures, and adjustments for interest, taxes, depreciation and amortization, net income attributable to noncontrolling interests, stock compensation expense, restructuring costs, and the financial impact of other non-cash or non-recurring items recorded during any such 12-month period. For the 12-month period ended March 31, 2018, the first lien net debt to consolidated EBITDA ratio financial covenant under the Credit Facility limited the ratio of first lien net debt to consolidated EBITDA, as defined, to less than or equal to 5.25 to 1.00. The Company was in compliance with all such covenants at March 31, 2018, with a first lien net debt to consolidated EBITDA ratio of approximately 4.47 to 1.00.

Events of default under the Credit Facility include, but are not limited to, (1) CHS’ failure to pay principal, interest, fees or other amounts under the credit agreement when due (taking into account any applicable grace period), (2) any representation or warranty proving to have been materially incorrect when made, (3) covenant defaults subject, with respect to certain covenants, to an available cure, (4) bankruptcy and insolvency events, (5) a cross default to certain other debt, (6) certain undischarged judgments (not paid within an applicable grace period), (7) a change of control (as defined), (8) certain ERISA-related defaults and (9) the invalidity or impairment of specified security interests, guarantees or subordination provisions in favor of the administrative agent or lenders under the Credit Facility.

As of March 31, 2018, the availability for additional borrowings under the Credit Facility, subject to certain limitations as set forth in the Credit Facility, was approximately $650 million pursuant to the Revolving Facility, of which $57 million is in the form of outstanding letters of credit. CHS has the ability to amend the Credit Facility to provide for one or more tranches of term loans or increases in the Revolving Facility in an aggregate principal amount of up to $1.5 billion, only $1.0 billion of which is effectively available because of the Company’s additional undertakings in connection with the Loan Modification Agreement. As of March 31, 2018, the weighted-average interest rate under the Credit Facility, excluding swaps, was 5.6%.

 

22


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

2018 Financing Activity

On February 26, 2018, the Credit Facility was amended, with requisite revolving lender approval, to remove the consolidated EBITDA to interest expense ratio financial covenant, to replace the senior secured net debt to consolidated EBITDA ratio financial covenant with a first lien net debt to consolidated EBITDA ratio financial covenant, and to reduce the extended revolving credit commitments to $650 million (for a total of $840 million in revolving credit commitments when combined with the non-extended portion of the revolving credit facility). The new financial covenant provides for a maximum first lien net debt to consolidated EBITDA ratio of 5.25 to 1.0, reducing to 5.0 to 1.0 on July 1, 2018, 4.75 to 1.0 on January 1, 2019, 4.5 to 1.0 on January 1, 2020 and 4.25 to 1.0 on July 1, 2020. In addition, the Company agreed pursuant to the amendment to modify its ability to retain asset sale proceeds, and instead to apply them to prepayments of term loans based on pro forma first lien leverage. To the extent the pro forma ratio of first lien net debt to consolidated EBITDA is greater than or equal to 4.5 to 1.0, 100% of net cash proceeds of asset sales will be applied to prepay term loans; to the extent the pro forma first lien leverage ratio is less than 4.5 to 1.0 but greater than or equal to 4.0 to 1.0, 50% of such proceeds will be applied to prepay term loans; and to the extent the first lien leverage ratio is less than 4.0 to 1.0, there will be no requirement to prepay term loans with such proceeds. These ratios will be determined on a pro forma basis giving appropriate effect to the relevant asset sales and corresponding prepayments of term loans.

On March 23, 2018, the Company and CHS entered into the Fourth Amendment and Restatement Agreement to the Credit Facility (the “Agreement”). In addition to including the changes described in the paragraph above, the Agreement amended the Credit Facility to permit CHS to incur debt under either an Asset-Based Loan (“ABL”) facility in an amount up to $1.0 billion or maintain its Asset-Backed Securitization program. The Revolving Facility would be reduced to $425 million upon the effectiveness of the contemplated ABL facility. The Agreement also reduced the availability for incremental tranches of term loans or increases in the Revolving Facility to $500 million and removed the secured net leverage incurrence test with respect to junior secured debt. Term G Loans will accrue interest at a rate per annum initially equal to LIBOR plus 3.00%, in the case of LIBOR borrowings, and Alternate Base Rate plus 2.00%, in the case of Alternate Base Rate borrowing. Term H Loans will accrue interest at a rate per annum initially equal to LIBOR plus 3.25%, in the case of LIBOR borrowings, and Alternate Base Rate plus 2.25%, in the case of Alternate Base Rate borrowing.

8% Senior Notes due 2019

On November 22, 2011, CHS completed a private offering of $1.0 billion aggregate principal amount of 8% Senior Notes due 2019 (the “8% Senior Notes”). The net proceeds from this issuance, together with available cash on hand, were used to finance the purchase of up to $1.0 billion aggregate principal amount of CHS’ then outstanding 8 78% Senior Notes due 2015 and related fees and expenses. On March 21, 2012, CHS completed an offering of an additional $1.0 billion aggregate principal amount of 8% Senior Notes, which were issued in a private placement (at a premium of 102.5%). The net proceeds from this issuance were used to finance the purchase of approximately $850 million aggregate principal amount of CHS’ then outstanding 8 78% Senior Notes due 2015, to pay related fees and expenses and for general corporate purposes. The 8% Senior Notes bear interest at 8% per annum, payable semiannually in arrears on May 15 and November 15. Interest on the 8% Senior Notes accrues from the date of original issuance. Interest is calculated on the basis of a 360-day year comprised of twelve 30-day months.

CHS is entitled, at its option, to redeem all or a portion of the 8% Senior Notes upon not less than 30 nor more than 60 days’ notice, at the following redemption prices (expressed as a percentage of principal amount on the redemption date), plus accrued and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the periods set forth below:

 

Period

   Redemption Price  

November 15, 2017 to November 14, 2019

     100.000

Pursuant to a registration rights agreement entered into at the time of the issuance of the 8% Senior Notes, as a result of an exchange offer made by CHS, substantially all of the 8% Senior Notes issued in November 2011 and March 2012 were exchanged in May 2012 for new notes (the “8% Exchange Notes”) having terms substantially identical in all material respects to the 8% Senior Notes (except that the 8% Exchange Notes were issued under a registration statement pursuant to the Securities Act of 1933, as amended (the “1933 Act”)). References to the 8% Senior Notes shall also be deemed to include the 8% Exchange Notes unless the context provides otherwise.

 

23


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

7 18% Senior Notes due 2020

On July 18, 2012, CHS completed a public offering of 7 18% Senior Notes due 2020 (the “7 18% Senior Notes”). The net proceeds from this issuance were used to finance the purchase or redemption of $934 million aggregate principal amount of CHS’ then outstanding 8 78% Senior Notes due 2015, to pay for consents delivered in connection with a related tender offer, to pay related fees and expenses, and for general corporate purposes. The 7 18% Senior Notes bear interest at 7.125% per annum, payable semiannually in arrears on July 15 and January 15. Interest on the 7 18% Senior Notes accrues from the date of original issuance. Interest is calculated on the basis of a 360-day year comprised of twelve 30-day months.

CHS is entitled, at its option, to redeem all or a portion of the 7 18% Senior Notes upon not less than 30 nor more than 60 days’ notice, at the following redemption prices (expressed as a percentage of principal amount on the redemption date), plus accrued and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the periods set forth below:

 

Period

           Redemption Price          

July 15, 2017 to July 14, 2018

     101.781

July 15, 2018 to July 14, 2020

     100.000

5 18% Senior Secured Notes due 2021

On January 27, 2014, CHS completed a private offering of $1.0 billion aggregate principal amount of 5 18% Senior Secured Notes due 2021 (the “2021 Senior Secured Notes”). The net proceeds from this issuance were used to finance the HMA merger. The 2021 Senior Secured Notes bear interest at 5.125% per annum, payable semiannually in arrears on February 1 and August 1. Interest on the 2021 Senior Secured Notes accrues from the date of original issuance. Interest is calculated on the basis of a 360-day year comprised of twelve 30-day months. The 2021 Senior Secured Notes are secured by a first-priority lien, subject to a shared lien of equal priority with certain other obligations, including obligations under the Credit Facility and the 6 14% Senior Secured Notes, and subject to prior ranking liens permitted by the indenture governing the 2021 Senior Secured Notes, on substantially the same assets, subject to certain exceptions, that secure CHS’ obligations under the Credit Facility and the 6 14% Senior Secured Notes.

CHS is entitled, at its option, to redeem all or a portion of the 2021 Senior Secured Notes upon not less than 30 nor more than 60 days’ notice, at the following redemption prices (expressed as a percentage of principal amount on the redemption date), plus accrued and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the periods set forth below:

 

Period

           Redemption Price          

February 1, 2018 to January 31, 2019

     102.563

February 1, 2019 to January 31, 2020

     101.281

February 1, 2020 to January 31, 2021

     100.000

Pursuant to a registration rights agreement entered into at the time of the issuance of the 2021 Senior Secured Notes, as a result of an exchange offer made by CHS, all of the 2021 Senior Secured Notes issued in January 2014 were exchanged in October 2014 for new notes (the “2021 Exchange Notes”) having terms substantially identical in all material respects to the 2021 Senior Secured Notes (except that the exchange notes were issued under a registration statement pursuant to the 1933 Act). References to the 2021 Senior Secured Notes shall be deemed to be the 2021 Exchange Notes unless the context provides otherwise.

6 78% Senior Notes due 2022

On January 27, 2014, CHS completed a private offering of $3.0 billion aggregate principal amount of 6 78% Senior Notes due 2022 (the “6 78% Senior Notes”). The net proceeds from this issuance were used to finance the HMA merger. The 6 78% Senior Notes bear interest at 6.875% per annum, payable semiannually in arrears on February 1 and August 1. Interest on the 6 78% Senior Notes accrues from the date of original issuance. Interest is calculated on the basis of a 360-day year comprised of twelve 30-day months.

Prior to February 1, 2018, CHS may redeem some or all of the 6 78% Senior Notes at a redemption price equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest, if any, plus a “make-whole” premium, as described in the indenture governing the 6 78% Senior Notes. After February 1, 2018, CHS is entitled, at its option, to redeem all or a portion of the

 

24


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

6 78% Senior Notes upon not less than 30 nor more than 60 days’ notice, at the following redemption prices (expressed as a percentage of principal amount on the redemption date), plus accrued and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the periods set forth below:

 

Period

           Redemption Price          

February 1, 2018 to January 31, 2019

     103.438

February 1, 2019 to January 31, 2020

     101.719

February 1, 2020 to January 31, 2022

     100.000

Pursuant to a registration rights agreement entered into at the time of the issuance of the 6 78% Senior Notes, as a result of an exchange offer made by CHS, all of the 6 78% Senior Notes issued in January 2014 were exchanged in October 2014 for new notes (the “6 78% Exchange Notes”) having terms substantially identical in all material respects to the 6 78% Senior Notes (except that the exchange notes were issued under a registration statement pursuant to the 1933 Act). References to the 6 78% Senior Notes shall be deemed to be the 6 78% Exchange Notes unless the context provides otherwise.

6 14% Senior Secured Notes due 2023

On March 16, 2017, CHS completed a public offering of $2.2 billion aggregate principal amount of 6 14% Senior Secured Notes. The net proceeds from this issuance were used to finance the purchase or redemption of $700 million aggregate principal amount of CHS’ then outstanding 2018 Senior Secured Notes and related fees and expenses, and the repayment of $1.445 billion of the Term F Facility. On May 12, 2017, CHS completed a tack-on offering of $900 million aggregate principal amount of 6 14% Senior Secured Notes, increasing the total aggregate principal amount of 6 14% Senior Secured Notes to $3.1 billion. A portion of the net proceeds from this issuance were used to finance the repayment of approximately $713 million aggregate principal amount of CHS’ then outstanding Term A Facility and related fees and expenses. The tack-on notes have identical terms, other than issue date and issue price as the 6 14% Senior Secured Notes issued on March 16, 2017. The 6 14% Senior Secured Notes bear interest at 6.250% per annum, payable semiannually in arrears on March 31 and September 30, commencing September 30, 2017. Interest on the 6 14% Senior Secured Notes accrues from the date of original issuance. Interest is calculated on the basis of a 360-day year comprised of twelve 30-day months. The 6 14% Senior Secured Notes are secured by a first-priority lien subject to a shared lien of equal priority with certain other obligations, including obligations under the Credit Facility and the 2021 Senior Secured Notes, and subject to prior ranking liens permitted by the indenture governing the 6 14% Senior Secured Notes on substantially the same assets, subject to certain exceptions, that secure CHS’ obligations under the Credit Facility and the 2021 Senior Secured Notes.

CHS is entitled, at its option, to redeem all or a portion of the 6 14% Senior Secured Notes at any time prior to March 31, 2020, upon not less than 30 nor more than 60 days’ notice, at a price equal to 100% of the principal amount of the 6 14% Senior Secured Notes redeemed plus accrued and unpaid interest, if any, plus a “make-whole” premium, as described in the indenture governing the 6 14% Senior Secured Notes. In addition, CHS may redeem up to 40% of the aggregate principal amount of the 6 14% Senior Secured Notes at any time prior to March 31, 2020 using the net proceeds from certain equity offerings at the redemption price of 106.250% of the principal amount of the 6 14% Senior Secured Notes redeemed, plus accrued and unpaid interest, if any.

CHS may redeem some or all of the 6 14% Senior Secured Notes at any time on or after March 31, 2020 upon not less than 30 nor more than 60 days’ notice, at the following redemption prices (expressed as a percentage of principal amount on the redemption date), plus accrued and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the periods set forth below:

 

Period

           Redemption Price          

March 31, 2020 to March 30, 2021

     103.125

March 31, 2021 to March 30, 2022

     101.563

March 31, 2022 to March 30, 2023

     100.000

 

25


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

Receivables Facility

Prior to the effectiveness of the ABL Facility described in Note 15, CHS, through certain of its subsidiaries, participated in an accounts receivable loan agreement (the “Receivables Facility”) with a group of lenders and banks, Credit Agricolé Corporate and Investment Bank, as a managing agent and as the administrative agent. Patient-related accounts receivable (the “Receivables”) for certain affiliated hospitals served as collateral for the outstanding borrowings under the Receivables Facility. The interest rate on the borrowings was based on the commercial paper rate plus an applicable interest rate spread. The Receivables Facility was scheduled to expire on November 13, 2019. The outstanding borrowings pursuant to the Receivables Facility at March 31, 2018 totaled $538 million on the condensed consolidated balance sheet. At March 31, 2018, the carrying amount of Receivables included in the Receivables Facility totaled approximately $1.6 billion and is included in patient accounts receivable on the condensed consolidated balance sheet.

Loss from Early Extinguishment of Debt

The financing and repayment transactions discussed above resulted in a loss from the early extinguishment of debt of $4 million and an after-tax loss of $3 million for the three months ended March 31, 2018. The financing and repayment transactions discussed above resulted in a loss from the early extinguishment of debt of $21 million and an after-tax loss of $13 million for the three months ended March 31, 2017.

Other Debt

As of March 31, 2018, other debt consisted primarily of other obligations maturing in various installments through 2028.

To limit the effect of changes in interest rates on a portion of the Company’s long-term borrowings, the Company is a party to 8 separate interest swap agreements in effect at March 31, 2018, with an aggregate notional amount for currently effective swaps of $2.2 billion. On each of these swaps, the Company receives a variable rate of interest based on the three-month LIBOR in exchange for the payment of a fixed rate of interest. See Note 11 for additional information regarding these swaps.

The Company paid interest of $212 million and $279 million on borrowings during the three months ended March 31, 2018 and 2017, respectively.

 

26


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of financial instruments has been estimated by the Company using available market information as of March 31, 2018 and December 31, 2017, and valuation methodologies considered appropriate. The estimates presented in the table below are not necessarily indicative of amounts the Company could realize in a current market exchange (in millions):

 

     March 31, 2018      December 31, 2017  
     Carrying      Estimated Fair      Carrying      Estimated Fair  
     Amount      Value      Amount      Value  

Assets:

           

Cash and cash equivalents

   $ 424      $ 424      $ 563      $ 563  

Investments in equity securities

     149        149        -        -  

Available-for-sale securities

     119        119        252        252  

Trading securities

     -        -        37        37  

Liabilities:

           

Contingent Value Right

     3        3        2        2  

Credit Facility

     2,899        2,848        2,902        2,826  

8% Senior Notes

     1,922        1,738        1,922        1,637  

7 18% Senior Notes

     1,192        978        1,192        897  

5 18% Senior Secured Notes due 2021

     979        933        978        902  

6 78% Senior Notes

     2,946        1,743        2,943        1,729  

6 14% Senior Secured Notes

     3,063        2,855        3,061        2,800  

Receivables Facility and other debt

     589        589        611        611  

The carrying value of the Company’s long-term debt in the above table is presented net of unamortized deferred debt issuance costs. The estimated fair value is determined using the methodologies discussed below in accordance with accounting standards related to the determination of fair value based on the U.S. GAAP fair value hierarchy as discussed in Note 12. The estimated fair value for financial instruments with a fair value that does not equal its carrying value is considered a Level 1 valuation. The Company utilizes the market approach and obtains indicative pricing from the administrative agent to the Credit Facility to determine fair values or through publicly available subscription services such as Bloomberg where relevant.

Cash and cash equivalents. The carrying amount approximates fair value due to the short-term maturity of these instruments (less than three months).

Investments in equity securities. Estimated fair value is based on closing price as quoted in public markets.

Available-for-sale securities. Estimated fair value is based on closing price as quoted in public markets or other various valuation techniques.

Trading securities. Estimated fair value is based on closing price as quoted in public markets.

Contingent Value Right. Estimated fair value is based on the closing price as quoted on the public market where the CVR is traded.

Credit Facility. Estimated fair value is based on publicly available trading activity and supported with information from the Company’s bankers regarding relevant pricing for trading activity among the Company’s lending institutions.

8% Senior Notes. Estimated fair value is based on the closing market price for these notes.

7 18% Senior Notes. Estimated fair value is based on the closing market price for these notes.

5 18% Senior Secured Notes due 2021. Estimated fair value is based on the closing market price for these notes.

6 78% Senior Notes. Estimated fair value is based on the closing market price for these notes.

6 14% Senior Secured Notes. Estimated fair value is based on the closing market price for these notes.

 

27


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

Receivables Facility and other debt. The carrying amount of the Receivables Facility and all other debt approximates fair value due to the nature of these obligations.

Interest rate swaps. The fair value of interest rate swap agreements is the amount at which they could be settled, based on estimates calculated by the Company using a discounted cash flow analysis based on observable market inputs and validated by comparison to estimates obtained from the counterparty. The Company incorporates credit valuation adjustments (“CVAs”) to appropriately reflect both its own nonperformance or credit risk and the respective counterparty’s nonperformance or credit risk in the fair value measurements. In adjusting the fair value of its interest rate swap agreements for the effect of nonperformance or credit risk, the Company has considered the impact of any netting features included in the agreements.

The Company assesses the effectiveness of its hedge instruments on a quarterly basis. For the three months ended March 31, 2018 and 2017, the Company completed an assessment of the cash flow hedge instruments and determined the hedges to be highly effective. The Company has also determined that the ineffective portion of the hedges do not have a material effect on the Company’s condensed consolidated financial position, operations or cash flows. The counterparties to the interest rate swap agreements expose the Company to credit risk in the event of nonperformance. However, at March 31, 2018, most of the swap agreements entered into by the Company were in a net liability position such that the Company would be required to make the net settlement payments to the counterparties; the Company does not anticipate nonperformance by those counterparties. The Company does not hold or issue derivative financial instruments for trading purposes.

Interest rate swaps consisted of the following at March 31, 2018:

 

Swap #

   Notional Amount
(in millions)
     Fixed Interest Rate     Termination Date      Asset (Liability)
Fair Value
(in millions)
 
1    $ 400        1.882     August 30, 2019      $ 3  
2      200        2.515     August 30, 2019        -  
3      200        2.613     August 30, 2019        (1
4      300        2.041     August 30, 2020        4  
5      300        2.738     August 30, 2020        (1
6      300        2.892     August 30, 2020        (2
7      300        2.363     January 27, 2021        2  
8      200        2.368     January 27, 2021        1  

The Company is exposed to certain risks relating to its ongoing business operations. The risk managed by using derivative instruments is interest rate risk. Interest rate swaps are entered into to manage interest rate fluctuation risk associated with the term loans in the Credit Facility. Companies are required to recognize all derivative instruments as either assets or liabilities at fair value in the condensed consolidated statement of financial position. The Company designates its interest rate swaps as cash flow hedges. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (“OCI”) and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

Assuming no change in March 31, 2018 interest rates, approximately $9 million of interest expense resulting from the spread between the fixed and floating rates defined in each interest rate swap agreement will be recognized during the next 12 months. If interest rate swaps do not remain highly effective as a cash flow hedge, the derivatives’ gains or losses resulting from the change in fair value reported through OCI will be reclassified into earnings.

 

28


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

The following tabular disclosure provides the amount of pre-tax gain recognized as a component of OCI during the three months ended March 31, 2018 and 2017 (in millions):

 

     Amount of Pre-Tax Gain
Recognized in OCI (Effective Portion)
 
     Three Months Ended March 31,  

Derivatives in Cash Flow Hedging Relationships

   2018      2017  

Interest rate swaps

   $ 17      $ -  

The following tabular disclosure provides the location of the effective portion of the pre-tax loss reclassified from accumulated other comprehensive loss (“AOCL”) into interest expense on the condensed consolidated statements of loss during the three months ended March 31, 2018 and 2017 (in millions):

 

     Amount of Pre-Tax Loss Reclassified
from AOCL into Income (Effective  Portion)
 

Location of Loss Reclassified from

   Three Months Ended March 31,  

AOCL into Income (Effective Portion)            

   2018      2017  

Interest expense, net

   $ 5      $ 9  

The fair values of derivative instruments in the condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017 were as follows (in millions):

 

     Asset Derivatives      Liability Derivatives  
     March 31, 2018      December 31, 2017      March 31, 2018      December 31, 2017  
     Balance
Sheet
Location
     Fair Value      Balance
Sheet
Location
     Fair Value      Balance
Sheet
Location
     Fair Value      Balance
Sheet
Location
     Fair Value  

Derivatives designated as hedging instruments

    

Other
assets,
net
 
 
 
   $ 10       

Other
assets,
net
 
 
 
   $ 1       

Other
long-term
liabilities
 
 
 
   $ 4       

Other
long-term
liabilities
 
 
 
   $ 18  

12. FAIR VALUE

Fair Value Hierarchy

Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the Company utilizes the U.S. GAAP fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumption about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

The inputs used to measure fair value are classified into the following fair value hierarchy:

 

Level 1:

   Quoted market prices in active markets for identical assets or liabilities.
Level 2:    Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3:    Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Level 3 includes values determined using pricing models, discounted cash flow methodologies, or similar techniques reflecting the Company’s own assumptions.

In instances where the determination of the fair value hierarchy measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level

 

29


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment of factors specific to the asset or liability. Transfers between levels within the fair value hierarchy are recognized by the Company on the date of the change in circumstances that requires such transfer. There were no transfers between levels during the three-month periods ending March 31, 2018 or March 31, 2017.

The following table sets forth, by level within the fair value hierarchy, the financial assets and liabilities recorded at fair value on a recurring basis as of March 31, 2018 and December 31, 2017 (in millions):

 

     March 31, 2018              Level 1                      Level 2                      Level 3          

Available-for-sale securities

   $ 119      $ -      $ 119      $ -  

Investments in equity securities

     149        149        -        -  

Fair value of interest rate swap agreements

     10        -        10        -  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 278      $ 149      $ 129      $ -  
  

 

 

    

 

 

    

 

 

    

 

 

 

Contingent Value Right (CVR)

   $ 3      $ 3      $ -      $ -  

CVR-related liability

     259        -        -        259  

Fair value of interest rate swap agreements

     4        -        4        -  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 266      $ 3      $ 4      $ 259  
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2017      Level 1      Level 2      Level 3  

Available-for-sale securities

   $ 252      $ 132      $ 120      $ -  

Trading securities

     37        37        -        -  

Fair value of interest rate swap agreements

     1        -        1        -  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 290      $ 169      $ 121      $ -  
  

 

 

    

 

 

    

 

 

    

 

 

 

Contingent Value Right (CVR)

   $ 2      $ 2      $ -      $ -  

CVR-related liability

     256        -        -        256  

Fair value of interest rate swap agreements

     18        -        18        -  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 276      $ 2      $ 18      $ 256  
  

 

 

    

 

 

    

 

 

    

 

 

 

Investments in Equity Securities, Available-for-sale Securities and Trading Securities

Investments in equity securities and trading securities classified as Level 1 are measured using quoted market prices. Level 2 available-for-sale securities primarily consisted of bonds and notes issued by the United States government and its agencies and domestic and foreign corporations. The estimated fair values of these securities are determined using various valuation techniques, including a multi-dimensional relational model that incorporates standard observable inputs and assumptions such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids/offers and other pertinent reference data.

Contingent Value Right (CVR)

The CVR represents the estimate of the fair value for the contingent consideration paid to HMA shareholders as part of the HMA merger. The CVR is listed on the Nasdaq and the valuation at March 31, 2018 is based on the quoted trading price for the CVR on the last day of the period. Changes in the estimated fair value of the CVR are recorded through the condensed consolidated statements of loss.

 

30


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

CVR-related Liability

The CVR-related legal liability represents the Company’s estimate of fair value at March 31, 2018 of the liability associated with the legal matters assumed in the HMA merger, which are included in other long-term liabilities in the accompanying condensed consolidated balance sheet. This liability did not include those matters previously accrued by HMA as a probable contingency, which were settled and paid during the year ended December 31, 2015. To develop the estimate of fair value, the Company engaged an independent third-party valuation firm to measure the liability. The valuation was made utilizing the Company’s estimates of future outcomes for each legal case and simulating future outcomes based on the timing, probability and distribution of several scenarios using a Monte Carlo simulation model. Other inputs were then utilized for discounting the liability to the measurement date. The HMA legal matters underlying this fair value estimate were evaluated by management to determine the likelihood and impact of each of the potential outcomes. Using that information, as well as the potential correlation and variability associated with each case, a fair value was determined for the estimated future cash outflows to conclude or settle the HMA legal matters included in the analysis, excluding legal fees (which are expensed as incurred). Because of the unobservable nature of the majority of the inputs used to value the liability, the Company has classified the fair value measurement as a Level 3 measurement in the fair value hierarchy.

The fair value of the CVR-related legal liability will be measured each reporting period using similar measurement techniques, updated for the assumptions and facts existing at that date for each of the underlying legal matters. Changes in the fair value of the CVR related legal liability are recorded in future periods through the condensed consolidated statements of loss.

Fair Value of Interest Rate Swap Agreements

The valuation of the Company’s interest rate swap agreements is determined using market valuation techniques, including discounted cash flow analysis on the expected cash flows of each agreement. This analysis reflects the contractual terms of the agreement, including the period to maturity, and uses observable market-based inputs, including forward interest rate curves. The fair value of interest rate swap agreements are determined by netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates based on observable market forward interest rate curves and the notional amount being hedged.

The Company incorporates CVAs to appropriately reflect both its own nonperformance or credit risk and the respective counterparty’s nonperformance or credit risk in the fair value measurements. In adjusting the fair value of its interest rate swap agreements for the effect of nonperformance or credit risk, the Company has considered the impact of any netting features included in the agreements. The CVA on the Company’s interest rate swap agreements had an immaterial effect on the fair value of the related asset or liability at March 31, 2018. The CVA on the Company’s interest rate swap agreements resulted in a decrease in the fair value of the related liability of $1 million and an after-tax adjustment of less than $1 million to OCI at December 31, 2017.

The majority of the inputs used to value the Company’s interest rate swap agreements, including the forward interest rate curves and market perceptions of the Company’s credit risk used in the CVAs, are observable inputs available to a market participant. As a result, the Company has determined that the interest rate swap valuations are classified in Level 2 of the fair value hierarchy.

 

31


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

13. EMPLOYEE BENEFIT PLANS

The Company provides an unfunded Supplemental Executive Retirement Plan (“SERP”) for certain members of its executive management. The Company uses a December 31 measurement date for the benefit obligations and a January 1 measurement date for its net periodic costs for the SERP. Variances from actuarially assumed rates will result in increases or decreases in benefit obligations and net periodic cost in future periods. Benefits expense under the SERP was $2 million and $4 million for the three months ended March 31, 2018 and 2017, respectively. The accrued benefit liability for the SERP totaled $78 million and $83 million at March 31, 2018 and December 31, 2017, respectively, and is included in other long-term liabilities on the condensed consolidated balance sheets. The weighted-average assumptions used in determining net periodic cost for the three-month period ended March 31, 2018 was a discount rate of 3.4% and annual salary increase of 2.0%. The Company had equity investment securities in a rabbi trust generally designated to pay benefits of the SERP in the amounts of $91 million and $99 million at March 31, 2018 and December 31, 2017, respectively. These amounts are included in other assets, net on the condensed consolidated balance sheets.

During the three months ended March 31, 2018, certain members of executive management of the Company that were participants in the SERP retired and met the requirements for payout of their SERP retirement benefit. The SERP payout provisions require payment to the participant in an actuarially determined lump sum amount six months after the participant retires from the Company. Such amounts were paid out of the rabbi trust during the year ended December 31, 2017. As required by the pension accounting rules in U.S. GAAP, the Company recognized a non-cash settlement loss of less than $1 million during the three months ended March 31, 2018, and will recognize a non-cash settlement loss of less than $1 million during the remaining nine months ending December 31, 2018, which represent a pro-rata portion of the accumulated unrecognized actuarial loss out of accumulated other comprehensive loss.

 

32


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

14. CONTINGENCIES

The Company is a party to various legal, regulatory and governmental proceedings incidental to its business. Based on current knowledge, management does not believe that loss contingencies arising from pending legal, regulatory and governmental matters, including the matters described herein, will have a material adverse effect on the condensed consolidated financial position or liquidity of the Company. However, in light of the inherent uncertainties involved in pending legal, regulatory and governmental matters, some of which are beyond the Company’s control, and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to the Company’s results of operations or cash flows for any particular reporting period.

With respect to all legal, regulatory and governmental proceedings, the Company considers the likelihood of a negative outcome. If the Company determines the likelihood of a negative outcome with respect to any such matter is probable and the amount of the loss can be reasonably estimated, the Company records an accrual for the estimated loss for the expected outcome of the matter. If the likelihood of a negative outcome with respect to material matters is reasonably possible and the Company is able to determine an estimate of the possible loss or a range of loss, whether in excess of a related accrued liability or where there is no accrued liability, the Company discloses the estimate of the possible loss or range of loss. However, the Company is unable to estimate a possible loss or range of loss in some instances based on the significant uncertainties involved in, and/or the preliminary nature of, certain legal, regulatory and governmental matters.

In connection with the spin-off of QHC, the Company agreed to indemnify QHC for certain liabilities relating to outcomes or events occurring prior to April 29, 2016, the closing date of the spin-off, including (i) certain claims and proceedings that were known to be outstanding at or prior to the consummation of the spin-off and involved multiple facilities and (ii) certain claims, proceedings and investigations by governmental authorities or private plaintiffs related to activities occurring at or related to QHC’s healthcare facilities prior to the closing date of the spin-off, but only to the extent, in the case of clause (ii), that such claims are covered by insurance policies maintained by the Company, including professional liability and employer practices. In this regard, the Company continues to be responsible for HMA Legal Matters (as defined below) covered by the CVR agreement that relate to QHC’s business, and any amounts payable by the Company in connection therewith will continue to reduce the amount payable by the Company in respect of the CVRs. Notwithstanding the foregoing, the Company is not required to indemnify QHC in respect of any claims or proceedings arising out of or related to the business operations of Quorum Health Resources, LLC at any time or QHC’s compliance with the corporate integrity agreement. Subsequent to the spin-off of QHC, the Office of the Inspector General provided the Company with written assurance that it would look solely at QHC for compliance for its facilities under the Company’s Corporate Integrity Agreement; however, the Office of the Inspector General declined to enter into a separate corporate integrity agreement with QHC. In addition, on August 4, 2017, the Company initiated an arbitration against QHC for unpaid amounts due from QHC related to two transition services agreements entered into between QHC and the Company in connection with the spin-off. QHC filed a counterclaim, claiming breach of contract and tortious interference, among others. The arbitration is set to begin June 18, 2018. The Company believes the counterclaim is without merit and will vigorously defend the case.

HMA Legal Matters and Related CVR

The CVR agreement entitles the holder to receive a one-time cash payment of up to $1.00 per CVR, subject to downward adjustment based on the final resolution of certain litigation, investigations (whether formal or informal, including subpoenas), or other actions or proceedings related to HMA or its affiliates existing on or prior to July 29, 2013 (the date of the Company’s merger agreement with HMA) as more specifically provided in the CVR agreement (all such matters are referred to as the “HMA Legal Matters”), which include, but are not limited to, investigation and litigation matters as previously disclosed by HMA in public filings with the SEC and/or as described in more detail below. The adjustment reducing the ultimate amount paid to holders of the CVR is determined based on the amount of losses incurred by the Company in connection with the HMA Legal Matters as more specifically provided in the CVR agreement, which generally includes the amount paid for damages, costs, fees and expenses (including, without limitation, attorneys’ fees and expenses), and all fines, penalties, settlement amounts, indemnification obligations and other liabilities (all such losses are referred to as “HMA Losses”). If the aggregate amount of HMA Losses exceeds a deductible of $18 million, then the amount payable in respect of each CVR shall be reduced (but not below zero) by an amount equal to the quotient obtained by dividing: (a) the product of (i) all losses in excess of the deductible and (ii) 90%; by (b) the number of CVRs outstanding on the date on which final resolution of the existing litigation occurs. There are 264,544,053 CVRs outstanding as of the date hereof. If total HMA Losses (including HMA Losses that have occurred to date as noted in the table below) exceed approximately $312 million, then the holders of the CVRs will not be entitled to any payment in respect of the CVRs.

 

33


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

The CVRs do not have a finite payment date. Any payments the Company makes under the CVR agreement will be payable within 60 days after the final resolution of the HMA Legal Matters. The CVRs are unsecured obligations of CHS and all payments under the CVRs will be subordinated in right of payment to the prior payment in full of all of the Company’s senior obligations (as defined in the CVR agreement), which include outstanding indebtedness of the Company (subject to certain exceptions set forth in the CVR agreement) and the HMA Losses. The CVR agreement permits the Company to acquire all or some of the CVRs, whether in open market transactions, private transactions or otherwise. As of March 31, 2018, the Company had acquired no CVRs.

The following table represents the impact of legal expenses paid or incurred and settlements paid or deemed final as of March 31, 2018 on the amounts owed to CVR holders (in millions):

 

            Allocation of Expenses and Settlements Paid  
     Total Expenses
and Settlement
Cost
           Deductible            Company’s
Responsibility
at 10%
     Reduction to
Amount Owed
to CVR Holders
at 90%
 

As of December 31, 2017

     $             64        $             18        $             4        $             42  

Settlements paid

     -        -        -        -  

Legal expenses incurred and/or paid during the three months ended March 31, 2018

     -        -        -        -  
  

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2018

     $ 64        $ 18        $ 4        $ 42  
  

 

 

    

 

 

    

 

 

    

 

 

 

Amounts owed to CVR holders are dependent on the ultimate resolution of the HMA Legal Matters and determination of HMA Losses incurred. The settlement of any or all of the claims and expenses incurred on behalf of the Company in defending itself will (subject to the deductible) reduce the amounts owed to the CVR holders.

Underlying the CVR agreement are a number of claims included in the HMA Legal Matters asserted against HMA. The Company has recorded a liability in connection with those claims as part of the acquired assets and liabilities at the date of acquisition pursuant to the provisions of Financial Accounting Standards Board Accounting Standards Codification Topic 805 “Business Combinations.” For the estimate of the Company’s liabilities associated with the HMA Legal Matters that will be covered by the CVR and were not previously accrued by HMA, the Company recorded a liability of $284 million as part of the acquisition accounting for the HMA merger based on the Company’s estimate of fair value of such liabilities as of the date of acquisition. There was a $3 million increase in the liability during the three months ended March 31, 2018 and the estimated fair value of such liabilities, after consideration of amounts paid and current estimates of valuation inputs, was $259 million as of March 31, 2018, which is recorded in other long-term liabilities on the accompanying condensed consolidated balance sheet. As of March 31, 2018, there is currently no accrual recorded for the probable contingency claims underlying the CVR agreement. The estimated liability for probable contingency claims underlying the CVR agreement that was previously recorded by HMA, and reflected in the purchase accounting for HMA as an acquired liability has been settled and was paid during the year ended December 31, 2015. In addition, although legal fees are not included in the amounts currently accrued, such legal fees are taken into account in determining HMA Losses under the CVR agreement. Certain significant HMA Legal Matters underlying these liabilities are discussed in greater detail below.

HMA Matters Recorded at Fair Value

Medicare/Medicaid Billing Lawsuits

Beginning during the week of December 16, 2013, eleven qui tam lawsuits filed by private individuals against HMA were unsealed in various United States district courts. The United States has elected to intervene in all or part of eight of these matters; namely U.S. ex rel. Craig Brummer v. Health Management Associates, Inc. et al. (Middle District Georgia) (“Brummer”); U.S. ex rel. Ralph D. Williams v. Health Management Associates, Inc. et al. (Middle District Georgia) (“Williams”); U.S. ex rel. Scott H. Plantz, M.D. et al. v. Health Management Associates, Inc., et al. (Northern District Illinois) (“Plantz”); U.S. ex rel. Thomas L. Mason, M.D. et al. v. Health Management Associates, Inc. et al. (Western District North Carolina) (“Mason”); U.S. ex rel. Jacqueline Meyer, et al. v. Health Management Associates, Inc., Gary Newsome et al. (“Jacqueline Meyer”) (District of South Carolina); U.S. ex rel. George Miller, et al. v. Health Management Associates, Inc. (Eastern District of Pennsylvania) (“Miller”); U.S. ex rel. Bradley Nurkin v. Health

 

34


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

Management Associates, Inc. et al. (Middle District of Florida) (“Nurkin”); and U.S. ex rel. Paul Meyer v. Health Management Associates, Inc. et al. (Southern District Florida) (“Paul Meyer”). The United States has elected to intervene with respect to allegations in these cases that certain HMA hospitals inappropriately admitted patients and then submitted reimbursement claims for treating those individuals to federal healthcare programs in violation of the False Claims Act or that certain HMA hospitals had inappropriate financial relationships with physicians which violated the Stark law, the Anti-Kickback Statute, and the False Claims Act. Certain of these complaints also allege the same actions violated various state laws which prohibit false claims. The United States has declined to intervene in three of the eleven matters, namely U.S. ex rel. Anita France, et al. v. Health Management Associates, Inc. (Middle District Florida) (“France”) which involved allegations of wrongful billing and was settled; U.S. ex rel. Sandra Simmons v. Health Management Associates, Inc. et al. (Eastern District Oklahoma) (“Simmons”) which alleges unnecessary surgery by an employed physician and which was settled as to all allegations except alleged wrongful termination; and U.S. ex rel. David Napoliello, M.D. v. Health Management Associates, Inc. (Middle District Florida) (“Napoliello”) which alleges inappropriate admissions. On April 3, 2014, the Multi District Litigation Panel ordered the transfer and consolidation for pretrial proceedings of the eight intervened cases, plus the Napoliello matter, to the District of the District of Columbia under the name In Re: Health Management Associates, Inc. Qui Tam Litigation. On June 2, 2014, the court entered a stay of this matter until October 6, 2014, which was subsequently extended until February 27, 2015, May 27, 2015, September 25, 2015, January 25, 2016, May 25, 2016, September 26, 2016, December 27, 2016, April 27, 2017, August 28, 2017, December 18, 2017, March 19, 2018 and now until June 18, 2018. The Company intends to defend against the allegations in these matters, but also continues to cooperate with the government in the ongoing investigation of these allegations. The Company has been in discussions with the Civil Division of the United States Department of Justice (“DOJ”) regarding the resolutions of these matters. During the first quarter of 2015, the Company was informed that the Criminal Division continues to investigate former executive-level employees of HMA, and continues to consider whether any HMA entities should be held criminally liable for the acts of the former HMA employees. The Company is voluntarily cooperating with these inquiries and has not been served with any subpoenas or other legal process.

Other Probable Contingencies

Becker v. Community Health Systems, Inc. d/b/a Community Health Systems Professional Services Corporation d/b/a Community Health Systems d/b/a Community Health Systems PSC, Inc. d/b/a Rockwood Clinic P.S. and Rockwood Clinic, P.S. (Superior Court, Spokane, Washington). This suit was filed on February 29, 2012, by a former chief financial officer at Rockwood Clinic in Spokane, Washington. Becker claims he was wrongfully terminated for allegedly refusing to certify a budget for Rockwood Clinic in 2012. On February 29, 2012, he also filed an administrative complaint with the Department of Labor, Occupational Safety and Health Administration alleging that he is a whistleblower under Sarbanes-Oxley, which was dismissed by the agency and was appealed to an administrative law judge for a hearing that occurred on January 19-26, 2016. In a decision dated November 9, 2016, the law judge awarded Becker approximately $1.9 million for front pay, back pay and emotional damages with attorney fees to be later determined. The Company has appealed the award to the Administrative Review Board and is awaiting its decision. At a hearing on July 27, 2012, the trial court dismissed Community Health Systems, Inc. from the state case and subsequently certified the state case for an interlocutory appeal of the denial to dismiss his employer and the management company. The appellate court accepted the interlocutory appeal, and it was argued on April 30, 2014. On August 14, 2014, the court denied the Company’s appeal. On October 20, 2014, the Company filed a petition to review the denial with the Washington Supreme Court. The appeal was accepted and oral argument was heard on June 9, 2015. On September 15, 2015, the court denied the Company’s appeal and remanded to the trial court; a previous trial setting of September 12, 2016 has been vacated and not reset. The Company continues to vigorously defend these actions.

 

35


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

Summary of Recorded Amounts

The table below presents a reconciliation of the beginning and ending liability balances (in millions) during the three months ended March 31, 2018, with respect to the Company’s fair value determination in connection with HMA Legal Matters that were not previously accrued by HMA, and the remaining contingencies of the Company in respect of which an accrual has been recorded. In addition, future legal fees (which are expensed as incurred) and costs related to possible indemnification and criminal investigation matters associated with the HMA Legal Matters have not been accrued or included in the table below. Furthermore, although not accrued, such costs, if incurred, will be taken into account in determining the total amount of reductions applied to the amounts owed to CVR holders.

 

     CVR-Related
Liability

at Fair Value
     Other
Probable
Contingencies
 

Balance as of December 31, 2017

   $ 256      $ 14  

Expense

     3        5  

Cash payments

     -        (2
  

 

 

    

 

 

 

Balance as of March 31, 2018

   $ 259      $ 17  
  

 

 

    

 

 

 

With respect to the “Other Probable Contingencies” referenced in the chart above, in accordance with applicable accounting guidance, the Company establishes a liability for litigation, regulatory and governmental matters for which, based on information currently available, the Company believes that a negative outcome is known or is probable and the amount of the loss is reasonably estimable. For all such matters (whether or not discussed in this contingencies footnote), such amounts have been recorded in other accrued liabilities on the consolidated balance sheet and are included in the table above in the “Other Probable Contingencies” column. Due to the uncertainties and difficulty in predicting the ultimate resolution of these contingencies, the actual amount could differ from the estimated amount reflected as a liability on the consolidated balance sheet.

In the aggregate, attorneys’ fees and other costs incurred but not included in the table above related to probable contingencies, and CVR-related contingencies accounted for at fair value, totaled less than $1 million for both of the three-month periods ended March 31, 2018 and 2017, and are included in other operating expenses in the accompanying condensed consolidated statements of loss.

Matters for which an Outcome Cannot be Assessed

For the following legal matter, due to the uncertainties surrounding the ultimate outcome of the case, the Company cannot at this time assess what the outcome may be and is further unable to determine any estimate of loss or range of loss.

Class Action Shareholder Federal Securities Cases. Three purported class action cases have been filed in the United States District Court for the Middle District of Tennessee; namely, Norfolk County Retirement System v. Community Health Systems, Inc., et al., filed May 9, 2011; De Zheng v. Community Health Systems, Inc., et al., filed May 12, 2011; and Minneapolis Firefighters Relief Association v. Community Health Systems, Inc., et al., filed June 21, 2011. All three seek class certification on behalf of purchasers of the Company’s common stock between July 27, 2006 and April 11, 2011 and allege that misleading statements resulted in artificially inflated prices for the Company’s common stock. In December 2011, the cases were consolidated for pretrial purposes and NYC Funds and its counsel were selected as lead plaintiffs/lead plaintiffs’ counsel. In lieu of ruling on the Company’s motion to dismiss, the court permitted the plaintiffs to file a first amended consolidated class action complaint, which was filed on October 5, 2015. The Company’s motion to dismiss was filed on November 4, 2015 and oral argument was held on April 11, 2016. The Company’s motion to dismiss was granted on June 16, 2016 and on June 27, 2016, the plaintiffs filed a notice of appeal to the Sixth Circuit Court of Appeals. The matter was heard on May 3, 2017. On December 13, 2017, the Sixth Circuit reversed the trial court’s dismissal of the case and remanded it to the District Court. The Company filed a petition for a writ of certioriari to the United States Supreme Court on April 18, 2018 seeking review of the Sixth Circuit’s decision. The Company also filed a renewed partial motion to dismiss on February 9, 2018 in the District Court. The Company believes this consolidated matter is without merit and will vigorously defend this case.

 

36


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

15. SUBSEQUENT EVENTS

The Company has evaluated all material events occurring subsequent to the balance sheet date for events requiring disclosure or recognition in the condensed consolidated financial statements.

Effective April 1, 2018, one or more subsidiaries of the Company sold Bayfront Health Dade City (120 licensed beds) in Dade City, Florida, and its associated assets to subsidiaries of Adventist Health System for approximately $9 million in cash, which was received at the preliminary closing on March 30, 2018.

On April 3, 2018, the Company and CHS entered into an asset-based loan (ABL) credit agreement (the “ABL Credit Agreement”) (as further described below), with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders and other agents party thereto. Pursuant to the ABL Credit Agreement, the lenders have extended to CHS a revolving asset-based loan facility (the “ABL Facility”) in the maximum aggregate principal amount of $1.0 billion, subject to borrowing base capacity. The ABL facility includes borrowing capacity available for letters of credit of $50 million. CHS and all domestic subsidiaries of the CHS that guarantee the CHS’ other outstanding senior and senior secured indebtedness guarantee the obligations of CHS under the ABL Facility. In conjunction with the closing of the ABL Facility, the wholly-owned special-purpose entity that owned the Receivables pledged under the previous Receivables Facility became a subsidiary guarantor under the Credit Facility and CHS’ outstanding notes. Subject to certain exceptions, all obligations under the ABL Facility and the related guarantees are secured by a perfected first-priority security interest in substantially all of the Receivables, deposit, collection and other accounts and contract rights, books, records and other instruments related to the foregoing of the Company, CHS and the guarantors as well as a perfected junior-priority security interest in substantially all of the other assets of the Company, CHS and the guarantors, subject to customary exceptions and intercreditor arrangements. The revolving credit commitments under the Credit Facility were reduced to $425 million upon the effectiveness of the ABL Facility. In connection with entering into the ABL Credit Agreement and the ABL Facility, the Company repaid in full and terminated its Receivables Facility.

On April 18, 2018, one or more subsidiaries of the Company signed a definitive agreement for the sale of Munroe Regional Medical Center (421 licensed beds) in Ocala, Florida, and its associated assets to subsidiaries of Adventist Health System.

 

37


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

 

16. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The Senior Notes due 2019, 2020 and 2022, which are senior unsecured obligations of CHS, the 5 18% Senior Secured Notes due 2021, and the 6 14% Senior Secured Notes due 2023 (collectively, “the Notes”) are guaranteed on a senior basis by the Company and by certain of its existing and subsequently acquired or organized 100% owned domestic subsidiaries. In addition, equity interests in non-guarantors have been pledged as collateral except for four hospitals owned jointly with non-profit, health organizations. The Notes are fully and unconditionally guaranteed on a joint and several basis, with exceptions considered customary for such guarantees, limited to the release of the guarantee when a subsidiary guarantor’s capital stock is sold, or a sale of all of the subsidiary guarantor’s assets used in operations. The following condensed consolidating financial statements present Community Health Systems, Inc. (as parent guarantor), CHS (as the issuer), the subsidiary guarantors, the subsidiary non-guarantors and eliminations. These condensed consolidating financial statements have been prepared and presented in accordance with SEC Regulation S-X Rule 3-10 “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.”

The accounting policies used in the preparation of this financial information are consistent with those elsewhere in the condensed consolidated financial statements of the Company, except as noted below:

 

    Intercompany receivables and payables are presented gross in the supplemental condensed consolidating balance sheets.

 

    Cash flows from intercompany transactions are presented in cash flows from financing activities, as changes in intercompany balances with affiliates, net.

 

    Income tax expense is allocated from the parent guarantor to the income producing operations (other guarantors and non-guarantors) and the issuer through stockholders’ deficit. As this approach represents an allocation, the income tax expense allocation is considered non-cash for statement of cash flow purposes.

 

    Interest expense, net has been presented to reflect net interest expense and interest income from outstanding long-term debt and intercompany balances.

The Company’s intercompany activity consists primarily of daily cash transfers for purposes of cash management, the allocation of certain expenses and expenditures paid for by the Parent on behalf of its subsidiaries, and the push down of investment in its subsidiaries. This activity also includes the intercompany transactions between consolidated entities as part of the Receivables Facility that is further discussed in Note 10. The Company’s subsidiaries generally do not purchase services from one another; thus, the intercompany transactions do not represent revenue generating transactions. All intercompany transactions eliminate in consolidation.

From time to time, subsidiaries of the Company sell and/or repurchase noncontrolling interests in consolidated subsidiaries, which may change subsidiaries between guarantors and non-guarantors. Amounts for prior periods have been revised to reflect the status of guarantors and non-guarantors as of March 31, 2018.

 

38


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

Condensed Consolidating Statement of Loss

Three Months Ended March 31, 2018

 

     Parent
Guarantor
     Issuer      Other
Guarantors
     Non -
Guarantors
     Eliminations      Consolidated  
                   (In millions)                

Net operating revenues

   $ -      $ (5)      $ 2,243    $ 1,451    $ -      $ 3,689

Operating costs and expenses:

                 

Salaries and benefits

     -        -        824      824      -        1,648

Supplies

     -        -        400      216      -        616

Other operating expenses

     -        -        601      310      -        911

Government and other legal settlements and related costs

     -        -        5      -        -        5

Electronic health records incentive reimbursement

     -        -        (1)        -        -        (1)  

Rent

     -        -        47      42      -        89

Depreciation and amortization

     -        -        113      68      -        181

Impairment and (gain) loss on sale of businesses, net

     -        -        16      12      -        28
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating costs and expenses

     -        -        2,005      1,472      -        3,477
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(Loss) income from operations

     -        (5)        238      (21)        -        212

Interest expense, net

     -        91      136      1      -        228

Loss from early extinguishment of debt

     -        4      -        -        -        4

Equity in earnings of unconsolidated affiliates

     25      (33)        21      -        (20)        (7)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(Loss) income from continuing operations before income taxes

     (25)        (67)        81      (22)        20      (13)  

(Benefit from) provision for income taxes

     -        (42)        47      (12)        -        (7)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(Loss) income from continuing operations

     (25)        (25)        34      (10)        20      (6)  

Discontinued operations, net of taxes:

                 

Loss from discontinued operations, net of taxes

     -        -        -        -        -        -  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net (loss) income

     (25)        (25)        34        (10)      20        (6)

Less: Net income attributable to noncontrolling interests

     -        -        -        19        -        19  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net (loss) income attributable to Community Health Systems, Inc. stockholders

   $ (25)      $         (25)      $ 34    $ (29)      $ 20    $ (25)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

39


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

Condensed Consolidating Statement of Loss  
Three Months Ended March 31, 2017  
     Parent
  Guarantor  
            Issuer             Other
  Guarantors  
    Non -
  Guarantors  
      Eliminations         Consolidated    
     (In millions)  

Operating revenues (net of contractual allowances and discounts)

   $ -     $ (6   $ 2,879   $ 2,295   $ -     $ 5,168

Provision for bad debts

     -       -       489     193     -       682
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating revenues

     -       (6     2,390     2,102     -       4,486

Operating costs and expenses:

            

Salaries and benefits

     -       -       927     1,134     -       2,061

Supplies

     -       -       430     319     -       749

Other operating expenses

     -       -       599     458     -       1,057

Government and other legal settlements and related costs

     -       -       (41     -       -       (41

Electronic health records incentive reimbursement

     -       -       (2     (4     -       (6

Rent

     -       -       51     58     -       109

Depreciation and amortization

     -       -       124     112     -       236

Impairment and (gain) loss on sale of businesses, net

     -       -       41     209     -       250
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     -       -       2,129     2,286     -       4,415
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     -       (6     261     (184     -       71

Interest expense, net

     -       70     147     12     -       229

Loss from early extinguishment of debt

     -       21     -       -       -       21

Equity in earnings of unconsolidated affiliates

     199     121     163     -       (486     (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (199     (218     (49     (196     486     (176

Provision for (benefit from) income taxes

     -       (19     71     (52     -       -  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (199     (199     (120     (144     486     (176

Discontinued operations, net of taxes:

            

Loss from operations of entities sold or held for sale

     -       -       (3     2     -       (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of taxes

     -       -       (3     2     -       (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (199     (199     (123     (142     486     (177

Less: Net income attributable to noncontrolling interests

     -       -       -       22     -       22
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Community Health Systems, Inc. stockholders

   $ (199   $ (199   $ (123   $ (164   $ 486   $ (199
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

40


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

Condensed Consolidating Statement of Comprehensive Loss  
Three Months Ended March 31, 2018  
     Parent
Guarantor
    Issuer     Other
Guarantors
    Non -
Guarantors
    Eliminations     Consolidated  
     (In millions)  

Net (loss) income

   $ (25   $ (25   $ 34   $ (10   $ 20   $ (6

Other comprehensive income (loss), net of income taxes:

            

Net change in fair value of interest rate swaps, net of tax

     18     18     -       -       (18     18

Net change in fair value of available-for-sale securities, net of tax

     (2     (2     (2     -       4     (2

Amortization and recognition of unrecognized pension cost components, net of tax

     1     1     1     -       (2     1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     17     17     (1     -       (16     17
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

     (8     (8     33     (10     4     11

Less: Comprehensive income attributable to noncontrolling interests

     -       -       -       19     -       19
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income attributable to Community Health Systems, Inc. stockholders

   $ (8   $         (8)     $ 33   $ (29   $ 4   $ (8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Condensed Consolidating Statement of Comprehensive Loss  
Three Months Ended March 31, 2017  
     Parent
Guarantor
    Issuer     Other
Guarantors
    Non -
Guarantors
    Eliminations     Consolidated  
     (In millions)  

Net (loss) income

   $ (199   $ (199   $ (123   $ (142   $ 486   $ (177

Other comprehensive income, net of income taxes:

            

Net change in fair value of interest rate swaps, net of tax

     5     5     -       -       (5     5

Net change in fair value of available-for-sale securities, net of tax

     3     3     3     -       (6     3

Amortization and recognition of unrecognized pension cost components, net of tax

     -       -       -       -       -       -  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     8     8     3     -       (11     8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

     (191     (191     (120     (142     475     (169

Less: Comprehensive income attributable to noncontrolling interests

     -       -       -       22     -       22
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income attributable to

            

Community Health Systems, Inc. stockholders

   $ (191   $         (191)     $ (120   $ (164   $ 475   $ (191
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

41


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

Condensed Consolidating Balance Sheet  
March 31, 2018  
     Parent           Other     Non -              
     Guarantor     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  
     (In millions)  
       ASSETS          

Current assets:

            

Cash and cash equivalents

   $ -     $ -     $ 334   $ 90   $ -     $ 424

Patient accounts receivable

     -       -       439     2,014     -       2,453

Supplies

     -       -       287     155     -       442

Prepaid income taxes

     17     -       -       -       -       17

Prepaid expenses and taxes

     -       -       153     55     -       208

Other current assets

     -       1     130     318     -       449
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     17     1     1,343     2,632     -       3,993
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany receivable

     -       13,578     4,489     7,184     (25,251     -  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment, net

     -       -       4,397     2,574     -       6,971
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill

         2,869     1,835     -       4,704
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deferred income taxes

     64     -       -       -       -       64
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other assets, net

     -       51     1,635     1,024     (1,131     1,579
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment in subsidiaries

     -       21,133     12,308     -       (33,441     -  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 81   $ 34,763   $ 27,041   $ 15,249   $ (59,823   $ 17,311
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     LIABILITIES AND DEFICIT        

Current liabilities:

            

Current maturities of long-term debt

   $ -     $ -     $ 29   $ 8   $ -     $ 37

Accounts payable

     -       -       588     304     -       892

Accrued interest

     -       229     -       2     -       231

Accrued liabilities

     -       -       614     489     -       1,103
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     -       229     1,231     803     -       2,263
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt

     -       13,002     214     639     -       13,855
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payable

     828     21,120     24,049     13,435     (59,432     -  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deferred income taxes

     19     -       -       -       -       19
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other long-term liabilities

     9     1,121     983     370     (1,131     1,352
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     856     35,472     26,477     15,247     (60,563     17,489
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Redeemable noncontrolling interests in equity of consolidated subsidiaries

     -       -       -       523     -       523
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deficit:

            

Community Health Systems, Inc. stockholders’ deficit:

            

Common stock

     1     -       -       -       -       1

Additional paid-in capital

     2,014     296     (245     1,460     (1,511     2,014

Accumulated other comprehensive loss

     (16     (16     (9     (9     34     (16

(Accumulated deficit) retained earnings

     (2,774     (989     818     (2,046     2,217     (2,774
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Community Health Systems, Inc. stockholders’ deficit

     (775     (709     564     (595     740     (775

Noncontrolling interests in equity of consolidated subsidiaries

     -       -       -       74     -       74
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deficit

     (775     (709     564     (521     740     (701
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and deficit

   $ 81   $ 34,763   $ 27,041   $ 15,249   $ (59,823   $ 17,311
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

42


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

Condensed Consolidating Balance Sheet  
December 31, 2017  
     Parent           Other     Non -              
     Guarantor     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  
     (In millions)  
       ASSETS          

Current assets:

            

Cash and cash equivalents

   $ -     $ -     $ 497   $ 66   $ -     $ 563

Patient accounts receivable, net of allowance for doubtful accounts

     -       -       355     2,029     -       2,384

Supplies

     -       -       288     156     -       444

Prepaid income taxes

     17     -       -       -       -       17

Prepaid expenses and taxes

     -       -       146     52     -       198

Other current assets

     -       -       152     310     -       462
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     17     -       1,438     2,613     -       4,068
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany receivable

     -       13,381     5,857     7,109     (26,347     -  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment, net

     -       -       4,448     2,604     -       7,052
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill

     -       -       2,882     1,841     -       4,723
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deferred income taxes

     62     -       -       -       -       62
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other assets, net

     15     39     1,594     939     (1,042     1,545
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment in subsidiaries

     -       21,717     10,890     -       (32,607     -  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 94   $ 35,137   $ 27,109   $ 15,106   $ (59,996   $ 17,450
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     LIABILITIES AND DEFICIT        

Current liabilities:

            

Current maturities of long-term debt

   $ -     $ -     $ 25   $ 8   $ -     $ 33

Accounts payable

     -       -       663     304     -       967

Accrued interest

     -       228     -       1     -       229

Accrued liabilities

     -       -       644     483     -       1,127
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     -       228     1,332     796     -       2,356
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt

     -       12,998     216     666     -       13,880
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payable

     833     21,582     24,028     13,310     (59,753     -  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deferred income taxes

     19     -       -       -       -       19
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other long-term liabilities

     9     1,018     997     378     (1,042     1,360
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     861     35,826     26,573     15,150     (60,795     17,615
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Redeemable noncontrolling interests in equity of consolidated subsidiaries

     -       -       -       527     -       527
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deficit:

            

Community Health Systems, Inc. stockholders’ deficit:

            

Common stock

     1     -       -       -       -       1

Additional paid-in capital

     2,014     (252     204     234     (186     2,014

Accumulated other comprehensive loss

     (21     (21     (4     (4     29     (21

(Accumulated deficit) retained earnings

     (2,761     (416     336     (876     956     (2,761
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Community Health Systems, Inc. stockholders’ deficit

     (767     (689     536     (646     799     (767

Noncontrolling interests in equity of consolidated subsidiaries

     -       -       -       75     -       75
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deficit

     (767     (689     536     (571     799     (692
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and deficit

   $ 94   $ 35,137   $ 27,109   $ 15,106   $ (59,996   $ 17,450
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

43


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

Condensed Consolidating Statement of Cash Flows  
Three Months Ended March 31, 2018  
     Parent           Other     Non -               
     Guarantor     Issuer     Guarantors     Guarantors     Eliminations      Consolidated  
     (In millions)                

Net cash provided by (used in) operating activities

   $ 26   $ (58   $ 38   $ 100   $ -      $ 106
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flows from investing activities:

             

Acquisitions of facilities and other related businesses

     -       -       (3     (5     -        (8

Purchases of property and equipment

     -       -       (119     (51     -        (170

Proceeds from disposition of hospitals and other ancillary operations

     -       -       10     1     -        11

Proceeds from sale of property and equipment

     -       -       -       3     -        3

Purchases of available-for-sale securities and equity securities

     -       -       (11     (8     -        (19

Proceeds from sales of available-for-sale securities and equity securities

     -       -       28     6     -        34

Increase in other investments

     -       -       (14     (14     -        (28
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     -       -       (109     (68     -        (177
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flows from financing activities:

             

Repurchase of restricted stock shares for payroll tax withholding requirements

     (1     -       -       -       -        (1

Deferred financing costs and other debt-related costs

     -       -       (11     -       -        (11

Redemption of noncontrolling investments in joint ventures

     -       -       -       (3     -        (3

Distributions to noncontrolling investors in joint ventures

     -       -       -       (23     -        (23

Changes in intercompany balances with affiliates, net

     (25     69     (91     47     -        -  

Borrowings under credit agreements

     -       -       10     -       -        10

Proceeds from receivables facility

     -       -       -       49     -        49

Repayments of long-term indebtedness

     -       (11     -       (78     -        (89
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash (used in) provided by financing activities

     (26     58     (92     (8     -        (68
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net change in cash and cash equivalents

     -       -       (163     24     -        (139

Cash and cash equivalents at beginning of period

     -       -       497     66     -        563
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ -     $ -     $ 334   $ 90   $ -      $ 424
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

44


COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

Condensed Consolidating Statement of Cash Flows  
Three Months Ended March 31, 2017  
     Parent           Other     Non -               
     Guarantor     Issuer     Guarantors     Guarantors     Eliminations      Consolidated  
     (In millions)              

Net cash (used in) provided by operating activities

   $ -     $ (124   $ 234   $ 132   $ -      $ 242
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flows from investing activities:

             

Acquisitions of facilities and other related businesses

     -       -       (1     (1     -        (2

Purchases of property and equipment

     -       -       (93     (53     -        (146

Purchases of available-for-sale securities and equity securities

     -       -       (8     (4     -        (12

Proceeds from sales of available-for-sale securities and equity securities

     -       -       20     6     -        26

Increase in other investments

     -       -       (30     (7     -        (37
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     -       -       (112     (59     -        (171
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flows from financing activities:

             

Repurchase of restricted stock shares for payroll tax withholding requirements

     (5     -       -       -       -        (5

Deferred financing costs and other debt-related costs

     -       (40     -       -       -        (40

Proceeds from noncontrolling investors in joint ventures

     -       -       -       5     -        5

Redemption of noncontrolling investments in joint ventures

     -       -       -       (4     -        (4

Distributions to noncontrolling investors in joint ventures

     -       -       -       (28     -        (28

Changes in intercompany balances with affiliates, net

     5     157     (132     (30     -        -  

Borrowings under credit agreements

     -       596     12     2     -        610

Issuance of long-term debt

     -       2,200     -       -       -        2,200

Proceeds from receivables facility

     -       -       -       26     -        26

Repayments of long-term indebtedness

     -       (2,789     (31     (6     -        (2,826
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash provided by (used in) financing activities

     -       124     (151     (35     -        (62
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net change in cash and cash equivalents

     -       -       (29     38     -        9

Cash and cash equivalents at beginning of period

     -       -       174     64     -        238
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ -     $ -     $ 145   $ 102   $ -      $ 247
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

45


Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

You should read this discussion together with our condensed consolidated financial statements and the accompanying notes included herein.

Throughout this Quarterly Report on Form 10-Q, we refer to Community Health Systems, Inc., or the Parent Company, and its consolidated subsidiaries in a simplified manner and on a collective basis, using words like “we,” “our,” “us” and the “Company”. This drafting style is suggested by the Securities and Exchange Commission, or SEC, and is not meant to indicate that the publicly traded Parent Company or any particular subsidiary of the Parent Company owns or operates any asset, business or property. The hospitals, operations and businesses described in this filing are owned and operated by distinct and indirect subsidiaries of Community Health Systems, Inc.

Executive Overview

We are one of the largest publicly traded hospital companies in the United States and a leading operator of general acute care hospitals and outpatient facilities in communities across the country. We provide healthcare services through the hospitals that we own and operate and affiliated businesses in non-urban and selected urban markets throughout the United States. We generate revenues by providing a broad range of general and specialized hospital healthcare services and outpatient services to patients in the communities in which we are located. As of March 31, 2018, we owned or leased 127 hospitals, comprised of 125 general acute care hospitals and two stand-alone rehabilitation or psychiatric hospitals. For the hospitals that we own and operate, we are paid for our services by governmental agencies, private insurers and directly by the patients we serve.

We have been implementing a portfolio rationalization and deleveraging strategy by divesting hospitals and non-hospital businesses that are attractive to strategic and other buyers. Generally, these businesses are not in one of our strategically beneficial service areas, are less complementary to our business strategy and/or have lower operating margins. In connection with our announced divestiture initiative, we have received offers from strategic buyers to buy certain of our assets. After considering these offers, we have divested or may divest hospitals and non-hospital businesses when we find such offers to be attractive and in line with our operating strategy.

 

46


Completed Divestiture and Acquisition Activity

We completed no hospital divestitures during the three months ended March 31, 2018. The following table provides a summary of hospitals included in continuing operations that we divested during the year ended December 31, 2017:

 

Hospital

  

Buyer

   City, State    Licensed
Beds
   Effective Date

Easton Hospital

   Steward Health, Inc.    Easton, PA    196    May 1, 2017

Sharon Regional Health System

   Steward Health, Inc.    Sharon, PA    258    May 1, 2017

Northside Medical Center

   Steward Health, Inc.    Youngstown, OH    355    May 1, 2017

Trumbull Memorial Hospital

   Steward Health, Inc.    Warren, OH    311    May 1, 2017

Hillside Rehabilitation Hospital

   Steward Health, Inc.    Warren, OH    69    May 1, 2017

Wuesthoff Health System – Rockledge

   Steward Health, Inc.    Rockledge, FL    298    May 1, 2017

Wuesthoff Health System – Melbourne

   Steward Health, Inc.    Melbourne, FL    119    May 1, 2017

Sebastian River Medical Center

   Steward Health, Inc.    Sebastian, FL    154    May 1, 2017

Stringfellow Memorial Hospital

   The Health Care Authority   of the City of Anniston    Anniston, AL    125    May 1, 2017

Merit Health Gilmore Memorial

   Curae Health, Inc.    Amory, MS    95    May 1, 2017

Merit Health Batesville

   Curae Health, Inc.    Batesville, MS    112    May 1, 2017

Lake Area Medical Center

   CHRISTUS Health    Lake Charles, LA    88    June 30, 2017

Memorial Hospital of York

   PinnacleHealth System    York, PA    100    July 1, 2017

Lancaster Regional Medical Center

   PinnacleHealth System    Lancaster, PA    214    July 1, 2017

Heart of Lancaster Regional Medical Center

   PinnacleHealth System    Lititz, PA    148    July 1, 2017

Carlisle Regional Medical Center

   PinnacleHealth System    Carlisle, PA    165    July 1, 2017

Tomball Regional Medical Center

   HCA Holdings, Inc., or HCA    Tomball, TX    350    July 1, 2017

South Texas Regional Medical Center

   HCA    Jourdanton, TX    67    July 1, 2017

Deaconess Hospital

   MultiCare Health System    Spokane, WA    388    July 1, 2017

Valley Hospital

   MultiCare Health System    Spokane Valley, WA    123    July 1, 2017

Yakima Regional Medical and Cardiac Center

   Regional Health    Yakima, WA    214    September 1, 2017

Toppenish Community Hospital

   Regional Health    Toppenish, WA    63    September 1, 2017

Weatherford Regional Medical Center

   HCA    Weatherford, TX    103    October 1, 2017

Brandywine Hospital

   Reading Health System    Coatesville, PA    169    October 1, 2017

Chestnut Hill Hospital

   Reading Health System    Philadelphia, PA    148    October 1, 2017

Jennersville Hospital

   Reading Health System    West Grove, PA    63    October 1, 2017

Phoenixville Hospital

   Reading Health System    Phoenixville, PA    151    October 1, 2017

Pottstown Memorial Medical Center

   Reading Health System    Pottstown, PA    232    October 1, 2017

Highlands Regional Medical Center

   HCA    Sebring, FL    126    November 1, 2017

Merit Health Northwest Mississippi

   Curae Health, Inc.    Clarksdale, MS    181    November 1, 2017

On January 31, 2018, we signed a definitive agreement for the sale of Tennova Healthcare – Jamestown (85 licensed beds) in Jamestown, Tennessee, and its associated assets to subsidiaries of Rennova Health, Inc.

On February 14, 2018, we signed a definitive agreement for the sale of Byrd Regional Hospital (60 licensed beds) in Leesville, Louisiana, and its associated assets to subsidiaries of Allegiance Health Management.

Effective April 1, 2018, we sold Bayfront Health Dade City (120 licensed beds) in Dade City, Florida, and its associated assets to subsidiaries of Adventist Health System for approximately $9 million in cash, which was received at the preliminary closing on March 30, 2018.

On April 18, 2018, we signed a definitive agreement for the sale of Munroe Regional Medical Center (421 licensed beds) in Ocala, Florida, and its associated assets to subsidiaries of Adventist Health System.

 

47


During 2017, as reflected in the chart above, we completed the divestiture of all of the hospitals out of the previously announced 30 hospitals included in continuing operations which had been subject to definitive agreements or non-binding letters of intent. These 30 hospitals represented annual net operating revenues in 2016 of approximately $3.4 billion, and we received total net proceeds of approximately $1.7 billion in connection with the disposition of these hospitals.

In addition to the divestiture of these 30 hospitals in 2017, we continue to receive interest from potential buyers for certain of our hospitals. We are pursuing these interests for sale transactions involving hospitals which, together with the hospitals that are currently subject to definitive agreements and the hospital that was divested effective April 1, 2018, had a combined total of approximately $2.0 billion in annual net operating revenues and combined mid-single digit Adjusted EBITDA margins during 2017. These sale transactions are currently in various stages of negotiation with potential buyers. There can be no assurance that these potential divestitures (or the potential divestitures currently subject to definitive agreements) will be completed, or if they are completed, the ultimate timing of the completion of these divestitures.

There may be changes from time to time in the composition of the particular hospitals in respect of which we are pursuing potential divestitures as the result of various factors, including changes in any potential buyer or the negotiations with respect to the potential sale of any such hospital. The potential divestitures noted above, as well as the divestitures that were completed in 2017 and the divestitures that are currently subject to definitive agreements and/or that have been completed in 2018 to date, are intended to further implement our portfolio rationalization and deleveraging strategy as described above. When consistent with this strategy, we intend to continue to evaluate offers from potential buyers for additional divestitures in order to optimize our hospital asset portfolio.

Operating results and statistical data for the three months ended March 31, 2017, exclude hospitals still owned and hospitals divested during the three months ended March 31, 2017, that were previously classified as discontinued operations for accounting purposes.

During the three months ended March 31, 2018, we paid approximately $8 million to acquire the operating assets and related businesses of certain physician practices, clinics and other ancillary businesses that operate within the communities served by our hospitals.

Overview of Operating Results

Our net operating revenues for the three months ended March 31, 2018 decreased $797 million to approximately $3.7 billion compared to approximately $4.5 billion for the three months ended March 31, 2017. On a same-store basis, net operating revenues for the three months ended March 31, 2018 increased $57 million.

We had a loss from continuing operations of $6 million during the three months ended March 31, 2018, compared to a loss from continuing operations of $176 million for the three months ended March 31, 2017. Loss from continuing operations for the three months ended March 31, 2018 included the following:

 

    an after-tax charge of $4 million for government and other legal settlements, net of related legal expenses,

 

    an after-tax charge of $27 million for the impairment of goodwill and long-lived assets of hospitals sold or held for sale based on their estimated fair values,

 

    an after-tax charge of $1 million for employee termination benefits and other restructuring costs,

 

    an after-tax charge of $3 million for loss from early extinguishment of debt, and

 

    an after-tax charge of $4 million from fair value adjustments on the CVR agreement liability accounted for at fair value related to the HMA legal proceedings, and related legal expenses.

 

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Loss from continuing operations for the three months ended March 31, 2017 included the following:

 

    after-tax income of $26 million for government and other legal settlements, net of related legal expenses, primarily as a result of the previously announced settlement of the shareholder derivative action in January 2017,

 

    an after-tax charge of $214 million for the impairment of goodwill and long-lived assets of hospitals sold or held for sale based on their estimated fair values,

 

    an after-tax charge of $13 million for loss from early extinguishment of debt, and

 

    an after-tax charge of $5 million from fair value adjustments on the CVR agreement liability accounted for at fair value related to the HMA legal proceedings, and related legal expenses.

Consolidated inpatient admissions for the three months ended March 31, 2018, decreased 19.6%, compared to the three months ended March 31, 2017, and consolidated adjusted admissions for the three months ended March 31, 2018, decreased 20.8%, compared to the three months ended March 31, 2017. Same-store inpatient admissions for the three months ended March 31, 2018, decreased 2.4%, compared to the three months ended March 31, 2017, and same-store adjusted admissions for the three months ended March 31, 2018, decreased 1.9%, compared to the three months ended March 31, 2017.

Self-pay revenues represented approximately 2.2% and 3.1% of net operating revenues for the three months ended March 31, 2018 and 2017, respectively. The amount of foregone revenue related to providing charity care services as a percentage of net operating revenues was approximately 3.1% and 2.6% for the three months ended March 31, 2018 and 2017, respectively. Direct and indirect costs incurred in providing charity care services as a percentage of net operating revenues was approximately 0.4% and 0.3% for the three months ended March 31, 2018 and 2017, respectively.

The U.S. Congress and certain state legislatures have introduced and passed a large number of proposals and legislation designed to make major changes in the healthcare system, including changes that have increased access to health insurance. The most prominent of these recent efforts, the Affordable Care Act, affects how healthcare services are covered, delivered and reimbursed. It mandates that substantially all U.S. citizens maintain health insurance and increases health insurance coverage through a combination of public program expansion and private sector health insurance reforms.

However, the future of the Affordable Care Act is uncertain. The current Presidential administration and certain members of Congress have stated their intent to repeal or make significant changes to the Affordable Care Act, its implementation or its interpretation. For example, as part of the tax reform legislation which was enacted in December 2017, Congress eliminated the financial penalty associated with the individual mandate, effective January 1, 2019, which may result in fewer individuals electing to purchase health insurance. In addition, the President signed an executive order directing agencies to relax limits on certain health plans, potentially permitting the sale of short-term health insurance plans and coverage that does not meet the Affordable Care Act’s minimum requirements. Of critical importance to us will be the potential impact of any changes specific to the Medicaid funding and expansion provisions of the Affordable Care Act. We operate hospitals in five of the ten states that experienced the largest reductions in uninsured rates among adult residents between 2013 and 2015. In general, the states with the greatest reductions in the number of uninsured adult residents have expanded Medicaid. A number of states have opted out of the Medicaid coverage expansion provisions, but could ultimately decide to expand their programs at a later date. Of the 20 states in which we operated hospitals that were included in continuing operations as of March 31, 2018, nine states have taken action to expand their Medicaid programs. At this time, the other 11 states have not, including Florida, Alabama, Tennessee and Texas, where we operated a significant number of hospitals as of March 31, 2018. Some states use, or have applied to use, waivers granted by CMS to implement expansion, impose different eligibility or enrollment restrictions, or otherwise implement programs that vary from federal standards. CMS administrators have indicated that they are increasing state flexibility in the administration of Medicaid programs. For example, CMS has granted a limited number of state applications for waivers that allow a state to condition Medicaid enrollment on work or other community engagement. Several states have similar applications pending.

The Affordable Care Act makes a number of changes to Medicare and Medicaid, such as reductions to the Medicare annual market basket update for federal fiscal years 2010 through 2019, a productivity offset to the Medicare market basket update, and a reduction to the Medicare and Medicaid disproportionate share hospital payments, each of which could adversely impact the reimbursement received under these programs. The Affordable Care Act also includes provisions aimed at reducing fraud, waste and abuse in the healthcare industry.

 

49


We believe that the Affordable Care Act has had a positive impact on net operating revenues and income from continuing operations as the result of the expansion of private sector and Medicaid coverage that has occurred. However, legislative and executive branch efforts related to healthcare reform could result in increased prices for consumers purchasing health insurance coverage or the sale of insurance plans that contain gaps in coverage, which could destabilize insurance markets and impact the rates of uninsured or underinsured adults. Other provisions of the Affordable Care Act, such as requirements related to employee health insurance coverage and changes to Medicare and Medicaid reimbursement, have increased our operating costs or adversely impacted the reimbursement we receive.

It is difficult to predict the ongoing effect of the Affordable Care Act due to executive orders, changes to the law’s implementation, clarifications and modifications resulting from the rule-making process, judicial interpretations resulting from court challenges to its constitutionality and interpretation, whether and how many states ultimately decide to expand Medicaid coverage, the number of uninsured who elect to purchase health insurance coverage, budgetary issues at federal and state levels, and efforts to change or repeal the statute. We may not be able to fully realize the positive impact the Affordable Care Act may otherwise have on our business, results of operations, cash flow, capital resources and liquidity. We cannot predict whether we will be able to modify certain aspects of our operations to offset any potential adverse consequences from the Affordable Care Act or the impact of any alternative provisions that may be adopted.

In recent years, a number of laws, including the Affordable Care Act and MACRA, have promoted shifting from traditional fee-for-service reimbursement models to alternative payment models that tie reimbursement to quality and cost of care. CMS currently administers various ACOs and bundled payment demonstration projects and has indicated that it will continue to pursue similar initiatives.

The federal government has implemented a number of regulations and programs designed to promote the use of EHR technology and pursuant to the Health Information Technology for Economic and Clinical Health Act, or HITECH, established requirements for a Medicare and Medicaid incentive payments program for eligible hospitals and professionals that adopt and meaningfully use certified EHR technology. These payments are available for a maximum period of five or six years, depending on the program. Our hospital facilities have been implementing EHR technology on a facility-by-facility basis since 2011. We recognize incentive reimbursement related to the Medicare or Medicaid incentives as we are able to implement the certified EHR technology and meet the defined “meaningful use criteria,” and information from completed cost report periods is available from which to calculate the incentive reimbursement. The timing of recognizing incentive reimbursement does not correlate with the timing of recognizing operating expenses and incurring capital costs in connection with the implementation of EHR technology which may result in material period-to-period changes in our future results of operations.

Eligible hospitals and professionals that have not demonstrated meaningful use of certified EHR technology and have not applied and qualified for a hardship exception are subject to payment adjustments. Eligible hospitals are subject to a reduced market basket update to the inpatient prospective payment system standardized amount as of 2015 and for each subsequent fiscal year. Eligible professionals are subject to a 1% per year cumulative reduction applied to the MPFS amount for covered professional services, subject to a cap of 5%. Payment adjustments for eligible professionals failing to demonstrate meaningful use will no longer be applicable beginning in 2019, when the program is scheduled to be replaced by MIPS.

As a result of our current levels of cash, available borrowing capacity, long-term outlook on our debt repayments, the refinancing of our term loans and our continued projection of our ability to generate cash flows, we anticipate that we will be able to invest the necessary capital in our business over the next twelve months. We believe there continues to be ample opportunity for growth in substantially all of our markets by decreasing the need for patients to travel outside their communities for healthcare services through the provision of services at our facilities. Furthermore, we will continue to strive to improve operating efficiencies and procedures in order to improve our profitability at our hospitals.

 

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Sources of Revenue

The following table presents the approximate percentages of net operating revenues by payor source for the periods indicated. The data for the periods presented are not strictly comparable due to the effect that hospital acquisitions and divestitures have had on these statistics.

 

     Three Months Ended  
     March 31,  
     2018     2017  

Medicare

     28.0     27.5

Medicaid

     12.4       13.1  

Managed Care and other third-party payors

     57.4       56.3  

Self-pay

     2.2       3.1  
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

As shown above, we receive a substantial portion of our revenues from the Medicare and Medicaid programs. Included in Managed Care and other third-party payors is operating revenues from insurance companies with which we have insurance provider contracts, Medicare managed care, insurance companies for which we do not have insurance provider contracts, workers’ compensation carriers and non-patient service revenue, such as rental income and cafeteria sales. In the future, we generally expect revenues received from the Medicare and Medicaid programs to increase due to the general aging of the population. In addition, the Affordable Care Act has increased the number of insured patients in states that have expanded Medicaid, which in turn, has reduced the percentage of revenues from self-pay patients. However, it is unclear whether the trend of increased coverage will continue, due in part to the elimination of the financial penalty associated with the individual mandate, effective January 1, 2019. Further, the Affordable Care Act imposes significant reductions in amounts the government pays Medicare managed care plans. The trend toward increased enrollment in Medicare managed care may adversely affect our operating revenue growth. Other provisions in the Affordable Care Act impose minimum medical-loss ratios and require insurers to meet specific benefit requirements. Furthermore, in the normal course of business, managed care programs, insurance companies and employers actively negotiate the amounts paid to hospitals. The trend toward increased enrollment in managed care may adversely affect our operating revenue growth. There can be no assurance that we will retain our existing reimbursement arrangements or that these third-party payors will not attempt to further reduce the rates they pay for our services.

Net operating revenues include amounts estimated by management to be reimbursable by Medicare and Medicaid under prospective payment systems and provisions of cost-based reimbursement and other payment methods. In addition, we are reimbursed by non-governmental payors using a variety of payment methodologies. Amounts we receive for the treatment of patients covered by Medicare, Medicaid and non-governmental payors are generally less than the standard billing rates. We account for the differences between the estimated program reimbursement rates and the standard billing rates as contractual allowance adjustments, which we deduct from gross revenues to arrive at net operating revenues. Final settlements under some of these programs are subject to adjustment based on administrative review and audit by third parties. We account for adjustments to previous program reimbursement estimates as contractual allowance adjustments and report them in the periods that such adjustments become known. Contractual allowance adjustments related to final settlements and previous program reimbursement estimates impacted net operating revenues and net loss by an insignificant amount in each of the three-month periods ended March 31, 2018 and 2017.

The payment rates under the Medicare program for hospital inpatient and outpatient acute care services are based on a prospective payment system, depending upon the diagnosis of a patient’s condition. These rates are indexed for inflation annually, although increases have historically been less than actual inflation. On August 2, 2017, CMS issued the final rule to increase this index by 2.7% for hospital inpatient acute care services that are reimbursed under the prospective payment system, beginning October 1, 2017. The final rule provides for a 0.6% multifactor productivity reduction and a 0.75% reduction to hospital inpatient rates implemented pursuant to the Affordable Care Act, which, together with other payment adjustments, will yield an estimated net 1.3% increase in reimbursement for hospitals. An additional reduction applies to hospitals that do not submit required patient quality data. We are complying with this data submission requirement. Further, CMS has indicated that Medicare disproportionate share payments and changes to additional uncompensated care payments will increase overall inpatient hospital payment rates by approximately 0.6%. Payments may also be affected by admission and medical review criteria for inpatient services commonly known as the “two midnight rule.” Under the rule, for admissions on or after October 1, 2013, services to Medicare beneficiaries are only payable as inpatient hospital services when there is a reasonable expectation that the hospital care is medically necessary and will be required across two

 

51


midnights, absent unusual circumstances. Stays expected to need less than two midnights of hospital care are subject to medical review on a case-by-case basis. Reductions in the rate of increase or overall reductions in Medicare reimbursement may cause a decline in the growth of our net operating revenues.

Currently, several states utilize supplemental reimbursement programs for the purpose of providing reimbursement to providers to offset a portion of the cost of providing care to Medicaid and indigent patients. These programs are designed with input from CMS and are funded with a combination of state and federal resources, including, in certain instances, fees or taxes levied on the providers. Similar programs are also being considered by other states. The programs are generally authorized for a specified period of time and require CMS’s approval to be extended. CMS has indicated that it will take into account a state’s status with respect to expanding its Medicaid program in considering whether to extend these supplemental programs. We are unable to predict whether or on what terms CMS will extend the supplemental programs in the states in which we operate. As a result of existing supplemental programs, we recognize revenue and related expenses in the period in which the fixed and determinable amounts are estimable and collection is reasonably assured. Reimbursement under these programs is reflected in net operating revenues and included as Medicaid revenue in the table above, and fees, taxes or other program related costs are reflected in other operating expenses.

Results of Operations

Our hospitals offer a variety of services involving a broad range of inpatient and outpatient medical and surgical services. These include general acute care, emergency room, general and specialty surgery, critical care, internal medicine, obstetrics, diagnostic services, psychiatric and rehabilitation services. The strongest demand for hospital services generally occurs during January through April and the weakest demand for these services generally occurs during the summer months. Accordingly, eliminating the effects of new acquisitions and/or divestitures, our net operating revenues and earnings are historically highest during the first quarter and lowest during the third quarter.

The following tables summarize, for the periods indicated, selected operating data.

 

     Three Months Ended
            March 31,            
 
             2018                     2017          

Operating results, as a percentage of net operating revenues:

    

Net operating revenues

     100.0     100.0

Operating expenses (a)

     (88.6     (87.5

Depreciation and amortization

     (4.9     (5.3

Impairment and (gain) loss on sale of businesses, net

     (0.8     (5.6
  

 

 

   

 

 

 

Income from operations

     5.7       1.6  

Interest expense, net

     (6.2     (5.1

Loss from early extinguishment of debt

     (0.1     (0.5

Equity in earnings of unconsolidated affiliates

     0.2       0.1  
  

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (0.4     (3.9

Benefit from income taxes

     0.2       -  
  

 

 

   

 

 

 

Loss from continuing operations

     (0.2     (3.9

Loss from discontinued operations, net of taxes

     -       -  
  

 

 

   

 

 

 

Net loss

     (0.2     (3.9

Less: Net income attributable to noncontrolling interests

     (0.5     (0.5
  

 

 

   

 

 

 

Net loss attributable to Community Health Systems, Inc. stockholders

     (0.7 )%      (4.4 )% 
  

 

 

   

 

 

 

 

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     Three Months Ended
            March 31,            
 
             2018                     2017          

Percentage (decrease) increase from prior year:

    

Net operating revenues

     (17.8 )%      (10.3 )% 

Admissions

     (19.6     (11.5

Adjusted admissions (b)

     (20.8     (12.5

Average length of stay

     -       2.2  

Net loss attributable to Community Health Systems, Inc. (c)

     87.4       (1,909.1

Same-store percentage increase (decrease) from prior year (d):

    

Net operating revenues

     1.6     0.7

Admissions

     (2.4     (1.5

Adjusted admissions (b)

     (1.9     (1.4

 

 

(a) Operating expenses include salaries and benefits, supplies, other operating expenses, government and other legal settlements and related costs, electronic health records incentive reimbursement and rent.
(b) Adjusted admissions is a general measure of combined inpatient and outpatient volume. We computed adjusted admissions by multiplying admissions by gross patient revenues and then dividing that number by gross inpatient revenues.
(c) Includes loss from discontinued operations.
(d) Includes acquired hospitals to the extent we operated them in both periods and excludes our hospitals that have previously been classified as discontinued operations for accounting purposes. In addition, also excludes information for the hospitals sold or closed during 2017.

Three Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017

Net operating revenues decreased by 17.8% to approximately $3.7 billion for the three months ended March 31, 2018, from approximately $4.5 billion for the three months ended March 31, 2017. Net operating revenues from same-store hospitals increased $57 million or 1.6% during the three months ended March 31, 2018, as compared to the three months ended March 31, 2017. The increase in same-store net operating revenues was attributable to improved pricing due to higher acuity, offset by a decline in inpatient admissions and adjusted admissions. Non-same-store net operating revenues decreased $854 million during the three months ended March 31, 2018, in comparison to the prior year period, with the decrease attributable primarily to the divestiture of 30 hospitals during 2017. On a consolidated basis, inpatient admissions decreased by 19.6% and adjusted admissions decreased by 20.8% during the three months ended March 31, 2018 as compared to the three months ended March 31, 2017. On a same-store basis, net operating revenues per adjusted admission increased 3.5%, while inpatient admissions decreased by 2.4% and adjusted admissions decreased by 1.9% for the three months ended March 31, 2018, compared to the three months ended March 31, 2017.

Operating expenses, as a percentage of net operating revenues, decreased from 98.4% during the three months ended March 31, 2017 to 94.3% during the three months ended March 31, 2018. Operating expenses, excluding depreciation and amortization and impairment and (gain) loss on sale of businesses, as a percentage of net operating revenues, increased from 87.5% for the three months ended March 31, 2017 to 88.6% for the three months ended March 31, 2018. Salaries and benefits, as a percentage of net operating revenues, decreased from 45.9% for the three months ended March 31, 2017 to 44.7% for the three months ended March 31, 2018. This decrease in salaries and benefits, as a percentage of net operating revenues, was primarily due to improved staffing and benefit expense management. Supplies, as a percentage of net operating revenues, remained consistent at 16.7% for both the three-month periods ended March 31, 2018 and 2017. Other operating expenses, as a percentage of net operating revenues, increased from 23.5% for the three months ended March 31, 2017 to 24.7% for the three months ended March 31, 2018, primarily as a result of higher medical specialist fees, an increase in purchased services and higher information systems expense. Government and other legal settlements and related costs, as a percentage of net operating revenues, increased from income of (0.9)% for the three months ended March 31, 2017 to expense of 0.1% for the three months ended March 31, 2018 primarily as a result of the gain recorded from the settlement of the shareholder derivative action in January 2017. Rent, as a percentage of net operating revenues, remained consistent at 2.4% for both the three-month periods ended March 31, 2018 and 2017.

 

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Depreciation and amortization, as a percentage of net operating revenues, decreased from 5.3% for the three months ended March 31, 2017 to 4.9% for the three months ended March 31, 2018, primarily due to ceasing depreciation on property and equipment at hospitals sold or held for sale.

Impairment and (gain) loss on sale of businesses was $28 million for the three months ended March 31, 2018, compared to $250 million for the three months ended March 31, 2017. Impairment of goodwill and long-lived assets for the three months ended March 31, 2018 included impairment of approximately $28 million related to impairment of the long-lived assets and reporting unit goodwill allocated to hospitals classified as held for sale during the three months ended March 31, 2018. Impairment of goodwill and long-lived assets for the three months ended March 31, 2017 included impairment of approximately $250 million related to the impairment of the long-lived assets and reporting unit goodwill allocated to hospitals classified as held for sale during the three months ended March 31, 2017.

Interest expense, net, decreased by $1 million to $228 million for the three months ended March 31, 2018 compared to $229 million for the three months ended March 31, 2017, primarily due to a decrease in our average outstanding debt during the three months ended March 31, 2018, which resulted in a decrease in interest expense of $23 million. Additionally, a decrease in interest expense of $1 million for the three months ended March 31, 2018 is a result of more interest being capitalized as compared to the same period in 2017 because of an increase in major construction projects during the three months ended March 31, 2018. These decreases were partially offset by an increase in interest rates during the three months ended March 31, 2018, compared to the same period in 2017, which resulted in an increase in interest expense of $23 million.

Loss from early extinguishment of debt of $4 million was recognized during the three months ended March 31, 2018. Loss from early extinguishment of debt of $21 million was recognized during the three months ended March 31, 2017. The loss from early extinguishment of debt resulted from the repayment of certain outstanding notes and term loans under the Credit Facility as discussed further in Capital Resources.

Equity in earnings of unconsolidated affiliates, as a percentage of net operating revenues, increased from 0.1% for the three months ended March 31, 2017 to 0.2% for the three months ended March 31, 2018.

The net results of the above-mentioned changes resulted in loss from continuing operations before income taxes decreasing $163 million from loss of $176 million for the three months ended March 31, 2017 to loss of $13 million for the three months ended March 31, 2018.

The provision for income taxes on loss from continuing operations decreased from less than $1 million for the three months ended March 31, 2017 to a benefit from income taxes of $7 million for the three months ended March 31, 2018, primarily due to the release of a state valuation allowance of approximately $15 million as a result of an enacted tax law change partially offset by approximately $4 million of tax expense recognized on the tax deficiency from stock compensation expense for restricted stock vesting during the three months ended March 31, 2018. Our effective tax rates were 53.8% and less than 0.1% for the three months ended March 31, 2018 and 2017, respectively. The increase in our effective tax rate for the three months ended March 31, 2018, when compared to the three months ended March 31, 2017, was primarily due to the discrete items noted above, as well as the reduction in the amount of non-deductible goodwill written off as part of the impairment and gain (loss) on sale of businesses for the three months ended March 31, 2018 compared to the three months ended March 31, 2017, and a disproportionate increase in income from continuing operations before income taxes when compared to the decrease in net income attributable to noncontrolling interest for those same periods, which is not tax affected in our condensed consolidated financial statements.

Loss from continuing operations, as a percentage of net operating revenues, decreased from (3.9)% for the three months ended March 31, 2017 to (0.2)% for the three months ended March 31, 2018.

No discontinued operations were reported for the three months ended March 31, 2018. Discontinued operations include the results of operations of certain hospitals owned or leased by us as of March 31, 2017, which were classified as being held for sale or sold. The operation of these hospitals resulted in a loss, net of taxes, of $1 million for the three months ended March 31, 2017.

Net loss, as a percentage of net operating revenues, decreased from (3.9)% for the three months ended March 31, 2017 to (0.2)% for the three months ended March 31, 2018.

Net income attributable to noncontrolling interests, as a percentage of net operating revenues, remained consistent at 0.5% for both the three-month periods ended March 31, 2017 and 2018.

 

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Net loss attributable to Community Health Systems, Inc. was $25 million for the three months ended March 31, 2018, compared to $199 million for the three months ended March 31, 2017.

Liquidity and Capital Resources

Net cash provided by operating activities decreased $136 million, from approximately $242 million for the three months ended March 31, 2017, to approximately $106 million for the three months ended March 31, 2018. The decrease in cash provided by operating activities was primarily the result of a decline in cash flow from patient accounts receivable collections and net cash paid related to government settlements and related legal costs, as well as the loss of cash flow contributed from previously divested hospitals and a decrease in cash received from HITECH incentive reimbursement. Such decreases were offset by improvements in cash flow from supplies, prepaid expenses and other current assets and lower malpractice claim payments compared to the same period in 2017. Total cash paid for interest during the three months ended March 31, 2018 decreased to approximately $212 million compared to $279 million for the three months ended March 31, 2017, which is primarily related to the decrease in the average outstanding debt balance. Cash paid for income taxes, net of refunds received, resulted in a net refund of less than $1 million for the three months ended March 31, 2018, compared to less than $1 million paid for income taxes for the three months ended March 31, 2017.

Net cash used in investing activities increased $6 million, from approximately $171 million for the three months ended March 31, 2017 to approximately $177 million for the three months ended March 31, 2018. The increase in cash used in investing activities was primarily due to an increase in the cash used in the purchase of property and equipment of $24 million and an increase of $6 million in the cash used in the acquisition of facilities and other related equipment (for physician practices, clinics and other ancillary businesses as there were no hospital acquisitions during either the three months ended March 31, 2018 or 2017). These increases in cash outflows were offset by an increase in proceeds from the disposition of hospitals and other ancillary operations of $11 million, an increase in the proceeds from the sale of property and equipment of $3 million, an increase in cash provided by the net impact of the purchases and sales of available-for-sale securities and equity securities of $1 million and a decrease in cash used for other investments (primarily from internal-use software expenditures and physician recruiting costs) of $9 million for the three months ended March 31, 2018 compared to the same period in 2017.

Our net cash used in financing activities was $68 million for the three months ended March 31, 2018, compared to $62 million for the three months ended March 31, 2017, an increase of approximately $6 million. The increase in cash used in financing activities, in comparison to the prior year period, is primarily due to the net effect of our debt repayment, refinancing activity, and cash paid for deferred financing costs and other debt-related costs.

There have been no material changes outside of the ordinary course of business to our upcoming cash obligations during the three months ended March 31, 2018 from those disclosed in our 2017 Form 10-K, other than arising from the Fourth Amendment and Restatement Agreement to the Credit Facility (as discussed further in Capital Resources below).

Capital Expenditures

Cash expenditures for purchases of facilities and other related businesses were $8 million for the three months ended March 31, 2018, compared to $2 million for the three months ended March 31, 2017. Our expenditures for the three months ended March 31, 2018 and 2017 were related to the purchase of physician practices and other ancillary services.

Excluding the cost to construct replacement hospitals, our cash expenditures for routine capital for the three months ended March 31, 2018 totaled $170 million compared to $141 million for the three months ended March 31, 2017. These capital expenditures related primarily to the purchase of additional equipment, minor renovations and information systems infrastructure. Costs to construct replacement hospitals totaled less than $1 million for the three months ended March 31, 2018, compared to $5 million for the three months ended March 31, 2017. The costs to construct replacement hospitals for the three months ended March 31, 2018 represent both planning and construction costs for the replacement facility at La Porte, Indiana. The costs to construct replacement hospitals for the three months ended March 31, 2017 represent both planning and construction costs for the replacement hospital in York, Pennsylvania. In conjunction with the sale of Memorial Hospital of York on July 1, 2017, we no longer have any planned costs to construct this replacement hospital.

Pursuant to a hospital purchase agreement from our March 1, 2016 acquisition of La Porte Hospital and Starke Hospital, we committed to build replacement facilities in both La Porte, Indiana and Knox, Indiana. Under the terms of such agreement, construction of the replacement hospital for LaPorte Hospital is required to be completed within five years of the date of acquisition, or March 2021. In addition, construction of the replacement facility for Starke Hospital is required to be completed within five years

 

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of the date we enter into a new lease with Starke County, Indiana, the hospital lessor, or in the event we do not enter into a new lease with Starke County, construction shall be completed by September 30, 2026. We have not entered into a new lease with the lessor for Starke Hospital and currently anticipate completing construction of the Starke Hospital replacement facility in 2026. Construction costs, including equipment costs, for the La Porte and Starke replacement facilities are currently estimated to be approximately $125 million and $15 million, respectively.

Capital Resources

Net working capital was approximately $1.7 billion at both March 31, 2018 and December 31, 2017. Net working capital increased by approximately $18 million between December 31, 2017 and March 31, 2018. This increase is primarily due to the increase in estimated accounts receivable and the decrease in accounts payable during the three months ended March 31, 2018.

We have senior secured financing under a credit facility with a syndicate of financial institutions led by Credit Suisse, as administrative agent and collateral agent, which at December 31, 2017 included (i) a revolving credit facility with commitments through January 27, 2019 of approximately $929 million, of which a $739 million portion represented extended commitments maturing January 27, 2021, or the Revolving Facility, (ii) a Term G facility due 2019, or the Term G Facility, and (iii) a Term H facility due 2021, or the Term H Facility. The Revolving Facility includes a subfacility for letters of credit.

As of March 31, 2018, the availability for additional borrowings under the Credit Facility, subject to certain limitations as set forth in the Credit Facility, was approximately $650 million pursuant to the Revolving Facility (which would be reduced to $425 million upon the effectiveness of the contemplated ABL Facility as described below), of which $57 million is in the form of outstanding letters of credit. CHS has the ability to amend the Credit Facility to provide for one or more tranches of term loans or increases in the Revolving Facility in an aggregate principal amount of up to $500 million. As of March 31, 2018, the weighted-average interest rate under the Credit Facility, excluding swaps, was 5.6%.

The loans under the Credit Facility bear interest on the outstanding unpaid principal amount at a rate equal to an applicable percentage plus, at our option, either (a) an Alternate Base Rate (as defined) determined by reference to the greater of (1) the Prime Rate (as defined) announced by Credit Suisse or (2) the NYFRB Rate (as defined) plus 0.50% or (3) the adjusted LIBOR rate on such day for a three-month interest period commencing on the second business day after such day plus 1% or (b) LIBOR. In addition, the margin in respect of the Revolving Facility will be subject to adjustment determined by reference to a leverage-based pricing grid. Loans in respect of the Revolving Facility currently accrue interest at a rate per annum equal to LIBOR plus 2.50%, in the case of LIBOR borrowings, and Alternate Base Rate plus 1.50%, in the case of Alternate Base Rate borrowings. Prior to the Credit Facility amendment discussed below, the Term G Loan and Term H Loan accrued interest at a rate per annum equal to LIBOR plus 2.75% and 3.00%, respectively, in the case of LIBOR borrowings, and Alternate Base Rate plus 1.75% and 2.00%, respectively, in the case of Alternate Base Rate borrowings. The Term G Loan and the Term H Loan are subject to a 1.00% LIBOR floor and a 2.00% Alternate Base Rate floor.

Under the Term H Facility, we are required to make amortization payments in aggregate amounts equal to 1% of the original principal amount of the Term H Facility each year. As of December 31, 2016, no additional amortization payments were required to be made under the Term G Facility.

The term loan facility must be prepaid in an amount equal to (1) 100% of the net cash proceeds of certain asset sales and dispositions by us and our subsidiaries, subject to certain exceptions and reinvestment rights (as further described below), (2) 100% of the net cash proceeds of issuances of certain debt obligations or receivables-based financing by us and our subsidiaries, subject to certain exceptions, and (3) 75%, subject to reduction to a lower percentage based on our first lien net leverage ratio (as defined in the Credit Facility generally as the ratio of first lien net debt on the date of determination to our consolidated EBITDA, as defined, for the four quarters most recently ended prior to such date), of excess cash flow (as defined) for any year, subject to certain exceptions. Voluntary prepayments and commitment reductions are permitted in whole or in part, without any premium or penalty, subject to minimum prepayment or reduction requirements.

The borrower under the Credit Facility is our wholly-owned subsidiary CHS/Community Health Systems, Inc., or CHS. All of our obligations under the Credit Facility are unconditionally guaranteed by Community Health Systems, Inc. and certain of its existing and subsequently acquired or organized domestic subsidiaries. All obligations under the Credit Facility and the related guarantees are secured by a perfected first priority lien or security interest in substantially all of the assets of Community Health Systems, Inc., CHS and each subsidiary guarantor, including equity interests held by us or any subsidiary guarantor, but excluding, among others, the equity interests of non-significant subsidiaries, syndication

 

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subsidiaries, securitization subsidiaries and joint venture subsidiaries. Such assets constitute substantially the same assets, subject to certain exceptions, that secure CHS’ obligations under its outstanding senior secured notes.

We have agreed to pay letter of credit fees equal to the applicable percentage then in effect with respect to LIBOR borrowings under the Revolving Facility times the maximum aggregate amount available to be drawn under all letters of credit outstanding under the subfacility for letters of credit. The issuer of any letter of credit issued under the subfacility for letters of credit will also receive a customary fronting fee and other customary processing charges. We are obligated to pay commitment fees of 0.50% per annum (subject to adjustment based upon our leverage ratio), on the unused portion of the Revolving Facility.

The Credit Facility contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting our and our subsidiaries’ ability, subject to certain exceptions, to, among other things, (1) declare dividends, make distributions or redeem or repurchase capital stock, (2) prepay, redeem or repurchase other debt, (3) incur liens or grant negative pledges, (4) make loans and investments and enter into acquisitions and joint ventures, (5) incur additional indebtedness or provide certain guarantees, (6) make capital expenditures, (7) engage in mergers, acquisitions and asset sales, (8) conduct transactions with affiliates, (9) alter the nature of our businesses, (10) grant certain guarantees with respect to physician practices, (11) engage in sale and leaseback transactions or (12) change our fiscal year. We and our subsidiaries are also required to comply with specified financial covenants (consisting of a maximum first lien net debt to consolidated EBITDA leverage ratio) and various affirmative covenants. Under the Credit Facility, the first lien net debt to consolidated EBITDA leverage ratio is calculated as the ratio of total first lien debt, less unrestricted cash and cash equivalents, to consolidated EBITDA, as defined in the Credit Facility. The calculation of consolidated EBITDA as defined in the Credit Facility is a trailing 12-month calculation that begins with net income attributable to us, with certain pro forma adjustments to consider the impact of material acquisitions or divestitures, and adjustments for interest, taxes, depreciation and amortization, net income attributable to noncontrolling interests, stock compensation expense, restructuring costs, and the financial impact of other non-cash or non-recurring items recorded during any such 12-month period. For the 12-month period ended March 31, 2018, the first lien net debt to consolidated EBITDA leverage ratio financial covenant under the Credit Facility limited the ratio of first lien net debt to consolidated EBITDA, as defined, to less than or equal to 5.25 to 1.00. We were in compliance with all such covenants at March 31, 2018, with a first lien net debt to consolidated EBITDA leverage ratio of approximately 4.47 to 1.00.

Events of default under the Credit Facility include, but are not limited to, (1) our failure to pay principal, interest, fees or other amounts under the credit agreement when due (taking into account any applicable grace period), (2) any representation or warranty proving to have been materially incorrect when made, (3) covenant defaults subject, with respect to certain covenants, to an available cure, (4) bankruptcy and insolvency events, (5) a cross default to certain other debt, (6) certain undischarged judgments (not paid within an applicable grace period), (7) a change of control (as defined), (8) certain ERISA-related defaults and (9) the invalidity or impairment of specified security interests, guarantees or subordination provisions in favor of the administrative agent or lenders under the Credit Facility.

On February 26, 2018, the Credit Facility was amended, with requisite revolving lender approval, to remove the consolidated EBITDA to interest expense ratio financial covenant, to replace the senior secured net debt to consolidated EBITDA ratio financial covenant with a first lien net debt to consolidated EBITDA ratio financial covenant, and to reduce the extended revolving credit commitments to $650 million (for a total of $840 million in revolving credit commitments when combined with the non-extended portion of the revolving credit facility). The new financial covenant provides for a maximum first lien net debt to consolidated EBITDA ratio of 5.25 to 1.0, reducing to 5.0 to 1.0 on July 1, 2018, 4.75 to 1.0 on January 1, 2019, 4.5 to 1.0 on January 1, 2020 and 4.25 to 1.0 on July 1, 2020. In addition, we agreed pursuant to the amendment to modify its ability to retain asset sale proceeds, and instead to apply them to prepayments of term loans based on pro forma first lien leverage. To the extent the pro forma ratio of first lien net debt to consolidated EBITDA is greater than or equal to 4.5 to 1.0, 100% of net cash proceeds of asset sales will be applied to prepay term loans; to the extent the first lien leverage ratio is less than 4.5 to 1.0 but greater than or equal to 4.0 to 1.0, 50% of such proceeds will be applied to prepay term loans; and to the extent the pro forma first lien leverage ratio is less than 4.0 to 1.0, there will be no requirement to prepay term loans with such proceeds. These ratios will be determined on a pro forma basis giving appropriate effect to the relevant asset sales and corresponding prepayments of term loans.

On March 23, 2018, we and CHS, entered into the Fourth Amendment and Restatement Agreement to the Credit Facility, or the Agreement. In addition to including the changes described in the paragraph above, the Agreement amended the Credit Facility to permit CHS to incur debt under either an Asset-Based Loan facility, or ABL, in an amount up to $1.0 billion or maintain its Asset-Backed Securitization program. The Revolving Facility would be reduced to $425 million upon the effectiveness of the contemplated ABL facility. The Agreement also reduced the availability for incremental tranches of term loans or increases in the Revolving Facility to $500 million and removed the secured net leverage incurrence test with respect to junior secured debt. Term G Loans will accrue interest at a rate per annum initially equal to LIBOR plus 3.00%, in the case of LIBOR borrowings, and Alternate Base Rate

 

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plus 2.00%, in the case of Alternate Base Rate borrowing. Term H Loans will accrue interest at a rate per annum initially equal to LIBOR plus 3.25%, in the case of LIBOR borrowings, and Alternate Base Rate plus 2.25%, in the case of Alternate Base Rate borrowing.

On March 16, 2017, CHS completed a public offering of $2.2 billion aggregate principal amount of 6 14% Senior Secured Notes due 2023, or the 6 14% Senior Secured Notes. The net proceeds from this issuance were used to finance the purchase or redemption of $700 million aggregate principal amount of the 2018 Senior Secured Notes and related fees and expenses, and the repayment of $1.445 billion of the Term F Facility. On May 12, 2017, CHS completed a tack-on offering of $900 million aggregate principal amount of 6 14% Senior Secured Notes, increasing the total aggregate principal amount of 6 14% Senior Secured Notes to $3.1 billion. A portion of the net proceeds from this issuance were used to finance the repayment of approximately $713 million aggregate principal amount of CHS’ then outstanding Term A Facility and related fees and expenses. The tack-on notes have identical terms, other than issue date and issue price as the 6 14% Senior Secured Notes issued on March 16, 2017. The 6 14% Senior Secured Notes bear interest at 6.250% per annum, payable semiannually in arrears on March 31 and September 30, commencing September 30, 2017. Interest on the 6 14% Senior Secured Notes accrues from the date of original issuance. Interest is calculated on the basis of a 360-day year comprised of twelve 30-day months. Both the 2021 Senior Secured Notes and the 6 14% Senior Secured Notes are secured by a first-priority lien subject to a shared lien of equal priority with certain other obligations, including obligations under the Credit Facility, and subject to prior ranking liens permitted by the indentures governing the 2021 Senior Secured Notes and the 6 14% Senior Secured Notes on substantially the same assets, subject to certain exceptions, that secure CHS’ obligations under the Credit Facility.

Prior to the effectiveness of the ABL described below, CHS, through certain of its subsidiaries, participated in an accounts receivable loan agreement, or the Receivables Facility, with a group of lenders and banks, Credit Agricolé Corporate and Investment Bank, as a managing agent and as the administrative agent. Patient-related accounts receivable, or the Receivables, for certain affiliated hospitals served as collateral for the outstanding borrowings under the Receivables Facility. The interest rate on the borrowings was based on the commercial paper rate plus an applicable interest rate spread. The Receivables Facility was scheduled to expire on November 13, 2019. The outstanding borrowings pursuant to the Receivables Facility at March 31, 2018 totaled $538 million on the condensed consolidated balance sheet. At March 31, 2018, the carrying amount of Receivables included in the Receivables Facility totaled approximately $1.6 billion and is included in patient accounts receivable on the condensed consolidated balance sheet.

On April 3, 2018, we and CHS entered into an asset-based loan (ABL) credit agreement, or the ABL Credit Agreement, with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders and other agents party thereto. Pursuant to the ABL Credit Agreement, the lenders have extended to CHS a revolving asset-based loan facility, or the ABL Facility, in the maximum aggregate principal amount of $1.0 billion, subject to borrowing base capacity. The ABL Facility includes borrowing capacity available for letters of credit of $50 million. CHS and all domestic subsidiaries of the CHS that guarantee the CHS’ other outstanding senior and senior secured indebtedness guarantee the obligations of CHS under the ABL Facility. Subject to certain exceptions, all obligations under the ABL Facility and the related guarantees are secured by a perfected first-priority security interest in substantially all of the Receivables, deposit, collection and other accounts and contract rights, books, records and other instruments related to the foregoing of the Company, CHS and the guarantors as well as a perfected junior-priority security interest in substantially all of the other assets of the Company, CHS and the guarantors, subject to customary exceptions and intercreditor arrangements. The revolving credit commitments under the Credit Facility were reduced to $425 million upon the effectiveness of the ABL facility. In connection with entering into the ABL Credit Agreement and the ABL Facility, we repaid in full and terminated our Receivables Facility.

Borrowings under the ABL Facility bear interest at a rate per annum equal to an applicable percentage, plus, at the Borrower’s option, either (a) an Alternative base rate or (b) a LIBOR rate. From and after the end of the second full fiscal quarter after the closing of the ABL Facility, the applicable percentage under the ABL Facility will be determined based on excess availability as a percentage of the maximum commitment amount under the ABL facility at a rate per annum of 1.25%, 1.50% and 1.75% for loans based on the Alternative base rate and 2.25%, 2.50% and 2.75% for loans based on the LIBOR rate. From and after the end of the first full fiscal quarter after the closing of the ABL Facility, the applicable commitment fee rate under the ABL Facility will be determined based on average utilization as a percentage of the maximum commitment amount under the ABL Facility at a rate per annum of either 0.50% or 0.625% times the unused portion of the ABL facility.

Principal amounts outstanding under the ABL Facility will be due and payable in full on April 3, 2023. The ABL Facility includes a 91-day springing maturity applicable if more than $250 million in the aggregate pri