COMMUNITY HEALTH SYSTEMS, INC. 10-Q
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, 2006
Commission file number 001-15925
COMMUNITY HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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13-3893191
(I.R.S. Employer
Identification Number) |
7100 Commerce Way, Suite 100
Brentwood, Tennessee
(Address of principal executive offices)
37027
(Zip Code)
615-465-7000
(Registrants 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 þ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, or non-accelerated filer, see definition of accelerated filer and large accelerated
filer in Rule 126-2 of the Exchange Act (check one).
Larger accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicated by check mark whether the registrant is a shell company (as defined in Rule 126-2 of
the Exchange Act).
Yes o No þ
As of April 20, 2006, there were outstanding 98,293,051 shares of the Registrants Common
Stock, $.01 par value.
Community Health Systems, Inc.
Form 10-Q
For the Three Months Ended March 31, 2006
1
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
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March 31, |
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December 31, |
|
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2006 |
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2005 |
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|
(Unaudited) |
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|
ASSETS |
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|
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Current assets |
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|
|
|
|
|
|
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Cash and cash equivalents |
|
$ |
111,951 |
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|
$ |
104,108 |
|
Patient accounts receivable, net of allowance for doubtful accounts of $340,847 and
$346,024 at March 31, 2006 and December 31, 2005, respectively |
|
|
699,067 |
|
|
|
656,029 |
|
Supplies |
|
|
94,864 |
|
|
|
95,200 |
|
Deferred income taxes |
|
|
4,128 |
|
|
|
4,128 |
|
Prepaid expenses and taxes |
|
|
32,445 |
|
|
|
33,377 |
|
Other current assets |
|
|
53,455 |
|
|
|
36,494 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
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|
995,910 |
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|
|
929,336 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Property and equipment |
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|
2,175,228 |
|
|
|
2,128,639 |
|
Less accumulated depreciation and amortization |
|
|
(547,770 |
) |
|
|
(517,648 |
) |
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|
|
|
|
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Property and equipment, net |
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|
1,627,458 |
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|
|
1,610,991 |
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|
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|
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Goodwill |
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1,267,557 |
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|
1,259,816 |
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|
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|
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|
|
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|
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Other assets, net |
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158,364 |
|
|
|
149,202 |
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|
|
|
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|
|
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Total assets |
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$ |
4,049,289 |
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|
$ |
3,949,345 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities |
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Current maturities of long-term debt |
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$ |
19,284 |
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$ |
19,124 |
|
Accounts payable |
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|
158,190 |
|
|
|
189,940 |
|
Current income taxes payable |
|
|
31,822 |
|
|
|
19,811 |
|
Accrued interest |
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|
11,062 |
|
|
|
8,591 |
|
Accrued liabilities |
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252,238 |
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|
215,064 |
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Total current liabilities |
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472,596 |
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452,530 |
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Long-term debt |
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1,516,269 |
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1,648,500 |
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Deferred income taxes |
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|
157,579 |
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|
157,579 |
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|
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Other long-term liabilities |
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139,818 |
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|
126,159 |
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|
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Stockholders equity |
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Preferred stock, $.01 par value per share, 100,000,000 shares authorized,
none issued |
|
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|
Common stock, $.01 par value per share, 300,000,000 shares authorized;
99,443,600 shares issued and 98,468,051 shares outstanding
at March 31, 2006 and 94,539,837 shares issued and 93,564,288 shares
outstanding at December 31, 2005 |
|
|
994 |
|
|
|
945 |
|
Additional paid-in capital |
|
|
1,334,789 |
|
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|
1,208,930 |
|
Treasury stock, at cost, 975,549 shares at March 31, 2006 and
December 31, 2005 |
|
|
(6,678 |
) |
|
|
(6,678 |
) |
Unearned stock-based compensation |
|
|
|
|
|
|
(13,204 |
) |
Accumulated other comprehensive income |
|
|
20,491 |
|
|
|
15,191 |
|
Retained earnings |
|
|
413,431 |
|
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|
359,393 |
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Total stockholders equity |
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|
1,763,027 |
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|
1,564,577 |
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|
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Total liabilities and stockholders equity |
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$ |
4,049,289 |
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|
$ |
3,949,345 |
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|
See accompanying notes.
2
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
(Unaudited)
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Three Months Ended |
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March 31, |
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2006 |
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|
2005 |
|
Net operating revenues |
|
$ |
1,026,562 |
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|
$ |
908,263 |
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|
|
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|
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|
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|
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Operating costs and expenses: |
|
|
|
|
|
|
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|
Salaries and benefits |
|
|
407,668 |
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|
|
360,233 |
|
Provision for bad debts |
|
|
107,591 |
|
|
|
93,051 |
|
Supplies |
|
|
122,820 |
|
|
|
112,656 |
|
Other operating expenses |
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|
207,043 |
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|
178,064 |
|
Rent |
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|
22,982 |
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|
|
20,477 |
|
Depreciation and amortization |
|
|
42,506 |
|
|
|
39,797 |
|
Minority interest in earnings |
|
|
613 |
|
|
|
887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total operating costs and expenses |
|
|
911,223 |
|
|
|
805,165 |
|
|
|
|
|
|
|
|
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|
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|
Income from operations |
|
|
115,339 |
|
|
|
103,098 |
|
Interest expense, net |
|
|
21,787 |
|
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|
22,781 |
|
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|
|
|
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|
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Income from continuing operations
before income taxes |
|
|
93,552 |
|
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|
80,317 |
|
Provision for income taxes |
|
|
36,298 |
|
|
|
31,238 |
|
|
|
|
|
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|
Income from continuing operations |
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|
57,254 |
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|
49,079 |
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|
Discontinued operations, net of taxes: |
|
|
|
|
|
|
|
|
Loss from operations of hospitals sold and held for sale |
|
|
(657 |
) |
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|
(5,473 |
) |
Loss on sale of hospitals |
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|
(2,559 |
) |
|
|
(7,618 |
) |
|
|
|
|
|
|
|
Loss on discontinued operations |
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|
(3,216 |
) |
|
|
(13,091 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net income |
|
$ |
54,038 |
|
|
$ |
35,988 |
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|
|
|
|
|
|
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|
Income from continuing operations per common share: |
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|
|
|
|
|
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Basic |
|
$ |
0.59 |
|
|
$ |
0.56 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.58 |
|
|
$ |
0.52 |
|
|
|
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|
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|
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|
Net income per common share: |
|
|
|
|
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|
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Basic |
|
$ |
0.56 |
|
|
$ |
0.41 |
|
|
|
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Diluted |
|
$ |
0.55 |
|
|
$ |
0.39 |
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|
Weighted-average number of shares outstanding: |
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|
|
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|
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|
Basic |
|
|
96,552,448 |
|
|
|
87,926,338 |
|
|
|
|
|
|
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|
Diluted |
|
|
98,209,271 |
|
|
|
98,087,086 |
|
|
|
|
|
|
|
|
See accompanying notes.
3
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
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|
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|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
54,038 |
|
|
$ |
35,988 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
42,506 |
|
|
|
41,137 |
|
Minority interest in earnings |
|
|
613 |
|
|
|
887 |
|
Stock-based compensation expense |
|
|
3,651 |
|
|
|
496 |
|
Loss on sale of hospitals |
|
|
3,937 |
|
|
|
6,295 |
|
Excess tax benefits relating to stock-based compensation |
|
|
(4,360 |
) |
|
|
|
|
Other non-cash expenses, net |
|
|
(590 |
) |
|
|
(471 |
) |
Changes in operating assets and liabilities, net of effects
of acquisitions and divestitures: |
|
|
|
|
|
|
|
|
Patient accounts receivable |
|
|
(42,326 |
) |
|
|
(11,510 |
) |
Supplies, prepaid expenses and other current assets |
|
|
2,798 |
|
|
|
1,849 |
|
Accounts payable, accrued liabilities and income taxes |
|
|
28,371 |
|
|
|
66,025 |
|
Other |
|
|
2,176 |
|
|
|
8,013 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
90,814 |
|
|
|
148,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Acquisitions of facilities and other related equipment |
|
|
(17,448 |
) |
|
|
(24,854 |
) |
Purchases of property and equipment |
|
|
(39,704 |
) |
|
|
(33,166 |
) |
Disposition of hospitals |
|
|
500 |
|
|
|
51,861 |
|
Proceeds from sale of equipment |
|
|
34 |
|
|
|
2,131 |
|
Increase in other assets |
|
|
(22,425 |
) |
|
|
(7,237 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(79,043 |
) |
|
|
(11,265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
1,919 |
|
|
|
15,958 |
|
Excess tax benefits relating to stock-based compensation |
|
|
4,360 |
|
|
|
|
|
Stock buy-back |
|
|
(8,112 |
) |
|
|
(4,390 |
) |
Deferred financing costs |
|
|
(16 |
) |
|
|
(749 |
) |
Redemption of convertible notes |
|
|
(128 |
) |
|
|
|
|
Proceeds from minority investors in joint ventures |
|
|
3,060 |
|
|
|
1,383 |
|
Redemption of minority investments in joint ventures |
|
|
(530 |
) |
|
|
(290 |
) |
Distributions to minority investors in joint ventures |
|
|
(596 |
) |
|
|
(382 |
) |
Borrowings under credit agreement |
|
|
|
|
|
|
|
|
Repayments of long-term indebtedness |
|
|
(3,885 |
) |
|
|
(13,025 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(3,928 |
) |
|
|
(1,495 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
7,843 |
|
|
|
135,949 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
104,108 |
|
|
|
82,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
111,951 |
|
|
$ |
218,447 |
|
|
|
|
|
|
|
|
See accompanying notes.
4
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of Community Health Systems, Inc. and its
Subsidiaries (the Company) as of March 31, 2006, and for the three month periods ended March 31,
2006, and March 31, 2005, have been prepared in accordance with accounting principles generally
accepted in the United States of America. 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, 2006, are not necessarily indicative
of the results to be expected for the full fiscal year ending December 31, 2006. Certain
information and disclosures normally included in the notes to consolidated financial statements
have been condensed or omitted as permitted by the rules and regulations of the Securities and
Exchange Commission (SEC), although the Company believes the disclosure is 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, 2005, contained in the Companys Annual Report on Form
10-K. Certain prior-period balances in the accompanying condensed consolidated financial
statements have been reclassified to conform to the current periods presentation of financial
information. These reclassifications include discontinued operations as described in Note 5.
2. ACCOUNTING FOR STOCK-BASED COMPENSATION
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment (SFAS No. 123(R)) which
replaced SFAS No. 123 and supercedes APB Opinion No. 25 (APB 25). The Company adopted the
provisions of SFAS No. 123(R) on January 1, 2006 electing to use the modified prospective method
for transition purposes. The modified prospective method requires that compensation expense be
recorded for all unvested stock options and share awards that subsequently vest or are modified at
the beginning of the period of adoption, without restatement of prior periods.
The impact from total compensation expense related to stock-based equity plans for the three months
ended March 31, 2006 was a decrease to income from continuing operations before income taxes of
$3.7 million and a decrease to net income of $2.4 million or $0.02 per diluted share. Prior to
January 1, 2006, the Company accounted for stock-based compensation under the recognition and
measurement provisions of APB 25. The impact from total compensation expense related to
stock-based equity plans recognized under APB 25 for the three months ended March 31,
2005, was a decrease to income from continuing operations of $0.5 million and a decrease
to net income of $0.3 million or $0.00 per diluted share. The resulting change in the comparable
periods is a decrease to income from continuing operations of $3.2 million and a decrease to net
income of $2.1 million or $0.02 per diluted share.
SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash flow as required
under APB 25 and related interpretations. This requirement reduced our net operating cash flows
and increased our financing cash flows by $4.4 million for the three months ended March 31, 2006.
Our deferred compensation cost at December 31, 2005, of $13.2 million, arising from the
issuance of restricted stock in 2005 and recorded as a component of stockholders equity as
required under APB 25, was reclassified into additional paid-in capital upon the adoption of
SFAS No. 123(R).
At March 31, 2006, $50.9 million of unrecognized stock-based compensation expense from all
outstanding unvested stock options and restricted stock is expected to be recognized over a
weighted average period of 2.5 years.
5
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. ACCOUNTING FOR STOCK-BASED COMPENSATION (Continued)
The pro forma table below reflects net income and earnings per share for the three months ended
March 31, 2005, had the Company applied the fair value recognition provisions of SFAS No. 123 (in
thousands, except per share data):
|
|
|
|
|
|
|
Three months |
|
|
|
Ended |
|
|
|
March 31, |
|
|
|
2005 |
|
Net income, as reported |
|
$ |
35,988 |
|
|
|
|
|
|
Add: Stock-Based compensation expense recognized
under APB 25, net of tax |
|
|
349 |
|
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of tax |
|
|
(2,183 |
) |
|
|
|
|
|
|
|
|
|
Pro-forma net income |
|
$ |
34,154 |
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
0.41 |
|
|
|
|
|
|
|
|
|
|
Basic Pro-forma |
|
$ |
0.39 |
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
0.39 |
|
|
|
|
|
|
|
|
|
|
Diluted pro-forma |
|
$ |
0.37 |
|
|
|
|
|
For the purposes of the above table the fair value of each option grant was estimated on the date
of grant using the Black Scholes option pricing model with the following weighted average
assumptions used for grants during the three months ended March 31, 2005:
|
|
|
|
|
|
|
Three months |
|
|
Ended |
|
|
March 31, |
|
|
2005 |
Expected volatility |
|
|
36.7 |
% |
Expected dividends |
|
|
0 |
|
Expected term |
|
4 years |
|
Risk-free interest rate |
|
|
3.875 |
% |
Stock-based compensation awards are granted under the Community Health Systems, Inc. Amended and
Restated 2000 Stock Option and Award Plan (the 2000 Plan). The 2000 Plan allows for the grant of
incentive stock options intended to qualify under Section 422 of the Internal Revenue Code as well
as stock options which do not so qualify, stock appreciation rights, restricted stock, performance
units and performance shares, phantom stock awards and share awards. Persons eligible to receive
grants under the 2000 Plan include the Companys directors, officers, employees and consultants.
To date, the options granted under the 2000 Plan are nonqualified stock options for tax purposes.
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 and
options granted in 2006 have an 8 year contractual term. The exercise price of options granted to
employees under the 2000 Plan were equal to the fair value of the Companys common stock on the
option grant date. As of March 31, 2006, 6,614,423 shares of unissued common stock remain reserved
for future grants under the 2000 Plan. The Company also has options outstanding under its Employee
Stock Option Plan (the 1996 Plan). These options are fully vested and exercisable and no
additional grants of options will be made under the 1996 Plan.
6
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. ACCOUNTING FOR STOCK-BASED COMPENSATION (Continued)
The fair value of stock-based awards was estimated using the Black Scholes option pricing model
with the assumptions and weighted average fair values during the
three months ended March 31, 2006,
as follows:
|
|
|
|
|
|
|
Three months |
|
|
Ended |
|
|
March 31, |
|
|
2006 |
Expected volatility |
|
|
24.2 |
% |
Expected dividends |
|
|
0 |
|
Expected term |
|
4 years |
|
Risk-free interest rate |
|
|
4.65 |
% |
As part of its SFAS No. 123(R) adoption, the Company examined concentrations of holdings, its
historical patterns of option exercises and forfeitures as well as forward looking factors, in an
effort to determine if there were any discernable employee populations. From this analysis, the
Company identified two employee populations, one consisting primarily of certain senior executives
and the other consisting of all other recipients.
The expected volatility rate was estimated based on historical volatility. As part of its adoption
of SFAS No. 123(R) the Company also reviewed the market based implied volatility of actively traded
options of its common stock and determined that historical volatility did not differ significantly
from the implied volatility.
The expected life computation is based on historical exercise and cancellation patterns and forward
looking factors where present for each population identified. The risk-free interest rate is based
on the U.S. Treasury yield curve in effect at the time of the grant. The pre-vesting forfeiture
rate is based on historical rates and forward looking factors for each population identified. As
required under SFAS No. 123(R) the Company will adjust the estimated forfeiture rate to its actual
experience.
Options
outstanding and exercisable under the 1996 Plan and 2000 Plan as of March 31, 2006, and
changes during the three months then ended were as follows (in thousands, except share and per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Weighted |
|
Remaining |
|
|
|
|
|
|
|
|
Average |
|
Contractual |
|
Aggregate |
|
|
|
|
|
|
Exercise |
|
Term |
|
Intrinsic |
|
|
Shares |
|
Price |
|
(in years) |
|
Value |
Outstanding at December 31, 2005 |
|
|
5,370,274 |
|
|
$ |
22.63 |
|
|
|
|
|
|
$ |
73,204 |
|
Granted |
|
|
949,000 |
|
|
|
38.30 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(472,253 |
) |
|
|
14.75 |
|
|
|
|
|
|
|
11,080 |
|
Forfeited and cancelled |
|
|
(32,805 |
) |
|
|
30.18 |
|
|
|
|
|
|
|
196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006 |
|
|
5,814,216 |
|
|
|
25.70 |
|
|
7.3 years |
|
|
60,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2006 |
|
|
3,839,707 |
|
|
|
20.85 |
|
|
6.8 years |
|
|
58,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of stock options granted during the three months
ended March 31, 2006, was $10.43. The aggregate intrinsic value in the table above represents the
total pretax intrinsic value (the difference between the Companys closing stock price on the last
trading day of the reporting period and the exercise price, multiplied by the number of the
in-the-money options) that would have been received by the option holders had all option holders
exercised their options on March 31, 2006. This amount changes based on the market value of the
Companys stock.
7
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. ACCOUNTING FOR STOCK-BASED COMPENSATION (Continued)
The Company has also awarded restricted stock under the 2000 Plan to various employees and its
directors. 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 Companys senior executives
restricted stock awards also contain a performance objective that must be met in addition to the
vesting requirements. If the performance objective is not attained the awards will be forfeited in
their entirety. 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. Notwithstanding
the above mentioned performance objectives and vesting requirements, the restrictions will lapse
earlier in the event of death, disability, termination of employment by employer for reason other
than for cause of the holder of the restricted stock or in the event of change in control of the
Company.
Restricted
stock outstanding under the 2000 Plan as of March 31, 2006, and changes during the three
months then ended is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Fair |
|
|
Shares |
|
Value |
Unvested at December 31, 2005 |
|
|
558,000 |
|
|
$ |
32.37 |
|
Granted |
|
|
564,000 |
|
|
|
38.30 |
|
Vested |
|
|
(184,308 |
) |
|
|
32.37 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at March 31, 2006 |
|
|
937,692 |
|
|
|
35.95 |
|
|
|
|
|
|
|
|
|
|
As of March 31, 2006, there was $32.2 million of unrecognized stock-based compensation expense
related to unvested restricted stock expected to be recognized over a
weighted-average period of
2.5 years.
Under the Directors Fee Deferral Plan, the Companys outside directors may elect to receive share
equivalent units in lieu of cash for their directors fee. These units are held in the plan until
the director electing to receive the share equivalent units retires or otherwise terminates his/her
directorship with the Company. Share equivalent units are converted to shares of common stock of
the Company at the time of distribution. For each of the three months ended March 31, 2006 and
2005, $50,000 of directors fees earned during that quarter were elected to be deferred pursuant to
the plan, which were converted at a price equivalent to the closing market price of the Companys
stock at each of the respective quarter ends into 1,434.993 units at March 31, 2006, and 1,425.093
units at March 31, 2005. At March 31, 2006, there are a
total of 6,377.545 units deferred in the
plan with an aggregate fair value of $230,000, based on the closing market price of the Companys
common stock at March 31, 2006 of $36.15.
3. COST OF REVENUE
The majority of the Companys 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
Companys corporate office costs, which were $22.1 million and $15.3 million for the three month
periods ended March 31, 2006 and 2005, respectively. These corporate office costs include
stock-based compensation expense recognized under SFAS No. 123(R).
4. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management of the Company to make estimates and
assumptions that affect the amounts reported in the consolidated financial statements. Actual
results could differ from the estimates.
5. ACQUISITIONS AND DIVESTITURES
Effective January 31, 2005, the Companys lease of Scott County Hospital, a 99 bed facility located
in Oneida, Tennessee, expired pursuant to its terms.
8
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. ACQUISITIONS AND DIVESTITURES (Continued)
Effective March 31, 2005, the Company sold The Kings Daughters Hospital, a 137 bed facility
located in Greenville, Mississippi, to Delta Regional Medical Center, also located in Greenville,
Mississippi. In a separate transaction, also effective March 31, 2005, the Company sold Troy
Regional Medical Center, a 97 bed facility located in Troy, Alabama, Lakeview Community Hospital, a
74 bed facility located in Eufaula, Alabama and Northeast Medical Center, a 75 bed facility located
in Bonham, Texas to Attentus Healthcare Company of Brentwood, Tennessee. The aggregate sales price
for these four hospitals was approximately $52.0 million and was received in cash.
During 2005, the Company acquired through four separate purchase transactions and one capital lease
transaction, most of the assets and working capital of five hospitals. On March 1, 2005, the
Company acquired an 85% controlling interest in Chestnut Hill Hospital, a 222 bed hospital located
in Philadelphia, Pennsylvania. On June 30, 2005, the Company acquired, through a capital lease,
Bedford County Medical Center, a 104 bed hospital located in Shelbyville, Tennessee. On September
30, 2005, the Company acquired the assets of Newport Hospital and Clinic located in Newport,
Arkansas. This facility, which was previously operated as an 83 bed acute care general hospital,
was closed by its former owner simultaneous with this transaction. The operations of this hospital
were consolidated with Harris Hospital, also located in Newport, which is owned and operated by a
wholly owned subsidiary of the Company. On October 1, 2005, the Company acquired Sunbury Community
Hospital, a 123 bed hospital located in Sunbury, Pennsylvania, and Bradley Memorial Hospital, a 251
bed hospital located in Cleveland, Tennessee. The aggregate consideration for the five hospitals
totaled approximately $168 million, of which $138 million was paid in cash and $30 million was
assumed in liabilities. Goodwill recognized in these transactions totaled $43 million, which is
expected to be fully deductible for tax purposes.
Effective March 1, 2006, the Company completed the acquisition of Forrest City Hospital, a 118-bed
hospital and related assets located in Forrest City, Arkansas, through a combination purchase and
capital lease transaction. The aggregate consideration for this transaction totaled approximately
$10.4 million, of which $10.2 million was paid in cash and $0.2 million was assumed in liabilities.
Effective March 18, 2006, the Company sold Highland Medical Center, a 123 bed facility located in
Lubbock, Texas, to Shiloh Health Services, Inc. of Louisville, Kentucky. The proceeds from this
sale was $0.5 million. This hospital had previously been classified as held for sale by the
Company.
In connection with the above sale transactions and in accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, the Company has classified the results of
operations of Scott County Hospital, The Kings Daughters Hospital, Troy Regional Medical Center,
Lakeview Community Hospital, Northeast Medical Center and Highland Medical Center as discontinued
operations in the accompanying condensed consolidated statements of income.
Net operating revenues and loss from discontinued operations reported for the six hospitals in
discontinued operations for the three month periods ended March 31, 2006 and 2005 (as applicable)
are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Net operating revenues |
|
$ |
4,294 |
|
|
$ |
33,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations before income taxes |
|
$ |
(1,008 |
) |
|
$ |
(8,398 |
) |
Loss on sale of hospitals |
|
|
(3,938 |
) |
|
|
(6,295 |
) |
|
|
|
|
|
|
|
Loss from discontinued operations, before taxes |
|
|
(4,946 |
) |
|
|
(14,693 |
) |
Income tax benefit |
|
|
1,730 |
|
|
|
1,602 |
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax |
|
$ |
(3,216 |
) |
|
$ |
(13,091 |
) |
|
|
|
|
|
|
|
The computation of loss from discontinued operations before taxes for the three months ended March
31, 2006 includes the net write-off of $4.4 million of tangible assets at the one hospital sold
during the three months ended March 31, 2006.
9
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. ACQUISITIONS AND DIVESTITURES (Continued)
The computation of the loss from discontinued operations, before taxes, for the three months ended
March 31, 2005 includes the net write-off of $41.5 million of tangible assets and $16.2 million of
goodwill at the four hospitals sold during the three months ended March 31, 2005.
Assets and liabilities of the hospitals classified as discontinued operations included in the
accompanying condensed consolidated balance sheets as of March 31, 2006 and December 31, 2005 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Current assets |
|
$ |
2,465 |
|
|
$ |
4,133 |
|
Property and equipment |
|
|
|
|
|
|
|
|
Other assets |
|
|
|
|
|
|
3,000 |
|
Current liabilities |
|
|
(4,451 |
) |
|
|
(6,601 |
) |
|
|
|
|
|
|
|
Net assets |
|
$ |
(1,986 |
) |
|
$ |
532 |
|
|
|
|
|
|
|
|
Pending Acquisitions
A definitive agreement was signed on February 2, 2006, for the purchase of Vista Health, which
includes Victory Memorial Hospital (336 licensed beds) and St. Therese Medical Center (currently
utilizing 71 non-acute care beds), both located in Waukegan, Illinois, as well as Vista Imaging
Center located in Gurnee, Illinois, Vista Surgery and Treatment Center in Lindenhurst, Illinois and
Vista M.R. Institute, with locations in Lindenhurst and Gurnee. The purchase price for Vista
Health is approximately $104 million plus working capital. This acquisition is expected to close
in the second quarter of 2006. The seller is a not-for-profit corporation.
A second definitive agreement signed on February 16, 2006, was executed for the purchase of Via
Christi Oklahoma Regional Medical Center located in Ponca City, Oklahoma (140 licensed beds). The
purchase price for Via Christi is approximately $56 million plus working capital. This acquisition
is expected to close in the second quarter of 2006. The seller is a not-for-profit corporation.
6. RECENT ACCOUNTING PRONOUNCEMENT
On November 10, 2005, the FASB issued Interpretation No. 45-3, Application of FASB Interpretation
No. 45 to Minimum Revenue Guarantees Granted to a Business or Its Owners (FIN 45-3). FIN 45-3
amends FIN 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, to expand the scope to include guarantees granted
to a business, such as a physicians practice, or its owner(s), that the revenue of the business
for a period will be at least a specified amount. Under FIN 45-3, the accounting requirements of
FIN 45 are effective for any new revenue guarantees issued or modified on or after January 1, 2006,
and the disclosure of all revenue guarantees, regardless of whether they were recognized under FIN
45, is required for all interim and annual periods beginning on or after January 1, 2006. The
adoption of this interpretation did not have a material impact on the Companys consolidated
results of operations or consolidated financial position.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the three months ended March 31, 2006, are as
follows (in thousands):
|
|
|
|
|
Balance as of December 31, 2005 |
|
$ |
1,259,816 |
|
Goodwill acquired as part of acquisitions during 2006 |
|
|
876 |
|
Consideration adjustments and finalization of purchase price |
|
|
|
|
allocations for acquisitions completed prior to 2006 |
|
|
|
|
|
|
|
6,865 |
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2006 |
|
$ |
1,267,557 |
|
|
|
|
|
10
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
The Company completed its most recent annual goodwill impairment test as required by SFAS No. 142,
Goodwill and Other Intangible Assets, using a measurement date of September 30, 2005. Based on
the results of the impairment test, the Company was not required to recognize an impairment of
goodwill in 2005.
The gross carrying amount of the Companys other intangible assets was $12.8 million at March 31,
2006 and $11.9 million at December 31, 2005, and the net carrying amount was $8.0 million at March
31, 2006 and $7.6 million at December 31, 2005. Other intangible assets are included in other
assets, net on the Companys condensed consolidated balance sheets.
The weighted average amortization period for the intangible assets subject to amortization is
approximately seven years. There are no expected residual values related to these intangible
assets. Amortization expense on these intangible assets was $0.4 million and $0.3 million during
the three months ended March 31, 2006 and March 31, 2005, respectively. Amortization expense on
intangible assets is estimated to be $1.3 million for the remainder of 2006, $1.5 million in 2007,
$0.9 million in 2008, $0.8 million in 2009, $0.8 million in 2010, and $0.5 million in 2011.
8. EARNINGS PER SHARE
The following table sets forth the components of the numerator and denominator for the computation
of basic and diluted income from continuing operations per share (in thousands, except share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
Numerator: |
|
|
|
|
|
|
|
|
Numerator for basic earnings per share -
Income from continuing operations available to
common stockholders basic |
|
$ |
57,254 |
|
|
$ |
49,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings per share -
Income from continuing operations |
|
$ |
57,254 |
|
|
$ |
49,079 |
|
Interest, net of tax, on 4 25% convertible notes |
|
|
135 |
|
|
|
2,189 |
|
|
|
|
|
|
|
|
Income from continuing operations available
to common stockholders diluted |
|
$ |
57,389 |
|
|
$ |
51,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding basic |
|
|
96,552,448 |
|
|
|
87,926,338 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Non-employee director options |
|
|
11,915 |
|
|
|
11,174 |
|
Restricted stock awards |
|
|
43,641 |
|
|
|
8,351 |
|
Employee options |
|
|
1,012,727 |
|
|
|
1,559,147 |
|
4 25% Convertible notes |
|
|
588,540 |
|
|
|
8,582,076 |
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding diluted |
|
|
98,209,271 |
|
|
|
98,087,086 |
|
|
|
|
|
|
|
|
Dilutive securities outstanding not included in the computation
of earning per share because their effect is antidilutive: |
|
|
|
|
|
|
|
|
Employee options |
|
|
1,062,400 |
|
|
|
86,000 |
|
Since the net income per share including the impact of the conversion of the convertible notes
(none of which remains outstanding as of March 31, 2006) is less than the basic net income per
share for each of the three months ended March 31, 2006 and March 31, 2005, the convertible notes
are dilutive and accordingly must be included in the fully diluted calculation.
9. STOCKHOLDERS EQUITY
On January 17, 2006, the Company completed the redemption of all its remaining outstanding 4.25%
Convertible Subordinated Notes due 2008 (the Notes). Prior to the call for redemption being
given on December 16, 2005, there was $136.6 million in aggregate principal amount of the Notes
outstanding. At the conclusion of the call for redemption, $0.1 million in principal
11
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. STOCKHOLDERS EQUITY (Continued)
amount of the Notes were redeemed for cash and $136.5 million of the Notes were converted by the
holders into 4,074,510 shares of the Companys common stock, $0.1 par value per share.
On December 16, 2005, the Company announced an open market repurchase program for up to five
million shares of the Companys common stock not to exceed $200 million in purchases. This
repurchase program commenced January 14, 2006 and will conclude at the earlier of three years or
when the maximum number of shares have been repurchased or the maximum dollar amount has been
reached. Through March 31, 2006, the Company had repurchased pursuant to this repurchase plan
225,000 shares at a weighted average price of $36.05 per share. The maximum number of shares that
may still be purchased under the repurchase program is 4,775,000. The remaining maximum dollar
amount of shares that is permitted to be purchased under the Companys existing indebtedness is
$191.9 million. This repurchase plan follows a prior repurchase plan for up to five million shares
which concluded on January 13, 2006. The Company repurchased
3,029,700 shares at a weighted-average
price of $31.20 per share under the prior program.
10. COMPREHENSIVE INCOME
The following table presents the components of comprehensive income, net of related taxes. The net
change in fair value of interest rate swap agreements is a function of the spread between the fixed
interest rate of each swap and the underlying variable interest rate under the Companys credit
facility (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Net income |
|
$ |
54,038 |
|
|
$ |
35,988 |
|
Net change in fair value of interest rate swaps |
|
|
5,134 |
|
|
|
5,527 |
|
Unrealized Gains on Investments |
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
59,338 |
|
|
$ |
41,515 |
|
|
|
|
|
|
|
|
The net change in fair value of the interest rate swap and unrealized gains on investments are
included in stockholders equity on the accompanying condensed consolidated balance sheets.
11. LONG-TERM DEBT
On August 19, 2004, the Company entered into a $1.625 billion senior secured credit facility with a
consortium of lenders which was subsequently amended on December 16, 2004 and on July 8, 2005.
This facility replaced the Companys previous credit facility and consists of a $1.2 billion term
loan that matures in 2011 (as opposed to 2010 under the previous facility) and a $425 million
revolving credit facility that matures in 2009 (as opposed to 2008 under the previous facility).
The Company may elect from time to time an interest rate per annum for the borrowings under the
term loan, including the incremental term loan, and revolving credit facility equal to (a) an
alternate base rate, which will be equal to the greatest of (i) the Prime Rate in effect and (ii)
the Federal Funds Effective Rate, plus 50 basis points, plus (1) 75 basis points for the term loan
and (2) the Applicable Margin for revolving credit loans or (b) the Eurodollar Rate plus (1) 175
basis points for the term loan and (2) the Applicable Margin for Eurodollar revolving credit loans.
The Company also pays a commitment fee for the daily average unused commitments under the
revolving credit facility. The commitment fee is based on a pricing grid depending on the
Applicable Margin for Eurodollar revolving credit loans and ranges from 0.250% to 0.500%. The
commitment fee is payable quarterly in arrears and on the revolving credit termination date with
respect to the available revolving credit commitments. In addition, the Company will pay fees for
each letter of credit issued under the credit facility. The purpose of the facility was to
refinance our previous credit agreement, repay specified other indebtedness, and fund general
corporate purposes including declaration and payment of cash dividends, to repurchase shares or
make other distributions, subject to certain restrictions.
On October 15, 2001, the Company sold $287.5 million aggregate principal amount (including the
underwriters over-allotment option) of 4.25% convertible notes for face value. On November 14,
2005 the Company elected to call for redemption $150.0 million in principal amount of the
convertible notes. At the conclusion of the first call for redemption, $0.3 million in principal
amount of the convertible notes were redeemed for cash, and $149.7 million of the convertible notes
called for redemption, plus an additional $0.9 million of the convertible notes, were converted by
the holders into 4,495,083 shares of the Companys common stock, $.01 par value per share. On
December 16, 2005 the Company elected to call for redemption the remaining
12
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. LONG-TERM DEBT (Continued)
convertible notes. On January 17, 2006, at the conclusion of this second call for redemption, $0.1
million in principal amount of the convertible notes were redeemed for cash and notes with an
aggregate principal amount of $136.5 million were converted into 4,074,510 shares of the Companys
common stock.
As of March 31, 2006, the Companys availability for additional borrowings under its revolving
credit facility was $425 million, of which $27 million was set aside for outstanding letters of
credit. The Company also has the ability to add up to $200 million of borrowing capacity from
receivable transactions (including securitizations) under its senior secured credit facility which
has not yet been accessed. The Company also has the ability to amend the senior secured credit
facility to provide for one or more tranches of term loans in an aggregate principal amount of $400
million, which the Company has not yet accessed. As of March 31, 2006, the Companys weighted
average interest rate under its credit facility was 6.7%.
On December 16, 2004, the Company issued $300 million 6.5% senior subordinated notes due 2012. On
April 8, 2005, the Company exchanged these notes for notes having substantially the same terms as
the outstanding notes, except the exchange notes are registered under federal securities law.
12. SUBSEQUENT EVENTS
Effective April 1, 2006, the Company completed its acquisition of two hospitals from the Baptist
Health System, Birmingham, Alabama: Baptist Medical Center DeKalb (134 licensed beds) and Baptist
Medical Center Cherokee (60 licensed beds). The total consideration for these two hospitals was
approximately $66.0 million, of which $65.1 was paid in cash and $0.9 was assumed in liabilities.
13
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
You should read this discussion together with our unaudited condensed consolidated financial
statements and accompanying notes included herein.
Unless the context otherwise requires, Community Health Systems, the Company we, us and
our refer to Community Health Systems, Inc. and its consolidated subsidiaries.
Executive Overview
We are the largest non-urban provider of general hospital healthcare services in the United States
in terms of number of facilities and net operating revenues. We generate revenue by providing a
broad range of general hospital healthcare services to patients in the communities in which we are
located. We are paid for our services by governmental agencies, private insurers and directly by
the patients we serve. For the quarter ended March 31, 2006, we generated $1.027 billion in net
operating revenues, a growth of 13.0% over the first quarter of 2005, $57.3 million in income from
continuing operations, a growth of 16.7% over the first quarter of 2005, and $54.0 million of net
income, a growth of 50.2% over the first quarter of 2005. The growth in net income for the first
quarter of 2006 reflected a $9.9 million reduction in losses from discontinued operations compared
to the first quarter of 2005.
Admissions at hospitals owned throughout both periods decreased 2.4% during the three month period
ended March 31, 2006, as compared to the same period in the prior year. Adjusted admissions for
those same hospitals decreased 0.9% during the three month period
ended March 31, 2006, compared to
the same period in the prior year. This decrease in volume is largely the result of not
experiencing the significant number of flu and respiratory related admissions during the three
month period ended March 31, 2006, as we did during the three month period ended March 31, 2005.
However, the average acuity level of procedures increased in the current quarter, driven by strong
surgical volume, which provided higher net revenues per adjusted admission and translated into
higher related margins than the same quarter in the prior year.
Consistent with the execution of our operating strategy and our efforts to maximize shareholder
value, we acquired the assets through a long-term lease and purchase of one hospital during the
quarter ended March 31, 2006, two hospitals subsequent to the end of the quarter and are positioned
to acquire two additional hospitals where we have executed definitive agreements pending. From
time to time we may consider hospitals for disposition if we determine their operating results or
potential growth no longer meet our strategic objectives. This was the case for the hospital sold
during the quarter ended March 31, 2006.
Sources of Consolidated Net Operating Revenue
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
2006 |
|
2005 |
Medicare |
|
|
32.1 |
% |
|
|
33.7 |
% |
Medicaid |
|
|
9.3 |
% |
|
|
8.9 |
% |
Managed Care |
|
|
23.9 |
% |
|
|
23.3 |
% |
Self-pay |
|
|
11.7 |
% |
|
|
12.8 |
% |
Other third party payors |
|
|
23.0 |
% |
|
|
21.3 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
Net operating revenues include amounts estimated by management to be reimbursable by Medicare and
Medicaid under prospective payment systems and provisions of cost-reimbursement and other payment
methods. In addition, we are reimbursed by non-governmental payors using a variety of payment
methodologies. Amounts we receive for treatment of patients covered by these programs 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 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 adjustments and report them
in the periods that these adjustments become known. Adjustments related to final settlements or
appeals that increased revenue were insignificant in each of the three month periods ended March
31, 2006 and 2005.
14
The payment rates under the Medicare program for inpatients are based on a prospective payment
system, depending upon the diagnosis of a patients condition. While these rates are indexed for
inflation annually, the increases have historically been less than actual inflation. Reductions in
the rate of increase in Medicare reimbursement may have an adverse impact on our net
operating revenue growth. While the Medicare Prescription Drug, Improvement and Modernization Act
of 2003 provides a broad range of provider payment benefits, federal government spending in excess
of federal budgetary provisions contained in passage of the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 could result in future deficit spending for the Medicare system,
which could cause future payments under the Medicare system to grow at a slower rate or decline.
In addition, specified managed care programs, insurance companies, and employers are actively
negotiating the amounts paid to hospitals. The trend toward increased enrollment in managed care
may adversely affect our net operating revenue growth.
Results of Operations
Our hospitals offer a variety of services involving a broad range of inpatient and outpatient
medical and surgical services. These include diagnostic and therapeutic services, emergency
services, general surgery, orthopedic services, cardiovascular services and various other specialty
services including home health and skilled nursing. The strongest demand for hospital services
generally occurs during January through April and the weakest demand for these services occurs
during the summer months. Accordingly, eliminating the effect of new acquisitions, 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, |
|
|
2006 |
|
2005 |
Consolidated (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
Operating expenses (b) |
|
|
(84.6 |
)% |
|
|
(84.2 |
)% |
Depreciation and amortization |
|
|
(4.1 |
)% |
|
|
(4.4 |
)% |
Minority interest in earnings |
|
|
(0.1 |
)% |
|
|
(0.1 |
)% |
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
11.2 |
% |
|
|
11.3 |
% |
Interest expense, net |
|
|
(2.1 |
)% |
|
|
(2.5 |
)% |
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes |
|
|
9.1 |
% |
|
|
8.8 |
% |
Provision for income taxes |
|
|
(3.5 |
)% |
|
|
(3.4 |
)% |
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
5.6 |
% |
|
|
5.4 |
% |
Loss on discontinued operations |
|
|
(0.3 |
)% |
|
|
(1.4 |
)% |
|
|
|
|
|
|
|
|
|
Net Income |
|
|
5.3 |
% |
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, 2006 |
Percentage increase from same period
prior year (a): |
|
|
|
|
Net operating revenues |
|
|
13.0 |
% |
Admissions |
|
|
4.6 |
|
Adjusted admissions (c) |
|
|
6.4 |
|
Average length of stay |
|
|
|
|
Net Income (e) |
|
|
50.2 |
|
|
|
|
|
|
Same-store percentage increase (decrease)
from same period prior year (a)(d): |
|
|
|
|
Net operating revenues |
|
|
6.8 |
% |
Admissions |
|
|
(2.4 |
) |
Adjusted admissions (c) |
|
|
(0.9 |
) |
|
|
|
(a) |
|
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, we have restated our prior period
financial statements and statistical results to reflect the reclassification as discontinued
operations of five hospitals which were sold and one hospital where the lease expired. |
|
(b) |
|
Operating expenses include salaries and benefits, provision for bad debts, supplies,
rent and other operating expenses. |
|
(c) |
|
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. |
|
(d) |
|
Includes acquired hospitals to the extent we operated them during comparable periods in
both years. |
|
(e) |
|
Includes loss from operations of discontinued hospitals, loss on sale of discontinued
hospitals and loss on impairment of assets of the hospital held for sale. |
Three months Ended March 31, 2006 Compared to Three months Ended March 31, 2005
Net operating revenues increased 13.0% to $1.027 billion for the three months ended March 31, 2006,
from $908.3 million for the three months ended March 31, 2005. Of the $118.3 million increase in
net operating revenues, the hospital acquired in the first quarter 2006 and the three hospitals
acquired in the second and fourth quarters of 2005, which are not yet included in same-store
revenues, contributed approximately $56.5 million, and hospitals we owned throughout both periods
contributed approximately $61.8 million, an increase of 6.8%. Of the increase from hospitals owned
throughout both periods, approximately 7.7% was attributable to rate increases, payor mix and the
acuity level of services provided, driven by strong surgical volume, offset by approximately 0.9%
decrease attributable to volume decreases. A less severe season of flu and respiratory related
admissions in the current year period as compared to the prior year period is the primary cause of
the decrease in volume.
Inpatient admissions increased by 4.6%. Adjusted admissions increased by 6.4%. On a same-store
basis, inpatient admissions decreased by 2.4% and same-store adjusted admissions decreased by 0.9%.
With respect to consolidated admissions, approximately 6.7% of admissions were from newly acquired
hospitals. On a same-store basis, net inpatient revenues increased by 4.7% and net outpatient
revenues increased by 8.8%. Consolidated average length of stay and same-store average length of
stay were unchanged from the prior year period at 4.2 days.
Operating expenses, as a percentage of net operating revenues, increased to 84.6% for the three
months ended March 31, 2006 compared to 84.2% for the three months ended March 31, 2005. Salaries
and benefits, as a percentage of net operating revenues, was unchanged from the prior period at
39.7% for the three months ended March 31, 2006 and March 31, 2005, as the impact of recent
acquisitions and the recognition of additional stock-based compensation offset efficiencies gained
since the prior year period. Provision for bad debts, as a percentage of net operating revenues,
increased 0.3% to 10.5% for the three months ended March 31, 2006 compared to 10.2% for the three
months ended March 31, 2005. Supplies, as a percentage of net operating revenues, decreased 0.4%
to 12.0% for the three months ended March 31, 2006 as compared to 12.4% for the three months ended
March 31, 2005, primarily as a result of better pricing through our new group purchasing
arrangement entered into in 2005. Rent and other operating expenses, as a percentage of net
operating revenues, increased from 21.9% for the three months ended March 31, 2005, to 22.4% for
the three months ended March 31, 2006 primarily as a result of an increase in utilities expense and
recent acquisitions having higher other operating expenses as a percentage of net operating
revenues. Income from continuing operations margin increased 0.2% to 5.6% for the three months
ended March 31, 2006 as compared to 5.4% for the three months
ended March 31, 2005. This improvement in margin is due to depreciation and amortization and
interest expense representing a smaller percentage of net operating revenue
16
in the three months
ended March 31, 2006 as compared to the three months ended March 31, 2005, offsetting the slight
increase in operating expenses as a percentage of net operating revenue. Net income margins
increased from 4.0% for the three months ended March 31, 2005 to 5.3% for the three months ended
March 31, 2006, due to the increase in margin of income from continuing operations and to the
decrease in loss from discontinued operations during the three months ended March 31, 2006.
On a same-store basis, we achieved a decrease in salary and benefits expense of 0.4% of net
operating revenues resulting from operating efficiency gains and a decrease in supplies expense of
0.5% of net operating revenues as a result of better pricing through our new group purchasing
agreement entered into in 2005, offset by increases in bad debt expense of 0.5% of net operating
revenues and an increase in other operating expenses of 0.1% of net operating revenues.
Depreciation and amortization increased by $2.7 million from $39.8 million for the three months
ended March 31, 2005 to $42.5 million for the three months ended March 31, 2006. Depreciation and
amortization relating to hospitals acquired in 2005 and 2006, which have not been included in
same-store results accounted for $2.0 million of the increase, and capital expenditures account for
the remaining $0.7 million.
Interest expense, net, decreased by $1.0 million from $22.8 million for the three months ended
March 31, 2005, to $21.8 million for the three months ended March 31, 2006. A decrease in our
average outstanding debt during the three months ended March 31, 2006 as compared to the three
months ended March 31, 2005 accounted for a $3.6 million of this decrease offset by an increase of
$2.6 million resulting from an increase in interest rates during the three months ended March 31,
2006, as compared to the three months ended March 31, 2005.
The net results of the above mentioned changes resulted in income from continuing operations before
income taxes increasing $13.2 million from $80.3 million for the three months ended March 31, 2005
to $93.5 million for the three months ended March 31, 2006.
Provision for income taxes increased from $31.2 million for the three months ended March 31, 2005,
to $36.3 million for the three months ended March 31, 2006 due to the continued growth in net
revenue and resulting increase in income from continuing operations, before income taxes.
Net income was $54.0 million for the three months ended March 31, 2006 compared to $36.0 million
for the three months ended March 31, 2005, an increase of 50.2%. The increase in income from
continuing operations accounted for $8.1 million of the increase in net income and a reduction in
loss on discontinued operations of $9.9 million accounted for the remainder of the increase in net
income.
Liquidity and Capital Resources
Net cash provided by operating activities was $90.8 million for the three months ended March 31,
2006 compared to $148.7 million for the three months ended March 31, 2005, a decrease of $57.9
million or 38.9%. This decrease in cash flow from operating activities is primarily the result of
the following: a $6.0 million build-up in accounts receivable as a result of a recent acquisition,
$24.8 million reduction in comparable cash flows, as a result of prior years cash flows benefiting
from a four day reduction in days revenue outstanding and $23.3 million resulting from the timing
of payments of accounts payable and other liabilities. In addition, cash paid for income taxes
increased $16.0 million, $4.4 million of excess tax benefit from the exercise of stock options was
classified as financing cash flows in 2006 in accordance with SFAS No. 123(R) and changes in all
other operating assets and liabilities reduced cash flows by $1.4 million. These decreases in cash
flows were offset by the increase in net income of $18.0 million. The use of cash in investing
activities increased to $79.0 million from $11.3 million as a result of the prior year period
having included proceeds of $51.8 million received from the sale of four hospitals.
Capital Expenditures
Cash expenditures related to purchases of facilities were $17.4 million for the three months ended
March 31, 2006 and $24.9 for the three months ended March 31, 2005. The expenditures during the
three months ended March 31, 2006, included $15.5 million for the acquisition of one hospital,
contingent settlements of working capital items from three prior year acquisitions, the acquisition
of two physician practices in one of our current markets and $1.9 million for information systems
and other equipment to integrate recently acquired hospitals. The expenditures for the three months
ended March 31, 2005, included $23.8 million for
the acquisition of a hospital, a surgery center in
17
one of our current markets, the acquisition of a
physician practice in one of our current markets and $1.1 million for information systems and other
equipment to integrate recently acquired hospitals.
Excluding the cost to construct replacement hospitals, our capital expenditures for the three
months ended March 31, 2006, totaled $38.5 million, compared to $32.3 million for the three months
ended March 31, 2005. Costs to construct replacement hospitals totaled $1.2 million during the
three months ended March 31, 2006 and $0.9 million for the three months ended March 31, 2005.
Total additions to property and equipment during the three months ended March 31, 2006 included
$8.8 million related to the construction of the new corporate headquarters for which cash has not
yet been expended.
Pursuant to hospital purchase agreements in effect as of March 31, 2006, we are required to build
replacement facilities in Petersburg, Virginia, by August 2008, and in Shelbyville, Tennessee by
June 2009. Also, as required by an amendment to a lease agreement entered into in 2005, we agreed
to build a replacement hospital at our Barstow, California location. Estimated construction costs,
including equipment, are approximately $230 million for these three replacement facilities. In
addition, we have entered into an agreement with a developer to build a new corporate headquarters
to be completed in 2006. In accordance with generally accepted accounting principles we account
for this project as if we own the assets. Estimated construction costs of the new corporate
headquarters are approximately $40 million of which approximately $20 million has been incurred
through March 31, 2006. We expect total capital expenditures of approximately $250 to $260 million
in 2006, including approximately $218 to $222 million for renovation and equipment purchases (which
includes amounts which are required to be expended pursuant to the terms of the hospital purchase
agreements) and approximately $32 to $38 million for construction and equipment cost of the
replacement hospitals and corporate headquarters.
Capital Resources
Net working capital was $523.3 million at March 31, 2006, compared to $476.8 million at December
31, 2005. The $49.1 million increase was attributable primarily to an increase in accounts
receivable and a decrease in accounts payable which reflect the timing of our collections and cash
payments offset by increases in income taxes payable compensation related accruals and other
accrued liabilities.
On August 19, 2004 and as subsequently amended on December 16, 2004 and July 8, 2005, we entered
into a $1.625 billion senior secured credit facility with a consortium of lenders. This facility
replaced our previous credit facility and consists of a $1.2 billion term loan with a final
maturity in 2011 (as opposed to 2010 under our previous facility) and a $425 million revolving
tranche that matures in 2009. We may elect from time to time an interest rate per annum for the
borrowings under the term loan, and revolving credit facility equal to (a) an alternate base rate,
which will be equal to the greatest of (i) the Prime Rate; (ii) the Federal Funds Effective Rate
plus 50 basis points (the ABR), plus (1) 75 basis points for the term loan and (2) the Applicable
Margin for revolving credit loans or (b) the Eurodollar Rate plus (1) 175 basis points for the term
loan and (2) the Eurodollar Applicable Margin for revolving credit loans. The applicable margin
varies depending on the ratio of our total indebtedness to annual consolidated EBITDA, ranging from
0.25% to 1.25% for alternate base rate loans and from 1.25% to 2.25% for Eurodollar loans. We also
pay a commitment fee for the daily average unused commitments under the revolving tranche. The
commitment fee is based on a pricing grid depending on the Applicable Margin for Eurodollar
revolving credit loans and ranges from 0.250% to 0.500%. The commitment fee is payable quarterly
in arrears and on the revolving credit termination date with respect to the available revolving
credit commitments. In addition, we will pay fees for each letter of credit issued under the
credit facility. The purpose of the facility was to refinance our previous credit agreement, repay
other indebtedness, and fund general corporate purposes including to declare and pay cash
dividends, to repurchase shares or make other distributions, subject to certain restrictions. As
of March 31, 2006, our availability for additional borrowings under our revolving credit facility
was $425 million, of which $27 million is set aside for outstanding letters of credit. We also
have the ability to add up to $200 million of securitized debt and $400 million additional term
loans under our agreement, which we have not yet accessed. As of
March 31, 2006, our weighted-average interest rate under our credit facility was 6.7%.
The terms of the credit facility include various restrictive covenants. These covenants include
restrictions on additional indebtedness, liens, investments, asset sales, capital expenditures,
sale and leasebacks, contingent obligations, transactions with affiliates, dividends and stock
repurchases and fundamental changes. We would be required to amend the existing credit agreement
in order to pay dividends to our shareholders or repurchase our shares in excess of $200 million.
The covenants also require maintenance of various ratios regarding consolidated total indebtedness,
consolidated interest, and fixed charges.
18
We are currently a party to ten separate interest swap agreements to limit the effect of changes in
interest rates on a portion of our long-term borrowings. Under one agreement, effective November
4, 2002, we pay interest at a fixed rate of 3.3% on $150 million notional amount of indebtedness.
This agreement expires in November 2007. Under a second agreement, effective June 13, 2003, we pay
interest at a fixed rate of 2.04% on $100 million notional amount of indebtedness. This agreement
expires in June 2007.
Under a third agreement, effective June 13, 2003, we pay interest at a fixed rate of 2.40% on $100
million notional amount of indebtedness. This agreement expires in June 2008. Under a fourth
agreement, effective October 3, 2003, we pay interest at a fixed rate of 2.31% on $100 million
notional amount of indebtedness. This agreement expires in October 2006. Under a fifth agreement,
effective August 12, 2004, we pay interest at a fixed rate of 3.586% on $100 million notional
amount of indebtedness. This agreement expires in August 2008. Under a sixth agreement, effective
May 25, 2005, we pay interest at a fixed rate of 4.061% on $100 million notional amount of
indebtedness. This agreement expires in May 2008. Under a seventh agreement, effective June 6,
2005, we pay interest at a fixed rate of 3.935% on $100 million notional amount of indebtedness.
This agreement expires in June 2009. Under an eighth agreement, effective November 30, 2005, we
pay interest at a fixed rate of 4.3375% on $100 million notional amount of indebtedness. This
agreement expires in November 2009. Under a ninth agreement, effective January 23, 2006, we pay
interest at a fixed rate of 4.709% on $100 million notional amount of indebtedness. This agreement
expires in January 2011. Under a tenth agreement, effective October 3, 2006, we will pay interest
at a fixed rate of 4.7185% on $100 million notional amount of indebtedness. This agreement expires
in August 2011. On each of these swaps, we received a variable rate of interest based on the
three-month London Inter-Bank Offer Rate (LIBOR), in exchange for the payment by us of a fixed
rate of interest. We currently pay, on a quarterly basis, a margin above LIBOR of 175 basis points
for revolver loans and term loans under the senior secured credit facility.
We believe that internally generated cash flows, availability of additional borrowings under our
revolving credit facility of $425 million, the ability to add $400 million of term loans and $200
million of accounts receivable securitized debt under our senior secured credit facility, and
continued access to the bank credit and capital markets will be sufficient to finance acquisitions,
capital expenditures and working capital requirements through the next 12 months. We believe these
same sources of cash flows, borrowings under our credit agreement as well as access to bank credit
and capital markets will be available to us beyond the next 12 months and into the foreseeable
future.
Off-balance sheet arrangements
Excluding the hospital for which the lease expired in January 2005 pursuant to its terms, our
consolidated operating results for the three months ended March 31, 2006 and 2005, included $69.7
million and $71.2 million, respectively, of net operating revenue and $4.5 million and $8.4
million, respectively, of income from operations, generated from seven hospitals operated by us
under operating lease arrangements. In accordance with generally accepted accounting principles,
the respective assets and the future lease obligations under these arrangements are not recorded on
our consolidated balance sheet. Lease payments under these arrangements are included in rent
expense when paid and totaled approximately $3.9 million for the three months ended March 31, 2006
and $3.8 million for the three months ended March 31, 2005. The current terms of these operating
leases expire between June 2007 and December 2019, not including lease extensions that we have
options to exercise. If we allow these leases to expire, we would no longer generate revenue nor
incur expenses from these hospitals.
In the past, we have utilized operating leases as a financing tool for obtaining the operations of
specified hospitals without acquiring, through ownership, the related assets of the hospital and
without a significant outlay of cash at the front end of the lease. We utilize the same management
and operating strategies to improve operations at those hospitals held under operating leases as we
do at those hospitals that we own. We have not entered into any operating leases for hospital
operations since December 2000 other than renewing existing leases.
Joint Ventures
We have from time to time sold minority interests in certain of our subsidiaries or acquired
subsidiaries with existing minority interest ownership positions. This was the case with our
acquisition of Chestnut Hill Hospital in March 2005, pursuant to which we acquired an 85% interest
with the remaining 15% interest owned by the University of Pennsylvania. In our other joint
ventures, physicians are the minority interest holders. The amount of minority interest in equity
is included in other long-term liabilities and the minority interest in income or loss is recorded
separately in the condensed consolidated statements of income. We do not believe these minority
ownerships are material to our financial position or results of operations. The balance of
minority interests included in long-term liabilities was $20.2 million as of March 31, 2006, and
$17.2 million as of December 31, 2005, and the
19
amount of minority interest in earnings was $0.6
million for the three months ended March 31, 2006 and $0.9 million for the three months ended March
31, 2005.
Reimbursement, Legislative and Regulatory Changes
Legislative and regulatory action has resulted in continuing change in the Medicare and Medicaid
reimbursement programs which will continue to limit payment increases under these programs and in
some cases implement payment decreases. Within the statutory
framework of the Medicare and Medicaid programs, there are substantial areas subject to
administrative rulings, interpretations, and discretion which may further affect payments made
under those programs, and the federal and state governments might, in the future, reduce the funds
available under those programs or require more stringent utilization and quality reviews of
hospital facilities. Additionally, there may be a continued rise in managed care programs and
future restructuring of the financing and delivery of healthcare in the United States. These events
could cause our future results to decline.
Inflation
The healthcare industry is labor intensive. Wages and other expenses increase during periods of
inflation and when labor shortages occur in the marketplace. In addition, our suppliers pass along
rising costs to us in the form of higher prices. We have implemented cost control measures,
including our case and resource management program, to curb increases in operating costs and
expenses. We have, to date, offset increases in operating costs by increasing reimbursement for
services and expanding services. However, we cannot predict our ability to cover or offset future
cost increases.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amount of assets
and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities
at the date of our financial statements. Actual results may differ from these estimates under
different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of significant judgments and
uncertainties, and potentially result in materially different results under different assumptions
and conditions. We believe that our critical accounting policies are limited to those described
below.
Third Party Reimbursement
Net operating revenues include amounts estimated by management to be reimbursable by Medicare and
Medicaid under prospective payment systems and provisions of cost-reimbursement and other payment
methods. In addition, we are reimbursed by non-governmental payors using a variety of payment
methodologies. Amounts we receive for treatment of patients covered by these programs are generally
less than the standard billing rates. Contractual allowances are automatically calculated and
recorded through our internally developed automated contractual allowance system. Within the
automated system, actual Medicare DRG data, coupled with all payors historical paid claims data,
is utilized to calculate the contractual allowances. This data is automatically updated on a
monthly basis and subjected to review by management to ensure reasonableness and accuracy. We
account for the differences between the estimated program reimbursement rates and the standard
billing rates as contractual 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 record adjustments to the estimated
billings in the periods that such adjustments become known. We account for adjustments to previous
program reimbursement estimates as contractual adjustments and report them in future periods as
final settlements are determined. However, due to the complexities involved in these estimates,
actual payments we receive could be different from the amounts we estimate and record.
20
Allowance for Doubtful Accounts
Substantially all of our accounts receivable are related to providing healthcare services to our
hospitals patients. Collection of these accounts receivable is our primary source of cash and is
critical to our operating performance. Our primary collection risks relate to uninsured patients
and outstanding patient balances for which the primary insurance payor has paid and the remaining
outstanding balance (generally deductibles and co-payments) is owed by the patient. At the point
of service, for patients required to make a co-payment, we generally collect less than 10% of the
related revenue. For all procedures scheduled in advance, our policy is to verify insurance
coverage prior to the date of the procedure. Insurance coverage is not verified in advance of
procedures for walk-in and emergency room patients. Our estimate for the allowance for doubtful
accounts is generally calculated by reserving as uncollectible all governmental and
non-governmental accounts over 150 days from discharge. Collections are impacted by the economic
ability of patients to pay and the effectiveness of our collection efforts. Significant changes in
payor mix, business office operations, economic conditions or trends in federal and state
governmental healthcare coverage could affect our collection of accounts receivable.
Generally we do not provide specific reserves by payor category but estimate bad debts as a
consolidated provision for total accounts receivable. We believe our policy of reserving all
accounts over 150 days from discharge, without regard to payor class, has resulted in reasonable
estimates determined on a consistent basis. We believe that we collect substantially all of our
third-party insured receivables which includes receivables from governmental agencies. Since our
methodology is not applied by individual payor class, reserving all amounts over 150 days, which
includes some accounts that are collectible, has provided us with a reasonable estimate of an
allowance for doubtful accounts to cover all accounts receivable, including individual amounts in
both the 150 day and under and over 150 day categories, that are uncollectible. To date, we believe
there has not been a material difference between our bad debt allowances and the ultimate
historical collection rates on accounts receivables including self-pay. We review our overall
reserve adequacy by monitoring historical cash collections as a percentage of trailing net revenue,
as well as review for significant changes in payor mix and recent acquisition or disposals.
Our policy is to write-off gross accounts receivable if the balance is under $10.00 or when such
amounts are placed with outside collection agencies. We believe this policy accurately reflects
the ongoing collection efforts within the Company and is consistent with industry practices. At
both March 31, 2006 and December 31, 2005, we had approximately $740 million
being pursued by various outside collection agencies. We expect to collect less than 5%, net of
estimated collection fees, of the amounts being pursued by outside collection agencies. As these
amounts have been written-off, they are not included in our gross accounts receivable or our
allowance for doubtful accounts. However, we take into consideration estimated collections of
these amounts written-off in evaluating the reasonableness of our allowance for doubtful accounts.
Days revenue outstanding was 61 at March 31, 2006 and 61 at December 31, 2005, which is within our
target range for days revenue outstanding of 60 65 days.
The following table is an aging of our gross (prior to allowances for contractual adjustments and
doubtful accounts) accounts receivable (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of |
|
|
|
March 31, 2006 |
|
|
December 31, 2005 |
|
|
|
0-150 days |
|
|
Over 150 days |
|
|
0-150 days |
|
|
Over 150 days |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross accounts receivable |
|
$ |
1,693,382 |
|
|
$ |
366,743 |
|
|
$ |
1,526,620 |
|
|
$ |
362,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
The approximate percentage of total gross accounts receivable (prior to allowance for
contractual adjustments and doubtful accounts) summarized by aging categories is as follows:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
March 31, |
|
December 31, |
|
|
2006 |
|
2005 |
0 to 60 days |
|
|
65.7 |
% |
|
|
63.7 |
% |
61 to 150 days |
|
|
16.5 |
% |
|
|
17.1 |
% |
151 to 360 days |
|
|
6.2 |
% |
|
|
6.5 |
% |
Over 360 days |
|
|
11.6 |
% |
|
|
12.7 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
The approximate percentage of total gross accounts receivable (prior to allowances for contractual
adjustments and doubtful accounts) summarized by payor is as follows:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
March 31, |
|
December 31, |
|
|
2006 |
|
2005 |
Insured receivables |
|
|
68 |
% |
|
|
65 |
% |
Self-pay receivables |
|
|
32 |
% |
|
|
35 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Although we do not specifically maintain information for individual categories of self-pay,
included in the percentage of self-pay receivables shown in the table above, we estimate uninsured
self-pay receivables are approximately 45% to 50%, patient deductibles and co-insurance after
third-party insurance payments are approximately 45% to 50%, and those insured patients billed
directly because their insurance has not paid are approximately 5% to 10%. Those accounts that are
being billed directly to patients because their third-party insurance coverage has not paid are
reclassified to self-pay receivables from insured receivables generally after 60 days from
discharge in order to bill the patients directly and get them involved in assisting with the
collection process from their third-party insurance company. None of these amounts represents a
denial from commercial or other third-party payors. We estimate, on a historical basis, the
uncollected portion of self-pay receivables related to co-insurance, co-payments and deductibles
range from 35% to 45% and the uncollected portion of self-pay receivables related to uninsured
patients range from 80% to 90%. Additionally, we estimate the uncollected portion of self-pay
receivables related to insured patients billed directly is insignificant. In the aggregate, we
expect the uncollectible portion of all self-pay receivables, before recoveries of accounts
previously written-off, to be approximately 60% to 70% at March 31, 2006. The allowance for
doubtful accounts as reported in the condensed consolidated financial statements at March 31, 2006
represents approximately 53% of self-pay receivables as described above, net of allowances for
other discounts.
Goodwill and Other Intangibles
Goodwill represents the excess of cost over the fair value of net assets acquired. Goodwill
arising from business combinations is accounted for under the provisions of SFAS No. 141 Business
Combinations and SFAS No. 142 and is not amortized. SFAS No. 142 requires goodwill to be
evaluated for impairment at the same time every year and when an event occurs or circumstances
change such that it is reasonably possible that an impairment may exist. We selected September
30th as our annual testing date.
The SFAS No. 142 goodwill impairment model requires a comparison of the book value of net assets to
the fair value of the related operations that have goodwill assigned to them. If the fair value is
determined to be less than book value, a second step is performed to compute the amount of the
impairment. We estimate the fair values of the related operations using both a debt free
discounted cash flow model as well as an adjusted EBITDA multiple model. These models are both
based on our best estimate of future revenues and operating costs, based primarily on historical
performance and general market conditions, and are subject to review and approval by senior
management and the Board of Directors. The cash flow forecasts are adjusted by an appropriate
discount rate based on our weighted average cost of capital. We performed our initial evaluation,
as required by SFAS No. 142, during the first quarter of 2002 and the annual evaluation as of each
succeeding September 30. No impairment has been indicated by these evaluations. Estimates used to
conduct the impairment review, including revenue and profitability projections or fair
22
values, could cause our analysis to indicate that our goodwill is impaired in subsequent periods and result
in a write-off of a portion or all of our goodwill.
Professional Liability Insurance Claims
We accrue for estimated losses resulting from professional liability claims. The accrual, which
includes an estimate for incurred but not reported claims, is based on historical loss patterns and
actuarially determined projections and is discounted to its net present value using a weighted
average risk-free discount rate of 4.1% and 3.2% in 2005 and 2004, respectively. To the extent
that subsequent claims information varies from managements estimates, the liability is adjusted
currently. Our insurance is underwritten on a claims-made basis. Prior to June 1, 2002,
substantially all of our professional and general liability risks were subject to a $0.5 million
per occurrence deductible; for claims reported from June 1, 2002 through June 1, 2003, these
deductibles were $2.0 million per occurrence. Additional coverage above these deductibles was
purchased through captive insurance companies in which we had a 7.5% minority ownership interest in
each and to which the premiums paid by us represented less than 8% of the total premium revenues of
each captive insurance company. With the formation of our own wholly-owned captive insurance
company in June 2003, we terminated our minority interest relationships in those entities.
Substantially all claims reported on or after June 1, 2003 and before June 1, 2005 are self-insured
up to $4 million per claim. Substantially, all claims reported on or after June 1, 2005 are
self-insured up to $5 million per claim. Management on occasion has selectively increased the
insured risk at certain hospitals based upon insurance pricing and other factors and may continue
that practice in the future. Excess insurance for all hospitals is purchased through commercial
insurance companies and generally covers us for liabilities in excess of the self insured amount
and up to $100 million per occurrence for all claims reported on or after June 1, 2003.
Income Taxes
We must make estimates in recording provision for income taxes, including determination of deferred
tax assets and deferred tax liabilities and any valuation allowances that might be required against
the deferred tax assets. We believe that future income will enable us to realize these deferred
tax assets, subject to the valuation allowances we have established.
We operate in multiple states with varying tax laws. We are subject to both federal and state
audits of tax returns. Our federal income tax returns have been examined by the Internal Revenue
Service through fiscal year 1996, which resulted in no material adjustments. In February 2005, we
were notified by the Internal Revenue Service of its intent to examine our consolidated tax return
for 2003. We make estimates we believe are accurate in order to determine that tax accruals are
adequate to cover any potential adjustments arising from tax examinations. We believe the results
of this examination will not be material to our consolidated statements of income or financial
position.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment (SFAS No. 123(R)), which
replaces SFAS No. 123 and supercedes APB 25. We adopted SFAS No. 123(R) which requires all
share-based payments to employees, including grants of employee stock options, to be recognized in
the financial statements based on their fair values on January 1, 2006, using the modified
prospective method for transition purposes. Total compensation expense related to stock-based
awards included in the accompanying statements of income are $3.7 million for the three months
ended March 31, 2006, recognized under SFAS No. 123R, and $0.5 million for the three months ended
March 31, 2005, recognized under APB 25. At March 31, 2006, $50.9 million of total unrecognized
stock-based compensation is expected to be recognized over a weighted-average period of 2.5 months.
We anticipate recognizing a total of approximately $20 million in stock-based compensation for the
year ended December 31, 2006, under SFAS No. 123(R) as compared to $5 million recognized for the
year ended December 31, 2005 under APB 25. Additional compensation expense for awards made after
the adoption of SFAS No. 123(R) will vary depending on many factors, including the number of awards
granted, the market value of our stock on the date of grant and other variables used in determining
the fair value of those options on the date of grant.
SFAS No. 123(R) also requires that the tax benefits of tax deductions in excess of recognized
stock-based compensation expense be reported as financing cash flows rather than as operating cash
flows. During the three months ended March 31, 2006, $4.4 million of excess tax benefits related
to stock-based compensation were classified as a reduction to operating cash flows and an increase
to financing cash flows. We cannot estimate what the future
23
impact on our Statement of Cash Flows will be because it depends on, among other things, when employees exercise stock options.
On November 10, 2005, the FASB issued Interpretation No. 45-3, Application of FASB Interpretation
No. 45 to Minimum Revenue Guarantees Granted to a Business or Its Owners (FIN 45-3). FIN 45-3
amends FIN 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, to expand the scope to include guarantees granted to
a business, such as a physicians practice, or its owner(s), that the revenue of the business for a
period will be at least a specified amount. Under FIN 45-3, the accounting requirements of FIN 45
are effective for any new revenue guarantees issued or modified on or after January 1, 2006 and the
disclosure of all revenue guarantees, regardless of whether they were recognized under FIN 45, is
required for all interim and annual periods beginning after January 1, 2006. The adoption of this
interpretation did not have a material impact on our consolidated results of operations or
consolidated financial position.
FORWARD-LOOKING STATEMENTS
Some of the matters discussed in this report include forward-looking statements. Statements that
are predictive in nature, that depend upon or refer to future events or conditions or that include
words such as expects, anticipates, intends, plans, believes, estimates,
thinks, and similar expressions are forward-looking statements. These statements involve known
and unknown risks, uncertainties, and other factors that may cause our actual results and
performance to be materially different from any future results or performance expressed or implied
by these forward-looking statements. These factors include, but are not limited to, the following:
|
|
|
general economic and business conditions, both nationally and in the regions in which we operate; |
|
|
|
|
demographic changes; |
|
|
|
|
existing governmental regulations and changes in, or the failure to comply with,
governmental regulations; |
|
|
|
|
legislative proposals for healthcare reform; |
|
|
|
|
the impact of the Medicare Prescription Drug, Improvement and Modernization Act of 2003,
which includes specific reimbursement changes for small urban and non-urban hospitals; |
|
|
|
|
our ability, where appropriate, to enter into managed care provider arrangements and the
terms of these arrangements; |
|
|
|
|
changes in inpatient or outpatient Medicare and Medicaid payment levels; |
|
|
|
|
uncertainty regarding the application of the Health Insurance Portability and
Accountability Act of 1996 regulations; |
|
|
|
|
increases in wages as a result of inflation or competition for highly technical
positions and rising supply cost due to market pressure from pharmaceutical companies and
new product releases; |
|
|
|
|
liability and other claims asserted against us, including self-insured malpractice claims; |
|
|
|
|
competition; |
|
|
|
|
our ability to attract and retain qualified personnel, key management, physicians,
nurses, and other healthcare workers; |
|
|
|
|
trends toward treatment of patients in less acute or specialty healthcare settings
including ambulatory surgery centers or specialty hospitals; |
|
|
|
|
changes in medical or other technology; |
|
|
|
|
changes in generally accepted accounting principles; |
|
|
|
|
the availability and terms of capital to fund additional acquisitions or replacement facilities; |
|
|
|
|
our ability to successfully acquire and integrate additional hospitals; |
|
|
|
|
our ability to obtain adequate levels of general and professional liability insurance; |
|
|
|
|
potential adverse impact of known and unknown government investigations; |
|
|
|
|
timeliness of reimbursement payments received under government programs; and |
|
|
|
|
the other risk factors set forth in our public filings with the Securities and Exchange Commission. |
Although we believe that these statements are based upon reasonable assumptions, we can give no
assurance that our goals will be achieved. Given these uncertainties, prospective investors are
cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements are made as of the date of
this filing. We assume no obligation to update or revise them or provide reasons why actual results
may differ.
24
Item 3: Quantitative and Qualitative Disclosures about Market Risk
We are exposed to interest rate changes, primarily as a result of our credit agreement which bears
interest based on floating rates. In order to manage the volatility relating to the market risk, we
entered into interest rate swap agreements described under the heading Liquidity and Capital
Resources in Item 2. We do not anticipate any material changes in our primary market risk
exposures in 2006. We utilize risk management procedures and controls in executing derivative
financial instrument transactions. We do not execute transactions or hold derivative financial
instruments for trading purposes. Derivative financial instruments related to interest rate
sensitivity of debt obligations are used with the goal of mitigating a portion of the exposure when
it is cost effective to do so.
A 1% change in interest rates on variable rate debt would have resulted in interest expense
fluctuating approximately $1.3 million for the three months ended March 31, 2006.
Item 4: Controls and Procedures
As of the end of the period covered by this report, our Chief Executive Officer and Chief Financial
Officer, with the participation of other members of management, have evaluated the effectiveness of
our disclosure controls and procedures, as defined in Rules 13a 15(e) and 15d 15(e) under the
Securities Exchange Act of 1934, as amended. Based on such evaluations, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures are
adequately designed to ensure that the information required to be included in this report has been
recorded, processed, summarized and reported on in a timely basis. There have been no significant
changes in our internal controls over financial reporting during the quarter covered by this report
that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
25
PART II OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we receive various inquiries or subpoenas from state regulators, fiscal
intermediaries, the Centers for Medicare and Medicaid Services and the Department of Justice
regarding various Medicare and Medicaid issues. In addition, we are subject to other claims and
lawsuits arising in the ordinary course of our business. We are not aware of any pending or
threatened litigation that is not covered by insurance policies or reserved for in our financial
statements or which we believe would have a material adverse impact on us.
In
May 1999, we were served with a complaint in U.S. exrel. Bledsoe v. Community Health Systems,
Inc., subsequently moved to the Middle District of Tennessee, Case No. 2-00-0083. This qui tam
action sought treble damages and penalties under the False Claims Act against us. The Department of
Justice did not intervene in this action. The allegations in the amended complaint were extremely
general, but involved Medicare billing at our White County Community Hospital in Sparta, Tennessee.
By order entered on September 19, 2001, the U.S. District Court granted our motion for judgment on
the pleadings and dismissed the case, with prejudice.
The qui tam whistleblower (also referred to as a relator) appealed the district courts ruling to
the U.S. Court of Appeals for the Sixth Circuit. On September 10, 2003, the Sixth Circuit Court of
Appeals rendered its decision in this case, affirming in part and reversing in part the district
courts decision to dismiss the case with prejudice. The court affirmed the lower courts dismissal
of certain of plaintiffs claims on the grounds that his allegations had been previously publicly
disclosed. In addition, the appeals court agreed that, as to all other allegations, the relator had
failed to include enough information to meet the special pleading requirements for fraud under the
False Claims Act and the Federal Rules of Civil Procedure. However, the case was returned to the
district court to allow the relator another opportunity to amend his complaint in an attempt to
plead his fraud allegations with particularity.
In May 2004, the relator in U.S. exrel. Bledsoe v. Community Health Systems, Inc. filed an amended
complaint alleging fraud involving Medicare billing at White County Community Hospital. We then
filed a renewed motion to dismiss the amended complaint. On January 6, 2005, the District Court
dismissed with prejudice the bulk of the relators allegations. The only remaining allegations
involve a handful of 1997-98 charges at White County. After further motion practice between the
relator and the United States Government regarding the relators right to participate in a previous
settlement with the Company, the District Court again dismissed all claims in the case on December
13, 2005. On January 9, 2006, the relator filed a notice of appeal to the U.S. Court of Appeals
for the Sixth Circuit.
In August 2004, we were served a complaint in Arleana Lawrence and Robert Hollins v. Lakeview
Community Hospital and Community Health Systems, Inc. (now styled Arleana Lawrence and Lisa Nichols
vs. Eufaula Community Hospital, Community Health Systems, Inc., South Baldwin Regional Medical
Center and Community Health Systems Professional Services Corporation) in the Circuit Court of
Barbour County, Alabama (Eufaula Division). This alleged class action was brought by the plaintiffs
on behalf of themselves and as the representatives of similarly situated uninsured individuals who
were treated at our Lakeview Hospital or any of our other Alabama hospitals. The plaintiffs allege
that uninsured patients who do not qualify for Medicaid, Medicare or charity care are charged
unreasonably high rates for services and materials and that we use unconscionable methods to
collect bills. The plaintiffs seek restitution of overpayment, compensatory and other allowable
damages and injunctive relief. In October 2005, the complaint was amended to eliminate one of the
named plaintiffs and to add our management company subsidiary as a defendant. In November 2005,
the complaint was again amended to add another plaintiff, Lisa Nichols and another defendant, our
hospital in Foley, Alabama, South Baldwin Regional Medical Center. Discovery has commenced in this
case. We are vigorously defending this case.
In September 2004, we were served with a complaint in James Monroe v. Pottstown Memorial Hospital
and Community Health Systems, Inc. in the Court of Common Pleas, Montgomery County, Pennsylvania.
This alleged class action was brought by the plaintiff on behalf of himself and as the
representative of similarly situated uninsured individuals who were treated at our Pottstown
Memorial Hospital or any of our other Pennsylvania hospitals. The plaintiff alleges that uninsured
patients who do not qualify for Medicaid, Medicare or charity care are charged unreasonably high
rates for services and materials and that we use unconscionable methods to collect bills. The
plaintiff seeks recovery under the Pennsylvania Unfair Trade Practices and Consumer Protection Law,
restitution of overpayment, compensatory and other allowable damages and injunctive relief. This
case was recently dismissed and refiled, adding our management company subsidiary as a defendant.
We are vigorously defending this case.
26
On March 3, 2005, we were served with a complaint in Sheri Rix v. Heartland Regional Medical Center
and Health Care Systems, Inc. in the Circuit Court of Williamson County, Illinois. This alleged
class action was brought by the plaintiff on behalf of herself and as the representative of
similarly situated uninsured individuals who were treated at our Heartland Regional Medical Center.
The plaintiff alleges that uninsured patients who do not qualify for Medicaid, Medicare or charity
care are charged unreasonably high rates for services and materials and that we use unconscionable
methods to collect bills. The plaintiff seeks recovery for breach of contract and the covenant of
good faith and fair dealing, violation of the Illinois Consumer Fraud and Deceptive Practices Act,
restitution of overpayment, and for unjust enrichment. The plaintiff class seeks compensatory and
other damages and equitable relief. We are vigorously defending this case.
On April 8, 2005, we were served with a first amended complaint, styled Chronister, et al. v.
Granite City Illinois Hospital Company, LLC d/b/a Gateway Regional Medical Center, in the Circuit
Court of Madison County, Illinois. The complaint seeks class action status on behalf of the
uninsured patients treated at Gateway Regional Medical Center and alleges statutory, common law,
and consumer fraud in the manner in which the hospital bills and collects for the services rendered
to uninsured patients. The plaintiff seeks compensatory and punitive damages and declaratory and
injunctive relief. We are vigorously defending this case.
On February 10, 2006, we received a letter from the Civil Division of the U.S. Department of
Justice requesting documents in an investigation they are conducting involving the Company. The
inquiry appears to be related to the way in which different state Medicaid programs apply to the
federal government for matching or supplemental funds that are ultimately used to pay for a small
portion of the services provided to Medicaid and indigent patients. These programs are referred to
by different names, including intergovernmental payments, upper payment limit programs, and
Medicaid disproportionate share hospital payments. The inquiry focuses on our hospitals in 3
states Arkansas, New Mexico, and South Carolina (7 hospitals). We have provided the Department
of Justice with the requested documents and based on our review and the reviews of our external
consultants and the applicable statutes and regulations, we do not believe there have been any
improprieties or that we have received any inappropriate payments. This government inquiry is
still at an early stage, however, and we are unable at this time to evaluate the existence or
extent of any potential financial exposure.
Item 1A.Risk Factors
There have been no material changes with regard to the risk factors previously disclosed in our
most recent annual report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On December 16, 2005, the Company announced an open market repurchase program for up to five
million shares of the Companys common stock not to exceed $200 million in purchases. This
purchase program commenced January 14, 2006 and will conclude at the earlier of three years or when
the maximum number of shares have been repurchased or the maximum dollar amount has been reached.
Through March 31, 2006, the Company had repurchased 225,000
shares at a weighted-average price of
$36.05 per share under the repurchase program. This repurchase plan follows a prior repurchase
plan for up to five million shares which concluded on January 13, 2006. The Company repurchased
3,029,700 shares at a weighted-average price of $31.20 per share under the prior program.
27
The following table contains information about our purchases of our common stock during the first
quarter of 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Maximum |
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
|
of Shares |
|
Shares |
|
|
|
|
|
|
|
|
|
|
|
|
Purchased as |
|
that |
|
|
|
|
|
|
|
|
|
|
|
|
Part of |
|
May Yet Be |
|
|
|
|
Total |
|
|
|
|
|
Publicly |
|
Purchased |
|
|
|
|
Number |
|
|
|
|
|
Announced |
|
Under the |
|
|
|
|
of Shares |
|
Average Price |
|
Plans or |
|
Plans or |
Period |
|
|
|
Purchased |
|
Paid Per Share |
|
Programs |
|
Programs |
January 1, 2006 |
- |
January 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1, 2006 |
- |
February 28, 2006 |
|
|
200,000 |
|
|
|
35.99 |
|
|
|
200,000 |
|
|
|
4,800,000 |
|
March 1, 2006 |
- |
March 31, 2006 |
|
|
25,000 |
|
|
|
36.53 |
|
|
|
225,000 |
|
|
|
4,775,000 |
|
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|
|
31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|
|
32.1 |
|
Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
|
|
32.2 |
|
Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this Report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
Date: April 27, 2006 |
|
COMMUNITY HEALTH SYSTEMS, INC.
(Registrant) |
|
|
|
|
|
|
|
By:
|
|
/s/ Wayne T. Smith |
|
|
|
|
|
|
|
|
|
Wayne T. Smith |
|
|
|
|
Chairman of the Board, |
|
|
|
|
President and Chief Executive Officer
(principal executive officer) |
|
|
|
By:
|
|
/s/ W. Larry Cash |
|
|
|
|
|
|
|
|
|
W. Larry Cash
Executive Vice President, Chief Financial
Officer and Director |
|
|
|
|
(principal financial officer) |
|
|
|
By:
|
|
/s/ T. Mark Buford |
|
|
|
|
|
|
|
|
|
T. Mark Buford
Vice President and Corporate Controller |
|
|
|
|
(principal accounting officer) |
29
Index to Exhibits
|
|
|
|
|
|
|
No. |
|
Description |
|
|
31.1 |
|
|
|
Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
|
|
|
31.2 |
|
|
|
Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
|
|
|
32.1 |
|
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
|
|
|
|
|
|
|
|
|
32.2 |
|
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
30
EXHIBIT 31.1
I, Wayne T. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Community Health
Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) designed such internal controls over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors:
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: April 27, 2006 /s/ Wayne T. Smith
----------------------------------
Wayne T. Smith
Chairman of the Board, President
and Chief Executive Officer
EXHIBIT 31.2
I, W. Larry Cash, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Community Health
Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) designed such internal controls over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors:
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: April 27, 2006 /s/ W. Larry Cash
---------------------------------------
W. Larry Cash
Executive Vice President,
Chief Financial Officer and Director
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Community Health Systems,
Inc. (the "Company") on Form 10-Q for the period ending March 31, 2006, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Wayne T. Smith, Chairman of the Board, President and Chief Executive Officer
of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to
ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
/s/ Wayne T. Smith
- ---------------------------
Wayne T. Smith
Chairman of the Board, President and Chief Executive Officer
April 27, 2006
A signed original of this written statement required by Section 906 has been
provided to Community Health Systems, Inc. and will be retained by Community
Health Systems, Inc. and furnished to the Securities and Exchange Commission or
its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Community Health Systems,
Inc. (the "Company") on Form 10-Q for the period ending March 31, 2006, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, W. Larry Cash, Executive Vice President, Chief Financial Officer and Director
of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to
ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
/s/ W. Larry Cash
- -----------------------------
W. Larry Cash
Executive Vice President, Chief Financial Officer and Director
April 27, 2006
A signed original of this written statement required by Section 906 has been
provided to Community Health Systems, Inc. and will be retained by Community
Health Systems, Inc. and furnished to the Securities and Exchange Commission or
its staff upon request.