UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-15925

COMMUNITY HEALTH SYSTEMS, INC.

Delaware		13-3893191
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)
4000 Meridian Boulevard		37067
Franklin, Tennessee		(Zip Code)
(Address of principal executive offices)

(Registrant’s telephone number)
615-465-7000

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

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

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

     As of July 22, 2011, there were outstanding 93,212,756 shares of the Registrant’s Common Stock, $0.01 par value.

 

 

Community Health Systems, Inc.

Form 10-Q

For the Three and Six Months Ended June 30, 2011

		Page
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets — June 30, 2011 and December 31, 2010 (Unaudited)			2
Condensed Consolidated Statements of Income — Three and Six Months Ended June 30, 2011 and June 30, 2010 (Unaudited)			3
Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2011 and June 30, 2010 (Unaudited)			4
Notes to Condensed Consolidated Financial Statements (Unaudited)			5
Item 2. Management’s Discussion and Analysis of Financial Condition And Results of Operations			38
Item 3. Quantitative and Qualitative Disclosures about Market Risk			58
Item 4. Controls and Procedures			58
Part II. Other Information
Item 1. Legal Proceedings			58
Item 1A. Risk Factors			63
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			63
Item 3. Defaults Upon Senior Securities			63
Item 4. (Removed and Reserved)			63
Item 5. Other Information			63
Item 6. Exhibits			64
Signatures			65
Index to Exhibits			66
EX-4.1
EX-12
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I FINANCIAL INFORMATION

Item 1.		Financial Statements

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)

		June 30,				December 31,
		2011				2010
ASSETS
Current assets
Cash and cash equivalents		$	191,432			$	299,169
Patient accounts receivable, net of allowance for doubtful accounts of $1,793,404 and $1,639,198 at June 30, 2011 and December 31, 2010, respectively			1,792,404				1,714,542
Supplies			342,268				329,114
Prepaid income taxes			—				118,464
Deferred income taxes			115,819				115,819
Prepaid expenses and taxes			117,458				100,754
Other current assets			175,109				193,331
Total current assets			2,734,490				2,871,193
Property and equipment			8,798,266				8,383,122
Less accumulated depreciation and amortization			(2,291,842	)			(2,058,685	)
Property and equipment, net			6,506,424				6,324,437
Goodwill			4,227,970				4,150,247
Other assets, net			1,356,531				1,352,246
Total assets		$	14,825,415			$	14,698,123
LIABILITIES AND EQUITY
Current liabilities
Current maturities of long-term debt		$	70,112			$	63,139
Accounts payable			583,924				526,338
Current income tax payable			349				—
Deferred income taxes			8,882				8,882
Accrued interest			145,146				146,415
Accrued liabilities			854,329				897,266
Total current liabilities			1,662,742				1,642,040
Long-term debt			8,781,443				8,808,382
Deferred income taxes			608,177				608,177
Other long-term liabilities			1,026,069				1,001,675
Total liabilities			12,078,431				12,060,274
Redeemable noncontrolling interests in equity of consolidated subsidiaries			376,658				387,472
EQUITY
Community Health Systems, Inc. stockholders’ equity
Preferred stock, $.01 par value per share, 100,000,000 shares authorized; none issued			—				—
Common stock, $.01 par value per share, 300,000,000 shares authorized; 93,210,424 shares issued and 92,234,875 shares outstanding at June 30, 2011, and 93,644,862 shares issued and 92,669,313 shares outstanding at December 31, 2010			932				936
Additional paid-in capital			1,119,205				1,126,751
Treasury stock, at cost, 975,549 shares at June 30, 2011 and December 31, 2010			(6,678	)			(6,678	)
Accumulated other comprehensive loss			(200,533	)			(230,927	)
Retained earnings			1,396,095				1,299,382
Total Community Health Systems, Inc. stockholders’ equity			2,309,021				2,189,464
Noncontrolling interests in equity of consolidated subsidiaries			61,305				60,913
Total equity			2,370,326				2,250,377
Total liabilities and equity		$	14,825,415			$	14,698,123

See accompanying notes to the condensed consolidated financial statements.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Net operating revenues		$	3,433,829			$	3,080,646			$	6,787,881			$	6,149,258
Operating costs and expenses:
Salaries and benefits			1,384,096				1,231,559				2,763,463				2,478,240
Provision for bad debts			433,002				367,002				832,971				733,503
Supplies			449,279				430,574				907,096				852,686
Other operating expenses			654,737				559,962				1,269,530				1,116,581
Rent			62,431				60,851				125,601				122,908
Depreciation and amortization			161,376				149,779				319,531				293,682
Total operating costs and expenses			3,144,921				2,799,727				6,218,192				5,597,600
Income from operations			288,908				280,919				569,689				551,658
Interest expense, net			163,230				160,759				326,448				320,182
Equity in earnings of unconsolidated affiliates			(12,017	)			(10,980	)			(30,151	)			(23,570	)
Income from continuing operations before income taxes			137,695				131,140				273,392				255,046
Provision for income taxes			44,821				42,761				88,913				82,310
Income from continuing operations			92,874				88,379				184,479				172,736
Discontinued operations, net of taxes:
Income (loss) from operations of entities sold and held for sale			235				(2,037	)			(1,443	)			(1,398	)
Impairment of hospitals held for sale			(39,562	)			—				(47,930	)			—
Loss on sale			—				—				(3,234	)			—
Loss from discontinued operations, net of taxes			(39,327	)			(2,037	)			(52,607	)			(1,398	)
Net income			53,547				86,342				131,872				171,338
Less: Net income attributable to noncontrolling interests			18,158				16,277				35,159				31,266
Net income attributable to Community Health Systems, Inc.		$	35,389			$	70,065			$	96,713			$	140,072
Basic earnings (loss) per share attributable to Community Health Systems, Inc. common stockholders (1):
Continuing operations		$	0.82			$	0.77			$	1.64			$	1.53
Discontinued operations			(0.43	)			(0.02	)			(0.58	)			(0.01	)
Net income		$	0.39			$	0.75			$	1.06			$	1.51
Diluted earnings (loss) per share attributable to Community Health Systems, Inc. common stockholders (1):
Continuing operations		$	0.81			$	0.76			$	1.62			$	1.51
Discontinued operations			(0.43	)			(0.02	)			(0.57	)			(0.01	)
Net income		$	0.39			$	0.74			$	1.05			$	1.49
Weighted-average number of shares outstanding:
Basic			91,130,672				93,358,771				91,069,876				92,491,839
Diluted			91,783,725				94,711,919				91,960,610				93,779,001

See accompanying notes to the condensed consolidated financial statements.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

		Six Months Ended
		June 30,
		2011				2010
Cash flows from operating activities
Net income		$	131,872			$	171,338
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			324,367				301,060
Stock-based compensation expense			20,732				20,418
Loss on sale			3,234				—
Impairment of hospitals held for sale			47,930				—
Excess tax benefit relating to stock-based compensation			(4,659	)			(10,104	)
Other non-cash expenses, net			4,313				(2,342	)
Changes in operating assets and liabilities, net of effects of acquisitions and divestitures:
Patient accounts receivable			(83,082	)			(63,896	)
Supplies, prepaid expenses and other current assets			9,374				(1,147	)
Accounts payable, accrued liabilities and income taxes			129,518				114,100
Other			1,086				12,365
Net cash provided by operating activities			584,685				541,792
Cash flows from investing activities
Acquisitions of facilities and other related equipment			(204,264	)			(2,413	)
Purchases of property and equipment			(351,383	)			(263,924	)
Proceeds from disposition of ancillary operations			18,464				—
Proceeds from sale of property and equipment			8,034				2,307
Increase in other non-operating assets			(75,211	)			(64,258	)
Net cash used in investing activities			(604,360	)			(328,288	)
Cash flows from financing activities
Proceeds from exercise of stock options			18,831				53,615
Deferred financing costs			(234	)			—
Excess tax benefit relating to stock-based compensation			4,659				10,104
Stock buy-back			(50,002	)			(12,242	)
Proceeds from noncontrolling investors in joint ventures			863				5,155
Redemption of noncontrolling investments in joint ventures			(3,303	)			(2,395	)
Distributions to noncontrolling investors in joint ventures			(30,078	)			(29,371	)
Repayments of long-term indebtedness			(28,798	)			(34,157	)
Net cash used in financing activities			(88,062	)			(9,291	)
Net change in cash and cash equivalents			(107,737	)			204,213
Cash and cash equivalents at beginning of period			299,169				344,541
Cash and cash equivalents at end of period		$	191,432			$	548,754
Supplemental disclosure of cash flow information:
Interest payments		$	327,717			$	320,150
Income tax (refunds received) paid, net		$	(25,697	)		$	79,711

See accompanying notes to the condensed consolidated financial statements.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

     The unaudited condensed consolidated financial statements of Community Health Systems, Inc. and its subsidiaries (the “Company”) as of June 30, 2011 and December 31, 2010 and for the three-month and six-month periods ended June 30, 2011 and June 30, 2010, have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for such periods. All intercompany transactions and balances have been eliminated. The results of operations for the three and six months ended June 30, 2011, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2011. 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 (the “SEC”). The Company believes the disclosures are adequate to make the information presented not misleading. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2010, contained in the Company’s Annual Report on Form 10-K.

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

     During the three months ended March 31, 2011, the Company sold a multi-specialty physician clinic and made the decision to sell a hospital. In June 2011, the Company entered into a definitive agreement to sell two of its hospitals in Oklahoma. As of June 30, 2011, the Company has three hospitals held for sale. The condensed consolidated statement of income for the three and six months ended June 30, 2010 has been restated to reclassify the results of operations for these entities to discontinued operations. The condensed consolidated balance sheet as of December 31, 2010 has been restated to present the long-lived assets of the disposal group as held for sale in other assets, net for comparative purposes with the June 30, 2011 presentation.

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

2. ACCOUNTING FOR STOCK-BASED COMPENSATION

     Stock-based compensation awards are granted under the Community Health Systems, Inc. 2000 Stock Option and Award Plan, amended and restated as of March 24, 2009 (the “2000 Plan”), and the Community Health Systems, Inc. 2009 Stock Option and Award Plan, amended and restated as of March 18, 2011 (the “2009 Plan”).

     The 2000 Plan allows for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code (“IRC”), as well as stock options which do not so qualify, stock appreciation rights, restricted stock, restricted stock units, performance-based shares or units and other share awards. Prior to being amended in 2009, the 2000 Plan also allowed for the grant of phantom stock. Persons eligible to receive grants under the 2000 Plan include the Company’s directors, officers, employees and consultants. To date, all options granted under the 2000 Plan have been “nonqualified” stock options for tax purposes. Generally, vesting of these granted options occurs in one-third increments on each of the first three anniversaries of the award date. Options granted prior to 2005 have a 10-year contractual term, options granted in 2005 through 2007 have an eight-year contractual term and options granted in 2008 or later have a 10-year contractual term. As of June 30, 2011, 127,250 shares of unissued common stock were reserved for future grants under the 2000 Plan.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

     The 2009 Plan provides for the grant of incentive stock options intended to qualify under Section 422 of the IRC and for the grant of stock options which do not so qualify, stock appreciation rights, restricted stock, restricted stock units, performance-based shares or units and other share awards. Persons eligible to receive grants under the 2009 Plan include the Company’s directors, officers, employees and consultants. Options granted in 2011 have a 10-year contractual term. As of June 30, 2011, 2,897,129 shares of unissued common stock were reserved for future grants under the 2009 Plan.

     The exercise price of all options granted is equal to the fair value of the Company’s common stock on the option grant date.

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Effect on income from continuing operations before income taxes		$	(10,814	)		$	(10,655	)		$	(20,732	)		$	(20,418	)
Effect on net income		$	(6,867	)		$	(6,473	)		$	(13,165	)		$	(12,404	)

     At June 30, 2011, $79.5 million of unrecognized stock-based compensation expense was expected to be recognized over a weighted-average period of 26 months. Of that amount, $17.2 million related to outstanding unvested stock options was expected to be recognized over a weighted-average period of 26 months and $62.3 million related to outstanding unvested restricted stock, restricted stock units and phantom shares was expected to be recognized over a weighted-average period of 26 months. There were no modifications to awards during the three and six months ended June 30, 2011.

     The fair value of stock options was estimated using the Black Scholes option pricing model with the following assumptions and weighted-average fair values during the three and six months ended June 30, 2011 and 2010:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Expected volatility			38.1	%			35.3	%			31.5	%			33.6	%
Expected dividends			—				—				—				—
Expected term		4 years				3 years				4 years				3.1 years
Risk-free interest rate			1.35	%			1.20	%			1.73	%			1.47	%

     In determining expected term, the Company examined concentrations of option holdings and 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 primary employee populations, one consisting of certain senior executives and the other consisting of substantially all other recipients.

     The expected volatility rate was estimated based on historical volatility. In determining expected volatility, the Company also reviewed the market-based implied volatility of actively traded options of its common stock and determined that historical volatility utilized to estimate the expected volatility did not differ significantly from the implied volatility.

     The expected term 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. The Company adjusts the estimated forfeiture rate to its actual experience.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

     Options outstanding and exercisable under the 2000 Plan and the 2009 Plan as of June 30, 2011, and changes during each of the three-month periods following December 31, 2010, were as follows (in thousands, except share and per share data):

										Weighted -
						Weighted -				Average				Aggregate
						Average				Remaining				Intrinsic
						Exercise				Contractual				Value as of
		Shares				Price				Term				June 30, 2011
Outstanding at December 31, 2010			7,834,332			$	32.08
Granted			1,329,000				37.96
Exercised			(595,431	)			30.44
Forfeited and cancelled			(64,508	)			34.84
Outstanding at March 31, 2011			8,503,393				33.10
Granted			45,000				28.12
Exercised			(23,579	)			29.98
Forfeited and cancelled			(50,342	)			32.70
Outstanding at June 30, 2011			8,474,472			$	33.08			5.8 years				$	9,910
Exercisable at June 30, 2011			5,804,556			$	32.78			4.3 years				$	7,468

     The weighted-average grant date fair value of stock options granted during the three months ended June 30, 2011 and 2010 was $8.89 and $10.07, respectively, and $10.29 and $8.54 during the six months ended June 30, 2011 and 2010, respectively. The aggregate intrinsic value (the number of in-the-money stock options multiplied by the difference between the Company’s closing stock price on the last trading day of the reporting period ($25.68) and the exercise price of the respective stock options) in the table above represents the amount that would have been received by the option holders had all option holders exercised their options on June 30, 2011. This amount changes based on the market value of the Company’s common stock. The aggregate intrinsic value of options exercised during the three months ended June 30, 2011 and 2010 was $0.2 million and $18.6 million, respectively. The aggregate intrinsic value of options exercised during the six months ended June 30, 2011 and 2010 was $6.1 million and $28.2 million, respectively. The aggregate intrinsic value of options vested and expected to vest approximates that of the outstanding options.

     The Company has also awarded restricted stock under the 2000 Plan and the 2009 Plan to its directors and employees of certain subsidiaries. The restrictions on these shares generally lapse in one-third increments on each of the first three anniversaries of the award date. Certain of the restricted stock awards granted to the Company’s senior executives contain a performance objective that must be met in addition to any 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 or termination of employment by the Company for any reason other than for cause of the holder of the restricted stock, or change in control of the Company. Restricted stock awards subject to performance standards are not considered outstanding for purposes of determining earnings per share until the performance objectives have been satisfied.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

     Restricted stock outstanding under the 2000 Plan and the 2009 Plan as of June 30, 2011, and changes during each of the three-month periods following December 31, 2010, were as follows:

						Weighted -
						Average
						Grant Date
		Shares				Fair Value
Unvested at December 31, 2010			2,125,291			$	27.92
Granted			1,084,949				37.96
Vested			(962,662	)			27.27
Forfeited			—				—
Unvested at March 31, 2011			2,247,578				33.04
Granted			8,000				28.12
Vested			(12,000	)			33.49
Forfeited			—				—
Unvested at June 30, 2011			2,243,578				33.02

     On February 25, 2009, under the 2000 Plan, each of the Company’s outside directors received a grant of shares of phantom stock equal in value to approximately $130,000 divided by the closing price of the Company’s common stock on that date ($18.18), or 7,151 shares per director (a total of 42,906 shares of phantom stock). Pursuant to a March 24, 2009 amendment to the 2000 Plan, all subsequent grants of this type are denominated as “restricted stock unit” awards. On May 19, 2009, the newly elected outside director received a grant of 7,151 restricted stock units under the 2000 Plan, having a value at the time of $180,706 based upon the closing price of the Company’s common stock on that date of $25.27. On February 24, 2010, six of the Company’s seven outside directors each received a grant of 4,130 restricted stock units under the 2000 Plan, having a value at the time of approximately $140,000 based upon the closing price of the Company’s common stock on that date of $33.90. One outside director, who did not stand for reelection in 2010, did not receive such a grant. On February 23, 2011, each of the Company’s six outside directors received a grant of 3,688 restricted stock units under the 2009 Plan, having a value at the time of approximately $140,000 based upon the closing price of the Company’s common stock on that date of $37.96. Vesting of these shares of phantom stock and restricted stock units occurs in one-third increments on each of the first three anniversaries of the award date. During the three months ended June 30, 2011, 2,384 shares vested at a weighted-average grant date fair value of $25.27. During the six months ended June 30, 2011, 22,560 shares vested at a weighted-average grant date fair value of $24.68. None of these grants were canceled during the three and six months ended June 30, 2011. As of June 30, 2011, there were 52,956 shares of phantom stock and restricted stock units unvested at a weighted-average grant date fair value of $31.67.

     Under the Directors’ Fees Deferral Plan, the Company’s outside directors may elect to receive share equivalent units in lieu of cash for their directors’ fees. These share equivalent 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 based on the closing market price of the Company’s common stock on that date. The following table represents the amount of directors’ fees which were deferred during each of the respective periods, and the number of share equivalent units into which such directors’ fees would have converted had each of the directors who had deferred such fees retired or terminated his/her directorship with the Company as of the end of the respective periods (in thousands, except share equivalent units):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Directors’ fees earned and deferred into plan		$	55			$	45			$	110			$	90
Share equivalent units			2,142				1,331				3,517				2,549

     At June 30, 2011, a total of 22,318 share equivalent units were deferred in the plan with an aggregate fair value of $0.6 million, based on the closing market price of the Company’s common stock at June 30, 2011 of $25.68.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

3. COST OF REVENUE

     Substantially all of the Company’s operating costs and expenses are “cost of revenue” items. Operating costs that could be classified as general and administrative by the Company would include the Company’s corporate office costs at its Franklin, Tennessee office, which were $47.8 million and $42.4 million for the three months ended June 30, 2011 and 2010, respectively, and $89.5 million and $80.2 million for the six months ended June 30, 2011 and 2010, respectively. Included in these amounts is stock-based compensation expense of $10.8 million and $10.7 million for the three months ended June 30, 2011 and 2010, respectively, and $20.7 million and $20.4 million for the six months ended June 30, 2011 and 2010, respectively.

4. USE OF ESTIMATES

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

5. ACQUISITIONS AND DIVESTITURES

   Acquisitions

     The Company accounts for all transactions that represent business combinations after January 1, 2009 using the acquisition method of accounting, where the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquired entity are recognized and measured at their fair values on the date the Company obtains control in the acquiree. Such fair values that are not finalized for reporting periods following the acquisition date are estimated and recorded as provisional amounts. Adjustments to these provisional amounts during the measurement period (defined as the date through which all information required to identify and measure the consideration transferred, the assets acquired, the liabilities assumed and any noncontrolling interests has been obtained, limited to one year from the acquisition date) are recorded as of the date of acquisition. Any material impact to comparative information for periods after acquisition, but before the period in which adjustments are identified, is reflected in those prior periods as if the adjustments were considered as of the acquisition date. Goodwill is determined as the excess of the fair value of the consideration conveyed in the acquisition over the fair value of the net assets acquired.

     Effective May 1, 2011, one or more subsidiaries of the Company completed the acquisition of Mercy Health Partners based in Scranton, Pennsylvania, a healthcare system of two acute care hospitals, a long-term acute care facility and other healthcare providers. This healthcare system includes Regional Hospital of Scranton (198 licensed beds) located in Scranton, Pennsylvania, and Tyler Memorial Hospital (48 licensed beds) located in Tunkhannock, Pennsylvania. This healthcare system also includes a long-term acute care facility, Special Care Hospital (67 licensed beds) located in Nanticoke, Pennsylvania, as well as several outpatient clinics and other ancillary facilities. The total cash consideration paid for fixed assets was approximately $150.5 million, with additional consideration of $12.3 million assumed in liabilities as well as a credit applied at closing of $2.1 million for negative acquired working capital, for a total consideration of $160.7 million. Based upon the Company’s preliminary purchase price allocation relating to this acquisition as of June 30, 2011, approximately $42.1 million of goodwill has been recorded. The preliminary allocation of the purchase price has been determined by the Company based on available information and is subject to settling amounts related to purchased working capital and final appraisals of tangible and intangible assets. Adjustments to the purchase price allocation are not expected to be material.

     Effective October 1, 2010, one or more subsidiaries of the Company completed the acquisition of Forum Health based in Youngstown, Ohio, a healthcare system of two acute care hospitals, a rehabilitation hospital and other healthcare providers. This healthcare system includes Northside Medical Center (355 licensed beds) located in Youngstown, Ohio, and Trumbull Memorial Hospital (311 licensed beds) located in Warren, Ohio. This healthcare system also includes Hillside Rehabilitation Hospital (69 licensed beds) located in Warren, Ohio, as well as several outpatient clinics and other ancillary facilities. The total cash consideration paid for fixed assets and working capital was approximately $93.4 million and $27.8 million, respectively, with additional consideration of $40.3 million assumed in liabilities, for a total consideration of $161.5 million. Based upon the Company’s final purchase price allocation relating to this acquisition as of June 30, 2011, approximately $8.1 million of goodwill has been recorded.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

     Effective October 1, 2010, one or more subsidiaries of the Company completed the acquisition of Bluefield Regional Medical Center (240 licensed beds) located in Bluefield, West Virginia. The total cash consideration paid for fixed assets was approximately $35.4 million, with additional consideration of $8.9 million assumed in liabilities as well as a credit applied at closing of $1.8 million for negative acquired working capital, for a total consideration of $42.5 million. Based upon the Company’s final purchase price allocation relating to this acquisition as of June 30, 2011, approximately $2.4 million of goodwill has been recorded.

     Effective July 7, 2010, one or more subsidiaries of the Company completed the acquisition of Marion Regional Healthcare System located in Marion, South Carolina. This healthcare system includes Marion Regional Hospital (124 licensed beds), an acute care hospital, along with a related skilled nursing facility and other ancillary services. The total cash consideration paid for fixed assets and working capital was approximately $18.6 million and $5.8 million, respectively, with additional consideration of $3.9 million assumed in liabilities, for a total consideration of $28.3 million. Based upon the Company’s final purchase price allocation relating to this acquisition as of June 30, 2011, no goodwill has been recorded.

     Additionally, during the six months ended June 30, 2011, the Company paid approximately $55.1 million to acquire the operating assets and related businesses of certain physician practices, clinics and other ancillary businesses that operate within the communities served by its hospitals. In connection with these acquisitions, the Company allocated approximately $14.7 million of the consideration paid to property and equipment, $3.4 million to net working capital, $1.5 million to other intangible assets, and the remainder, approximately $35.5 million consisting of intangible assets that do not qualify for separate recognition, was allocated to goodwill.

     Approximately $5.3 million and $1.2 million of acquisition costs related to prospective and closed acquisitions were expensed during the three months ended June 30, 2011 and 2010, respectively, and $8.7 million and $1.8 million during the six months ended June 30, 2011 and 2010, respectively.

   Discontinued Operations

     Effective February 1, 2011, the Company sold Willamette Community Medical Group, which is a physician clinic operating as Oregon Medical Group (“OMG”), located in Springfield, Oregon, with a carrying amount of net assets, including an allocation of reporting unit goodwill, of $19.7 million to Oregon Healthcare Resources, LLC, for $14.6 million in cash.

     In March 2011, the Company made the decision to sell one of its hospitals. In June 2011, the Company entered into a definitive agreement to sell two of its hospitals. Accordingly, these three hospitals are classified as held for sale at June 30, 2011.

     The Company has classified the results of operations for OMG and the three hospitals held for sale as discontinued operations in the accompanying condensed consolidated statements of income for the three and six months ended June 30, 2011 and 2010.

     Net operating revenues and loss from discontinued operations for the respective periods are as follows (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Net operating revenues		$	68,479			$	90,378			$	140,563			$	182,448
Income (loss) from operations of entities sold and held for sale before income taxes			392				(3,232	)			(2,280	)			(1,994	)
Impairment of hospitals held for sale			(38,600	)			—				(51,695	)			—
Loss on sale			—				—				(5,061	)			—
Loss from discontinued operations, before taxes			(38,208	)			(3,232	)			(59,036	)			(1,994	)
Income tax expense (benefit)			1,119				(1,195	)			(6,429	)			(596	)
Loss from discontinued operations, net of taxes		$	(39,327	)		$	(2,037	)		$	(52,607	)		$	(1,398	)

     Interest expense was allocated to discontinued operations based on sale proceeds available for debt repayment.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

     The long-lived assets and allocated goodwill as of December 31, 2010 of the physician clinic sold during the quarter ended March 31, 2011 and the three hospitals classified as held for sale at June 30, 2011 totaled approximately $182.7 million, and are included in the accompanying condensed consolidated balance sheet in other assets, net.

     The long-lived assets and allocated goodwill as of June 30, 2011 of the three hospitals held for sale, net of impairment, totaled approximately $122.6 million and are included in the accompanying condensed consolidated balance sheet in other assets, net.

6. INCOME TAXES

     The total amount of unrecognized benefit that would affect the effective tax rate, if recognized, was approximately $7.7 million as of June 30, 2011. It is the Company’s policy to recognize interest and penalties related to unrecognized benefits in its condensed consolidated statements of income as income tax expense. During the six months ended June 30, 2011, the Company increased liabilities by $0.1 million and increased interest and penalties by approximately $0.2 million. A total of approximately $1.5 million of interest and penalties is included in the amount of the liability for uncertain tax positions at June 30, 2011.

     The Company believes that it is reasonably possible that approximately $2.3 million of its current unrecognized tax benefit may be recognized within the next 12 months as a result of a lapse of the statute of limitations and settlements with taxing authorities.

     The Company, or one of its subsidiaries, files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company has extended the federal statute of limitations for Triad Hospitals, Inc. (“Triad”) for the tax periods ended December 31, 1999, December 31, 2000, April 30, 2001, June 30, 2001, December 31, 2001, December 31, 2002 and December 31, 2003. The Company is currently under examination by the Internal Revenue Service (“IRS”) regarding the federal tax return of Triad for the tax periods ended December 31, 2004, December 31, 2005, December 31, 2006 and July 25, 2007. The Company believes the results of this examination will not be material to its consolidated results of operations or consolidated financial position. With few exceptions, the Company is no longer subject to state income tax examinations for years prior to 2007 and federal income tax examinations with respect to Community Health Systems, Inc. federal returns for years prior to 2007. The Company’s federal income tax returns for the 2007 and 2008 tax years are currently under examination by the IRS. The Company believes the results of this examination will not be material to its consolidated results of operations or consolidated financial position.

     Cash paid for income taxes, net of refunds received, resulted in a net cash refund of $25.0 million and net cash paid of $78.8 million for the three months ended June 30, 2011 and June 30, 2010, respectively. Cash paid for income taxes, net of refunds received, resulted in a net cash refund of $25.7 million and net cash paid of $79.7 million for the six months ended June 30, 2011 and June 30, 2010, respectively.

7. GOODWILL AND OTHER INTANGIBLE ASSETS

     The changes in the carrying amount of goodwill for the six months ended June 30, 2011, are as follows (in thousands):

Balance as of December 31, 2010 (as previously reported)		$	4,199,905
Goodwill allocated to disposal and hospitals held for sale			(49,658	)
Balance as of December 31, 2010 (as adjusted)			4,150,247
Goodwill acquired as part of acquisitions during 2011			77,760
Consideration adjustments and purchase price allocation adjustments for prior year’s acquisitions			(37	)
Balance as of June 30, 2011		$	4,227,970

     Goodwill is allocated to each identified reporting unit, which is defined as an operating segment or one level below the operating segment (referred to as a component of the entity). Management has determined that the Company’s operating segments meet the criteria to be classified as reporting units. At June 30, 2011, the hospital operations reporting unit, the home care agency operations reporting unit, and the hospital management services reporting unit had approximately $4.2 billion, $35.9 million and $33.3 million, respectively, of goodwill.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

     Goodwill is evaluated for impairment at the same time every year and when an event occurs or circumstances change that, more likely than not, reduce the fair value of the reporting unit below its carrying value. There is a two-step method for determining goodwill impairment. Step one is to compare the fair value of the reporting unit with the unit’s carrying amount, including goodwill. If this test indicates the fair value is less than the carrying value, then step two is required to compare the implied fair value of the reporting unit’s goodwill with the carrying value of the reporting unit’s goodwill. The Company has selected September 30 as its annual testing date. The Company performed its last annual goodwill evaluation as of September 30, 2010, which evaluation took place during the fourth quarter of 2010. No impairment was indicated by this evaluation.

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

     The gross carrying amount of the Company’s other intangible assets subject to amortization was $61.7 million at June 30, 2011 and $60.5 million at December 31, 2010, and the net carrying amount was $34.1 million at June 30, 2011 and $36.1 million at December 31, 2010. The carrying amount of the Company’s other intangible assets not subject to amortization was $44.1 million and $44.4 million at June 30, 2011 and December 31, 2010, respectively. Other intangible assets are included in other assets, net on the Company’s condensed consolidated balance sheets. Substantially all of the Company’s intangible assets are contract-based intangible assets related to operating licenses, management contracts, or non-compete agreements entered into in connection with prior acquisitions.

     The weighted-average amortization period for the intangible assets subject to amortization is approximately nine years. There are no expected residual values related to these intangible assets. Amortization expense on these intangible assets was $2.3 million and $3.1 million during the three months ended June 30, 2011 and 2010, respectively, and $4.2 million and $6.3 million during the six months ended June 30, 2011 and 2010, respectively. Amortization expense on intangible assets is estimated to be $3.9 million for the remainder of 2011, $7.1 million in 2012, $4.5 million in 2013, $2.9 million in 2014, $2.5 million in 2015 and $13.2 million in 2016 and thereafter.

     The gross carrying amount of capitalized software for internal use was approximately $396.9 million and $356.5 million at June 30, 2011 and December 31, 2010, respectively, and the net carrying amount considering accumulated amortization was approximately $219.1 million and $209.4 million at June 30, 2011 and December 31, 2010, respectively. The estimated amortization period for capitalized internal-use software is generally three years, except for capitalized costs related to significant system conversions, which is generally eight years. There is no expected residual value for capitalized internal-use software. At June 30, 2011, there was approximately $76.6 million of capitalized costs for internal-use software that is currently in the development stage and will begin amortization once the software project is complete and ready for its intended use. Amortization expense on capitalized internal-use software was $16.7 million and $11.0 million during the three months ended June 30, 2011 and 2010, respectively, and $34.7 million and $20.2 million during the six months ended June 30, 2011 and 2010, respectively. Amortization expense on capitalized internal-use software is estimated to be $37.5 million for the remainder of 2011, $75.1 million in 2012, $45.1 million in 2013, $18.1 million in 2014, $15.7 million in 2015 and $27.6 million in 2016 and thereafter.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

8. EARNINGS PER SHARE

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Numerator:
Income from continuing operations, net of taxes		$	92,874			$	88,379			$	184,479			$	172,736
Less: Income from continuing operations attributable to noncontrolling interests, net of taxes			18,158				16,313				35,159				31,332
Income from continuing operations attributable to Community Health Systems, Inc. common stockholders — basic and diluted		$	74,716			$	72,066			$	149,320			$	141,404
Loss from discontinued operations, net of taxes		$	(39,327	)		$	(2,037	)		$	(52,607	)		$	(1,398	)
Less: Loss from discontinued operations attributable to noncontrolling interests, net of taxes			—				(36	)			—				(66	)
Loss from discontinued operations attributable to Community Health Systems, Inc. common stockholders — basic and diluted		$	(39,327	)		$	(2,001	)		$	(52,607	)		$	(1,332	)
Denominator:
Weighted-average number of shares outstanding — basic			91,130,672				93,358,771				91,069,876				92,491,839
Effect of dilutive securities:
Restricted stock awards			263,876				522,496				258,871				423,442
Employee stock options			381,632				815,455				623,662				847,380
Other equity-based awards			7,545				15,197				8,201				16,340
Weighted-average number of shares outstanding — diluted			91,783,725				94,711,919				91,960,610				93,779,001

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

Employee stock options			6,726,417				3,503,906				5,560,855				4,432,069

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

9. STOCKHOLDERS’ EQUITY

     Authorized capital shares of the Company include 400,000,000 shares of capital stock consisting of 300,000,000 shares of common stock and 100,000,000 shares of preferred stock. Each of the aforementioned classes of capital stock has a par value of $0.01 per share. Shares of preferred stock, none of which were outstanding as of June 30, 2011, may be issued in one or more series having such rights, preferences and other provisions as determined by the Board of Directors without approval by the holders of common stock.

     On September 15, 2010, the Company commenced a new open market repurchase program for up to 4,000,000 shares of the Company’s common stock, not to exceed $100 million in repurchases. This program will conclude at the earliest of three years from the commencement date, when the maximum number of shares has been repurchased or when the maximum dollar amount has been expended. During the three and six months ended June 30, 2011, the Company repurchased and retired 1,763,566 shares at a weighted-average price of $28.31 under this program. The cumulative number of shares that have been repurchased and retired under this program through June 30, 2011 is 2,214,838 shares at a weighted-average price of $28.82 per share.

     On December 9, 2009, the Company commenced the predecessor open market repurchase program for up to 3,000,000 shares of the Company’s common stock, not to exceed $100 million in repurchases. This program concluded in September 2010 when purchases approximated the total permitted maximum dollar amount allowed under the program. During the three and six months ended June 30, 2010, the Company repurchased and retired 356,000 shares at a weighted-average price of $34.24 under this program. During the year ended December 31, 2010, the Company repurchased and retired 2,964,528 shares, which is the cumulative number of shares that were repurchased under this program, at a weighted-average price of $33.69 per share.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

     The following schedule presents the reconciliation of the carrying amount of total equity, equity attributable to the Company, and equity attributable to the noncontrolling interests for the six-month period ended June 30, 2011 (in thousands):

							Community Health Systems, Inc. Stockholders
																			Accumulated
		Redeemable									Additional								Other												Total
		Noncontrolling					Common				Paid-in				Treasury				Comprehensive				Retained				Noncontrolling				Stockholders’
		Interests					Stock				Capital				Stock				Income (Loss)				Earnings				Interests				Equity
Balance, December 31, 2010		$	387,472				$	936			$	1,126,751			$	(6,678	)		$	(230,927	)		$	1,299,382			$	60,913			$	2,250,377
Comprehensive income:
Net income			25,211					—				—				—				—				96,713				9,948				106,661
Net change in fair value of interest rate swaps			—					—				—				—				27,477				—				—				27,477
Net change in fair value of available-for-sale securities			—					—				—				—				1,338				—				—				1,338
Amortization and recognition of unrecognized pension cost components			—					—				—				—				1,579				—				—				1,579
Total comprehensive income			25,211					—				—				—				30,394				96,713				9,948				137,055
Distributions to noncontrolling interests, net of contributions			(19,387	)				—				—				—				—				—				(9,828	)			(9,828	)
Purchase of subsidiary shares from noncontrolling interests			(2,792	)				—				(498	)			—				—				—				—				(498	)
Other reclassifications of noncontrolling interests			(2,004	)				—				—				—				—				—				272				272
Adjustment to redemption value of redeemable noncontrolling interests			(11,842	)				—				11,842				—				—				—				—				11,842
Repurchases of common stock			—					(18	)			(50,002	)			—				—				—				—				(50,020	)
Issuance of common stock in connection with the exercise of stock options			—					6				18,831				—				—				—				—				18,837
Cancellation of restricted stock for tax withholdings on vested shares			—					(3	)			(13,110	)			—				—				—				—				(13,113	)
Excess tax benefit from exercise of stock options			—					—				4,659				—				—				—				—				4,659
Share-based compensation			—					11				20,732				—				—				—				—				20,743
Balance, June 30, 2011		$	376,658				$	932			$	1,119,205			$	(6,678	)		$	(200,533	)		$	1,396,095			$	61,305			$	2,370,326

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

		Six Months Ended
		June 30, 2011
Net income attributable to Community Health Systems, Inc.		$	96,713
Transfers to the noncontrolling interests:
Net decrease in Community Health Systems, Inc. paid-in capital for purchase of subsidiary partnership interests			(498	)
Net transfers to the noncontrolling interests			(498	)
Change to Community Health Systems, Inc. stockholders’ equity from net income attributable to Community Health Systems, Inc. and transfers to noncontrolling interests		$	96,215

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

10. COMPREHENSIVE INCOME

     The following table presents the components of comprehensive income, net of related taxes (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Net income		$	53,547			$	86,342			$	131,872			$	171,338
Net change in fair value of interest rate swaps			(8,969	)			(33,694	)			27,477				(45,051	)
Net change in fair value of available-for-sale securities			268				476				1,338				630
Amortization and recognition of unrecognized pension cost components			807				758				1,579				5,233
Comprehensive income			45,653				53,882				162,266				132,150
Less: Comprehensive income attributable to noncontrolling interests			18,158				16,277				35,159				31,266
Comprehensive income attributable to Community Health Systems, Inc.		$	27,495			$	37,605			$	127,107			$	100,884

     The net change in fair value of the interest rate swaps, the net change in fair value of available-for-sale securities and the amortization and recognition of unrecognized pension cost components are included in accumulated other comprehensive loss on the accompanying condensed consolidated balance sheets.

11. EQUITY INVESTMENTS

     As of June 30, 2011, the Company owned equity interests of 27.5% in four hospitals in Las Vegas, Nevada, and 26.1% in one hospital in Las Vegas, Nevada, in which Universal Health Systems, Inc. owns the majority interest, and an equity interest of 38.0% in three hospitals in Macon, Georgia, in which HCA Inc. owns the majority interest.

     Summarized combined financial information for the three and six months ended June 30, 2011 and 2010, for these unconsolidated entities in which the Company owns an equity interest is as follows (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Revenues		$	373,448			$	358,586			$	746,039			$	716,065
Operating costs and expenses			334,765				321,457				652,752				645,977
Income from continuing operations before taxes			38,652				37,113				93,236				70,045

     The summarized financial information for the three and six months ended June 30, 2011 and 2010 was derived from the unaudited financial information provided to the Company by those unconsolidated entities.

     The Company’s investment in all of its unconsolidated affiliates was $421.0 million and $409.5 million at June 30, 2011 and December 31, 2010, respectively, and is included in other assets, net in the accompanying condensed consolidated balance sheets. Included in the Company’s results of operations is the Company’s equity in pre-tax earnings from all of its investments in unconsolidated affiliates, which was $12.0 million and $11.0 million for the three months ended June 30, 2011 and 2010, respectively, and $30.2 million and $23.6 million for the six months ended June 30, 2011 and 2010, respectively.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

12. LONG-TERM DEBT

Credit Facility and Notes

     In connection with the consummation of the acquisition of Triad in July 2007, the Company’s wholly-owned subsidiary CHS/Community Health Systems, Inc. (“CHS”) obtained approximately $7.2 billion of senior secured financing under a new credit facility (the “Credit Facility”) with a syndicate of financial institutions led by Credit Suisse, as administrative agent and collateral agent, and issued approximately $3.0 billion aggregate principal amount of 8.875% senior notes due 2015 (the “Notes”). The Company used the net proceeds of $3.0 billion from the Notes offering and the net proceeds of approximately $6.1 billion of term loans under the Credit Facility to acquire the outstanding shares of Triad, to refinance certain of Triad’s indebtedness and the Company’s indebtedness, to complete certain related transactions, to pay certain costs and expenses of the transactions and for general corporate uses. Specifically, the Company repaid its outstanding debt under the previously outstanding credit facility, the 6.50% senior subordinated notes due 2012 and certain of Triad’s existing indebtedness.

     The Credit Facility consisted of an approximately $6.1 billion funded term loan facility with a maturity of seven years, a $400 million delayed draw term loan facility with a maturity of seven years and a $750 million revolving credit facility with a maturity of six years. As of December 31, 2007, the $400 million delayed draw term loan facility had been reduced to $300 million at the request of CHS. During the fourth quarter of 2008, $100 million of the delayed draw term loan was drawn by CHS, reducing the delayed draw term loan availability to $200 million at December 31, 2008. In January 2009, CHS drew down the remaining $200 million of the delayed draw term loan. The revolving credit facility also includes a subfacility for letters of credit and a swingline subfacility. The Credit Facility requires quarterly amortization payments of each term loan facility equal to 0.25% of the outstanding amount of the term loans. On November 5, 2010, CHS entered into an amendment and restatement of its existing Credit Facility. The amendment extends by two and a half years, until January 25, 2017, the maturity date of $1.5 billion of the existing term loans under the Credit Facility and increases the pricing on these term loans to LIBOR plus 350 basis points. If more than $50 million of the Notes remain outstanding on April 15, 2015, without having been refinanced, then the maturity date for the extended term loans will be accelerated to April 15, 2015. The maturity date of the balance of the term loans of approximately $4.5 billion remains unchanged at July 25, 2014. The amendment also increases CHS’s ability to issue additional indebtedness under the uncommitted incremental facility to $1.0 billion from $600 million, permits CHS to issue Term A term loans under the incremental facility, and provides up to $2.0 billion of borrowing capacity from receivable transactions, an increase of $0.5 billion, of which $1.7 billion would be required to be used for repayment of existing term loans.

     The term loan facility must be prepaid in an amount equal to (1) 100% of the net cash proceeds of certain asset sales and dispositions by the Company and its subsidiaries, subject to certain exceptions and reinvestment rights, (2) 100% of the net cash proceeds of issuances of certain debt obligations or receivables based financing by the Company and its subsidiaries, subject to certain exceptions, and (3) 50%, subject to reduction to a lower percentage based on the Company’s leverage ratio (as defined in the Credit Facility generally as the ratio of total debt on the date of determination to the Company’s EBITDA, as defined, for the four quarters most recently ended prior to such date), of excess cash flow (as defined) for any year, commencing in 2008, subject to certain exceptions. Voluntary prepayments and commitment reductions are permitted in whole or in part, without any premium or penalty, subject to minimum prepayment or reduction requirements.

     The obligor under the Credit Facility is CHS. All of the obligations under the Credit Facility are unconditionally guaranteed by the Company and certain existing and subsequently acquired or organized domestic subsidiaries. All obligations under the Credit Facility and the related guarantees are secured by a perfected first priority lien or security interest in substantially all of the assets of the Company, CHS and each subsidiary guarantor, including equity interests held by the Company, CHS or any subsidiary guarantor, but excluding, among others, the equity interests of non-significant subsidiaries, syndication subsidiaries, securitization subsidiaries and joint venture subsidiaries.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

     The loans under the Credit Facility bear interest on the outstanding unpaid principal amount at a rate equal to an applicable percentage plus, at CHS’s option, either (a) an Alternate Base Rate (as defined) determined by reference to the greater of (1) the Prime Rate (as defined) announced by Credit Suisse or (2) the Federal Funds Effective Rate (as defined) plus one-half of 1.0% or (3) the adjusted London Interbank Offered Rate (“LIBOR”) on such day for a three-month interest period commencing on the second business day after such day plus 1%, or (b) a reserve adjusted LIBOR for dollars (Eurodollar rate) (as defined). The applicable percentage for Alternate Base Rate loans is 1.25% for term loans due 2014 and is 2.25% for term loans due 2017. The applicable percentage for Eurodollar rate loans is 2.25% for term loans due 2014 and 3.5% for term loans due 2017. The applicable percentage for revolving loans is 1.25% for Alternate Base Rate revolving loans and 2.25% for Eurodollar revolving loans, in each case subject to reduction based on the Company’s leverage ratio. Loans under the swingline subfacility bear interest at the rate applicable to Alternate Base Rate loans under the revolving credit facility.

     CHS has agreed to pay letter of credit fees equal to the applicable percentage then in effect with respect to Eurodollar rate loans under the revolving credit facility times the maximum aggregate amount available to be drawn under all letters of credit outstanding under the subfacility for letters of credit. The issuer of any letter of credit issued under the subfacility for letters of credit will also receive a customary fronting fee and other customary processing charges. CHS was initially obligated to pay commitment fees of 0.50% per annum (subject to reduction based upon the Company’s leverage ratio) on the unused portion of the revolving credit facility. For purposes of this calculation, swingline loans are not treated as usage of the revolving credit facility. With respect to the delayed draw term loan facility, CHS was also obligated to pay commitment fees of 0.50% per annum for the first nine months after the closing of the Credit Facility, 0.75% per annum for the next three months after such nine-month period and thereafter, 1.0% per annum. In each case, the commitment fee was paid on the unused amount of the delayed draw term loan facility. After the draw down of the remaining $200 million of the delayed draw term loan in January 2009, CHS no longer pays any commitment fees for the delayed draw term loan facility. CHS paid arrangement fees on the closing of the Credit Facility and pays an annual administrative agent fee.

     The Credit Facility contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting the Company’s and its subsidiaries’ ability, subject to certain exceptions, to, among other things (1) declare dividends, make distributions or redeem or repurchase capital stock, (2) prepay, redeem or repurchase other debt, (3) incur liens or grant negative pledges, (4) make loans and investments and enter into acquisitions and joint ventures, (5) incur additional indebtedness or provide certain guarantees, (6) make capital expenditures, (7) engage in mergers, acquisitions and asset sales, (8) conduct transactions with affiliates, (9) alter the nature of the Company’s businesses, (10) grant certain guarantees with respect to physician practices, (11) engage in sale and leaseback transactions or (12) change the Company’s fiscal year. The Company is also required to comply with specified financial covenants (consisting of a leverage ratio and an interest coverage ratio) and various affirmative covenants.

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

     The Notes were issued by CHS in connection with the Triad acquisition in the principal amount of approximately $3.0 billion. The Notes will mature on July 15, 2015. The Notes bear interest at the rate of 8.875% per annum, payable semiannually in arrears on January 15 and July 15, commencing January 15, 2008. Interest on the Notes accrues from the date of original issuance. Interest is calculated on the basis of a 360-day year comprised of twelve 30-day months.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

     Except as set forth below, CHS is not entitled to redeem the Notes prior to July 15, 2011.

     On and after July 15, 2011, CHS is entitled, at its option, to redeem all or a portion of the Notes upon not less than 30 nor more than 60 days notice, at the redemption prices (expressed as a percentage of principal amount on the redemption date), plus accrued and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on July 15 of the years set forth below:

Period		Redemption Price
2011			104.438	%
2012			102.219	%
2013 and thereafter			100.000	%

     CHS is entitled, at its option, to redeem the Notes, in whole or in part, at any time prior to July 15, 2011, upon not less than 30 or more than 60 days notice, at a redemption price equal to 100% of the principal amount of Notes redeemed plus the Applicable Premium (as defined), and accrued and unpaid interest, if any, as of the applicable redemption date.

     Pursuant to a registration rights agreement entered into at the time of the issuance of the Notes, as a result of an exchange offer made by CHS, substantially all of the Notes issued in July 2007 were exchanged in November 2007 for new notes (the “Exchange Notes”) having terms substantially identical in all material respects to the Notes (except that the Exchange Notes were issued under a registration statement pursuant to the Securities Act of 1933, as amended). References to the Notes shall also be deemed to include the Exchange Notes unless the context provides otherwise.

     As of June 30, 2011, the availability for additional borrowings under the Credit Facility was $750 million pursuant to the revolving credit facility, of which $37.9 million was set aside for outstanding letters of credit. CHS has the ability to amend the Credit Facility to provide for one or more tranches of term loans in an aggregate principal amount of $1.0 billion, which CHS has not yet accessed. CHS also has the ability to add up to $300 million of borrowing capacity from receivable transactions (including securitizations) under the Credit Facility, which has not yet been accessed. As of June 30, 2011, the weighted-average interest rate under the Credit Facility, excluding swaps, was 3.2%.

     The Company paid interest of $101.6 million and $99.9 million on borrowings during the three months ended June 30, 2011 and 2010, respectively, and $327.7 million and $320.2 million for the six months ended June 30, 2011 and 2010, respectively.

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

     The fair value of financial instruments has been estimated by the Company using available market information as of June 30, 2011 and December 31, 2010, and valuation methodologies considered appropriate. The estimates presented are not necessarily indicative of amounts the Company could realize in a current market exchange (in thousands):

		June 30, 2011								December 31, 2010
		Carrying				Estimated Fair				Carrying				Estimated Fair
		Amount				Value				Amount				Value
Assets:
Cash and cash equivalents		$	191,432			$	191,432			$	299,169			$	299,169
Available-for-sale securities			33,097				33,097				31,570				31,570
Trading securities			38,709				38,709				35,092				35,092
Liabilities:
Credit Facility			5,974,321				5,806,274				5,999,337				5,882,124
Senior notes			2,784,331				2,846,978				2,784,331				2,923,548
Other debt			43,478				43,478				36,122				36,122

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

     Available-for-sale securities. Estimated fair value is based on closing price as quoted in public markets.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

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

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

     Senior notes. Estimated fair value is based on the average bid and ask price as quoted by the bank who served as underwriter in the sale of these notes.

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

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

     The Company assesses the effectiveness of its hedge instruments on a quarterly basis. For the three and six months ended June 30, 2011 and 2010, the Company completed an assessment of the cash flow hedge instruments and determined the hedges to be highly effective. The Company has also determined that the ineffective portion of the hedges do not have a material effect on the Company’s consolidated financial position, operations or cash flows. The counterparties to the interest rate swap agreements expose the Company to credit risk in the event of nonperformance. However, at June 30, 2011, each swap agreement entered into by the Company was in a net liability position so that the Company would be required to make the net settlement payments to the counterparties; the Company does not anticipate nonperformance by those counterparties. The Company does not hold or issue derivative financial instruments for trading purposes.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

     Interest rate swaps consisted of the following at June 30, 2011:

		Notional
		Amount				Fixed Interest				Termination				Fair Value
Swap #		(in 000’s)				Rate				Date				(in 000’s)
1		$	300,000				5.1140	%		August 8, 2011				$	1,533
2			100,000				4.7185	%		August 19, 2011					605
3			100,000				4.7040	%		August 19, 2011					603
4			100,000				4.6250	%		August 19, 2011					592
5			200,000				4.9300	%		August 30, 2011					1,551
6			200,000				3.0920	%		September 18, 2011					1,248
7			100,000				3.0230	%		October 23, 2011					869
8			200,000				4.4815	%		October 26, 2011					2,712
9			200,000				4.0840	%		December 3, 2011					3,279
10			100,000				3.8470	%		January 4, 2012					1,822
11			100,000				3.8510	%		January 4, 2012					1,824
12			100,000				3.8560	%		January 4, 2012					1,826
13			200,000				3.7260	%		January 8, 2012					3,610
14			200,000				3.5065	%		January 16, 2012					3,514
15			250,000				5.0185	%		May 30, 2012					10,654
16			150,000				5.0250	%		May 30, 2012					6,401
17			200,000				4.6845	%		September 11, 2012					10,208
18			100,000				3.3520	%		October 23, 2012					3,798
19			125,000				4.3745	%		November 23, 2012					6,794
20			75,000				4.3800	%		November 23, 2012					4,082
21			150,000				5.0200	%		November 30, 2012					9,618
22			200,000				2.2420	%		February 28, 2013					5,561
23			100,000				5.0230	%		May 30, 2013					8,262
24			300,000				5.2420	%		August 6, 2013					27,964
25			100,000				5.0380	%		August 30, 2013					9,101
26			50,000				3.5860	%		October 23, 2013					3,130
27			50,000				3.5240	%		October 23, 2013					3,063
28			100,000				5.0500	%		November 30, 2013					9,857
29			200,000				2.0700	%		December 19, 2013					5,715
30			100,000				5.2310	%		July 25, 2014					11,994
31			100,000				5.2310	%		July 25, 2014					11,998
32			200,000				5.1600	%		July 25, 2014					23,584
33			75,000				5.0405	%		July 25, 2014					8,571
34			125,000				5.0215	%		July 25, 2014					14,218
35			100,000				2.6210	%		July 25, 2014					4,349
36			100,000				3.1100	%		July 25, 2014					5,788
37			100,000				3.2580	%		July 25, 2014					6,222
38			200,000				2.6930	%		October 26, 2014					7,504	(1)
39			300,000				3.4470	%		August 8, 2016					18,662	(2)
40			200,000				3.4285	%		August 19, 2016					12,096	(3)
41			100,000				3.4010	%		August 19, 2016					6,019	(4)
42			200,000				3.5000	%		August 30, 2016					12,529	(5)
43			100,000				3.0050	%		November 30, 2016					4,196

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

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

     Assuming no change in June 30, 2011 interest rates, approximately $176.7 million of interest expense resulting from the spread between the fixed and floating rates defined in each interest rate swap agreement will be recognized during the next 12 months. If interest rate swaps do not remain highly effective as a cash flow hedge, the derivatives’ gains or losses resulting from the change in fair value reported through OCI will be reclassified into earnings.

     The following tabular disclosure provides the amount of pre-tax loss recognized in the condensed consolidated balance sheets as a component of OCI during the three and six months ended June 30, 2011 and 2010 (in thousands):

Derivatives in Cash Flow Hedging		Amount of Pre-Tax Loss Recognized in OCI on Derivative (Effective Portion)
Relationships		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Interest rate swaps		$	(67,685	)		$	(107,656	)		$	(63,572	)		$	(178,564	)

     The following tabular disclosure provides the location of the effective portion of the pre-tax loss reclassified from accumulated other comprehensive loss (“AOCL”) into interest expense on the condensed consolidated statements of income during the three and six months ended June 30, 2011 and 2010 (in thousands):

Location of Loss Reclassified from
AOCL into Income (Effective		Amount of Pre-Tax Loss Reclassified from AOCL into Income (Effective Portion)
Portion)		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Interest expense, net		$	53,649			$	55,009			$	106,573			$	108,173

     The fair values of derivative instruments in the condensed consolidated balance sheets as of June 30, 2011 and December 31, 2010 were as follows (in thousands):

Asset Derivatives

Liability Derivatives

June 30, 2011

December 31, 2010

June 30, 2011

December 31, 2010

Balance

Balance

Balance

Balance

Sheet

Fair

Sheet

Fair

Sheet

Fair

Sheet

Fair

Location

Value

Location

Value

Location

Value

Location

Value

Derivatives designated as hedging instruments

Other assets, net

$

—

Other assets, net

$

—

Other long-term liabilities

$

297,526

Other long-term liabilities

$

340,526

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

14. FAIR VALUE

Fair Value Hierarchy

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

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

	Level 1:		Quoted market prices in active markets for identical assets or liabilities.
	Level 2:		Observable market-based inputs or unobservable inputs that are corroborated by market data.
	Level 3:		Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Level 3 includes values determined using pricing models, discounted cash flow methodologies, or similar techniques reflecting the Company’s own assumptions.

     In instances where the determination of the fair value hierarchy measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment of factors specific to the asset or liability.

     The following table sets forth, by level within the fair value hierarchy, the financial assets and liabilities recorded at fair value on a recurring basis as of June 30, 2011 and December 31, 2010 (in thousands):

		June 30,
		2011				Level 1				Level 2				Level 3
Available-for-sale securities		$	33,097			$	33,097			$	—			$	—
Trading securities			38,709				38,709				—				—
Total assets		$	71,806			$	71,806			$	—			$	—
Fair value of interest rate swap agreements		$	297,526			$	—			$	297,526			$	—
Total liabilities		$	297,526			$	—			$	297,526			$	—