Form 10-Q
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

Commission file number 001-15925

COMMUNITY HEALTH SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   13-3893191

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

4000 Meridian Boulevard

Franklin, Tennessee

 

37067

(Zip Code)

(Address of principal executive offices)    

615-465-7000

(Registrant’s telephone number)

 

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes ☑     No ☐

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

 

Large accelerated filer ☑   Accelerated filer  ☐   Smaller reporting company   
Non-accelerated filer ☐     Emerging growth company   

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

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

As of July 23, 2018, there were outstanding 116,253,738 shares of the Registrant’s Common Stock, $0.01 par value.

 

 

 


Table of Contents

Community Health Systems, Inc.

Form 10-Q

For the Three and Six Months Ended June 30, 2018

 

Part I.

 

Financial Information

    Page  
 

Item 1.

  

Financial Statements:

 
    

Condensed Consolidated Statements of Loss - Three and Six Months Ended June 30, 2018 and June 30, 2017 (Unaudited)

     
    

Condensed Consolidated Statements of Comprehensive Loss - Three and Six Months Ended June 30, 2018 and June 30, 2017 (Unaudited)

     
    

Condensed Consolidated Balance Sheets - June 30, 2018 and December  31, 2017 (Unaudited)

     
    

Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2018 and June 30, 2017 (Unaudited)

     
         Notes to Condensed Consolidated Financial Statements (Unaudited)    
 

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    50   
 

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

    77   
 

Item 4.

  

Controls and Procedures

    78   

Part II.

 

Other Information

 
 

Item 1.

  

Legal Proceedings

    78   
 

Item 1A.

  

Risk Factors

    82   
 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

    83   
 

Item 3.

  

Defaults Upon Senior Securities

    83   
 

Item 4.

  

Mine Safety Disclosures

    83   
 

Item 5.

  

Other Information

    83   
 

Item 6.

  

Exhibits

    84   

Signatures

    86   


Table of Contents

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF LOSS

(In millions, except share and per share data)

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
                 2018                             2017                             2018                             2017              

Operating revenues (net of contractual allowances and discounts)

     $ 4,823     $ 9,991

Provision for bad debts

       679       1,362
    

 

 

     

 

 

 

Net operating revenues (see Note 1)

   $ 3,562     4,144   $ 7,251     8,629
    

 

 

     

 

 

 

Operating costs and expenses:

        

Salaries and benefits

     1,617     1,920     3,265     3,981

Supplies

     592     697     1,208     1,446

Other operating expenses

     879     1,017     1,789     2,074

Government and other legal settlements and related costs

     1     7     7     (34

Electronic health records incentive reimbursement

     -       (17     (1     (23

Rent

     85     104     173     214

Depreciation and amortization

     177     223     358     458

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

     174     80     202     330
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     3,525     4,031     7,001     8,446
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     37     113     250     183

Interest expense, net

     235     239     464     468

(Gain) loss from early extinguishment of debt

     (64     10     (59     31

Equity in earnings of unconsolidated affiliates

     (5     (5     (12     (9
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (129     (131     (143     (307

Benefit from income taxes

     (38     (15     (45     (15
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (91     (116     (98     (292
  

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations, net of taxes:

        

Loss from operations of entities sold or held for sale

     -       (1     -       (2

Impairment of hospitals sold or held for sale

     -       (5     -       (5
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of taxes

     -       (6     -       (7
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (91     (122     (98     (299

Less: Net income attributable to noncontrolling interests

     19     15     37     36
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Community Health Systems, Inc. stockholders

   $ (110   $ (137   $ (135   $ (335
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic loss per share attributable to Community Health Systems, Inc. common stockholders (1):

        

Continuing operations

   $ (0.97   $ (1.17   $ (1.20   $ (2.94

Discontinued operations

     -       (0.06     -       (0.06
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (0.97   $ (1.22   $ (1.20   $ (3.01
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted loss per share attributable to Community Health Systems, Inc. common stockholders (1):

        

Continuing operations

   $ (0.97   $ (1.17   $ (1.20   $ (2.94

Discontinued operations

     -       (0.06     -       (0.06
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (0.97   $ (1.22   $ (1.20   $ (3.01
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of shares outstanding:

        

Basic

     112,837,944     111,909,858     112,566,230     111,582,911
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     112,837,944     111,909,858     112,566,230     111,582,911
  

 

 

   

 

 

   

 

 

   

 

 

 

(1) Total per share amounts may not add due to rounding.

See accompanying notes to the condensed consolidated financial statements.

 

2


Table of Contents

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In millions)

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
             2018                     2017                     2018                     2017          

Net loss

   $ (91   $ (122   $ (98   $ (299

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

        

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

     7     (2     25     3

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

     (1     2     (2     5

Amortization and recognition of unrecognized pension cost, net of tax

     1     1     1     1
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     7     1     24     9
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

     (84     (121     (74     (290

Less: Comprehensive income attributable to noncontrolling interests

     19     15     37     36
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to Community Health Systems, Inc. stockholders

   $ (103   $ (136   $ (111   $ (326
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

3


Table of Contents

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

(Unaudited)

 

             June 30, 2018                     December 31, 2017          

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 208     $ 563  

Patient accounts receivable (see Note 1)

     2,407       2,384  

Supplies

     432       444  

Prepaid income taxes

     8       17  

Prepaid expenses and taxes

     217       198  

Other current assets

     422       462  
  

 

 

   

 

 

 

Total current assets

     3,694       4,068  
  

 

 

   

 

 

 

Property and equipment

     11,148       11,497  

Less accumulated depreciation and amortization

     (4,399     (4,445
  

 

 

   

 

 

 

Property and equipment, net

     6,749       7,052  
  

 

 

   

 

 

 

Goodwill

     4,653       4,723  
  

 

 

   

 

 

 

Deferred income taxes

     101       62  
  

 

 

   

 

 

 

Other assets, net

     1,597       1,545  
  

 

 

   

 

 

 

Total assets

   $ 16,794     $ 17,450  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

    

Current liabilities:

    

Current maturities of long-term debt

   $ 41     $ 33  

Accounts payable

     839       967  

Accrued liabilities:

    

Employee compensation

     592       685  

Accrued interest

     174       229  

Other

     416       442  
  

 

 

   

 

 

 

Total current liabilities

     2,062       2,356  
  

 

 

   

 

 

 

Long-term debt

     13,673       13,880  
  

 

 

   

 

 

 

Deferred income taxes

     19       19  
  

 

 

   

 

 

 

Other long-term liabilities

     1,329       1,360  
  

 

 

   

 

 

 

Total liabilities

     17,083       17,615  
  

 

 

   

 

 

 

Redeemable noncontrolling interests in equity of consolidated subsidiaries

     514       527  
  

 

 

   

 

 

 

STOCKHOLDERS’ DEFICIT

    

Community Health Systems, Inc. stockholders’ deficit:

    

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

     -       -  

Common stock, $.01 par value per share, 300,000,000 shares authorized; 116,261,738 shares issued and outstanding at June 30, 2018, and 114,651,004 shares issued and outstanding at December 31, 2017

     1       1  

Additional paid-in capital

     2,013       2,014  

Accumulated other comprehensive loss

     (9     (21

Accumulated deficit

     (2,884     (2,761
  

 

 

   

 

 

 

Total Community Health Systems, Inc. stockholders’ deficit

     (879     (767

Noncontrolling interests in equity of consolidated subsidiaries

     76       75  
  

 

 

   

 

 

 

Total stockholders’ deficit

     (803     (692
  

 

 

   

 

 

 

Total liabilities and stockholders’ deficit

   $ 16,794     $ 17,450  
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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Table of Contents

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

     Six Months Ended  
     June 30,  
                 2018                             2017              

Cash flows from operating activities:

    

Net loss

   $ (98   $ (299

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

    

Depreciation and amortization

     358       458  

Government and other legal settlements and related costs

     7       6  

Stock-based compensation expense

     7       15  

Impairment of hospitals sold or held for sale

     -       5  

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

     202       330  

(Gain) loss from early extinguishment of debt

     (59     31  

Other non-cash expenses, net

     23       18  

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

    

Patient accounts receivable

     (21     186  

Supplies, prepaid expenses and other current assets

     (15     (55

Accounts payable, accrued liabilities and income taxes

     (308     (126

Other

     (2     (66
  

 

 

   

 

 

 

Net cash provided by operating activities

     94       503  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions of facilities and other related businesses

     (10     (4

Purchases of property and equipment

     (295     (274

Proceeds from disposition of hospitals and other ancillary operations

     88       921  

Proceeds from sale of property and equipment

     4       3  

Purchases of available-for-sale securities and equity securities

     (38     (37

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

     63       47  

Increase in other investments

     (53     (60
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (241     596  
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Repurchase of restricted stock shares for payroll tax withholding requirements

     (1     (5

Deferred financing costs and other debt-related costs

     (54     (62

Proceeds from noncontrolling investors in joint ventures

     1       5  

Redemption of noncontrolling investments in joint ventures

     (6     (4

Distributions to noncontrolling investors in joint ventures

     (52     (53

Borrowings under credit agreements

     26       840  

Issuance of long-term debt

     -       3,100  

Proceeds from ABL and receivables facility

     587       26  

Repayments of long-term indebtedness

     (709     (4,416
  

 

 

   

 

 

 

Net cash used in financing activities

     (208     (569
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (355     530  

Cash and cash equivalents at beginning of period

     563       238  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 208     $ 768  
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Interest payments

   $ (486   $ (409
  

 

 

   

 

 

 

Income tax (payments) refunds, net

   $ 9     $ (6
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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Table of Contents

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The unaudited condensed consolidated financial statements of Community Health Systems, Inc. (the “Parent” or “Parent Company”) and its subsidiaries (the “Company”) as of June 30, 2018 and December 31, 2017 and for the three-month and six-month periods ended June 30, 2018 and 2017, have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for such periods. All intercompany transactions and balances have been eliminated. The results of operations for the three and six months ended June 30, 2018, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2018. Certain information and disclosures normally included in the notes to condensed consolidated financial statements have been condensed or omitted as permitted by the rules and regulations of the Securities and Exchange Commission (the “SEC”). The Company believes the disclosures are adequate to make the information presented not misleading. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2017, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2018 (“2017 Form 10-K”).

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

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

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

The Company applied the modified retrospective approach to all contracts when adopting ASC 606. As a result, at the adoption of ASC 606 the majority of what was previously classified as the provision for bad debts in the statement of operations is now reflected as implicit price concessions (as defined in ASC 606) and therefore included as a reduction to net operating revenues in 2018. For changes in credit issues not assessed at the date of service, the Company will prospectively recognize those amounts in other operating expenses on the statement of operations. For periods prior to the adoption of ASC 606, the provision for bad debts has been presented consistent with the previous revenue recognition standards that required it to be presented separately as a component of net operating revenues. Additionally, upon adoption of Topic 606 the allowance for doubtful accounts of approximately $3.9 billion as of January 1, 2018 was reclassified as a component of net patient accounts receivable. Other than these changes in presentation on the condensed consolidated statement of operations and condensed consolidated balance sheet, the adoption of ASC 606 did not have a material impact on the consolidated results of operations for the three and six months ended June 30, 2018, and the Company does not expect it to have a material impact on its consolidated results of operations for the remainder of 2018 and on a prospective basis.

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

Net Operating Revenues

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

 

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Table of Contents

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

 

these goods and services are provided. The transaction price, which involves significant estimates, is determined based on the Company’s standard charges for the goods and services provided, with a reduction recorded for price concessions related to third party contractual arrangements as well as patient discounts and other patient price concessions. During the three and six months ended June 30, 2018, the impact of changes to the inputs used to determine the transaction price was considered immaterial to the current period.

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

The Company’s net operating revenues during the three and six months ended June 30, 2018 and 2017 have been presented in the table based on an allocation of the estimated transaction price with the patient between the primary patient classification of insurance coverage (in millions):

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
             2018                      2017                      2018                      2017          

Medicare

   $ 943      $ 1,131      $ 1,977      $ 2,352  

Medicaid

     479        544        938        1,133  

Managed Care and other third-party payors

     2,110        2,412        4,227        4,986  

Self-pay

     30        57        109        158  
  

 

 

    

 

 

    

 

 

    

 

 

 

 Total

   $ 3,562      $ 4,144      $ 7,251      $ 8,629  
  

 

 

    

 

 

    

 

 

    

 

 

 

Patient Accounts Receivable

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

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

Final settlements for some payors and programs are subject to adjustment based on administrative review and audit by third parties. As a result of these final settlements, the Company has recorded amounts due to third-party payors of $133 million and $156 million as of June 30, 2018 and December 31, 2017, respectively, and these amounts are included in accrued liabilities-other in the accompanying condensed consolidated balance sheets. Amounts due from third-party payors were $149 million and $153 million as of June 30, 2018 and December 31, 2017, respectively, and are included in other current assets in the accompanying condensed consolidated balance sheets. Substantially all Medicare and Medicaid cost reports are final settled through 2014.

 

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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

 

Charity Care

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

These charity care services are estimated to be $115 million and $112 million for the three months ended June 30, 2018 and 2017, respectively, and $229 million and $228 million for the six months ended June 30, 2018 and 2017, respectively, representing the value (at the Company’s standard charges) of these charity care services that are excluded from net operating revenues. The estimated cost incurred by the Company to provide these charity care services to patients who are unable to pay was approximately $14 million and $15 million for the three months ended June 30, 2018 and 2017, respectively, and $28 million and $29 million for the six months ended June 30, 2018 and 2017, respectively. The estimated cost of these charity care services was determined using a ratio of cost to gross charges and applying that ratio to the gross charges associated with providing care to charity patients for the period.

Accounting for the Impairment or Disposal of Long-Lived Assets.    During the six months ended June 30, 2018, the Company recorded a total combined impairment charge and loss on disposal of approximately $202 million to reduce the carrying value of certain hospitals that have been deemed held for sale based on the difference between the carrying value of the hospital disposal groups compared to estimated fair value less costs to sell. Included in the carrying value of the hospital disposal groups at June 30, 2018 is a net allocation of approximately $77 million of goodwill allocated from the hospital operations reporting unit goodwill based on a calculation of the disposal groups’ relative fair value compared to the total reporting unit. The Company will continue to evaluate the potential for further impairment of the long-lived assets of underperforming hospitals as well as evaluating offers for potential sale. Based on such analysis, additional impairment charges may be recorded in the future.

During the six months ended June 30, 2017, the Company recorded a total impairment charge of approximately $330 million to reduce the carrying value of certain hospitals that were deemed held for sale based on the difference between the carrying value of the hospital disposal groups compared to estimated fair value less costs to sell. Included in the carrying value of the hospital disposal groups is a net allocation of approximately $357 million of goodwill allocated from the hospital operations reporting unit goodwill based on a calculation of the disposal groups’ relative fair value compared to the total reporting unit.

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

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

 

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part of the adoption of this ASU, as well as any changes to its leasing strategy that may occur because of the changes to the accounting and recognition of leases.

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

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

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

2. ACCOUNTING FOR STOCK-BASED COMPENSATION

Stock-based compensation awards have been granted under the Community Health Systems, Inc. Amended and Restated 2000 Stock Option and Award Plan, amended and restated as of March 20, 2013 (the “2000 Plan”), and the Community Health Systems, Inc. Amended and Restated 2009 Stock Option and Award Plan, which was amended and restated as of March 14, 2018 and approved by the Company’s stockholders at the annual meeting of stockholders held on May 15, 2018 (the “2009 Plan”).

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

The 2009 Plan provides for the grant of incentive stock options intended to qualify under Section 422 of the IRC and for the grant of stock options which do not so qualify, stock appreciation rights, restricted stock, restricted stock units, performance-based shares or units and other share awards. Persons eligible to receive grants under the 2009 Plan include the Company’s directors, officers, employees and consultants. To date, all options granted under the 2009 Plan have been “nonqualified” stock options for tax purposes. Generally, vesting of these granted options occurs in one-third increments on each of the first three anniversaries of the award date. Options granted in 2011 or later have a 10-year contractual term. As of June 30, 2018, 8,606,484 shares of unissued common stock were reserved for future grants under the 2009 Plan.

 

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

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

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
           2018                 2017                 2018                 2017        

Effect on loss from continuing operations before income taxes

   $ (3   $ (6   $ (7   $ (15
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect on net loss

   $ (2   $ (4   $ (4   $ (9
  

 

 

   

 

 

   

 

 

   

 

 

 

At June 30, 2018, $18 million of unrecognized stock-based compensation expense related to outstanding unvested restricted stock and restricted stock units (the terms of which are summarized below) was expected to be recognized over a weighted-average period of 24 months. There is no expense to be recognized related to stock options. There were no modifications to awards during the three or six months ended June 30, 2018 and 2017.

Options outstanding and exercisable under the 2000 Plan and the 2009 Plan as of June 30, 2018, and changes during each of the three-month periods following December 31, 2017, were as follows (in millions, except share and per share data):

 

                  Weighted-      Aggregate  
                  Average      Intrinsic  
           Weighted-      Remaining          Value as of      
           Average      Contractual      June 30,  
             Shares                 Exercise Price                    Term                2018  

Exercisable at December 31, 2017

     1,115,667     $ 31.56        

Granted

     -       -        

Exercised

     -       -        

Forfeited and cancelled

     (383,666     32.19        
  

 

 

         

Outstanding at March 31, 2018

     732,001       31.23        

Granted

     -       -        

Exercised

     -       -        

Forfeited and cancelled

     (46,174     32.76        
  

 

 

         

Outstanding at June 30, 2018

     685,827     $ 31.12        2.4 years      $  
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at June 30, 2018

     685,827     $ 31.12        2.4 years      $  
  

 

 

   

 

 

    

 

 

    

 

 

 

No stock options were granted during the six months ended June 30, 2018 and 2017. The aggregate intrinsic value (calculated as the number of in-the-money stock options multiplied by the difference between the Company’s closing stock price on the last trading day of the reporting period ($3.32) 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, 2018. This amount changes based on the market value of the Company’s common stock. There were no options exercised during the three or six months ended June 30, 2018 and 2017. The aggregate intrinsic value of options vested and expected to vest approximates that of the outstanding options.

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

 

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performance-based awards granted beginning in March 2017, if the applicable target performance objective is met at the end of three years, then the portion of the restricted stock award subject to such performance objective will vest in full. Additionally, for these awards, based on the level of achievement for the applicable performance objective within the parameters specified in the award, the number of shares to be issued in connection with the vesting of the award will be adjusted to decrease or increase the number of shares specified in the original award. Notwithstanding the above-mentioned performance objectives and vesting requirements, the restrictions with respect to restricted stock granted under the 2000 Plan and the 2009 Plan will lapse earlier in the event of death, disability or termination of employment by the Company for any reason other than for cause of the holder of the restricted stock, or change in control of the Company. Restricted stock awards subject to performance standards that have not yet been satisfied are not considered outstanding for purposes of determining earnings per share until the performance objectives have been satisfied.

Restricted stock outstanding under the 2000 Plan and the 2009 Plan as of June 30, 2018, and changes during each of the three-month periods following December 31, 2017, were as follows:

 

           Weighted-  
           Average Grant  
                 Shares                     Date Fair Value      

Unvested at December 31, 2017

     2,643,919     $ 16.17  

Granted

     1,911,000       4.58  

Vested

     (981,326     25.73  

Forfeited

     (88,673     13.24  
  

 

 

   

Unvested at March 31, 2018

     3,484,920       7.20  

Granted

     31,000       3.97  

Vested

     (67,329     9.87  

Forfeited

     (52,355     4.30  
  

 

 

   

Unvested at June 30, 2018

     3,396,236       7.09  
  

 

 

   

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

RSUs outstanding under the 2000 Plan and the 2009 Plan as of June 30, 2018, and changes during each of the three-month periods following December 31, 2017, were as follows:

 

           Weighted-  
           Average Grant  
                 Shares                     Date Fair Value      

Unvested at December 31, 2017

     172,078     $ 12.78  

Granted

     296,944       4.58  

Vested

     (71,116     15.51  

Forfeited

     -       -  
  

 

 

   

Unvested at March 31, 2018

     397,906       6.17  

Granted

     -       -  

Vested

     -       -  

Forfeited

     -       -  
  

 

 

   

Unvested at June 30, 2018

     397,906       6.17  
  

 

 

   

 

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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 $43 million and $40 million for the three months ended June 30, 2018 and 2017, respectively, and $95 million and $92 million for the six months ended June 30, 2018 and 2017, respectively. Included in these corporate office costs is stock-based compensation of $3 million and $6 million for the three months ended June 30, 2018 and 2017, respectively, and $7 million and $15 million for the six months ended June 30, 2018 and 2017, respectively.

4. USE OF ESTIMATES

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

5. ACQUISITIONS AND DIVESTITURES

Acquisitions

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

During the six months ended June 30, 2018, one or more subsidiaries of the Company paid approximately $10 million to acquire the operating assets and related businesses of certain physician practices, clinics and other ancillary businesses that operate within the communities served by the Company’s affiliated hospitals. In connection with these acquisitions, during the six months ended June 30, 2018, the Company allocated approximately $3 million of the consideration paid to property and equipment and net working capital and the remainder, approximately $7 million consisting of intangible assets that do not qualify for separate recognition, to goodwill. No hospitals were acquired in 2017 or during the six months ended June 30, 2018.

Acquisition and integration expenses related to prospective and closed acquisitions included in other operating expenses on the condensed consolidated statements of loss was less than $1 million during both of the three-month periods ended June 30, 2018 and 2017, and approximately $1 million during both of the six-month periods ended June 30, 2018 and 2017.

 

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Divestitures

The following table provides a summary of hospitals included in continuing operations that the Company divested during the year ended December 31, 2017 and the six months ended June 30, 2018:

 

               Licensed       

Hospital

  

Buyer

  

City, State                

   Beds     

Effective Date    

2018 Divestitures:

           
Tennova-Dyersburg Regional    West Tennessee Healthcare    Dyersburg, TN      225      June 1, 2018
Tennova-Regional Jackson    West Tennessee Healthcare    Jackson, TN      150      June 1, 2018
Tennova- Volunteer Martin    West Tennessee Healthcare    Martin, TN      100      June 1, 2018
Williamson Memorial Hospital    Mingo Health Partners, LLC    Williamson, WV      76      June 1, 2018
Byrd Regional Hospital    Allegiance Health Management    Leesville, LA      60      June 1, 2018
Tennova Healthcare - Jamestown    Rennova Health, Inc.    Jamestown, TN      85      June 1, 2018
Bayfront Health Dade City    Adventist Health System    Dade City, FL      120      April 1, 2018

2017 Divestitures:

           
Highlands Regional Medical Center    HCA Holdings, Inc. (“HCA”)    Sebring, FL      126      November 1, 2017
Merit Health Northwest Mississippi    Curae Health, Inc.    Clarksdale, MS      181      November 1, 2017
Weatherford Regional Medical Center    HCA    Weatherford, TX      103      October 1, 2017
Brandywine Hospital    Reading Health System    Coatesville, PA      169      October 1, 2017
Chestnut Hill Hospital    Reading Health System    Philadelphia, PA      148      October 1, 2017
Jennersville Hospital    Reading Health System    West Grove, PA      63      October 1, 2017
Phoenixville Hospital    Reading Health System    Phoenixville, PA      151      October 1, 2017
Pottstown Memorial Medical Center    Reading Health System    Pottstown, PA      232      October 1, 2017
Yakima Regional Medical and Cardiac Center    Regional Health    Yakima, WA      214      September 1, 2017
Toppenish Community Hospital    Regional Health    Toppenish, WA      63      September 1, 2017
Memorial Hospital of York    PinnacleHealth System    York, PA      100      July 1, 2017
Lancaster Regional Medical Center    PinnacleHealth System    Lancaster, PA      214      July 1, 2017
Heart of Lancaster Regional Medical Center    PinnacleHealth System    Lititz, PA      148      July 1, 2017
Carlisle Regional Medical Center    PinnacleHealth System    Carlisle, PA      165      July 1, 2017
Tomball Regional Medical Center    HCA    Tomball, TX      350      July 1, 2017
South Texas Regional Medical Center    HCA    Jourdanton, TX      67      July 1, 2017
Deaconess Hospital    MultiCare Health System    Spokane, WA      388      July 1, 2017
Valley Hospital    MultiCare Health System    Spokane Valley, WA      123      July 1, 2017
Lake Area Medical Center    CHRISTUS Health    Lake Charles, LA      88      June 30, 2017
Easton Hospital    Steward Health, Inc.    Easton, PA      196      May 1, 2017
Sharon Regional Health System    Steward Health, Inc.    Sharon, PA      258      May 1, 2017
Northside Medical Center    Steward Health, Inc.    Youngstown, OH      355      May 1, 2017
Trumbull Memorial Hospital    Steward Health, Inc.    Warren, OH      311      May 1, 2017
Hillside Rehabilitation Hospital    Steward Health, Inc.    Warren, OH      69      May 1, 2017
Wuesthoff Health System – Rockledge    Steward Health, Inc.    Rockledge, FL      298      May 1, 2017
Wuesthoff Health System – Melbourne    Steward Health, Inc.    Melbourne, FL      119      May 1, 2017
Sebastian River Medical Center    Steward Health, Inc.    Sebastian, FL      154      May 1, 2017
Stringfellow Memorial Hospital    The Health Care Authority of the City of Anniston    Anniston, AL      125      May 1, 2017
Merit Health Gilmore Memorial    Curae Health, Inc.    Amory, MS      95      May 1, 2017
Merit Health Batesville    Curae Health, Inc.    Batesville, MS      112      May 1, 2017

 

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A discontinued operation in U.S. GAAP is a disposal that represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. Additional disclosures are required for significant components of the entity that are disposed of or are held for sale but do not qualify as discontinued operations. The divestitures above do not meet the criteria for reporting as discontinued operations and are included in continuing operations for the six months ended June 30, 2018 and 2017.

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

Net operating revenues and loss from discontinued operations for the three and six months ended June 30, 2017 are as follows (in millions):

 

           Three Months Ended                   Six Months Ended          
     June 30, 2017     June 30, 2017  

Net operating revenues

   $ 21     $ 45  
  

 

 

   

 

 

 

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

   $ (2   $ (3

Impairment of hospitals sold or held for sale

     (7     (7

Loss on sale, net

     (1     (1
  

 

 

   

 

 

 

Loss from discontinued operations, before taxes

     (10     (11

Income tax benefit

     (4     (4
  

 

 

   

 

 

 

Loss from discontinued operations, net of taxes

   $ (6   $ (7
  

 

 

   

 

 

 

The following table discloses amounts included in the condensed consolidated balance sheet for the hospitals classified as held for sale as of June 30, 2018 and December 31, 2017 (in millions):

 

                                                                                         
     June 30, 2018      December 31, 2017  

Other current assets

   $ 21      $ 8  

Other assets, net

     132        12  

Accrued liabilities

     5        2  

Other Hospital Closures

During the three months ended June 30, 2018, the Company completed the planned closure of Twin Rivers Regional Medical Center in Kennett, Missouri. The Company recorded an impairment charge of approximately $4 million during the three months ended June 30, 2018, to adjust the fair value of the supplies, inventory and long-lived assets of this hospital, including property and equipment and capitalized software costs, based on their estimated fair value and future utilization.

6. INCOME TAXES

The total amount of unrecognized benefit that would impact the effective tax rate, if recognized, was approximately $7 million as of June 30, 2018. A total of approximately $4 million of interest and penalties is included in the amount of the liability for uncertain tax positions at June 30, 2018. It is the Company’s policy to recognize interest and penalties related to unrecognized benefits in its condensed consolidated statements of loss as income tax expense.

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

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

 

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Community Health Systems, Inc. for the tax periods ended December 31, 2007, 2008, 2009 and 2010, and through December 31, 2019 for the tax periods ended December 31, 2014 and 2015.

The Company’s effective tax rates were 29.5% and 11.5% for the three months ended June 30, 2018 and 2017, respectively, and 31.5% and 4.9% for the six months ended June 30, 2018 and 2017, respectively. This increase in the Company’s effective tax rate for the three and six months ended June 30, 2018, when compared to the three and six months ended June 30, 2017, was primarily due to the release of a state valuation allowance of approximately $15 million as a result of an enacted tax law change partially offset by approximately $4 million of tax expense recognized on the tax deficiency from stock compensation expense for restricted stock vesting during the six months ended June 30, 2018. Additionally, the rate was impacted by a reduction in the amount of the non-deductible goodwill written off as part of the impairment and gain (loss) on sale of businesses for the six months ended June 30, 2018, compared to the six months ended June 30, 2017, and a disproportionate increase in income from continuing operations before income taxes, when compared to the increase in net income attributable to noncontrolling interest for those same periods, which is not tax affected in the Company’s condensed consolidated financial statements.

Cash paid for income taxes, net of refunds received, resulted in a net refund of $9 million and net cash paid of $5 million during the three months ended June 30, 2018 and 2017, respectively, and a net refund of $9 million and net cash paid of $6 million during the six months ended June 30, 2018 and 2017, respectively.

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

The Tax Act also made other changes to the U.S. tax code, which changes included, but were not limited to (1) creating a new limitation on deductible interest expense; (2) changing rules related to uses and limitations of net operating loss carryforwards; and (3) modifying the rules governing the deductibility of certain executive compensation.

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

The Company has not completed the accounting for the income tax effects of the Tax Act. At December 31, 2017, the Company recorded a discrete net tax expense of $32 million primarily related to provisional amounts under SAB 118 for the remeasurement of U.S. deferred tax assets and liabilities due to Rate Reduction. No changes were recorded to this provisional estimate during the six months ended June 30, 2018. However, this estimate may differ from the final accounting as supplemental legislation, regulatory guidance or evolving technical interpretations become available.

At June 30, 2018, the Company was not able to reasonably estimate and, therefore, has not recorded a provisional amount for the Tax Act’s impact on certain state valuation allowances. The Company will record a provisional amount in the first reporting period in which a reasonable estimate can be determined. Such timing will depend upon the Company’s ability to obtain, prepare and analyze the necessary information to determine whether a valuation allowance needs to be recognized.

 

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7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The changes in the carrying amount of goodwill for the six months ended June 30, 2018 are as follows (in millions):

 

Balance as of December 31, 2017

  

Goodwill

   $                     7,537  

Accumulated impairment losses

     (2,814
  

 

 

 
     4,723  
  

 

 

 

Goodwill acquired as part of acquisitions during current year

     7  

Goodwill allocated to hospitals held for sale

     (77
  

 

 

 

Balance as of June 30, 2018

  

Goodwill

     7,467  

Accumulated impairment losses

     (2,814
  

 

 

 
   $ 4,653  
  

 

 

 

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, 2018, the Company had approximately $4.7 billion of goodwill recorded.

Goodwill is evaluated for impairment annually and when an event occurs or circumstances change that, more likely than not, reduce the fair value of the reporting unit below its carrying value. During 2017, the Company adopted ASU 2017-04, which allows a company to record a goodwill impairment when the reporting unit’s carrying value exceeds the fair value determined in step one. In 2017, consistent with prior years, the Company performed its annual goodwill evaluation during the fourth quarter as of September 30, 2017, and then an updated evaluation as of November 30, 2017 due to the identification of certain impairment indicators. With the elimination of the time-intensive step two calculation to determine the implied value of goodwill, the Company has considered the additional benefits of performing the annual goodwill evaluation later in the fourth quarter to coincide with the timing of the next fiscal year’s budgeting and financial projection process. Based on these considerations, the Company has elected to change the annual goodwill impairment measurement date to October 31. The next annual goodwill evaluation will be performed during the fourth quarter of 2018 with an October 31, 2018 measurement date, or sooner if the Company identifies certain indicators of impairment.

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

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

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

 

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these assumptions changes materially in the future, including further decline in the Company’s stock price or fair value of long-term debt, lower than expected hospital volumes, higher market interest rates or increased operating costs. Such changes impacting the calculation of fair value could result in a material impairment charge in the future.

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

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

Intangible Assets

No intangible assets other than goodwill were acquired during the six months ended June 30, 2018. The gross carrying amount of the Company’s other intangible assets subject to amortization was $18 million at both June 30, 2018 and December 31, 2017, and the net carrying amount was $9 million and $10 million at June 30, 2018 and December 31, 2017, respectively. The carrying amount of the Company’s other intangible assets not subject to amortization was $75 million and $79 million at June 30, 2018 and December 31, 2017, respectively. Other intangible assets are included in other assets, net on the Company’s condensed consolidated balance sheets. Substantially all of the Company’s intangible assets are contract-based intangible assets related to operating licenses, management contracts, tradenames, or non-compete agreements entered into in connection with prior acquisitions.

The weighted-average remaining amortization period for the intangible assets subject to amortization is approximately seven years. There are no expected residual values related to these intangible assets. Amortization expense on these intangible assets was less than $1 million and $1 million during the three months ended June 30, 2018 and 2017, respectively, and $1 million and $3 million for the six months ended June 30, 2018 and 2017, respectively. Amortization expense on intangible assets is estimated to be $1 million for the remainder of 2018, $2 million in 2019, $1 million in 2020, $1 million in 2021, $1 million in 2022, $1 million in 2023 and $2 million thereafter.

The gross carrying amount of capitalized software for internal use was approximately $1.2 billion at June 30, 2018 and December 31, 2017, and the net carrying amount was approximately $387 million and $416 million at June 30, 2018 and December 31, 2017, respectively. The estimated amortization period for capitalized internal-use software is generally three years, except for capitalized costs related to significant system conversions, which is generally eight to ten years. There is no expected residual value for capitalized internal-use software. At June 30, 2018, there was approximately $44 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 $34 million and $47 million during the three months ended June 30, 2018 and 2017, respectively, and $70 million and $95 million for the six months ended June 30, 2018 and 2017, respectively. Amortization expense on capitalized internal-use software is estimated to be $69 million for the remainder of 2018, $115 million in 2019, $81 million in 2020, $53 million in 2021, $36 million in 2022, $20 million in 2023 and $13 million thereafter.

 

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8. EARNINGS PER SHARE

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

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
            2018                     2017                     2018                     2017          

Numerator:

       

Loss from continuing operations, net of taxes

  $ (91   $ (116   $ (98   $ (292

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

    19       15       37       36  
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (110   $ (131   $ (135   $ (328
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of taxes

  $ -     $ (6   $ -     $ (7

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

    -       -       -       -  
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ -     $ (6   $ -     $ (7
 

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

       

Weighted-average number of shares outstanding — basic

    112,837,944       111,909,858       112,566,230       111,582,911  

Effect of dilutive securities:

       

Restricted stock awards

    -       -       -       -  

Employee stock options

    -       -       -       -  

Other equity-based awards

    -       -       -       -  
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of shares outstanding — diluted

    112,837,944       111,909,858       112,566,230       111,582,911  
 

 

 

   

 

 

   

 

 

   

 

 

 

The Company generated a loss from continuing operations attributable to Community Health Systems, Inc. common stockholders for the three and six-month periods ended June 30, 2018 and 2017, so the effect of dilutive securities is not considered because their effect would be antidilutive. If the Company had generated income from continuing operations, the effect of restricted stock awards on the diluted shares calculation would have been an increase of 47,754 shares and 215,313 shares during the three months ended June 30, 2018 and 2017, respectively, and 60,558 shares and 147,043 shares for the six months ended June 30, 2018 and 2017, respectively.

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
            2018                     2017                     2018                     2017          

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

       

Employee stock options and restricted stock awards

    1,792,512       2,360,317       1,856,431       2,934,023  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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9. STOCKHOLDERS’ DEFICIT

Authorized capital shares of the Company include 400,000,000 shares of capital stock consisting of 300,000,000 shares of common stock and 100,000,000 shares of preferred stock. Each of the aforementioned classes of capital stock has a par value of $0.01 per share. Shares of preferred stock, none of which were outstanding as of June 30, 2018, may be issued in one or more series having such rights, preferences and other provisions as determined by the Board of Directors without approval by the holders of common stock.

On November 6, 2015, the Company adopted an open market repurchase program for up to 10,000,000 shares of the Company’s common stock, not to exceed $300 million in repurchases. The repurchase program will expire on the earlier of November 5, 2018, when the maximum number of shares has been repurchased, or when the maximum dollar amount has been expended. During the year ended December 31, 2015, the Company repurchased and retired 532,188 shares at a weighted-average price of $27.31 per share, which is the cumulative number of shares repurchased and retired under this program. No shares were repurchased under this program during the years ended December 31, 2016 and 2017. In addition, no shares were repurchased under this program during the six months ended June 30, 2018.

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

With the exception of a special cash dividend of $0.25 per share paid by the Company in December 2012, historically, the Company has not paid any cash dividends. Subject to certain exceptions, the Company’s Credit Facility limits the ability of the Company’s subsidiaries to pay dividends and make distributions to the Company, and limits the Company’s ability to pay dividends and/or repurchase stock, to an amount not to exceed $200 million in the aggregate plus an additional $25 million in any particular year plus the aggregate amount of proceeds from the exercise of stock options. The indentures governing each series of our outstanding notes also restrict the Company’s subsidiaries from, among other matters, paying dividends and making distributions to the Company, which thereby limits the Company’s ability to pay dividends and/or repurchase stock. As of June 30, 2018, under the most restrictive test in these agreements (and subject to certain exceptions), the Company has approximately $225 million available with which to pay permitted dividends and/or repurchase shares of stock.

 

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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, 2018 (in millions):

 

                    Community Health Systems, Inc. Stockholders              
    Redeemable
  Noncontrolling  
Interest
                Common 
Stock
     Additional 
Paid-In
Capital
   

 

Accumulated

Other
 Comprehensive 
Income (Loss)

     Accumulated 
Deficit
     Noncontrolling 
Interest
    Total
  Stockholders’  
Deficit
 

Balance, December 31, 2017

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

Comprehensive income (loss)

    21           -       -       24     (135     16     (95

Adoption of new accounting standards

    -             -       -       (12     12     -       -  

Contributions from noncontrolling interests

    -             -       -       -       -       1     1

Distributions to noncontrolling interests

    (37           -       -       -       -       (15     (15

Purchase of subsidiary shares from noncontrolling interests

    (2           -       (3     -       -       (1     (4

Adjustment to redemption value of redeemable noncontrolling interests

    5           -       (5     -       -       -       (5

Share-based compensation

    -             -       7     -       -       -       7
 

 

 

         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2018

  $ 514         $ 1   $ 2,013   $ (9   $ (2,884   $ 76   $ (803
 

 

 

         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

               Six Months Ended            
     June 30, 2018  

Net loss attributable to Community Health Systems, Inc. stockholders

   $ (135

Transfers from the noncontrolling interests:

  

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

     (3
  

 

 

 

Net transfers from the noncontrolling interests

     (3
  

 

 

 

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

   $ (138
  

 

 

 

 

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10. LONG-TERM DEBT

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

 

               June 30,                   December 31,      
     2018     2017  

Credit Facility:

    

Term G Loan

    $ 1,013      $ 1,037  

Term H Loan

     1,857       1,903  

8% Senior Notes due 2019

     155       1,925  

7 18% Senior Notes due 2020

     121       1,200  

5 18% Senior Secured Notes due 2021

     1,000       1,000  

6 78% Senior Notes due 2022

     2,632       3,000  

6 14% Senior Secured Notes due 2023

     3,100       3,100  

Junior-Priority Secured Notes due 2023

     1,770       -  

Junior-Priority Secured Notes due 2024

     1,355       -  

Receivables Facility

     -       565  

ABL Facility

     538       -  

Capital lease obligations

     298       304  

Other

     55       48  

Less: Unamortized deferred debt issuance costs and note premium

     (180     (169
  

 

 

   

 

 

 

Total debt

     13,714       13,913  

Less: Current maturities

     (41     (33
  

 

 

   

 

 

 

Total long-term debt

    $ 13,673      $ 13,880  
  

 

 

   

 

 

 

Credit Facility

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

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

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

The term loan facility must be prepaid in an amount equal to (1) 100% of the net cash proceeds of certain asset sales and dispositions by the Company and its subsidiaries, subject to certain exceptions and reinvestment rights (as further described below), (2) 100% of the net cash proceeds of issuances of certain debt obligations or receivables-based financing by the Company and its

 

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subsidiaries, subject to certain exceptions, and (3) 75%, subject to reduction to a lower percentage based on the Company’s first lien net leverage ratio (as defined in the Credit Facility generally as the ratio of first lien net debt on the date of determination to the Company’s consolidated EBITDA, as defined, for the four quarters most recently ended prior to such date), of excess cash flow (as defined) for any year, subject to certain exceptions. Voluntary prepayments and commitment reductions are permitted in whole or in part, without any premium or penalty, subject to minimum prepayment or reduction requirements.

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

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

The Credit Facility contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting the Company’s and its subsidiaries’ ability, subject to certain exceptions, to, among other things (1) declare dividends, make distributions or redeem or repurchase capital stock, (2) prepay, redeem or repurchase other debt, (3) incur liens or grant negative pledges, (4) make loans and investments and enter into acquisitions and joint ventures, (5) incur additional indebtedness or provide certain guarantees, (6) make capital expenditures, (7) engage in mergers, acquisitions and asset sales, (8) conduct transactions with affiliates, (9) alter the nature of the Company’s businesses, (10) grant certain guarantees with respect to physician practices, (11) engage in sale and leaseback transactions or (12) change the Company’s fiscal year. The Company is also required to comply with specified financial covenants (consisting of a first lien net debt to consolidated EBITDA leverage ratio) and various affirmative covenants. Under the Credit Facility, the first lien net debt to consolidated EBITDA ratio is calculated as the ratio of total first lien debt, less unrestricted cash and cash equivalents, to consolidated EBITDA, as defined in the Credit Facility. The calculation of consolidated EBITDA as defined in the Credit Facility is a trailing 12-month calculation that begins with net income attributable to the Company, with certain pro forma adjustments to consider the impact of material acquisitions or divestitures, and adjustments for interest, taxes, depreciation and amortization, net income attributable to noncontrolling interests, stock compensation expense, restructuring costs, and the financial impact of other non-cash or non-recurring items recorded during any such 12-month period. For the 12-month period ended June 30, 2018, the first lien net debt to consolidated EBITDA ratio financial covenant under the Credit Facility limited the ratio of first lien net debt to consolidated EBITDA, as defined, to less than or equal to 5.25 to 1.00. The Company was in compliance with all such covenants at June 30, 2018, with a first lien net debt to consolidated EBITDA ratio of approximately 4.91 to 1.00.

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

As of June 30, 2018, the availability for additional borrowings under the Credit Facility, subject to certain limitations as set forth in the Credit Facility, was approximately $425 million pursuant to the Revolving Facility, of which $88 million is in the form of outstanding letters of credit. CHS has the ability to amend the Credit Facility to provide for one or more tranches of term loans or increases in the Revolving Facility in an aggregate principal amount of up to $1.5 billion, only $1.0 billion of which is effectively available because of the Company’s additional undertakings in connection with the Loan Modification Agreement. As of June 30, 2018, the weighted-average interest rate under the Credit Facility, excluding swaps, was 6.6%.

 

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

 

2018 Financing Activity

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

On March 23, 2018, the Company and CHS entered into the Fourth Amendment and Restatement Agreement to the Credit Facility (the “Agreement”). In addition to including the changes described in the paragraph above, the Company further modified its ability to retain asset sale proceeds, and instead to apply them to prepayments of term loans based on pro forma first lien leverage. To the extent the pro forma ratio of first lien net debt to consolidated EBITDA is greater than or equal to 4.25 to 1.00, 100% of net cash proceeds of asset sales will be applied to prepay term loans; to the extent the pro forma first lien leverage ratio is less than 4.25 to 1.00 but greater than or equal to 3.75 to 1.0, 50% of such proceeds will be applied to prepay term loans; and to the extent the first lien leverage ratio is less than 3.75 to 1.00, there will be no requirement to prepay term loans with such proceeds. The Agreement also amended the Credit Facility to permit CHS to incur debt under either an asset-based loan (“ABL”) facility in an amount up to $1.0 billion or maintain its Asset-Backed Securitization program. The Revolving Facility would be reduced to $425 million upon the effectiveness of the contemplated ABL facility. The Agreement also reduced the availability for incremental tranches of term loans or increases in the Revolving Facility to $500 million and removed the secured net leverage incurrence test with respect to junior secured debt. Term G Loans will accrue interest at a rate per annum initially equal to LIBOR plus 3.00%, in the case of LIBOR borrowings, and Alternate Base Rate plus 2.00%, in the case of Alternate Base Rate borrowing. Term H Loans will accrue interest at a rate per annum initially equal to LIBOR plus 3.25%, in the case of LIBOR borrowings, and Alternate Base Rate plus 2.25%, in the case of Alternate Base Rate borrowing.

On April 3, 2018, the Company and CHS entered into an asset-based loan (ABL) credit agreement (the “ABL Credit Agreement”) (as further described below), with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders and other agents party thereto. Pursuant to the ABL Credit Agreement, the lenders have extended to CHS a revolving asset-based loan facility (the “ABL Facility”) in the maximum aggregate principal amount of $1.0 billion, subject to borrowing base capacity. The ABL facility includes borrowing capacity available for letters of credit of $50 million. CHS and all domestic subsidiaries of CHS that guarantee CHS’ other outstanding senior and senior secured indebtedness guarantee the obligations of CHS under the ABL Facility. In conjunction with the closing of the ABL Facility, the wholly-owned special-purpose entity that owned the Receivables pledged under the previous Receivables Facility became a subsidiary guarantor under the Credit Facility and CHS’ outstanding notes. Subject to certain exceptions, all obligations under the ABL Facility and the related guarantees are secured by a perfected first-priority security interest in substantially all of the Receivables, deposit, collection and other accounts and contract rights, books, records and other instruments related to the foregoing of the Company, CHS and the guarantors as well as a perfected junior-priority security interest in substantially all of the other assets of the Company, CHS and the guarantors, subject to customary exceptions and intercreditor arrangements. The revolving credit commitments under the Credit Facility were reduced to $425 million upon the effectiveness of the ABL Facility. In connection with entering into the ABL Credit Agreement and the ABL Facility, the Company repaid in full and terminated its Receivables Facility. The outstanding borrowings pursuant to the ABL Facility at June 30, 2018 totaled $538 million on the condensed consolidated balance sheet.

On June 22, 2018, CHS completed its previously announced offers to exchange certain of its outstanding senior unsecured notes due 2019, 2020 and 2022 for new junior-priority secured notes due 2023 and 2024, the terms and amounts of which are further discussed below.

 

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8% Senior Notes due 2019

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

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

 

Period

  

        Redemption Price        

November 15, 2017 to November 14, 2019

   100.000%    

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

On June 22, 2018, CHS issued approximately $1.770 billion aggregate principal amount of new Junior-Priority Secured Notes due 2023 (the “2023 Junior-Priority Notes”) in exchange for the same amount of 8% Senior Notes. The terms of the 2023 Junior-Priority Notes are described below. Following this exchange, CHS had $155 million aggregate principal amount of 8% Senior Notes outstanding.

7 18% Senior Notes due 2020

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

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

 

Period

  

        Redemption Price        

July 15, 2018 to July 14, 2020

   100.000%    

On June 22, 2018, CHS issued approximately $1.079 billion aggregate principal amount of new Junior-Priority Secured Notes due 2024 (the “2024 Junior-Priority Notes”) in exchange for the same amount of 7 18% Senior Notes. The terms of the 2024 Junior-Priority Notes are described below. Following this exchange, CHS had $121 million aggregate principal amount of 7 18% Senior Notes outstanding.

 

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5 18% Senior Secured Notes due 2021

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

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

 

Period

  

        Redemption Price        

February 1, 2018 to January 31, 2019

   102.563%    

February 1, 2019 to January 31, 2020

   101.281%    

February 1, 2020 to January 31, 2021

   100.000%    

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

6 78% Senior Notes due 2022

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

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

 

Period

  

        Redemption Price        

February 1, 2018 to January 31, 2019

   103.438%    

February 1, 2019 to January 31, 2020

   101.719%    

February 1, 2020 to January 31, 2022

   100.000%    

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

On June 22, 2018, CHS issued approximately $276 million aggregate principal amount of the 2024 Junior-Priority Notes in exchange for approximately $368 million of 6 78% Senior Notes. Following this exchange, CHS had $2.632 billion aggregate principal amount of 6 78% Senior Notes outstanding.

 

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6 14% Senior Secured Notes due 2023

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

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

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

 

Period

  

        Redemption Price        

March 31, 2020 to March 30, 2021

   103.125%    

March 31, 2021 to March 30, 2022

   101.563%    

March 31, 2022 to March 30, 2023

   100.000%    

Junior-Priority Secured Notes due 2023

On June 22, 2018, CHS completed a private offering of $1.770 billion aggregate principal amount of the 2023 Junior-Priority Notes in exchange for the same amount of 8% Senior Notes. The 2023 Junior-Priority Notes bear interest at (i) 11% per annum from June 22, 2018 to, but excluding, June 22, 2019 and (ii) 9 78% per annum from June 22, 2019 until maturity, payable semiannually in arrears on June 30 and December 31. Interest on the 2023 Junior-Priority Notes accrues from the date of original issuance with the first interest payment date on December 31, 2018. Interest is calculated on the basis of a 360-day year comprised of twelve 30-day months.

Prior to June 30, 2020, CHS may redeem some or all of the 2023 Junior-Priority Notes at a redemption price equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest, if any, plus a “make-whole” premium, as described in the indenture governing the 2023 Junior-Priority Notes. After June 30, 2020, CHS is entitled, at its option, to redeem all or a portion of the 2023 Junior-Priority Notes upon not less than 30 nor more than 60 days’ notice, at the following redemption prices (expressed as a percentage of principal amount on the redemption date), plus accrued and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the periods set forth below:

 

Period

  

        Redemption Price        

June 30, 2020 to June 30, 2021

   107.406%    

July 1, 2021 to June 30, 2022

   103.703%    

July 1, 2022 to June 30, 2023

   100.000%    

 

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In addition, at any time prior to June 30, 2020, CHS may redeem up to 40% of the aggregate principal amount of the 2023 Junior-Priority Notes with the proceeds of certain equity offerings at 109.875%, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.

Junior-Priority Secured Notes due 2024

On June 22, 2018, CHS completed a private offering of $1.355 billion aggregate principal amount of the 2024 Junior-Priority Notes in exchange for approximately $1.079 billion of 7 18% Senior Notes and approximately $368 million of 6 78% Senior Notes. The 2024 Junior-Priority Notes bear interest at a rate of 8 18% per annum, payable semiannually in arrears on June 30 and December 31. Interest on the 2024 Junior-Priority Notes accrues from the date of original issuance with the first interest payment date on December 31, 2018. Interest is calculated on the basis of a 360-day year comprised of twelve 30-day months.

Prior to June 30, 2021, CHS may redeem some or all of the 2024 Junior-Priority Notes at a redemption price equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest, if any, plus a “make-whole” premium, as described in the indenture governing the 2024 Junior-Priority Notes. After June 30, 2021, CHS is entitled, at its option, to redeem all or a portion of the 2024 Junior-Priority Notes upon not less than 30 nor more than 60 days’ notice, at the following redemption prices (expressed as a percentage of principal amount on the redemption date), plus accrued and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the periods set forth below:

 

Period

  

        Redemption Price        

June 30, 2021 to June 30, 2022

   104.063%    

July 1, 2022 to June 30, 2023

   102.031%    

July 1, 2023 to June 30, 2024

   100.000%    

In addition, at any time prior to June 30, 2021, CHS may redeem up to 40% of the aggregate principal amount of the 2024 Junior-Priority Notes with the proceeds of certain equity offerings at 108.125%, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.

The indentures governing each of the 2023 Junior-Priority Notes and 2024 Junior-Priority Notes also prohibit CHS from purchasing, repurchasing, redeeming, defeasing or otherwise acquiring or retiring any outstanding 8% Senior Notes and 7 18% Senior Notes after the consummation of the exchange offers described above with: (a) cash or cash equivalents on hand as of the consummation of such exchange offers; (b) cash generated from operations; (c) proceeds from assets sales; or (d) proceeds from the issuance of, or in exchange for, secured debt, in each case, prior to the date that is 60 days prior to the relevant maturity dates of such 8% Senior Notes and 7 18% Senior Notes, as applicable.

Receivables Facility

Prior to the effectiveness of the ABL Facility described above, CHS, through certain of its subsidiaries, participated in an accounts receivable loan agreement (the “Receivables Facility”) with a group of lenders and banks, Credit Agricolé Corporate and Investment Bank, as a managing agent and as the administrative agent. Patient-related accounts receivable (the “Receivables”) for certain affiliated hospitals served as collateral for the outstanding borrowings under the Receivables Facility. The interest rate on the borrowings was based on the commercial paper rate plus an applicable interest rate spread. The Receivables Facility was repaid in full and terminated upon the effectiveness of the ABL Facility on April 3, 2018.

 

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(Gain) Loss from Early Extinguishment of Debt

The financing and repayment transactions discussed above resulted in a gain from early extinguishment of debt of $64 million and a loss from early extinguishment of debt of $10 million for the three months ended June 30, 2018 and 2017, respectively, and an after-tax gain of $50 million and after-tax loss of $7 million for the three months ended June 30, 2018 and 2017, respectively. Gain from early extinguishment of debt was $59 million and a loss from early extinguishment of debt of $31 million for the six months ended June 30, 2018 and 2017, respectively, and an after-tax gain of $46 million and an after-tax loss of $20 million for the six months ended June 30, 2018 and 2017, respectively.

Other Debt

As of June 30, 2018, other debt consisted primarily of other obligations maturing in various installments through 2028.

To limit the effect of changes in interest rates on a portion of the Company’s long-term borrowings, the Company is a party to 8 separate interest swap agreements in effect at June 30, 2018, with an aggregate notional amount for currently effective swaps of $2.2 billion. On each of these swaps, the Company receives a variable rate of interest based on the three-month LIBOR in exchange for the payment of a fixed rate of interest. See Note 11 for additional information regarding these swaps.

The Company paid interest of $274 million and $130 million on borrowings during the three months ended June 30, 2018 and 2017, respectively, and $486 million and $409 million for the six months ended June 30, 2018 and 2017, respectively.

11. 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, 2018 and December 31, 2017, and valuation methodologies considered appropriate. The estimates presented in the table below are not necessarily indicative of amounts the Company could realize in a current market exchange (in millions):

 

    June 30, 2018     December 31, 2017  
        Carrying             Estimated Fair             Carrying             Estimated Fair      
    Amount     Value     Amount     Value  

Assets:

       

Cash and cash equivalents

  $ 208     $ 208     $ 563     $ 563  

Investments in equity securities

    141       141       -       -  

Available-for-sale securities

    117       117       252       252  

Trading securities

    -       -       37       37  

Liabilities:

       

Contingent Value Right

    3       3       2       2  

Credit Facility

    2,834       2,828       2,902       2,826  

8% Senior Notes due 2019

    155       151       1,922       1,637  

7 18% Senior Notes due 2020

    121       108       1,192       897  

5 18% Senior Secured Notes due 2021

    981       927       978       902  

6 78% Senior Notes due 2022

    2,587       1,356       2,943       1,729  

6 14% Senior Secured Notes due 2023

    3,064       2,840       3,061       2,800  

Junior-Priority Secured Notes due 2023

    1,749       1,597       -       -  

Junior-Priority Secured Notes due 2024

    1,338       1,119       -       -  

ABL Facility and other debt

    587       587       611       611  

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

 

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

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

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

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

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

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

8% Senior Notes due 2019. Estimated fair value is based on the closing market price for these notes.

7 18% Senior Notes due 2020. Estimated fair value is based on the closing market price for these notes.

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

6 78% Senior Notes due 2022. Estimated fair value is based on the closing market price for these notes.

6 14% Senior Secured Notes due 2023. Estimated fair value is based on the closing market price for these notes.

Junior-Priority Secured Notes due 2023. Estimated fair value is based on the closing market price for these notes.

Junior-Priority Secured Notes due 2024. Estimated fair value is based on the closing market price for these notes.

ABL Facility and other debt. The carrying amount of the ABL Facility and all other debt (which, at December 31, 2017 includes the Receivables Facility) 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 six months ended June 30, 2018 and 2017, the Company completed an assessment of the cash flow hedge instruments and determined the hedges to be highly effective. The Company has also determined that the ineffective portion of the hedges do not have a material effect on the Company’s condensed consolidated financial position, operations or cash flows. The counterparties to the interest rate swap agreements expose the Company to credit risk in the event of nonperformance. However, at June 30, 2018, most of the swap agreements entered into by the Company were in a net liability position such that the Company would be required to make the net settlement payments to the counterparties; the Company does not anticipate nonperformance by those counterparties. The Company does not hold or issue derivative financial instruments for trading purposes.

 

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Interest rate swaps consisted of the following at June 30, 2018:

 

                        Asset (Liability)  
       Notional Amount                    Fair Value  

            Swap  #            

   (in millions)        Fixed Interest Rate       

Termination Date

   (in millions)  
1    $ 400        1.882 %      August 30, 2019    $ 3  
2      200        2.515 %      August 30, 2019      -  
3      200        2.613 %      August 30, 2019      -  
4      300        2.041 %      August 30, 2020      5  
5      300        2.738 %      August 30, 2020      -  
6      300        2.892 %      August 30, 2020      (1
7      300        2.363 %      January 27, 2021      3  
8      200        2.368 %      January 27, 2021      3  

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

Assuming no change in interest rates in effect as of June 30, 2018, approximately $2 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 gain (loss) recognized as a component of OCI during the three and six months ended June 30, 2018 and 2017 (in millions):

 

    Amount of Pre-Tax Gain (Loss) Recognized in OCI (Effective  Portion)  
Derivatives in Cash Flow Hedging   Three Months Ended June 30,     Six Months Ended June 30,  

Relationships

          2018                     2017                     2018                     2017          

Interest rate swaps

  $ 6     $ (8   $ 23     $ (8

The following tabular disclosure provides the location of the effective portion of the pre-tax loss reclassified from accumulated other comprehensive loss (“AOCL”) into interest expense on the condensed consolidated statements of loss during the three and six months ended June 30, 2018 and 2017 (in millions):

 

    Amount of Pre-Tax Loss Reclassified  
    from AOCL into Income (Effective Portion)  
Location of Loss Reclassified from   Three Months Ended June 30,     Six Months Ended June 30,  

AOCL into Income (Effective Portion)

          2018                         2017                           2018                           2017              

Interest expense, net

  $ 2     $ 8     $ 7     $ 17  

 

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The fair values of derivative instruments in the condensed consolidated balance sheets as of June 30, 2018 and December 31, 2017 were as follows (in millions):

 

     Asset Derivatives      Liability Derivatives  
         June 30, 2018              December 31, 2017              June 30, 2018              December 31, 2017      
     Balance           Balance           Balance           Balance       
     Sheet           Sheet           Sheet           Sheet       
     Location    Fair Value      Location    Fair Value      Location    Fair Value      Location    Fair Value  

Derivatives designated as hedging instruments

   Other
assets,
net
   $ 14      Other
assets,
net
   $ 1      Other
long-
term
liabilities
   $ 1      Other
long-
term
liabilities
   $ 18  

12. FAIR VALUE

Fair Value Hierarchy

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

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

 

  Level 1: Quoted market prices in active markets for identical assets or liabilities.

 

  Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

 

  Level 3: Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Level 3 includes values determined using pricing models, discounted cash flow methodologies, or similar techniques reflecting the Company’s own assumptions.

In instances where the determination of the fair value hierarchy measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment of factors specific to the asset or liability. Transfers between levels within the fair value hierarchy are recognized by the Company on the date of the change in circumstances that requires such transfer. There were no transfers between levels during the six-month periods ending June 30, 2018 or June 30, 2017.

 

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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, 2018 and December 31, 2017 (in millions):

 

         June 30, 2018                  Level 1                      Level 2                      Level 3          

Investments in equity securities

   $ 141      $ 141      $ -      $ -  

Available-for-sale securities

     117        -        117        -  

Fair value of interest rate swap agreements

     14        -        14        -  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 272      $ 141      $ 131      $ -  
  

 

 

    

 

 

    

 

 

    

 

 

 

Contingent Value Right (CVR)

   $ 3      $ 3      $ -      $ -  

CVR-related liability

     263        -        -        263  

Fair value of interest rate swap agreements

     1        -        1        -  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 267      $ 3      $ 1      $ 263  
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2017      Level 1      Level 2      Level 3  

Available-for-sale securities

   $ 252      $ 132      $ 120      $ -  

Trading securities

     37        37        -        -  

Fair value of interest rate swap agreements

     1        -        1        -  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 290      $ 169      $ 121      $ -  
  

 

 

    

 

 

    

 

 

    

 

 

 

Contingent Value Right (CVR)

   $ 2      $ 2      $ -      $ -  

CVR-related liability

     256        -        -        256  

Fair value of interest rate swap agreements

     18        -        18        -  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 276      $ 2      $ 18      $ 256  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

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

Contingent Value Right (CVR)

The CVR represents the estimate of the fair value for the contingent consideration paid to HMA shareholders as part of the HMA merger. The CVR is listed on the Nasdaq and the valuation at June 30, 2018 is based on the quoted trading price for the CVR on the last day of the period. Changes in the estimated fair value of the CVR are recorded through the condensed consolidated statements of loss.

 

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CVR-related Liability

The CVR-related legal liability represents the Company’s estimate of fair value at June 30, 2018 of the liability associated with the legal matters assumed in the HMA merger, which are included in other long-term liabilities in the accompanying condensed consolidated balance sheet. This liability did not include those matters previously accrued by HMA as a probable contingency, which were settled and paid during the year ended December 31, 2015. To develop the estimate of fair value, the Company engaged an independent third-party valuation firm to measure the liability. The valuation was made utilizing the Company’s estimates of future outcomes for each legal case and simulating future outcomes based on the timing, probability and distribution of several scenarios using a Monte Carlo simulation model. Other inputs were then utilized for discounting the liability to the measurement date. The HMA legal matters underlying this fair value estimate were evaluated by management to determine the likelihood and impact of each of the potential outcomes. Using that information, as well as the potential correlation and variability associated with each case, a fair value was determined for the estimated future cash outflows to conclude or settle the HMA legal matters included in the analysis, excluding legal fees (which are expensed as incurred). Because of the unobservable nature of the majority of the inputs used to value the liability, the Company has classified the fair value measurement as a Level 3 measurement in the fair value hierarchy.

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

Fair Value of Interest Rate Swap Agreements

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

The Company incorporates CVAs to appropriately reflect both its own nonperformance or credit risk and the respective counterparty’s nonperformance or credit risk in the fair value measurements. In adjusting the fair value of its interest rate swap agreements for the effect of nonperformance or credit risk, the Company has considered the impact of any netting features included in the agreements. The CVA on the Company’s interest rate swap agreements had an immaterial effect on the fair value of the related asset or liability at June 30, 2018. The CVA on the Company’s interest rate swap agreements resulted in a decrease in the fair value of the related liability of $1 million and an after-tax adjustment of less than $1 million to OCI at December 31, 2017.

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

 

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13. EMPLOYEE BENEFIT PLANS

The Company provides an unfunded Supplemental Executive Retirement Plan (“SERP”) for certain members of its executive management. The Company uses a December 31 measurement date for the benefit obligations and a January 1 measurement date for its net periodic costs for the SERP. Variances from actuarially assumed rates will result in increases or decreases in benefit obligations and net periodic cost in future periods. Benefits expense under the SERP was $2 million and $3 million for the three months ended June 30, 2018 and 2017, respectively, and $4 million and $7 million for the six months ended June 30, 2018 and 2017, respectively. The accrued benefit liability for the SERP totaled $71 million and $83 million at June 30, 2018 and December 31, 2017, respectively, and is included in other long-term liabilities on the condensed consolidated balance sheets. The weighted-average assumptions used in determining net periodic cost for the three months ended June 30, 2018 was a discount rate of 3.4% and annual salary increase of 2.0%. The Company had equity investment securities in a rabbi trust generally designated to pay benefits of the SERP in the amounts of $83 million and $99 million at June 30, 2018 and December 31, 2017, respectively. These amounts are included in other assets, net on the condensed consolidated balance sheets.

During the six months ended June 30, 2018, certain members of executive management of the Company that were participants in the SERP retired and met the requirements for payout of their SERP retirement benefit. The SERP payout provisions require payment to the participant in an actuarially determined lump sum amount six months after the participant retires from the Company. Such amounts were paid out of the rabbi trust during the year ended December 31, 2017. As required by the pension accounting rules in U.S. GAAP, the Company recognized a non-cash settlement loss of $1 million during the six months ended June 30, 2018, and will recognize a non-cash settlement loss of less than $1 million during the remaining six months ending December 31, 2018, which represents a pro-rata portion of the accumulated unrecognized actuarial loss out of accumulated other comprehensive loss.

14. CONTINGENCIES

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

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

In connection with the spin-off of Quorum Health Corporation (“QHC”), the Company agreed to indemnify QHC for certain liabilities relating to outcomes or events occurring prior to April 29, 2016, the closing date of the spin-off, including (i) certain claims and proceedings that were known to be outstanding at or prior to the consummation of the spin-off and involved multiple facilities and (ii) certain claims, proceedings and investigations by governmental authorities or private plaintiffs related to activities occurring at or related to QHC’s healthcare facilities prior to the closing date of the spin-off, but only to the extent, in the case of clause (ii), that such claims are covered by insurance policies maintained by the Company, including professional liability and employer practices. In this regard, the Company continues to be responsible for HMA Legal Matters (as defined below) covered by the CVR agreement that relate to QHC’s business, and any amounts payable by the Company in connection therewith will continue to reduce the amount payable by the Company in respect of the CVRs. Notwithstanding the foregoing, the Company is not required to indemnify QHC in respect of any claims or proceedings arising out of or related to the business operations of Quorum Health Resources, LLC at any time or QHC’s compliance with the corporate integrity agreement. Subsequent to the spin-off of QHC, the Office of the Inspector General provided the Company with written assurance that it would look solely at QHC for compliance for its facilities under the Company’s Corporate Integrity Agreement; however, the Office of the Inspector General declined to enter into a separate corporate integrity

 

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agreement with QHC. In addition, on August 4, 2017, the Company initiated an arbitration against QHC for unpaid amounts due from QHC related to a Computer Data Processing Transition Services Agreement and a Shared Services Transition Services Agreement (“TSAs”) entered into between QHC and the Company in connection with the spin-off. QHC filed a counterclaim, claiming breach of contract and tortious interference, among others. The arbitration began on June 18, 2018 and continued through June 27, 2018. It will reconvene on October 1, 2018. On June 25, 2018, the arbitration panel issued a partial order that the TSAs were enforceable contracts that would continue by their terms until their expiration in April 2021. QHC had attempted to challenge the legal enforceability of both of those agreements. The Company believes the counterclaim is without merit and will vigorously defend against it.

HMA Legal Matters and Related CVR

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

The CVRs do not have a finite payment date. Any payments the Company makes under the CVR agreement will be payable within 60 days after the final resolution of the HMA Legal Matters. The CVRs are unsecured obligations of CHS and all payments under the CVRs will be subordinated in right of payment to the prior payment in full of all of the Company’s senior obligations (as defined in the CVR agreement), which include outstanding indebtedness of the Company (subject to certain exceptions set forth in the CVR agreement) and the HMA Losses. The CVR agreement permits the Company to acquire all or some of the CVRs, whether in open market transactions, private transactions or otherwise. As of June 30, 2018, the Company had acquired no CVRs.

The following table represents the impact of legal expenses paid or incurred and settlements paid or deemed final as of June 30, 2018 on the amounts owed to CVR holders (in millions):

 

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

As of December 31, 2017

    $ 64       $ 18       $ 4       $ 42  

Settlements paid

    -       -       -       -  

Legal expenses incurred and/or paid during the six months ended June 30, 2018

    1       -       1       -  
 

 

 

   

 

 

   

 

 

   

 

 

 

As of June 30, 2018

    $ 65       $ 18       $ 5       $ 42  
 

 

 

   

 

 

   

 

 

   

 

 

 

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

Underlying the CVR agreement are a number of claims included in the HMA Legal Matters asserted against HMA. The Company has recorded a liability in connection with those claims as part of the acquired assets and liabilities at the date of acquisition pursuant

 

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to the provisions of Financial Accounting Standards Board Accounting Standards Codification Topic 805 “Business Combinations.” For the estimate of the Company’s liabilities associated with the HMA Legal Matters that will be covered by the CVR and were not previously accrued by HMA, the Company recorded a liability of $284 million as part of the acquisition accounting for the HMA merger based on the Company’s estimate of fair value of such liabilities as of the date of acquisition. There was a $7 million increase in the liability during the six months ended June 30, 2018 and the estimated fair value of such liabilities, after consideration of amounts paid and current estimates of valuation inputs, was $263 million as of June 30, 2018, which is recorded in other long-term liabilities on the accompanying condensed consolidated balance sheet. As of June 30, 2018, there is currently no accrual recorded for the probable contingency claims underlying the CVR agreement. The estimated liability for probable contingency claims underlying the CVR agreement that was previously recorded by HMA, and reflected in the purchase accounting for HMA as an acquired liability has been settled and was paid during the year ended December 31, 2015. In addition, although legal fees are not included in the amounts currently accrued, such legal fees are taken into account in determining HMA Losses under the CVR agreement. Certain significant HMA Legal Matters underlying these liabilities are discussed in greater detail below.

HMA Matters Recorded at Fair Value

Medicare/Medicaid Billing Lawsuits

Beginning during the week of December 16, 2013, eleven qui tam lawsuits filed by private individuals against HMA were unsealed in various United States district courts. The United States has elected to intervene in all or part of eight of these matters; namely U.S. ex rel. Craig Brummer v. Health Management Associates, Inc. et al. (Middle District Georgia) (“Brummer”); U.S. ex rel. Ralph D. Williams v. Health Management Associates, Inc. et al. (Middle District Georgia) (“Williams”); U.S. ex rel. Scott H. Plantz, M.D. et al. v. Health Management Associates, Inc., et al. (Northern District Illinois) (“Plantz”); U.S. ex rel. Thomas L. Mason, M.D. et al. v. Health Management Associates, Inc. et al. (Western District North Carolina) (“Mason”); U.S. ex rel. Jacqueline Meyer, et al. v. Health Management Associates, Inc., Gary Newsome et al. (“Jacqueline Meyer”) (District of South Carolina); U.S. ex rel. George Miller, et al. v. Health Management Associates, Inc. (Eastern District of Pennsylvania) (“Miller”); U.S. ex rel. Bradley Nurkin v. Health Management Associates, Inc. et al. (Middle District of Florida) (“Nurkin”); and U.S. ex rel. Paul Meyer v. Health Management Associates, Inc. et al. (Southern District Florida) (“Paul Meyer”). The United States has elected to intervene with respect to allegations in these cases that certain HMA hospitals inappropriately admitted patients and then submitted reimbursement claims for treating those individuals to federal healthcare programs in violation of the False Claims Act or that certain HMA hospitals had inappropriate financial relationships with physicians which violated the Stark law, the Anti-Kickback Statute, and the False Claims Act. Certain of these complaints also allege the same actions violated various state laws which prohibit false claims. The United States has declined to intervene in three of the eleven matters, namely U.S. ex rel. Anita France, et al. v. Health Management Associates, Inc. (Middle District Florida) (“France”) which involved allegations of wrongful billing and was settled; U.S. ex rel. Sandra Simmons v. Health Management Associates, Inc. et al. (Eastern District Oklahoma) (“Simmons”) which alleges unnecessary surgery by an employed physician and which was settled as to all allegations except alleged wrongful termination; and U.S. ex rel. David Napoliello, M.D. v. Health Management Associates, Inc. (Middle District Florida) (“Napoliello”) which alleges inappropriate admissions. On April 3, 2014, the Multi District Litigation Panel ordered the transfer and consolidation for pretrial proceedings of the eight intervened cases, plus the Napoliello matter, to the District of the District of Columbia under the name In Re: Health Management Associates, Inc. Qui Tam Litigation. On June 2, 2014, the court entered a stay of this matter until October 6, 2014, which was subsequently extended until February 27, 2015, May 27, 2015, September 25, 2015, January 25, 2016, May 25, 2016, September 26, 2016, December 27, 2016, April 27, 2017, August 28, 2017, December 18, 2017, March 19, 2018, June 18, 2018 and now until September 18, 2018. The Company intends to defend against the allegations in these matters, but also continues to cooperate with the government in the ongoing investigation of these allegations. The Company has been in discussions with the Civil Division of the United States Department of Justice (“DOJ”) regarding the resolutions of these matters. During the first quarter of 2015, the Company was informed that the Criminal Division continues to investigate former executive-level employees of HMA, and continues to consider whether any HMA entities should be held criminally liable for the acts of the former HMA employees. The Company is voluntarily cooperating with these inquiries and has not been served with any subpoenas or other legal process.

Other Probable Contingencies

Becker v. Community Health Systems, Inc. d/b/a Community Health Systems Professional Services Corporation d/b/a Community Health Systems d/b/a Community Health Systems PSC, Inc. d/b/a Rockwood Clinic P.S. and Rockwood Clinic, P.S. (Superior Court, Spokane, Washington). This suit was filed on February 29, 2012, by a former chief financial officer at Rockwood Clinic in Spokane, Washington. Becker claims he was wrongfully terminated for allegedly refusing to certify a budget for Rockwood Clinic in 2012. On February 29, 2012, he also filed an administrative complaint with the Department of Labor, Occupational Safety and Health Administration alleging that he is a whistleblower under Sarbanes-Oxley, which was dismissed by the agency and was appealed to an

 

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administrative law judge for a hearing that occurred on January 19-26, 2016. In a decision dated November 9, 2016, the law judge awarded Becker approximately $1.9 million for front pay, back pay and emotional damages with attorney fees to be later determined. The Company has appealed the award to the Administrative Review Board and is awaiting its decision. At a hearing on July 27, 2012, the trial court dismissed Community Health Systems, Inc. from the state case and subsequently certified the state case for an interlocutory appeal of the denial to dismiss his employer and the management company. The appellate court accepted the interlocutory appeal, and it was argued on April 30, 2014. On August 14, 2014, the court denied the Company’s appeal. On October 20, 2014, the Company filed a petition to review the denial with the Washington Supreme Court. The appeal was accepted and oral argument was heard on June 9, 2015. On September 15, 2015, the court denied the Company’s appeal and remanded to the trial court; a previous trial setting of September 12, 2016 has been vacated and not reset. The Company continues to vigorously defend these actions.

Summary of Recorded Amounts

The table below presents a reconciliation of the beginning and ending liability balances (in millions) during the six months ended June 30, 2018, with respect to the Company’s fair value determination in connection with HMA Legal Matters that were not previously accrued by HMA, and the remaining contingencies of the Company in respect of which an accrual has been recorded. In addition, future legal fees (which are expensed as incurred) and costs related to possible indemnification and criminal investigation matters associated with the HMA Legal Matters have not been accrued or included in the table below. Furthermore, although not accrued, such costs, if incurred, will be taken into account in determining the total amount of reductions applied to the amounts owed to CVR holders.

 

     CVR-Related     Other  
     Liability     Probable  
             at Fair Value                         Contingencies              

Balance as of December 31, 2017

     $ 256       $ 14  

Expense

     7       5  

Reserve for insured claim

     -       4  

Cash payments

     -       (2
  

 

 

   

 

 

 

Balance as of June 30, 2018

     $ 263       $ 21  
  

 

 

   

 

 

 

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

In the aggregate, attorneys’ fees and other costs incurred but not included in the table above related to probable contingencies, and CVR-related contingencies accounted for at fair value, totaled less than $1 million and $1 million for the three months ended June 30, 2018 and 2017, respectively, and $1 million for both of the six-month periods ended June 30, 2018 and 2017, and are included in other operating expenses in the accompanying condensed consolidated statements of loss.

Matters for which an Outcome Cannot be Assessed

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

Class Action Shareholder Federal Securities Cases. Three purported class action cases have been filed in the United States District Court for the Middle District of Tennessee; namely, Norfolk County Retirement System v. Community Health Systems, Inc., et al., filed May 9, 2011; De Zheng v. Community Health Systems, Inc., et al., filed May 12, 2011; and Minneapolis Firefighters Relief Association v. Community Health Systems, Inc., et al., filed June 21, 2011. All three seek class certification on behalf of purchasers of the Company’s common stock between July 27, 2006 and April 11, 2011 and allege that misleading statements resulted in artificially inflated prices for the Company’s common stock. In December 2011, the cases were consolidated for pretrial purposes and NYC Funds and its counsel were selected as lead plaintiffs/lead plaintiffs’ counsel. In lieu of ruling on the Company’s motion to dismiss,

 

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the court permitted the plaintiffs to file a first amended consolidated class action complaint, which was filed on October 5, 2015. The Company’s motion to dismiss was filed on November 4, 2015 and oral argument was held on April 11, 2016. The Company’s motion to dismiss was granted on June 16, 2016 and on June 27, 2016, the plaintiffs filed a notice of appeal to the Sixth Circuit Court of Appeals. The matter was heard on May 3, 2017. On December 13, 2017, the Sixth Circuit reversed the trial court’s dismissal of the case and remanded it to the District Court. The Company filed a petition for a writ of certiorari to the United States Supreme Court on April 18, 2018 seeking review of the Sixth Circuit’s decision. The Company also filed a renewed partial motion to dismiss on February 9, 2018 in the District Court. The petition and partial motion to dismiss are pending. The Company believes this consolidated matter is without merit and will vigorously defend this case.

15. SUBSEQUENT EVENTS

On July 6, 2018, CHS completed a private offering of $1.033 billion aggregate principal amount of 8 58% Senior Secured Notes due 2024 (the “8 58% Senior Secured Notes”). The terms of the 8 58% Senior Secured Notes are governed by an indenture, dated as of July 6, 2018, among CHS, the Company, the subsidiary guarantors party thereto, Regions Bank, as trustee and Credit Suisse AG, as collateral agent. The 8 58% Senior Secured Notes bear interest at a rate of 8 58% per year payable semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2019. The Notes are unconditionally guaranteed on a senior-priority secured basis by the Company and each of the CHS current and future domestic subsidiaries that provide guarantees under CHS’ senior secured credit facilities, CHS’ ABL facility, any capital market debt securities of CHS (including CHS’ outstanding senior notes) and certain other long-term debt of CHS. Using the proceeds from the offering, the Company repaid the outstanding balance owed under the Term G Loan and paid fees and expenses related to the offering.

On July 18, 2018, one or more subsidiaries of the Company signed a definitive agreement for the sale of Sparks Regional Medical Center (492 licensed beds) in Fort Smith, Arkansas, and Sparks Medical Center (103 licensed beds) in Van Buren, Arkansas and its associated assets to subsidiaries of Baptist Health.

 

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16. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION     

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

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

 

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

 

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

 

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

 

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

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

From time to time, subsidiaries of the Company sell and/or repurchase noncontrolling interests in consolidated subsidiaries, which may change subsidiaries between guarantors and non-guarantors. Amounts for prior periods have been revised to reflect the status of guarantors and non-guarantors as of June 30, 2018.

 

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Condensed Consolidating Statement of Loss

Three Months Ended June 30, 2018

 

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

Net operating revenues

   $ -     $ (2   $ 2,147   $ 1,417   $ -     $ 3,562

Operating costs and expenses:

            

Salaries and benefits

     -       -       810     807     -       1,617

Supplies

     -       -       383     209     -       592

Other operating expenses

     -       -       569     310     -       879

Government and other legal settlements and related costs

     -       -       1     -       -       1

Rent

     -       -       43     42     -       85

Depreciation and amortization

     -       -       109     68     -       177

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

     -       14     4     156     -       174
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     -       14     1,919     1,592     -       3,525
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     -       (16     228     (175     -       37

Interest expense, net

     -       98     143     (6     -       235

(Gain) loss from early extinguishment of debt

     -       (65     1     -       -       (64

Equity in earnings of unconsolidated affiliates

     110     114     198     -       (427     (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

     (110     (163     (114     (169     427     (129

(Benefit from) provision for income taxes

     -       (53     4     11     -       (38
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (110     (110     (118     (180     427     (91

Discontinued operations, net of taxes:

            

Loss from discontinued operations, net of taxes

     -       -       -       -       -       -  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (110     (110     (118     (180     427     (91

Less: Net income attributable to noncontrolling interests

     -       -       -       19     -       19
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (110   $ (110   $ (118   $ (199   $ 427   $ (110
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Statement of Loss

Three Months Ended June 30, 2017

 

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

Operating revenues (net of contractual allowances and discounts)

   $ -     $ (6   $ 2,711   $ 2,118   $ -     $ 4,823

Provision for bad debts

     -       -       377     302     -       679
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating revenues

     -       (6     2,334     1,816     -       4,144

Operating costs and expenses:

            

Salaries and benefits

     -       -       897     1,023     -       1,920

Supplies

     -       -       412     285     -       697

Other operating expenses

     -       -       605     412     -       1,017

Government and other legal settlements and related costs

     -       -       7     -       -       7

Electronic health records incentive reimbursement

     -       -       (9     (8     -       (17

Rent

     -       -       51     53     -       104

Depreciation and amortization

     -       -       125     98     -       223

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

     -       -       39     41     -       80
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     -       -       2,127     1,904     -       4,031
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     -       (6     207     (88     -       113

Interest expense, net

     -       87     150     2     -       239

Loss from early extinguishment of debt

     -       10     -       -       -       10

Equity in earnings of unconsolidated affiliates

     137     50     70     -       (262     (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (137     (153     (13     (90     262     (131

(Benefit from) provision for income taxes

     -       (16     38     (37     -       (15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (137     (137     (51     (53     262     (116

Discontinued operations, net of taxes:

            

Income (loss) from operations of entities sold or held for sale

     -       -       2     (3     -       (1

Impairment of hospitals sold or held for sale

     -       -       (5     -       -       (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of taxes

     -       -       (3     (3     -       (6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (137     (137     (54     (56     262     (122

Less: Net income attributable to noncontrolling interests

     -       -       -       15     -       15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (137   $ (137   $ (54   $ (71   $ 262   $ (137
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Statement of Loss

Six Months Ended June 30, 2018

 

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

Net operating revenues

   $ -     $ (8   $ 4,393   $ 2,866   $ -     $ 7,251

Operating costs and expenses:

            

Salaries and benefits

     -       -       1,634     1,631     -       3,265

Supplies

     -       -       783     425     -       1,208

Other operating expenses

     -       -       1,168     621     -       1,789

Government and other legal settlements and related costs

     -       -       7     -       -       7

Electronic health records incentive reimbursement

     -       -       -       (1     -       (1

Rent

     -       -       90     83     -       173

Depreciation and amortization

     -       -       223     135     -       358

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

     -       14     20     168     -       202
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     -       14     3,925     3,062     -       7,001
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     -       (22     468     (196     -       250

Interest expense, net

     -       189     284     (9     -       464

(Gain) loss from early extinguishment of debt

     -       (61     2     -       -       (59

Equity in earnings of unconsolidated affiliates

     135     80     220     -       (447     (12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (135     (230     (38     (187     447     (143

(Benefit from) provision for income taxes

     -       (95     49     1     -       (45
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (135     (135     (87     (188     447     (98
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of taxes

     -       -       -       -       -       -  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (135     (135     (87     (188     447     (98

Less: Net income attributable to noncontrolling interests

     -       -       -       37     -       37
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (135   $ (135   $ (87   $ (225   $ 447   $ (135
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Statement of Loss

Six Months Ended June 30, 2017

 

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

Operating revenues (net of contractual allowances and discounts)

   $ -     $ (12   $ 5,592   $ 4,411   $ -     $ 9,991

Provision for bad debts

     -       -       866     496     -       1,362
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating revenues

     -       (12     4,726     3,915     -       8,629

Operating costs and expenses:

            

Salaries and benefits

     -       -       1,825     2,156     -       3,981

Supplies

     -       -       842     604     -       1,446

Other operating expenses

     -       -       1,203     871     -       2,074

Government and other legal settlements and related costs

     -       -       (34     -       -       (34

Electronic health records incentive reimbursement

     -       -       (11     (12     -       (23

Rent

     -       -       103     111     -       214

Depreciation and amortization

     -       -       248     210     -       458

Impairment of goodwill and long-lived assets

     -       -       80     250     -       330
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     -       -       4,256     4,190     -       8,446
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     -       (12     470     (275     -       183

Interest expense, net

     -       157     300     11     -       468

Loss from early extinguishment of debt

     -       31     -       -       -       31

Equity in earnings of unconsolidated affiliates

     335     169     236     -       (749     (9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (335     (369     (66     (286     749     (307

(Benefit from) provision for income taxes

     -       (34     107     (88     -       (15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (335     (335     (173     (198     749     (292

Discontinued operations, net of taxes:

            

Loss from operations of entities sold or held for sale

     -       -       (1     (1     -       (2

Impairment of hospitals sold or held for sale

     -       -       (5     -       -       (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of taxes

     -       -       (6     (1     -       (7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (335     (335     (179     (199     749     (299

Less: Net income attributable to noncontrolling interests

     -       -       -       36     -       36
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (335   $ (335   $ (179   $ (235   $ 749   $ (335
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Statement of Comprehensive Loss

Three Months Ended June 30, 2018

 

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

Net (loss) income

  $ (110   $ (110   $ (118   $ (180   $ 427   $ (91

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

           

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

    7     7     -       -       (7     7

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

    (1     (1     (1     -       2     (1

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

    1     1     1     -       (2     1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

    7     7     -       -       (7     7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

    (103     (103     (118     (180     420     (84

Less: Comprehensive income attributable to noncontrolling interests

    -       -       -       19     -       19
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (103   $ (103   $ (118   $ (199   $ 420   $ (103
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Comprehensive Loss

Three Months Ended June 30, 2017

 

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

Net (loss) income

  $ (137   $ (137   $ (54   $ (56   $ 262   $ (122

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

           

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

    (2     (2     -       -       2     (2

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

    2     2     2     -       (4     2

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

    1     1     1     -       (2     1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

    1     1     3     -       (4     1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

    (136     (136     (51     (56     258     (121

Less: Comprehensive income attributable to noncontrolling interests

    -       -       -       15     -       15
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (136   $ (136   $ (51   $ (71   $ 258   $ (136
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

44


Table of Contents

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

 

Condensed Consolidating Statement of Comprehensive Loss

Six Months Ended June 30, 2018

 

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

Net (loss) income

  $ (135   $ (135   $ (87   $ (188   $ 447   $ (98

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

           

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

    25     25     -       -       (25     25

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

    (2     (2     (2     -       4     (2

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

    1     1     1     -       (2     1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

    24     24     (1     -       (23     24
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

    (111     (111     (88     (188     424     (74

Less: Comprehensive income attributable to noncontrolling interests

    -       -       -       37     -       37
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (111   $ (111   $ (88   $ (225   $ 424   $ (111
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Comprehensive Loss

Six Months Ended June 30, 2017

 

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

Net (loss) income

  $ (335   $ (335   $ (179   $ (199   $ 749   $ (299

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

           

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

    3     3     -       -       (3     3

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

    5     5     5     -       (10     5

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

    1     1     1     -       (2     1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

    9     9     6     -       (15     9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

    (326     (326     (173     (199     734     (290

Less: Comprehensive income attributable to noncontrolling interests

    -       -       -       36     -       36
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (326   $ (326   $ (173   $ (235   $ 734   $ (326
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

45


Table of Contents

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

 

Condensed Consolidating Balance Sheet

June 30, 2018

 

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

Current assets:

           

Cash and cash equivalents

  $ -     $ -     $ 113   $ 95   $ -     $ 208

Patient accounts receivable

    -       -       1,968     439     -       2,407

Supplies

    -       -       290     142     -       432

Prepaid income taxes

    8     -       -       -       -       8

Prepaid expenses and taxes

    -       -       162     55     -       217

Other current assets

    -       1     110     311     -       422
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    8     1     2,643     1,042     -       3,694
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany receivable

    -       13,018     4,403     7,158     (24,579     -  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment, net

    -       -       4,409     2,340     -       6,749
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill

    -       -       2,869     1,784     -       4,653
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deferred income taxes

    101     -       -       -       -       101
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other assets, net

    -       42     725     830     -       1,597
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment in subsidiaries

    -       21,353     11,140     -       (32,493     -  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 109   $ 34,414   $ 26,189   $ 13,154   $ (57,072   $ 16,794
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND DEFICIT  

Current liabilities:

           

Current maturities of long-term debt

  $ -     $ -     $ 33   $ 8   $ -     $ 41

Accounts payable

    -       13     528     298     -       839

Accrued interest

    -       174     -       -       -       174

Accrued liabilities

    -       -       538     470     -       1,008
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    -       187     1,099     776     -       2,062
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt

    -       13,361     211     101     -       13,673
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payable

    960     21,677     23,523     12,926     (59,086     -  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deferred income taxes

    19     -       -       -       -       19
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other long-term liabilities

    9     1     934       385       -       1,329
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    988     35,226     25,767     14,188     (59,086     17,083
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Redeemable noncontrolling interests in equity of consolidated subsidiaries

    -       -       -       514     -       514
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Deficit:

           

Community Health Systems, Inc. stockholders’ deficit:

           

Common stock

    1     -       -       -       -       1

Additional paid-in capital

    2,013     230     (124     462     (568     2,013

Accumulated other comprehensive loss

    (9     (9     (8     (11     28     (9

(Accumulated deficit) retained earnings

    (2,884     (1,033     554     (2,075     2,554     (2,884
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Community Health Systems, Inc. stockholders’ deficit

    (879     (812     422     (1,624     2,014     (879

Noncontrolling interests in equity of consolidated subsidiaries

    -       -       -       76     -       76
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deficit

    (879     (812     422     (1,548     2,014     (803
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and deficit

  $ 109   $ 34,414   $ 26,189     $ 13,154   $ (57,072   $ 16,794
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

46


Table of Contents

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

 

Condensed Consolidating Balance Sheet

December 31, 2017

 

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

Current assets:

           

Cash and cash equivalents

  $ -     $ -     $ 499   $ 64   $ -     $ 563

Patient accounts receivable, net of allowance for doubtful accounts

    -       -       1,861     523     -       2,384

Supplies

    -       -       288     156     -       444

Prepaid income taxes

    17     -       -       -       -       17

Prepaid expenses and taxes

    -       -       146     52     -       198

Other current assets

    -       -       152     310     -       462
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    17     -       2,946     1,105     -       4,068
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany receivable

    -       13,381     5,092     7,873     (26,346     -  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment, net

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deferred income taxes

    62     -       -       -       -       62
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other assets, net

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment in subsidiaries

    -       21,742     10,890     -       (32,632     -  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 94   $ 35,162   $ 27,852   $ 14,362   $ (60,020   $ 17,450
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND DEFICIT  

Current liabilities:

           

Current maturities of long-term debt

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

Accounts payable

    -       -       663     304     -       967

Accrued interest

    -       228     1     -       -       229

Accrued liabilities

    -       -       644     483     -       1,127
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    -       228     1,333     795     -       2,356
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt

    -       12,998     779     103     -       13,880
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payable

    833     21,607     23,465     13,874     (59,779     -  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deferred income taxes

    19     -       -       -       -       19
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other long-term liabilities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    861     35,851     26,574     15,150     (60,821     17,615
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Redeemable noncontrolling interests in equity of consolidated subsidiaries

    -       -       -       527     -       527
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deficit:

           

Community Health Systems, Inc. stockholders’ deficit:

           

Common stock

    1     -       -       -       -       1

Additional paid-in capital

    2,014     (252     960     (523     (185     2,014

Accumulated other comprehensive loss

    (21     (21     (4     (4     29     (21

(Accumulated deficit) retained earnings

    (2,761     (416     322     (863     957     (2,761
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Community Health Systems, Inc. stockholders’ deficit

    (767     (689     1,278     (1,390     801     (767

Noncontrolling interests in equity of consolidated subsidiaries

    -       -       -       75     -       75
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deficit

    (767     (689     1,278     (1,315     801     (692
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and deficit

  $ 94   $ 35,162   $ 27,852   $ 14,362   $ (60,020   $ 17,450
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

47


Table of Contents

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

 

Condensed Consolidating Statement of Cash Flows

Six Months Ended June 30, 2018

 

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

Net cash provided by (used in) operating activities

   $ 37    $ (228    $ 49    $ 236    $ -      $ 94
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

           

Acquisitions of facilities and other related businesses

    -       -       (3     (7     -       (10

Purchases of property and equipment

    -       -       (210     (85     -       (295

Proceeds from disposition of hospitals and other ancillary operations

    -       -       12     76     -       88

Proceeds from sale of property and equipment

    -       -       1     3     -       4

Purchases of available-for-sale securities and equity securities

    -       -       (25     (13     -       (38

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

    -       -       50     13     -       63

Increase in other investments

    -       -       (24     (29     -       (53
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    -       -       (199     (42     -       (241
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

           

Repurchase of restricted stock shares for payroll tax withholding requirements

    (1     -       -       -       -       (1

Deferred financing costs and other debt-related costs

    -       (54     -       -       -       (54

Proceeds from noncontrolling investors in joint ventures

    -       -       -       1     -       1

Redemption of noncontrolling investments in joint ventures

    -       -       -       (6     -       (6

Distributions to noncontrolling investors in joint ventures

    -       -       -       (52     -       (52

Changes in intercompany balances with affiliates, net

    (36     (186     329     (107     -       -  

Borrowings under credit agreements

    -       -       22     4     -       26

Proceeds from ABL and receivables facility

    -       538     49     -       -       587

Repayments of long-term indebtedness

    -       (70     (636     (3     -       (709
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

    (37     228     (236     (163     -       (208
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

    -       -       (386     31     -       (355

Cash and cash equivalents at beginning of period

    -       -       499     64     -       563
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ -      $ -      $ 113    $ 95    $ -      $ 208
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

48


Table of Contents

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

 

Condensed Consolidating Statement of Cash Flows

Six Months Ended June 30, 2017

 

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

Net cash (used in) provided by operating activities

   $ (11    $ (163    $ 364    $ 313      $ -      $ 503
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

           

Acquisitions of facilities and other related businesses

    -       -       -       (4     -       (4

Purchases of property and equipment

    -       -       (174     (100     -       (274

Proceeds from disposition of hospitals and other ancillary operations

    -       -       111     810     -       921

Proceeds from sale of property and equipment

    -       -       3     -       -       3

Purchases of available-for-sale securities and equity securities

    -       -       (27     (10     -       (37

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

    -       -       38     9     -       47

Increase in other investments

    -       -       (49     (11     -       (60
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

    -       -       (98     694     -       596
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

           

Repurchase of restricted stock shares for payroll tax withholding requirements

    (5     -       -       -       -       (5

Deferred financing costs and other debt-related costs

    -       (62     -       -       -       (62

Proceeds from noncontrolling investors in joint ventures

    -       -       -       5     -       5

Redemption of noncontrolling investments in joint ventures

    -       -       -       (4     -       (4

Distributions to noncontrolling investors in joint ventures

    -       -       -       (53     -       (53

Changes in intercompany balances with affiliates, net

    16     578     316       (910     -       -  

Borrowings under credit agreements

    -       795     26     19     -       840

Issuance of long-term debt

    -       3,100     -       -       -       3,100

Proceeds from receivables facility

    -       -       26     -       -       26

Repayments of long-term indebtedness

    -       (4,248     (151     (17     -       (4,416
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    11     163     217       (960     -       (569
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

    -       -       483     47     -       530

Cash and cash equivalents at beginning of period

    -       -       176     62     -       238
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ -      $ -      $ 659    $ 109    $ -      $ 768
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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

Executive Overview

We are one of the largest publicly traded hospital companies in the United States and a leading operator of general acute care hospitals and outpatient facilities in communities across the country. We provide healthcare services through the hospitals that we own and operate and affiliated businesses in non-urban and selected urban markets throughout the United States. We generate revenues by providing a broad range of general and specialized hospital healthcare services and outpatient services to patients in the communities in which we are located. As of June 30, 2018, we owned or leased 119 hospitals, comprised of 117 general acute care hospitals and two stand-alone rehabilitation or psychiatric hospitals. For the hospitals that we own and operate, we are paid for our services by governmental agencies, private insurers and directly by the patients we serve.

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

 

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Completed Divestiture and Acquisition Activity

The following table provides a summary of hospitals included in continuing operations that we divested during the year ended December 31, 2017 and the six months ended June 30, 2018:

 

               Licensed       

Hospital

  

Buyer

  

City, State                

   Beds     

Effective Date    

2018 Divestitures

           

Bayfront Health Dade City

   Adventist Health System    Dade City, FL      120      April 1, 2018

Tennova-Dyersburg Regional

   West Tennessee Healthcare    Dyersburg, TN      225      June 1, 2018

Tennova-Regional Jackson

   West Tennessee Healthcare    Jackson, TN      150      June 1, 2018

Tennova- Volunteer Martin

   West Tennessee Healthcare    Martin, TN      100      June 1, 2018

Williamson Memorial Hospital

   Mingo Health Partners, LLC    Williamson, WV      76      June 1, 2018

Byrd Regional Hospital

   Allegiance Health Management    Leesville, LA      60      June 1, 2018

Tennova Healthcare - Jamestown

   Rennova Health, Inc.    Jamestown, TN      85      June 1, 2018

2017 Divestitures

           

Easton Hospital

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

Sharon Regional Health System

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

Northside Medical Center

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

Trumbull Memorial Hospital

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

Hillside Rehabilitation Hospital

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

Wuesthoff Health System – Rockledge

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

Wuesthoff Health System – Melbourne

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

Sebastian River Medical Center

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

Stringfellow Memorial Hospital

  

The Health Care Authority of the City of Anniston

   Anniston, AL      125      May 1, 2017

Merit Health Gilmore Memorial

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

Merit Health Batesville

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

Lake Area Medical Center

   CHRISTUS Health    Lake Charles, LA      88      June 30, 2017

Memorial Hospital of York

   PinnacleHealth System    York, PA      100      July 1, 2017

Lancaster Regional Medical Center

   PinnacleHealth System    Lancaster, PA      214      July 1, 2017

Heart of Lancaster Regional Medical Center

   PinnacleHealth System    Lititz, PA      148      July 1, 2017

Carlisle Regional Medical Center

   PinnacleHealth System    Carlisle, PA      165      July 1, 2017

Tomball Regional Medical Center

   HCA    Tomball, TX      350      July 1, 2017

South Texas Regional Medical Center

   HCA    Jourdanton, TX      67      July 1, 2017

Deaconess Hospital

   MultiCare Health System    Spokane, WA      388      July 1, 2017

Valley Hospital

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

Yakima Regional Medical and Cardiac Center

   Regional Health    Yakima, WA      214      September 1, 2017

Toppenish Community Hospital

   Regional Health    Toppenish, WA      63      September 1, 2017

Weatherford Regional Medical Center

   HCA    Weatherford, TX      103      October 1, 2017

Brandywine Hospital

   Reading Health System    Coatesville, PA      169      October 1, 2017

Chestnut Hill Hospital

   Reading Health System    Philadelphia, PA      148      October 1, 2017

Jennersville Hospital

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

Phoenixville Hospital

   Reading Health System    Phoenixville, PA      151      October 1, 2017

Pottstown Memorial Medical Center

   Reading Health System    Pottstown, PA      232      October 1, 2017

Highlands Regional Medical Center

   HCA    Sebring, FL      126      November 1, 2017

Merit Health Northwest Mississippi

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

 

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

On June 26, 2018, we signed a definitive agreement for the sale of AllianceHealth Deaconess (291 licensed beds) in Oklahoma City, Oklahoma, and its associated assets to subsidiaries of INTEGRIS Health.

On July 18, 2018, we signed a definitive agreement for the sale of Sparks Regional Medical Center (492 licensed beds) in Fort Smith, Arkansas, and Sparks Medical Center (103 licensed beds) in Van Buren, Arkansas and its associated assets to subsidiaries of Baptist Health.

During 2017, as reflected in the chart above, we completed the divestiture of 30 hospitals included in continuing operations. These 30 hospitals represented annual net operating revenues in 2016 of approximately $3.4 billion, and we received total net proceeds of approximately $1.7 billion in connection with the disposition of these hospitals.

During 2018, as reflected in the chart above, we have completed the divestiture of seven hospitals included in continuing operations. These seven hospitals represented annual net operating revenues in 2017 of approximately $274 million, and we received total net proceeds of approximately $86 million in connection with the disposition of these hospitals. In addition, we have entered into definitive agreements to sell five additional hospitals, which divestitures have not yet been completed.

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

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

Operating results and statistical data for the six months ended June 30, 2017, exclude hospitals still owned and hospitals divested during the six months ended June 30, 2017, that were previously classified as discontinued operations for accounting purposes.

During the six months ended June 30, 2018, we paid approximately $10 million to acquire the operating assets and related businesses of certain physician practices, clinics and other ancillary businesses that operate within the communities served by our hospitals.

Overview of Operating Results

Our net operating revenues for the three months ended June 30, 2018 decreased $582 million to approximately $3.6 billion compared to approximately $4.1 billion for the three months ended June 30, 2017. On a same-store basis, net operating revenues for the three months ended June 30, 2018 increased $111 million compared to the three months ended June 30, 2017.

We had a loss from continuing operations of $91 million during the three months ended June 30, 2018, compared to a loss from continuing operations of $116 million for the three months ended June 30, 2017. Loss from continuing operations for the three months ended June 30, 2018 included the following:

 

    an after-tax charge of $1 million for government and other legal settlements, net of related legal expenses,

 

    an after-tax charge of $145 million for the impairment of goodwill and long-lived assets of hospitals sold or held for sale based on their estimated fair values,

 

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    an after-tax charge of $9 million for employee termination benefits and other restructuring costs,

 

    after-tax income of $50 million for gain from early extinguishment of debt, and

 

    an after-tax charge of $3 million from fair value adjustments on the CVR agreement liability accounted for at fair value related to the Health Management Associates, Inc., or HMA, legal proceedings, and related legal expenses.

Loss from continuing operations for the three months ended June 30, 2017 included the following:

 

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

 

    an after-tax charge of $80 million for the impairment of goodwill and long-lived assets of hospitals sold or held for sale based on their estimated fair values,

 

    an after-tax charge of $2 million for employee termination benefits and other restructuring costs,

 

    an after-tax charge of $7 million for loss from early extinguishment of debt, and

 

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

Both consolidated inpatient admissions and consolidated adjusted admissions for the three months ended June 30, 2018, decreased 16.9%, compared to the three months ended June 30, 2017. Same-store inpatient admissions for the three months ended June 30, 2018, decreased 2.1%, compared to the three months ended June 30, 2017, and same-store adjusted admissions for the three months ended June 30, 2018, decreased 0.2%, compared to the three months ended June 30, 2017.

Our net operating revenues for the six months ended June 30, 2018 decreased $1.4 billion to approximately $7.3 billion compared to approximately $8.6 billion for the six months ended June 30, 2017. On a same-store basis, net operating revenues for the six months ended June 30, 2018 increased $170 million compared to the six months ended June 30, 2017.

We had a loss from continuing operations of $98 million during the six months ended June 30, 2018, compared to a loss from continuing operations of $292 million for the six months ended June 30, 2017. Loss from continuing operations for the six months ended June 30, 2018 included the following:

 

    an after-tax charge of $5 million for government and other legal settlements, net of related legal expenses,

 

    an after-tax charge of $172 million for the impairment of goodwill and long-lived assets of hospitals sold or held for sale based on their estimated fair values,

 

    an after-tax charge of $10 million for employee termination benefits and other restructuring costs,

 

    after-tax income of $46 million for gain from early extinguishment of debt, and

 

    an after-tax charge of $7 million from fair value adjustments on the CVR agreement liability accounted for at fair value related to the HMA legal proceedings, and related legal expenses.

Loss from continuing operations for the six months ended June 30, 2017 included the following:

 

    after-tax income of $22 million for government and other legal settlements, net of related legal expenses, primarily as a result of the previously announced settlement of the shareholder derivative action in January 2017,

 

    an after-tax charge of $299 million for the impairment of goodwill and long-lived assets of hospitals sold or held for sale based on their estimated fair values,

 

    an after-tax charge of $2 million for employee termination benefits and other restructuring costs,

 

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    an after-tax charge of $20 million for loss from early extinguishment of debt, and

 

    an after-tax charge of $9 million from fair value adjustments on the CVR agreement liability accounted for at fair value related to the HMA legal proceedings, and related legal expenses.

Consolidated inpatient admissions for the six months ended June 30, 2018, decreased 18.3%, compared to the six months ended June 30, 2017, and consolidated adjusted admissions for the six months ended June 30, 2018, decreased 19.0%, compared to the six months ended June 30, 2017. Same-store inpatient admissions for the six months ended June 30, 2018, decreased 2.2%, compared to the six months ended June 30, 2017, and same-store adjusted admissions for the six months ended June 30, 2018, decreased 1.0%, compared to the six months ended June 30, 2017.

Self-pay revenues represented approximately 0.8% and 1.4% of net operating revenues for the three months ended June 30, 2018 and 2017, respectively, 1.5% and 1.8% for the six months ended June 30, 2018 and 2017, respectively. The amount of foregone revenue related to providing charity care services as a percentage of net operating revenues was approximately 3.2% and 3.1% for the three months ended June 30, 2018 and 2017, respectively, 3.2% and 2.8% for the six months ended June 30, 2018 and 2017, respectively. Direct and indirect costs incurred in providing charity care services as a percentage of net operating revenues was approximately 0.4% for both the three-month and the six-month periods ended June 30, 2018 and 2017.

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

However, the future of the Affordable Care Act is uncertain. The current Presidential administration and certain members of Congress have stated their intent to repeal or make significant changes to the Affordable Care Act, its implementation or its interpretation. For example, as part of the tax reform legislation which was enacted in December 2017, Congress eliminated the financial penalty associated with the individual mandate, effective January 1, 2019, which may result in fewer individuals electing to purchase health insurance. In addition, in June 2018, the Department of Labor issued a final rule expanding availability of association health plans, which are not required to adhere to specific Affordable Care Act coverage mandates. Of critical importance to us will be the potential impact of any changes specific to the Medicaid funding and expansion provisions of the Affordable Care Act. We operate hospitals in five of the ten states that experienced the largest reductions in uninsured rates among adult residents between 2013 and 2015. In general, the states with the greatest reductions in the number of uninsured adult residents have expanded Medicaid. A number of states have opted out of the Medicaid coverage expansion provisions, but could ultimately decide to expand their programs at a later date. Of the 20 states in which we operated hospitals that were included in continuing operations as of June 30, 2018, 10 states have taken action to expand their Medicaid programs. At this time, the other 10 states have not, including Florida, Alabama, Tennessee and Texas, where we operated a significant number of hospitals as of June 30, 2018. Some states use, or have applied to use, waivers granted by CMS to implement expansion, impose different eligibility or enrollment restrictions, or otherwise implement programs that vary from federal standards. CMS administrators have indicated that they are increasing state flexibility in the administration of Medicaid programs. For example, CMS has granted a limited number of state applications for waivers that allow a state to condition Medicaid enrollment on work or other community engagement. Several states have similar applications pending.

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

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

 

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

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

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

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

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

Sources of Revenue

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

 

            Three Months Ended                     Six Months Ended          
    June 30,     June 30,  
    2018     2017     2018     2017  

Medicare

    26.5%       27.3%       27.3%       27.3%  

Medicaid

    13.5          13.1          12.9          13.1     

Managed Care and other third-party payors

    59.2          58.2          58.3          57.8     

Self-pay

    0.8          1.4          1.5          1.8     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    100.0%       100.0%       100.0%       100.0%  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Net operating revenues include amounts estimated by management to be reimbursable by Medicare and Medicaid under prospective payment systems and provisions of cost-based reimbursement and other payment methods. In addition, we are reimbursed by non-governmental payors using a variety of payment methodologies. Amounts we receive for the treatment of patients covered by Medicare, Medicaid and non-governmental payors are generally less than the standard billing rates. We account for the differences between the estimated program reimbursement rates and the standard billing rates as contractual allowance adjustments, which we deduct from gross revenues to arrive at net operating revenues. Final settlements under some of these programs are subject to adjustment based on administrative review and audit by third parties. We account for adjustments to previous program reimbursement estimates as contractual allowance adjustments and report them in the periods that such adjustments become known. Contractual allowance adjustments related to final settlements and previous program reimbursement estimates impacted net operating revenues and net loss by an insignificant amount in each of the three-month and six-month periods ended June 30, 2018 and 2017.

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

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

 

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Results of Operations

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

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

 

            Three Months Ended                   Six Months Ended        
    June 30,   June 30,
    2018   2017   2018   2017

Operating results, as a percentage of net operating revenues:

       

Net operating revenues

    100.0     100.0     100.0     100.0

Operating expenses (a)

    (89.1     (90.0     (88.9     (88.8

Depreciation and amortization

    (5.0     (5.4     (4.9     (5.3

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

    (4.9     (1.9     (2.8     (3.8
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

    1.0       2.7       3.4       2.1  

Interest expense, net

    (6.6     (5.8     (6.4     (5.4

Gain (loss) from early extinguishment of debt

    1.8       (0.2     0.8       (0.4

Equity in earnings of unconsolidated affiliates

    0.2       0.1       0.2       0.1  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations before income taxes

    (3.6     (3.2     (2.0     (3.6

Benefit from income taxes

    1.0       0.4       0.6       0.2  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

    (2.6     (2.8     (1.4     (3.4

Loss from discontinued operations, net of taxes

    -       (0.1     -       (0.1
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

    (2.6     (2.9     (1.4     (3.5

Less: Net income attributable to noncontrolling interests

    (0.5     (0.4     (0.5     (0.4
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to Community Health Systems, Inc. stockholders 

    (3.1 )%      (3.3 )%      (1.9 )%      (3.9 )% 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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      Three Months Ended       Six Months Ended  
    June 30, 2018   June 30, 2018

Percentage (decrease) increase from prior year:

   

Net operating revenues

    (14.0 )%      (16.0 )% 

Admissions

    (16.9     (18.3

Adjusted admissions (b)

    (16.9     (19.0

Average length of stay

    -       -  

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

    19.7       59.7  

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

   

Net operating revenues

    3.3     2.5

Admissions

    (2.1     (2.2

Adjusted admissions (b)

    (0.2     (1.0

 

 

(a) Operating expenses include salaries and benefits, supplies, other operating expenses, government and other legal settlements and related costs, electronic health records incentive reimbursement and rent.
(b) Adjusted admissions is a general measure of combined inpatient and outpatient volume. We computed adjusted admissions by multiplying admissions by gross patient revenues and then dividing that number by gross inpatient revenues.
(c) Includes loss from discontinued operations.
(d) Includes acquired hospitals to the extent we operated them in both periods and excludes our hospitals that have previously been classified as discontinued operations for accounting purposes. In addition, also excludes information for the hospitals sold or closed during 2017 and 2018.

Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017

Net operating revenues decreased by 14.0% to approximately $3.6 billion for the three months ended June 30, 2018, from approximately $4.1 billion for the three months ended June 30, 2017. Net operating revenues on a same-store basis from hospitals that were operated throughout both periods increased $111 million or 3.3% during the three months ended June 30, 2018, as compared to the three months ended June 30, 2017. The increase in same-store net operating revenues was attributable to improved pricing due to higher acuity, partially offset by a decline in inpatient admissions and adjusted admissions. Non-same-store net operating revenues decreased $692 million during the three months ended June 30, 2018, in comparison to the prior year period, with the decrease attributable primarily to the divestiture of hospitals during 2017 and 2018. On a consolidated basis, both inpatient admissions and adjusted admissions decreased by 16.9% during the three months ended June 30, 2018 as compared to the three months ended June 30, 2017. On a same-store basis, net operating revenues per adjusted admission increased 3.5%, while inpatient admissions decreased by 2.1% and adjusted admissions decreased by 0.2% for the three months ended June 30, 2018, compared to the three months ended June 30, 2017.

Operating expenses, as a percentage of net operating revenues, increased from 97.3% during the three months ended June 30, 2017 to 99.0% during the three months ended June 30, 2018. Operating expenses, excluding depreciation and amortization and impairment and (gain) loss on sale of businesses, as a percentage of net operating revenues, decreased from 90.0% for the three months ended June 30, 2017 to 89.1% for the three months ended June 30, 2018. Salaries and benefits, as a percentage of net operating revenues, decreased from 46.3% for the three months ended June 30, 2017 to 45.4% for the three months ended June 30, 2018. This decrease in salaries and benefits, as a percentage of net operating revenues, was primarily due to improved staffing and benefit expense management. Supplies, as a percentage of net operating revenues, decreased from 16.8% for the three months ended June 30, 2017 to 16.6% for the three months ended June 30, 2018. Other operating expenses, as a percentage of net operating revenues, increased from 24.6% for the three months ended June 30, 2017 to 24.7% for the three months ended June 30, 2018, primarily as a result of higher medical specialist fees, an increase in purchased services and higher information systems expense. Expense related to government and other legal settlements and related costs, as a percentage of net operating revenues, decreased from 0.2% for the three months ended June 30, 2017 to less than 0.1% for the three months ended June 30, 2018. Rent, as a percentage of net operating revenues, decreased from 2.5% for the three months ended June 30, 2017 to 2.4% for the three months ended June 30, 2018.

 

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Depreciation and amortization, as a percentage of net operating revenues, decreased from 5.4% for the three months ended June 30, 2017 to 5.0% for the three months ended June 30, 2018, primarily due to ceasing depreciation on property and equipment at hospitals sold or held for sale.

Impairment and (gain) loss on sale of businesses was $174 million for the three months ended June 30, 2018, compared to $80 million for the three months ended June 30, 2017. Impairment of goodwill and long-lived assets for the three months ended June 30, 2018 included impairment of approximately $52 million related to impairment of the long-lived assets and reporting unit goodwill allocated to hospitals classified as held for sale during the three months ended June 30, 2018. Impairment of goodwill and long-lived assets for the three months ended June 30, 2017 included impairment of approximately $80 million related to impairment of the long-lived assets and reporting unit goodwill allocated to hospitals classified as held for sale during the three months ended June 30, 2017.

Interest expense, net, decreased by $4 million to $235 million for the three months ended June 30, 2018 compared to $239 million for the three months ended June 30, 2017, primarily due to a decrease in our average outstanding debt during the three months ended June 30, 2018, which resulted in a decrease in interest expense of $22 million. Additionally, the decrease in interest expense of $4 million for the three months ended June 30, 2018 resulted from more interest being capitalized as compared to the same period in 2017 because of an increase in major construction projects during the three months ended June 30, 2018. These decreases were partially offset by an increase in interest rates during the three months ended June 30, 2018, compared to the same period in 2017, which resulted in an increase in interest expense of $22 million.

Gain from early extinguishment of debt of $64 million was recognized during the three months ended June 30, 2018, which resulted primarily from the refinancing and exchange of certain of our outstanding notes as discussed further in Capital Resources. Loss from early extinguishment of debt of $10 million was recognized during the three months ended June 30, 2017, which resulted from the repayment of certain outstanding notes and term loans under the Credit Facility.

Equity in earnings of unconsolidated affiliates, as a percentage of net operating revenues, increased from 0.1% for the three months ended June 30, 2017 to 0.2% for the three months ended June 30, 2018.

The net results of the above-mentioned changes resulted in loss from continuing operations before income taxes decreasing $2 million from loss of $131 million for the three months ended June 30, 2017 to loss of $129 million for the three months ended June 30, 2018.

The benefit from income taxes on loss from continuing operations increased from $15 million for the three months ended June 30, 2017 to $38 million for the three months ended June 30, 2018. Our effective tax rates were 29.5% and 11.5% for the three months ended June 30, 2018 and 2017, respectively. The increase in our effective tax rate for the three months ended June 30, 2018, when compared to the three months ended June 30, 2017, was primarily due to the reduction in the amount of non-deductible goodwill written off as part of the impairment and gain (loss) on sale of businesses for the three months ended June 30, 2018 compared to the three months ended June 30, 2017, and a disproportionate increase in income from continuing operations before income taxes when compared to the increase in net income attributable to noncontrolling interest for those same periods, which is not tax affected in our condensed consolidated financial statements.

Loss from continuing operations, as a percentage of net operating revenues, decreased from (2.8)% for the three months ended June 30, 2017 to (2.6)% for the three months ended June 30, 2018.

No discontinued operations were separately reported for the three months ended June 30, 2018. Discontinued operations include the results of operations of certain hospitals owned or leased by us as of June 30, 2017, which were classified as being held for sale or sold. The operation of these hospitals resulted in a loss, net of taxes, of $6 million for the three months ended June 30, 2017.

Net loss, as a percentage of net operating revenues, decreased from (2.9)% for the three months ended June 30, 2017 to (2.6)% for the three months ended June 30, 2018.

Net income attributable to noncontrolling interests, as a percentage of net operating revenues, increased from 0.4% for the three months ended June 30, 2017 to 0.5% for the three months ended June 30, 2018.

Net loss attributable to Community Health Systems, Inc. was $137 million for the three months ended June 30, 2017, compared to $110 million for the three months ended June 30, 2018.

 

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Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017

Net operating revenues decreased by 16.0% to approximately $7.3 billion for the six months ended June 30, 2018, from approximately $8.6 billion for the six months ended June 30, 2017. Net operating revenues on a same-store basis from hospitals that were operated throughout both periods increased $170 million or 2.5% during the six months ended June 30, 2018, as compared to the six months ended June 30, 2017. The increase in same-store net operating revenues was attributable to improved pricing due to higher acuity, partially offset by a decline in inpatient admissions and adjusted admissions. Non-same-store net operating revenues decreased $1.5 billion during the six months ended June 30, 2018, in comparison to the prior year period, with the decrease attributable primarily to the divestiture of hospitals during 2017 and 2018. On a consolidated basis, inpatient admissions decreased by 18.3% and adjusted admissions decreased by 19.0% during the six months ended June 30, 2018 as compared to the six months ended June 30, 2017. On a same-store basis, net operating revenues per adjusted admission increased 3.5%, while inpatient admissions decreased by 2.2% and adjusted admissions decreased by 1.0% for the six months ended June 30, 2018, compared to the six months ended June 30, 2017.

Operating expenses, as a percentage of net operating revenues, decreased from 97.9% during the six months ended June 30, 2017 to 96.6% during the six months ended June 30, 2018. Operating expenses, excluding depreciation and amortization and impairment and (gain) loss on sale of businesses, as a percentage of net operating revenues, increased from 88.8% for the six months ended June 30, 2017 to 88.9% for the six months ended June 30, 2018. Salaries and benefits, as a percentage of net operating revenues, decreased from 46.1% for the six months ended June 30, 2017 to 45.0% for the six months ended June 30, 2018. This decrease in salaries and benefits, as a percentage of net operating revenues, was primarily due to improved staffing and benefit expense management. Supplies, as a percentage of net operating revenues, decreased from 16.8% for the six months ended June 30, 2017 to 16.7% for the six months ended June 30, 2018. Other operating expenses, as a percentage of net operating revenues, increased from 24.1% for the six months ended June 30, 2017 to 24.7% for the six months ended June 30, 2018, primarily as a result of higher medical specialist fees, an increase in purchased services and higher information systems expense. Government and other legal settlements and related costs, as a percentage of net operating revenues, increased from income of 0.4% for the six months ended June 30, 2017 to expense of 0.1% for the six months ended June 30, 2018 primarily as a result of the gain recorded from the settlement of the shareholder derivative action in January 2017. Rent, as a percentage of net operating revenues, decreased from 2.5% for the six months ended June 30, 2017 to 2.4% for the six months ended June 30, 2018.

Depreciation and amortization, as a percentage of net operating revenues, decreased from 5.3% for the six months ended June 30, 2017 to 4.9% for the six months ended June 30, 2018, primarily due to ceasing depreciation on property and equipment at hospitals sold or held for sale.

Impairment and (gain) loss on sale of businesses was $202 million for the six months ended June 30, 2018, compared to $330 million for the six months ended June 30, 2017. Impairment of goodwill and long-lived assets for the six months ended June 30, 2018 included impairment of approximately $77 million related to impairment of the long-lived assets and reporting unit goodwill allocated to hospitals classified as held for sale during the six months ended June 30, 2018. Impairment of goodwill and long-lived assets for the six months ended June 30, 2017 included impairment of approximately $330 million related to impairment of the long-lived assets and reporting unit goodwill allocated to hospitals classified as held for sale during the six months ended June 30, 2017.

Interest expense, net, decreased by $4 million to $464 million for the six months ended June 30, 2018 compared to $468 million for the six months ended June 30, 2017, primarily due to a decrease in our average outstanding debt during the six months ended June 30, 2018, which resulted in a decrease in interest expense of $45 million. Additionally, a decrease in interest expense of $3 million for the six months ended June 30, 2018 resulted from more interest being capitalized as compared to the same period in 2017 because of an increase in major construction projects during the six months ended June 30, 2018. These decreases were partially offset by an increase in interest rates during the six months ended June 30, 2018, compared to the same period in 2017, which resulted in an increase in interest expense of $44 million.

Gain from early extinguishment of debt of $59 million was recognized during the six months ended June 30, 2018 which resulted primarily from the refinancing and exchange of certain of our outstanding notes and repayment of a portion of our term loans under the Credit Facility as discussed further in Capital Resources. Loss from early extinguishment of debt of $31 million was recognized during the six months ended June 30, 2017, which resulted from the repayment of certain outstanding notes and term loans under the Credit Facility.

Equity in earnings of unconsolidated affiliates, as a percentage of net operating revenues, increased from 0.1% for the six months ended June 30, 2017 to 0.2% for the six months ended June 30, 2018.

 

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The net results of the above-mentioned changes resulted in loss from continuing operations before income taxes decreasing $164 million from loss of $307 million for the six months ended June 30, 2017 to loss of $143 million for the six months ended June 30, 2018.

The benefit from income taxes on loss from continuing operations decreased from $15 million for the six months ended June 30, 2017 to $45 million for the six months ended June 30, 2018, primarily due to the release of a state valuation allowance of approximately $15 million as a result of an enacted tax law change partially offset by approximately $4 million of tax expense recognized on the tax deficiency from stock compensation expense for restricted stock vesting during the six months ended June 30, 2018. Our effective tax rates were 31.5% and 4.9% for the six months ended June 30, 2018 and 2017, respectively. The increase in our effective tax rate for the six months ended June 30, 2018, when compared to the six months ended June 30, 2017, was primarily due to the discrete items noted above, as well as the reduction in the amount of non-deductible goodwill written off as part of the impairment and gain (loss) on sale of businesses for the six months ended June 30, 2018 compared to the six months ended June 30, 2017, and a disproportionate increase in income from continuing operations before income taxes when compared to the increase in net income attributable to noncontrolling interest for those same periods, which is not tax affected in our condensed consolidated financial statements.

Loss from continuing operations, as a percentage of net operating revenues, decreased from (3.4)% for the six months ended June 30, 2017 to (1.4)% for the six months ended June 30, 2018.

No discontinued operations were separately reported for the six months ended June 30, 2018. Discontinued operations include the results of operations of certain hospitals owned or leased by us as of June 30, 2017, which were classified as being held for sale or sold. The operation of these hospitals resulted in a loss, net of taxes, of $7 million for the six months ended June 30, 2017.

Net loss, as a percentage of net operating revenues, decreased from (3.5)% for the six months ended June 30, 2017 to (1.4)% for the six months ended June 30, 2018.

Net income attributable to noncontrolling interests, as a percentage of net operating revenues, increased from 0.4% for the six months ended June 30, 2017 to 0.5% for the six months ended June 30, 2018.

Net loss attributable to Community Health Systems, Inc. was $335 million for the six months ended June 30, 2017, compared to $135 million for the six months ended June 30, 2018.

Liquidity and Capital Resources

Net cash provided by operating activities decreased $409 million, from approximately $503 million for the six months ended June 30, 2017, to approximately $94 million for the six months ended June 30, 2018. The decrease in cash provided by operating activities was primarily the result of higher interest payments due to the timing of payments on our existing notes due to the refinancing activity during the three months ended June 30, 2018, as well as from a decline in cash flow from patient accounts receivable collections. Other contributors to the lower cash provided by operating activities include the net cash received related to government settlements and related legal costs, as well as the loss of cash flow contributed from previously divested hospitals and a decrease in cash received from HITECH incentive reimbursement. Such decreases were offset by improvements in cash flow from supplies, prepaid expenses and other current assets and lower malpractice claim payments compared to the same period in 2017. Total cash paid for interest during the six months ended June 30, 2018 increased to approximately $486 million compared to $409 million for the six months ended June 30, 2017. Cash paid for interest for the year ending December 31, 2018 is expected to be approximately $910 million. Cash paid for income taxes, net of refunds received, resulted in a net refund of $9 million for the six months ended June 30, 2018, compared to $6 million paid for income taxes for the six months ended June 30, 2017.

Our net cash used in investing activities was approximately $241 million for the six months ended June 30, 2018, compared to net cash provided by investing activities of approximately $596 million for the six months ended June 30, 2017, a decrease of approximately $837 million. The cash used in investing activities was primarily impacted by a decrease in proceeds from the disposition of hospitals and other ancillary operations of $833 million as a result of fewer hospital dispositions in the first six months of 2018 compared to the same period in 2017, an increase in the cash used in the purchase of property and equipment of $21 million and an increase of $6 million in the cash used in the acquisition of facilities and other related equipment (for physician practices, clinics and other ancillary businesses as there were no hospital acquisitions during either the six months ended June 30, 2018 or 2017). These increases in cash outflows were offset by an increase in the proceeds from the sale of property and equipment of $1 million, an increase in cash provided by the net impact of the purchases and sales of available-for-sale securities and equity securities of $15 million and a decrease in cash used for other investments (primarily from internal-use software expenditures and physician recruiting costs) of $7 million for the six months ended June 30, 2018 compared to the same period in 2017.

 

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Our net cash used in financing activities was $208 million for the six months ended June 30, 2018, compared to $569 million for the six months ended June 30, 2017, a decrease of approximately $361 million. The decrease in cash used in financing activities, in comparison to the prior year period, is primarily due to the net effect of our debt repayment, refinancing activity, and cash paid for deferred financing costs and other debt-related costs.

There have been no material changes outside of the ordinary course of business to our upcoming cash obligations during the six months ended June 30, 2018 from those disclosed in our 2017 Form 10-K, other than arising from the Fourth Amendment and Restatement Agreement to the Credit Facility, the ABL Facility and the exchange offers for our outstanding notes (as discussed further in Capital Resources below).

Capital Expenditures

Cash expenditures for purchases of facilities and other related businesses were $10 million for the six months ended June 30, 2018, compared to $4 million for the six months ended June 30, 2017. Our expenditures for the six months ended June 30, 2018 and 2017 were related to the purchase of physician practices and other ancillary services.

Excluding the cost to construct replacement hospitals, our cash expenditures for routine capital for the six months ended June 30, 2018 totaled $294 million compared to $269 million for the six months ended June 30, 2017. These capital expenditures related primarily to the purchase of additional equipment, minor renovations and information systems infrastructure. Costs to construct replacement hospitals totaled $1 million for the six months ended June 30, 2018, compared to $5 million for the six months ended June 30, 2017. The costs to construct replacement hospitals for the six months ended June 30, 2018 represent both planning and construction costs for the replacement facility at La Porte, Indiana. The costs to construct replacement hospitals for the six months ended June 30, 2017 represent both planning and construction costs for the replacement hospital in York, Pennsylvania. In conjunction with the sale of Memorial Hospital of York on July 1, 2017, we no longer have any planned costs to construct this replacement hospital.

Pursuant to a hospital purchase agreement from our March 1, 2016 acquisition of La Porte Hospital and Starke Hospital, we committed to build replacement facilities in both La Porte, Indiana and Knox, Indiana. Under the terms of such agreement, construction of the replacement hospital for LaPorte Hospital is required to be completed within five years of the date of acquisition, or March 2021. In addition, construction of the replacement facility for Starke Hospital is required to be completed within five years of the date we enter into a new lease with Starke County, Indiana, the hospital lessor, or in the event we do not enter into a new lease with Starke County, construction shall be completed by September 30, 2026. We have not entered into a new lease with the lessor for Starke Hospital and currently anticipate completing construction of the Starke Hospital replacement facility in 2026. Construction costs, including equipment costs, for the La Porte and Starke replacement facilities are currently estimated to be approximately $125 million and $15 million, respectively.

Capital Resources

Net working capital was approximately $1.6 billion at June 30, 2018, compared to $1.7 billion at December 31, 2017. Net working capital decreased by approximately $80 million between December 31, 2017 and June 30, 2018. This decrease is primarily due to the decrease in cash offset by a decrease in accounts payable and other current liabilities during the six months ended June 30, 2018.

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

As of June 30, 2018, the availability for additional borrowings under the Credit Facility, subject to certain limitations as set forth in the Credit Facility, was approximately $425 million pursuant to the Revolving Facility, of which $88 million is in the form of outstanding letters of credit. CHS has the ability to amend the Credit Facility to provide for one or more tranches of term loans or increases in the Revolving Facility in an aggregate principal amount of up to $500 million. As of June 30, 2018, the weighted-average interest rate under the Credit Facility, excluding swaps, was 6.6%.

The loans under the Credit Facility bear interest on the outstanding unpaid principal amount at a rate equal to an applicable percentage plus, at our option, either (a) an Alternate Base Rate (as defined) determined by reference to the greater of (1) the Prime Rate (as defined) announced by Credit Suisse or (2) the NYFRB Rate (as defined) plus 0.50% or (3) the adjusted LIBOR rate on such

 

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day for a three-month interest period commencing on the second business day after such day plus 1% or (b) LIBOR. In addition, the margin in respect of the Revolving Facility will be subject to adjustment determined by reference to a leverage-based pricing grid. Based on our current leverage, loans in respect of the Revolving Facility currently accrue interest at a rate per annum equal to LIBOR plus 2.75%, in the case of LIBOR borrowings, and Alternate Base Rate plus 1.75%, in the case of Alternate Base Rate borrowings. Prior to the Credit Facility amendment discussed below, the Term G Loan and Term H Loan accrued interest at a rate per annum equal to LIBOR plus 2.75% and 3.00%, respectively, in the case of LIBOR borrowings, and Alternate Base Rate plus 1.75% and 2.00%, respectively, in the case of Alternate Base Rate borrowings. The Term G Loan and the Term H Loan are subject to a 1.00% LIBOR floor and a 2.00% Alternate Base Rate floor.

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

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

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

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

The Credit Facility contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting our and our subsidiaries’ ability, subject to certain exceptions, to, among other things, (1) declare dividends, make distributions or redeem or repurchase capital stock, (2) prepay, redeem or repurchase other debt, (3) incur liens or grant negative pledges, (4) make loans and investments and enter into acquisitions and joint ventures, (5) incur additional indebtedness or provide certain guarantees, (6) make capital expenditures, (7) engage in mergers, acquisitions and asset sales, (8) conduct transactions with affiliates, (9) alter the nature of our businesses, (10) grant certain guarantees with respect to physician practices, (11) engage in sale and leaseback transactions or (12) change our fiscal year. We and our subsidiaries are also required to comply with specified financial covenants (consisting of a maximum first lien net debt to consolidated EBITDA leverage ratio) and various affirmative covenants. Under the Credit Facility, the first lien net debt to consolidated EBITDA leverage ratio is calculated as the ratio of total first lien debt, less unrestricted cash and cash equivalents, to consolidated EBITDA, as defined in the Credit Facility. The calculation of consolidated EBITDA as defined in the Credit Facility is a trailing 12-month calculation that begins with net income attributable to us, with certain pro forma adjustments to consider the impact of material acquisitions or divestitures, and adjustments for interest, taxes, depreciation and amortization, net income attributable to noncontrolling interests, stock compensation expense, restructuring costs, and the financial impact of other non-cash or non-recurring items recorded during any such 12-month period. For the 12-month period ended June 30, 2018, the first lien net debt to consolidated EBITDA leverage ratio financial covenant under the Credit Facility limited the ratio of first lien net debt to consolidated EBITDA, as defined, to less than or equal to 5.25 to 1.00. We were in compliance with all such covenants at June 30, 2018, with a first lien net debt to consolidated EBITDA leverage ratio of approximately 4.91 to 1.00.

 

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

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

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

On March 23, 2018, we and CHS, entered into the Fourth Amendment and Restatement Agreement to the Credit Facility, or the Agreement. In addition to including the changes described in the paragraph above, we further modified our ability to retain asset sale proceeds, and instead to apply them to prepayments of term loans based on pro forma first lien leverage. To the extent the pro forma ratio of first lien net debt to consolidated EBITDA is greater than or equal to 4.25 to 1.00, 100% of net cash proceeds of asset sales will be applied to prepay term loans; to the extent the pro forma first lien leverage ratio is less than 4.25 to 1.00 but greater than or equal to 3.75 to 1.0, 50% of such proceeds will be applied to prepay term loans; and to the extent the first lien leverage ratio is less than 3.75 to 1.00, there will be no requirement to prepay term loans with such proceeds. The Agreement also amended the Credit Facility to permit CHS to incur debt under either an asset-based loan facility, or ABL, in an amount up to $1.0 billion or maintain its Asset-Backed Securitization program. The Revolving Facility would be reduced to $425 million upon the effectiveness of the contemplated ABL facility. The Agreement also reduced the availability for incremental tranches of term loans or increases in the Revolving Facility to $500 million and removed the secured net leverage incurrence test with respect to junior secured debt. Term G Loans will accrue interest at a rate per annum initially equal to LIBOR plus 3.00%, in the case of LIBOR borrowings, and Alternate Base Rate plus 2.00%, in the case of Alternate Base Rate borrowing. Term H Loans will accrue interest at a rate per annum initially equal to LIBOR plus 3.25%, in the case of LIBOR borrowings, and Alternate Base Rate plus 2.25%, in the case of Alternate Base Rate borrowing.

Prior to the effectiveness of the ABL Facility described below, CHS, through certain of its subsidiaries, participated in an accounts receivable loan agreement, or the Receivables Facility, with a group of lenders and banks, Credit Agricolé Corporate and Investment Bank, as a managing agent and as the administrative agent. Patient-related accounts receivable, or the Receivables, for certain

 

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affiliated hospitals served as collateral for the outstanding borrowings under the Receivables Facility. The interest rate on the borrowings was based on the commercial paper rate plus an applicable interest rate spread. The Receivables Facility was repaid in full and terminated upon the effectiveness of the ABL Facility on April 3, 2018.

On April 3, 2018, we and CHS entered into an asset-based loan (ABL) credit agreement, or the ABL Credit Agreement, with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders and other agents party thereto. Pursuant to the ABL Credit Agreement, the lenders have extended to CHS a revolving asset-based loan facility, or the ABL Facility, in the maximum aggregate principal amount of $1.0 billion, subject to borrowing base capacity. The ABL Facility includes borrowing capacity available for letters of credit of $50 million. CHS and all domestic subsidiaries of CHS that guarantee CHS’ other outstanding senior and senior secured indebtedness guarantee the obligations of CHS under the ABL Facility. Subject to certain exceptions, all obligations under the ABL Facility and the related guarantees are secured by a perfected first-priority security interest in substantially all of the Receivables, deposit, collection and other accounts and contract rights, books, records and other instruments related to the foregoing of the Company, CHS and the guarantors as well as a perfected junior-priority security interest in substantially all of the other assets of the Company, CHS and the guarantors, subject to customary exceptions and intercreditor arrangements. The revolving credit commitments under the Credit Facility were reduced to $425 million upon the effectiveness of the ABL facility. In connection with entering into the ABL Credit Agreement and the ABL Facility, we repaid in full and terminated our Receivables Facility. The outstanding borrowings pursuant to the ABL Facility at June 30, 2018 totaled $538 million on the condensed consolidated balance sheet.

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

Principal amounts outstanding under the ABL Facility will be due and payable in full on April 3, 2023. The ABL Facility includes a 91-day springing maturity applicable if more than $250 million in the aggregate principal amount of the Borrower’s 8% Senior Notes due 2019, Term G loans due 2019, 7.125% Senior Notes due 2020, Term H loans due 2021, 5.125% Senior Secured Notes due 2021, 6.875% Senior Notes due 2022 or 6.25% Senior Secured Notes due 2023 or refinancings thereof are scheduled to mature or similarly become due on a date prior to April 3, 2023.

The ABL Facility contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting our 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) engage in mergers, acquisitions and asset sales, (7) conduct transactions with affiliates, (8) alter the nature of the Company’s, CHS’ or the guarantors’ businesses, (9) grant certain guarantees with respect to physician practices, (10) engage in sale and leaseback transactions or (11) change our fiscal year. We are also required to comply with a consolidated fixed coverage ratio and various affirmative covenants. The consolidated fixed coverage ratio is calculated as the ratio of (x) consolidated EBITDA (as defined in the ABL Facility) less capital expenditures to (y) the sum of consolidated interest expense (as defined in the ABL Facility), scheduled principal payments, income taxes and restricted payments made in cash or in permitted investments. For purposes of calculating the consolidated fixed charge coverage ratio, the calculation of consolidated EBITDA as defined in the ABL Facility is a trailing 12-month calculation that begins with consolidated net income attributable to Holdings, with certain adjustments for interest, taxes, depreciation and amortization, net income attributable to noncontrolling interests, stock compensation expense, restructuring costs, and the financial impact of other non-cash or non-recurring items recorded during any such 12-month period.

 

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

On June 22, 2018, CHS completed offers to exchange (i) up to $1.925 billion aggregate principal amount of its new Junior-Priority Secured Notes due 2023, or the 2023 Junior-Priority Notes, in exchange for any and all of its $1.925 billion aggregate principal amount of outstanding 8% Senior Notes, (ii) up to $1.200 billion aggregate principal amount of its new Junior-Priority Secured Notes due 2024, or the 2024 Junior-Priority Notes, in exchange for any and all of its $1.200 billion aggregate principal amount of outstanding 7 18% Senior Notes, and (iii) to the extent that less than all of the outstanding 8% Senior Notes and 7 18% Senior Notes were tendered in the exchange offers, up to an aggregate principal amount of 2024 Junior-Priority Notes equal to, when taken together with the total notes issued in exchange for the validly tendered and accepted 8% Senior Notes and 7 18% Senior Notes, $3.125 billion, in exchange for its outstanding 6 78% Senior Notes. Upon completion of the exchange offers, CHS issued (i) approximately $1.770 billion aggregate principal amount of the 2023 Junior-Priority Notes in exchange for the same amount of 8% Senior Notes, (ii) approximately $1.079 billion aggregate principal amount of the 2024 Junior-Priority Notes in exchange for the same amount of 7 18% Senior Notes and (iii) approximately $276 million aggregate principal amount of the 2024 Junior-Priority Notes in exchange for approximately $368 million of 6 78% Senior Notes.

On July 6, 2018, CHS completed an offering of $1.033 billion aggregate principal amount of 8 58% Senior Secured Notes due 2024, or the 8 58% Senior Secured Notes. The terms of the 8 58% Senior Secured Notes are governed by an indenture, dated as of July 6, 2018, among CHS, the Company, the subsidiary guarantors party thereto, Regions Bank, as trustee and Credit Suisse AG, as collateral agent. The 8 58% Senior Secured Notes bear interest at a rate of 8 58% per year payable semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2019. The 8 58% Senior Secured Notes are unconditionally guaranteed on a senior-priority secured basis by us and each of the CHS current and future domestic subsidiaries that provide guarantees under CHS’ senior secured credit facilities, CHS’ ABL facility, any capital market debt securities of CHS (including CHS’ outstanding senior notes) and certain other long-term debt of CHS.

As of June 30, 2018, we are currently a party to interest rate swap agreements to limit the effect of changes in interest rates on approximately 64.6% of our variable rate debt. On each of these swaps, we receive a variable rate of interest based on the three-month LIBOR, in exchange for the payment by us of a fixed rate of interest. See Note 11 in the footnotes to the condensed consolidated financial statements for further information on our interest rate swap agreements.

The Credit Facility and the indentures that govern our outstanding notes contain various covenants that limit our ability to take certain actions, including our ability to:

 

    incur, assume or guarantee additional indebtedness;

 

    issue redeemable stock and preferred stock;

 

    repurchase capital stock;

 

    make restricted payments, including paying dividends and making certain loans, acquisitions and investments;

 

    redeem debt that is subordinated in right of payment to our outstanding notes;

 

    create liens;

 

    sell or otherwise dispose of assets, including capital stock of subsidiaries;

 

    impair the security interests;

 

    enter into agreements that restrict dividends and certain other payments from subsidiaries;

 

    merge, consolidate, sell or otherwise dispose of substantially all of our assets;

 

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    enter into transactions with affiliates; and

 

    guarantee certain obligations.

The indentures governing each of the 2023 Junior-Priority Notes and 2024 Junior-Priority Notes also prohibit CHS from purchasing, repurchasing, redeeming, defeasing or otherwise acquiring or retiring any outstanding 8% Senior Notes and 7 18% Senior Notes after the consummation of the exchange offers described above with: (a) cash or cash equivalents on hand as of the consummation of such exchange offers; (b) cash generated from operations; (c) proceeds from assets sales; or (d) proceeds from the issuance of, or in exchange for, secured debt, in each case, prior to the date that is 60 days prior to the relevant maturity dates of such 8% Senior Notes and 7 18% Senior Notes, as applicable.

In addition, our Credit Facility contains restrictive covenants and requires us to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet these restricted covenants and financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet those tests. A breach of any of these covenants could result in a default under our Credit Facility and/or the indentures that govern our outstanding notes. Upon the occurrence of an event of default under our Credit Facility or indentures that govern our outstanding notes, all amounts outstanding under our Credit Facility and the indentures that govern our outstanding notes may become immediately due and payable and all commitments under the Credit Facility to extend further credit may be terminated.

We believe that internally generated cash flows, availability for additional borrowings under our Credit Facility, of approximately $425 million, of which approximately $88 million is in the form of outstanding letters of credit, the availability under our new ABL Facility and our ability to amend the Credit Facility to provide for one or more incremental tranches of term loans and revolving credit commitments in an aggregate principal amount of up to $500 million, in each case subject to certain limitations as set forth in the Credit Facility, as well as our continued access to the capital markets, will be sufficient to finance acquisitions, capital expenditures, working capital requirements, and any equity or debt repurchases or other debt repayments we may elect to make through the next 12 months. In addition, we are currently required to utilize proceeds received from dispositions of assets, subject to certain exceptions, to repay outstanding debt.

We may elect from time to time to purchase our common stock under our open market repurchase program adopted on November 6, 2015, which authorizes us to purchase up to 10,000,000 shares of our common stock, not to exceed $300 million in repurchases (we have currently repurchased 532,188 shares under such program, all of which shares were repurchased during the three months ended December 31, 2015). In addition, we may elect from time to time to purchase our outstanding debt in open market purchases, privately negotiated transactions or otherwise. Any such equity or debt repurchases will depend upon prevailing market conditions, our liquidity requirements, contractual restrictions, applicable securities laws requirements, and other factors.

The ratio of earnings to fixed charges is a measure of our ability to meet our fixed obligations related to our indebtedness. The following table shows the ratio of earnings to fixed charges for the six months ended June 30, 2018:

 

          Six Months Ended     
     June 30, 2018

Ratio of earnings to fixed charges (1)

   *

 

  (1) Fixed charges include interest expensed and capitalized during the year plus an estimate of the interest component of rent expense. There are no shares of preferred stock outstanding. See exhibit 12 filed as part of this Report for the calculation of this ratio.

 

  * For the six months ended June 30, 2018, earnings were insufficient to cover fixed charges by approximately $153 million.

 

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Off-balance Sheet Arrangements

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 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. At June 30, 2018, we operated two hospitals under operating leases that had an immaterial impact on our consolidated operating results. The terms of the two operating leases we currently have in place expire between December 2020 and January 2028, not including lease extension options. If we allow these leases to expire, we would no longer generate revenues nor incur expenses from these hospitals.

Noncontrolling Interests

We have sold noncontrolling interests in certain of our subsidiaries or acquired subsidiaries with existing noncontrolling interest ownership positions. As of June 30, 2018, we have hospitals in 19 of the markets we serve, with noncontrolling physician ownership interests ranging from less than 1% to 40%. In addition, we have ten other hospitals with noncontrolling interests owned by non-profit entities. Redeemable noncontrolling interests in equity of consolidated subsidiaries was $514 million and $527 million as of June 30, 2018 and December 31, 2017, respectively, and noncontrolling interests in equity of consolidated subsidiaries was $76 million and $75 million as of June 30, 2018 and December 31, 2017, respectively. The amount of net income attributable to noncontrolling interests was $19 million and $15 million for the three months ended June 30, 2018 and 2017, respectively, and $37 million and $36 million for the six months ended June 30, 2018 and 2017, respectively. As a result of the change in the Stark Law “whole hospital” exception included in the Affordable Care Act, we are not permitted to introduce physician ownership at any of our hospital facilities that did not have physician ownership at the time of the adoption of the Affordable Care Act, or increase the aggregate percentage of physician ownership in any of our former or existing hospital joint ventures in excess of the aggregate physician ownership level held at the time of the adoption of the Affordable Care Act.

Reimbursement, Legislative and Regulatory Changes

Ongoing legislative and regulatory efforts could reduce or otherwise adversely affect the payments we receive from Medicare and Medicaid and other payors. 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 additional restructuring of the financing and delivery of healthcare in the United States. These events could cause our future financial results to decline. We cannot estimate the impact of Medicare and Medicaid reimbursement changes that have been enacted or are under consideration. We cannot predict whether additional reimbursement reductions will be made or whether any such changes or other restructuring of the financing and delivery of healthcare would have a material adverse effect on our business, financial conditions, results of operations, cash flow, capital resources and liquidity.

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 generally offset increases in operating costs by increasing reimbursement for services, expanding services and reducing costs in other areas. However, we cannot predict our ability to cover or offset future cost increases, particularly any increases in our cost of providing health insurance benefits to our employees.

 

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Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. 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 condensed consolidated 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.

Revenue Recognition

Upon our adoption of the new revenue recognition standard in the Financial Accounting Standards Board, or FASB, Accounting Standards Codification Topic 606, or ASC 606, we record net operating revenues at the transaction price estimated to reflect the total consideration due from patients and third-party payors in exchange for providing goods and services in patient care. These services are considered to be a single performance obligation and have a duration of less than one year. Revenues are recorded as these goods and services are provided. The transaction price, which involves significant estimates, is determined based on our standard charges for the goods and services provided, with a reduction recorded for price concessions related to third party contractual arrangements as well as patient discounts and patient price concessions. During the six months ended June 30, 2018, the impact of changes to the inputs used to determine the transaction price was considered immaterial to the current period.

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

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 calculated and recorded through internally-developed data collection and analysis tools to automate the monthly estimation of required contractual allowances. Within this automated system, payors’ historical paid claims data are utilized to calculate the contractual allowances. This data is automatically updated on a monthly basis. All hospital contractual allowance calculations are subjected to monthly 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 allowance adjustments, which is one component of the deductions from gross revenues to arrive at net operating revenues (net of contractual allowances and discounts). The process of estimating contractual allowances requires us to estimate the amount expected to be received based on payor contract provisions. The key assumption in this process is the estimated contractual reimbursement percentage, which is based on payor classification, historical paid claims data and, when applicable, application of the expected managed care plan reimbursement based on contract terms.

Due to the complexities involved in these estimates, actual payments we receive could be different from the amounts we estimate and record. If the actual contractual reimbursement percentage under government programs and managed care contracts differed by 1% at June 30, 2018 from our estimated reimbursement percentage, net loss for the six months ended June 30, 2018 would have changed by approximately $87 million, and net accounts receivable at June 30, 2018 would have changed by $111 million. Final settlements under some of these programs are subject to adjustment based on administrative review and audit by third parties. We account for adjustments to previous program reimbursement estimates as contractual allowance adjustments and report them in the periods that such adjustments become known. Contractual allowance adjustments related to final settlements and previous program reimbursement estimates impacted net operating revenues and net loss by an insignificant amount for each of the six-month periods ended June 30, 2018 and 2017.

 

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Patient Accounts Receivable

Substantially all of our accounts receivable are related to providing healthcare services to patients at our hospitals and affiliated businesses. 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 some but not all of the outstanding balance, with the remaining outstanding balance (generally deductibles and co-payments) owed by the patient. 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.

We estimate any adjustments to the transaction price for implicit price concessions by reserving a percentage of all self-pay accounts receivable without regard to aging category, based on collection history, adjusted for expected recoveries and any anticipated changes in trends. Our ability to estimate the transaction price and any implicit price concessions is not impacted by not utilizing an aging of our net accounts receivable as we believe that substantially all of the risk exists at the point in time such accounts are identified as self-pay. The percentage used to reserve for all self-pay accounts is based on our collection history. We believe that we collect substantially all of our third-party insured receivables, which include receivables from governmental agencies.

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

Patient accounts receivable can be impacted by the effectiveness of the Company’s collection efforts. Additionally, significant changes in payor mix, business office operations, economic conditions or trends in federal and state governmental healthcare coverage could affect the net realizable value of accounts receivable. The Company also continually reviews the net realizable value of accounts receivable by monitoring historical cash collections as a percentage of trailing net operating revenues, as well as by analyzing current period net revenue and admissions by payor classification, aged accounts receivable by payor, days revenue outstanding, the composition of self-pay receivables between pure self-pay patients and the patient responsibility portion of third-party insured receivables and the impact of recent acquisitions and dispositions. If the actual collection percentage differed by 1% at June 30, 2018 from our estimated collection percentage as a result of a change in expected recoveries, net loss for the six months ended June 30, 2018 would have changed by $56 million, and net accounts receivable at June 30, 2018 would have changed by $71 million. We also continually review our overall reserve adequacy by monitoring historical cash collections as a percentage of trailing net operating revenues, as well as by analyzing current period net revenue and admissions by payor classification, days revenue outstanding, the composition of self-pay receivables between pure self-pay patients and the patient responsibility portion of third-party insured receivables and the impact of recent acquisitions and dispositions.

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 our ongoing collection efforts and is consistent with industry practices. We had approximately $4.8 billion at June 30, 2018 and $4.2 billion December 31, 2017, being pursued by various outside collection agencies. We expect to collect less than 3%, 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 accounts receivable. Collections on amounts previously written-off are recognized as a recovery of net operating revenues when received. However, we take into consideration estimated collections of these future amounts written-off in determining the implicit price concessions used to measure the transaction price for the applicable portfolio of patient accounts receivable.

All of the following information is derived from our hospitals, excluding clinics, unless otherwise noted.

Patient accounts receivable from our hospitals represent approximately 98% of our total consolidated accounts receivable.

Days revenue outstanding, adjusted for the impact of receivables for state Medicaid supplemental payment programs, was 58 days at June 30, 2018 and 56 days at December 31, 2017.

 

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Total gross accounts receivable (prior to allowance for contractual adjustments and implicit price concessions) was approximately $17.8 billion as of June 30, 2018 and approximately $18.6 billion as of December 31, 2017. The approximate percentage of total gross accounts receivable (prior to allowance for contractual adjustments and implicit price concessions) summarized by aging categories is as follows:

 

As of June 30, 2018
    % of Gross Receivables

Payor

        0 -90 Days                90 -180 Days              180 - 365 Days        

    Over 365 Days    

Medicare

    14 %        1 %        - %     - %    

Medicaid

    7 %        1 %        1 %     1 %    

Managed Care and Other

    25 %        4 %        3 %     3 %    

Self-Pay

    10 %        8 %        10 %     12 %    
As of December 31, 2017                  
    % of Gross Receivables

Payor

        0 -90 Days                90 - 180 Days              180 - 365 Days        

    Over 365 Days    

Medicare

    13 %        1 %        - %     - %    

Medicaid

    7 %        1 %        1 %     1 %    

Managed Care and Other

    24 %        4 %        3 %     3 %    

Self-Pay

    8 %        7 %        15 %     12 %    

The approximate percentage of total gross accounts receivable (prior to allowances for contractual adjustments and implicit price concessions) summarized by payor is as follows:

 

                                                     
           June 30,           December 31,  
     2018   2017

Insured receivables

     60.6  %          57.9  %     

Self-pay receivables

     39.4        42.1   
  

 

 

 

 

 

 

 

Total

     100.0  %          100.0  %     
  

 

 

 

 

 

 

 

The combined total at our hospitals and clinics for the estimated implicit price concessions for self-pay accounts receivable and allowances for other self-pay discounts and contractuals, as a percentage of gross self-pay receivables, was approximately 89% and 92% at June 30, 2018 and December 31, 2017, respectively. During the three months ended June 30, 2018, we accelerated the placement with outside collection agencies of approximately $1.3 billion of gross self-pay accounts receivable. Since these receivables were fully reserved at the time of write-off, the overall percentage of reserves for the remaining self-pay accounts receivable decreased. If the receivables that have been written-off, but where collections are still being pursued by outside collection agencies, were included in both the allowances and gross self-pay receivables specified above, the percentage of combined allowances to total self-pay receivables would have been approximately 94% at both June 30, 2018 and December 31, 2017.

Goodwill and Other Intangibles

Goodwill represents the excess of the fair value of the consideration conveyed in the acquisition over the fair value of net assets acquired. Goodwill is evaluated for impairment annually and when an event occurs or circumstances change that, more likely than not, reduce the fair value of the reporting unit below its carrying value. During 2017, we adopted ASU 2017-04, which allows a company to record a goodwill impairment when the reporting units carrying value exceeds the fair value determined in step one. In 2017, consistent with prior years, we performed our annual goodwill evaluation during the fourth quarter as of September 30, 2017, and then an updated evaluation as of November 30, 2017 due to the identification of certain impairment indicators. With the elimination of the time-intensive step two calculation to determine the implied value of goodwill, we have considered the additional benefits of performing the annual goodwill evaluation later in the fourth quarter to coincide with the timing of the next fiscal year’s budgeting and financial projection process. Based on these considerations, we have elected to change the annual goodwill impairment measurement date to October 31. The next annual goodwill evaluation will be performed during the fourth quarter of 2018 with an October 31, 2018 measurement date, or sooner if we identify certain indicators of impairment.

 

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At June 30, 2018, we had approximately $4.7 billion of goodwill recorded, all of which resides at our hospital operations reporting unit.

During the three months ended December 31, 2017, in connection with the preparation of the financial statements included in our 2017 Form 10-K, we identified certain indicators of impairment and performed an interim goodwill impairment evaluation as of November 30, 2017. Those indicators were primarily a further decline in our market capitalization and fair value of our long-term debt during November 2017. We performed an estimated calculation of fair value in step one of the impairment test at November 30, 2017, which indicated that the carrying value of our hospital operations reporting unit exceeded its fair value. As a result of this evaluation and the early adoption of ASU 2017-04, we recorded a non-cash impairment charge of $1.419 billion to goodwill during the three months ended December 31, 2017.

The reduction in our fair value and the resulting goodwill impairment charges recorded during 2016 and 2017 reduced the carrying value of our hospital operations reporting unit to an amount equal to our estimated fair value. This increases the risk that future declines in fair value could result in goodwill impairment. The determination of fair value in step one of our goodwill impairment analysis is based on an estimate of fair value for the hospital operations reporting unit utilizing known and estimated inputs at the evaluation date. Some of those inputs include, but are not limited to, the most recent price of our common stock or fair value of our long-term debt, estimates of future revenue and expense growth, estimated market multiples, expected capital expenditures, income tax rates, and costs of invested capital. Future estimates of fair value could be adversely affected if the actual outcome of one or more of these assumptions changes materially in the future, including further decline in our stock price or fair value of our long-term debt, lower than expected hospital volumes, higher market interest rates or increased operating costs. Such changes impacting the calculation of our fair value could result in a material impairment charge in the future.

Impairment or Disposal of Long-Lived Assets

Whenever events or changes in circumstances indicate that the carrying values of certain long-lived assets may be impaired, we project the undiscounted cash flows expected to be generated by these assets. If the projections indicate that the reported amounts are not expected to be recovered, such amounts are reduced to their estimated fair value based on a quoted market price, if available, or an estimate based on valuation techniques available in the circumstances.

Professional Liability Claims

As part of our business of owning and operating hospitals, we are subject to legal actions alleging liability on our part. We accrue for losses resulting from such liability claims, as well as loss adjustment expenses that are out-of-pocket and directly related to such liability claims. These direct out-of-pocket expenses include fees of outside counsel and experts. We do not accrue for costs that are part of our corporate overhead, such as the costs of our in-house legal and risk management departments. The losses resulting from professional liability claims primarily consist of estimates for known claims, as well as estimates for incurred but not reported claims. The estimates are based on specific claim facts, our historical claim reporting and payment patterns, the nature and level of our hospital operations, and actuarially determined projections. The actuarially determined projections are based on our actual claim data, including historic reporting and payment patterns which have been gathered over an approximately 20-year period. As discussed below, since we purchase excess insurance on a claims-made basis that transfers risk to third-party insurers, the liability we accrue does include an amount for the losses covered by our excess insurance. We also record a receivable for the expected reimbursement of losses covered by our excess insurance. Since we believe that the amount and timing of our future claims payments are reliably determinable, we discount the amount we accrue for losses resulting from professional liability claims using the risk-free interest rate corresponding to the timing of our expected payments.

The net present value of the projected payments was discounted using a weighted-average risk-free rate of 2.2%, 1.8% and 1.6% in 2017, 2016 and 2015, respectively. This liability is adjusted for new claims information in the period such information becomes known to us. Professional malpractice expense includes the losses resulting from professional liability claims and loss adjustment expense, as well as paid excess insurance premiums, and is presented within other operating expenses in the accompanying condensed consolidated statements of loss.

Our processes for obtaining and analyzing claims and incident data are standardized across all of our hospitals and have been consistent for many years. We monitor the outcomes of the medical care services that we provide and for each reported claim, we obtain various information concerning the facts and circumstances related to that claim. In addition, we routinely monitor current key statistics and volume indicators in our assessment of utilizing historical trends. The average lag period between claim occurrence and payment of a final settlement is between three and four years, although the facts and circumstances of individual claims could result in

 

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the timing of such payments being different from this average. Since claims are paid promptly after settlement with the claimant is reached, settled claims represent approximately 1.0% of the total liability at the end of any period.

For purposes of estimating our individual claim accruals, we utilize specific claim information, including the nature of the claim, the expected claim amount, the year in which the claim occurred and the laws of the jurisdiction in which the claim occurred. Once the case accruals for known claims are determined, information is stratified by loss layers and retentions, accident years, reported years, geography, and claims relating to the acquired HMA hospitals versus claims relating to our other hospitals. Several actuarial methods are used against this data to produce estimates of ultimate paid losses and reserves for incurred but not reported claims. Each of these methods uses our company-specific historical claims data and other information. This company-specific data includes information regarding our business, including historical paid losses and loss adjustment expenses, historical and current case loss reserves, actual and projected hospital statistical data, a variety of hospital census information, employed physician information, professional liability retentions for each policy year, geographic information and other data.

Based on these analyses, we determine our estimate of the professional liability claims. The determination of management’s estimate, including the preparation of the reserve analysis that supports such estimate, involves subjective judgment of management. Changes in reserving data or the trends and factors that influence reserving data may signal fundamental shifts in our future claim development patterns or may simply reflect single-period anomalies. Even if a change reflects a fundamental shift, the full extent of the change may not become evident until years later. Moreover, since our methods and models use different types of data and we select our liability from the results of all of these methods, we typically cannot quantify the precise impact of such factors on our estimates of the liability. Due to our standardized and consistent processes for handling claims and the long history and depth of our company-specific data, our methodologies have produced reliably determinable estimates of ultimate paid losses.

We are primarily self-insured for these claims; however, we obtain excess insurance that transfers the risk of loss to a third-party insurer for claims in excess of our self-insured retentions. Our excess insurance is underwritten on a claims-made basis. For claims reported prior to June 1, 2002, substantially all of our professional and general liability risks were subject to a less than $1 million per occurrence self-insured retention and for claims reported from June 1, 2002 through June 1, 2003, these self-insured retentions were $2 million per occurrence. Substantially all claims reported 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 and before June 1, 2014 are self-insured up to $5 million per claim. Substantially all claims reported on or after June 1, 2014 and before June 1, 2018 are self-insured up to $10 million per claim. Substantially all claims reported on or after June 1, 2018 are self-insured up to $15 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 has been purchased through commercial insurance companies and generally covers us for liabilities in excess of the self-insured retentions. The excess coverage consists of multiple layers of insurance, the sum of which totals up to $95 million per occurrence and in the aggregate for claims reported on or after June 1, 2003, up to $145 million per occurrence and in the aggregate for claims reported on or after January 1, 2008, up to $195 million per occurrence and in the aggregate for claims reported on or after June 1, 2010, and up to $220 million per occurrence and in the aggregate for claims reported on or after June 1, 2015. In addition, for integrated occurrence malpractice claims, there is an additional $50 million of excess coverage for claims reported on or after June 1, 2014 and an additional $75 million of excess coverage for claims reported on or after June 1, 2015. For certain policy years prior to June 1, 2014, if the first aggregate layer of excess coverage becomes fully utilized, then the self-insured retention will increase to $10 million per claim for any subsequent claims in that policy year until our total aggregate coverage is met. Beginning June 1, 2018, this drop-down provision in the excess policies attaches over the $15 million per claim self-insured retention.

Effective June 1, 2014, the hospitals acquired from HMA were insured on a claims-made basis as described above and through commercial insurance companies as described above for substantially all claims reported on or after June 1, 2014 except for physician-related claims with an occurrence date prior to June 1, 2014. Prior to June 1, 2014, the former HMA hospitals obtained insurance coverage through a wholly-owned captive insurance subsidiary and a risk retention group subsidiary which are domiciled in the Cayman Islands and South Carolina, respectively. Those insurance subsidiaries, which are collectively referred to as the “Insurance Subsidiaries,” provided (i) claims-made coverage to all of the former HMA hospitals and (ii) occurrence-basis coverage to most of the physicians employed by the former HMA hospitals. The employed physicians not covered by the Insurance Subsidiaries generally maintained claims-made policies with unrelated third party insurance companies. To mitigate the exposure of the program covering the former HMA hospitals and other healthcare facilities, the Insurance Subsidiaries bought claims-made reinsurance policies from unrelated third parties for claims above self-retention levels of $10 million or $15 million per claim, depending on the policy year.

Effective January 1, 2008, the former Triad hospitals were insured on a claims-made basis as described above and through commercial insurance companies as described above for substantially all claims occurring on or after January 1, 2002 and reported on

 

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or after January 1, 2008. Substantially all losses for the former Triad hospitals in periods prior to May 1, 1999 were insured through a wholly-owned insurance subsidiary of HCA, Triad’s owner prior to that time, and excess loss policies maintained by HCA. HCA has agreed to indemnify the former Triad hospitals in respect of claims covered by such insurance policies arising prior to May 1, 1999. From May 1, 1999 through December 31, 2006, the former Triad hospitals obtained insurance coverage on a claims incurred basis from HCA’s wholly-owned insurance subsidiary with excess coverage obtained from other carriers that is subject to certain deductibles. Effective for claims incurred after December 31, 2006, Triad began insuring its claims from $1 million to $5 million through its wholly-owned captive insurance company, replacing the coverage provided by HCA. Substantially all claims occurring during 2007 were self-insured up to $10 million per claim.

There were no significant changes in our estimate of the reserve for professional liability claims during the six months ended June 30, 2018.

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 certain deferred tax assets, subject to the valuation allowance we have established.

The total amount of unrecognized benefit that would impact the effective tax rate, if recognized, was approximately $7 million as of June 30, 2018. A total of approximately $4 million of interest and penalties is included in the amount of liability for uncertain tax positions at June 30, 2018. It is our policy to recognize interest and penalties related to unrecognized benefits in our condensed consolidated statements of loss as income tax expense.

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

We, or one of our subsidiaries, file income tax returns in the United States federal jurisdiction and various state jurisdictions. With few exceptions, we are no longer subject to state income tax examinations for years prior to 2014. Our federal income tax returns for the 2009, 2010, 2014 and 2015 tax years are currently under examination by the Internal Revenue Service. We believe the results of these examinations will not be material to our consolidated results of operations or consolidated financial position. We have extended the federal statute of limitations through December 31, 2018 for Community Health Systems, Inc. for the tax periods ended December 31, 2007, 2008, 2009 and 2010 and through December 31, 2019 for the tax periods ended December 31, 2014 and 2015.

We have accounted for the effects of the comprehensive tax legislation commonly referred to as the Tax Cuts and Job Act, or the Tax Act, using reasonable estimates based on currently available information and our interpretations thereof, and the estimated impact of the Tax Act during the six months ended June 30, 2018 and year ended December 31, 2017, may be revised as a result of, among other things, changes in interpretations we have made and the issuance of new tax or accounting guidance. See Note 6 to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional information.

Recent Accounting Pronouncements

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

In February 2016, the FASB issued ASU 2016-02, which amends the accounting for leases, requiring lessees to recognize most leases on their balance sheet with a right-of-use asset and a corresponding lease liability. Leases will be classified as either finance or operating leases, which will impact the expense recognition of such leases over the lease term. The ASU also modifies the lease classification criteria for lessors and eliminates some of the real estate leasing guidance previously applied for certain leasing

 

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transactions. This ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We expect to adopt this ASU on January 1, 2019. Because of the number of leases we utilize to support our operations, the adoption of this ASU is expected to have a significant impact on our consolidated financial position and results of operations. We have organized an implementation group of cross-functional departmental management to ensure the completeness of its lease information, analyze the appropriate classification of current leases under the new standard, and develop new processes to execute, approve and classify leases on an ongoing basis. We have also engaged outside experts to assist in the development of this plan, as well as the identification and selection of software tools and processes to maintain lease information critical to applying the new standard. Management is currently evaluating the extent of this anticipated impact on our consolidated financial position and results of operations, and the quantitative and qualitative factors that will impact us as part of the adoption of this ASU, as well as any changes to our leasing strategy that may occur because of the changes to the accounting and recognition of leases.

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

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

In February 2018, the FASB issued ASU 2018-02, which allows for a reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects in accumulated other comprehensive income resulting from the enactment of the Tax Act and corresponding accounting treatment recorded in the fourth quarter of 2017. The ASU is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period for reporting periods for which financial statements have not yet been issued. We early adopted this ASU on January 1, 2018, resulting in a reclassification of $6 million from accumulated other comprehensive loss as a decrease to accumulated deficit.

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, among other things:

 

    general economic and business conditions, both nationally and in the regions in which we operate;

 

    the impact of changes made to the Affordable Care Act, the potential for repeal or additional changes to the Affordable Care Act, its implementation or its interpretation (including through executive orders), as well as changes in other federal, state or local laws or regulations affecting our business;

 

    the extent to which states support increases, decreases or changes in Medicaid programs, implement health insurance exchanges or alter the provision of healthcare to state residents through regulation or otherwise;

 

    the future and long-term viability of health insurance exchanges and potential changes to the beneficiary enrollment process;

 

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    risks associated with our substantial indebtedness, leverage and debt service obligations, and the fact that a substantial portion of our indebtedness will mature and become due in the near future, including our ability to refinance such indebtedness on acceptable terms or to incur additional indebtedness;

 

    demographic changes;

 

    changes in, or the failure to comply with, governmental regulations;

 

    potential adverse impact of known and unknown government investigations, audits, and federal and state false claims act litigation and other legal proceedings;

 

    our ability, where appropriate, to enter into and maintain provider arrangements with payors and the terms of these arrangements, which may be further affected by the increasing consolidation of health insurers and managed care companies and vertical integration efforts involving payors and healthcare providers;

 

    changes in, or the failure to comply with, contract terms with payors and changes in reimbursement rates paid by federal or state healthcare programs or commercial payors;

 

    any potential additional impairments in the carrying value of goodwill, other intangible assets, or other long-lived assets, or changes in the useful lives of other intangible assets;

 

    changes in inpatient or outpatient Medicare and Medicaid payment levels and methodologies;

 

    the effects related to the continued implementation of the sequestration spending reductions and the potential for future deficit reduction legislation;

 

    increases in the amount and risk of collectability of patient accounts receivable, including decreases in collectability which may result from, among other things, self-pay growth and difficulties in recovering payments for which patients are responsible, including co-pays and deductibles;

 

    the efforts of insurers, healthcare providers, large employer groups and others to contain healthcare costs, including the trend toward value-based purchasing;

 

    our ongoing ability to demonstrate meaningful use of certified EHR technology and recognize income for the related Medicare or Medicaid incentive payments, to the extent such payments have not expired;

 

    increases in wages as a result of inflation or competition for highly technical positions and rising supply and drug costs due to market pressure from pharmaceutical companies and new product releases;

 

    liabilities and other claims asserted against us, including self-insured malpractice claims;

 

    competition;

 

    our ability to attract and retain, at reasonable employment costs, 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 U.S. GAAP;

 

    the availability and terms of capital to fund any additional acquisitions or replacement facilities or other capital expenditures;

 

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    our ability to successfully make acquisitions or complete divestitures, including the disposition of hospitals and non-hospital businesses pursuant to our portfolio rationalization and deleveraging strategy, our ability to complete any such acquisitions or divestitures on desired terms or at all (including to realize the anticipated amount of proceeds from contemplated dispositions), the timing of the completion of any such acquisitions or divestitures, and our ability to realize the intended benefits from any such acquisitions or divestitures;

 

    the impact that changes in our relationships with joint venture or syndication partners could have on effectively operating our hospitals or ancillary services or in advancing strategic opportunities;

 

    our ability to successfully integrate any acquired hospitals, or to recognize expected synergies from acquisitions;

 

    the impact of seasonal severe weather conditions, including the timing and amount of insurance recoveries in relation to severe weather events such as Hurricanes Harvey and Irma, which impacted several of our affiliated hospitals in 2017;

 

    our ability to obtain adequate levels of general and professional liability insurance;

 

    timeliness of reimbursement payments received under government programs;

 

    effects related to outbreaks of infectious diseases;

 

    the impact of prior or potential future cyber-attacks or security breaches;

 

    any failure to comply with the terms of the Corporate Integrity Agreement;

 

    the concentration of our revenue in a small number of states;

 

    our ability to realize anticipated cost savings and other benefits from our current strategic and operational cost savings initiatives;

 

    changes in interpretations, assumptions and expectations regarding the Tax Act; and

 

    the other risk factors set forth in our 2017 Form 10-K, and our other public filings with the SEC.

Although we believe that these forward-looking statements are based upon reasonable assumptions, these assumptions are inherently subject to significant regulatory, economic and competitive uncertainties and contingencies, which are difficult or impossible to predict accurately and may be beyond our control. Accordingly, we cannot give any assurance that our expectations will in fact occur, and we caution that actual results may differ materially from those in the forward-looking statements. 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 undertake no obligation to revise or update any forward-looking statements, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to interest rate changes, primarily as a result of our Credit Facility 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 to manage our exposure to these fluctuations, as described under the heading “Liquidity and Capital Resources” in Part I, Item 2. 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. As of June 30, 2018, our approximately $2.2 billion notional amount of interest rate swap agreements outstanding represented approximately 64.6% of our variable rate debt.

A 1% change in interest rates on variable rate debt in excess of that amount covered by interest rate swaps would have resulted in interest expense fluctuating approximately $3 million and $8 million for the three months ended June 30, 2018 and 2017, respectively, and $6 million and $19 million for the six months ended June 30, 2018 and 2017, respectively.

 

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Item 4. Controls and Procedures

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 and Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on such evaluations, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective (at the reasonable assurance level) to ensure that the information required to be included in this report has been recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to ensure that the information required to be included in this report was accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

There have been no changes in our internal control over financial reporting during the three months ended June 30, 2018 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

PART II OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we receive inquiries or subpoenas from state regulators, state Medicaid Fraud Control units, fiscal intermediaries, the Centers for Medicare and Medicaid Services, the Department of Justice and other government entities regarding various Medicare and Medicaid issues. In addition to the matters discussed below, we are currently responding to subpoenas and administrative demands concerning (a) an inquiry regarding sleep labs at two Louisiana hospitals, (b) a civil investigative demand concerning short-term Medicaid eligibility determinations processed by third party vendors at one of our Pennsylvania hospitals, (c) certain cardiology procedures, medical records and quality assurance committee meeting minutes at a Tennessee hospital, (d) a civil investigative demand relating to the Company’s adoption of electronic health records technology and the meaningful use program, and (e) an inquiry regarding computer servers running the Windows 2003 operating system. In addition, we are subject to other claims and lawsuits arising in the ordinary course of our business including lawsuits and claims related to billing practices and the administration of charity care policies at our hospitals. Based on current knowledge, management does not believe that loss contingencies arising from pending legal, regulatory and governmental matters, including the matters described herein, will have a material adverse effect on the consolidated financial position or liquidity of the Company. However, in light of the inherent uncertainties involved in pending legal, regulatory and governmental matters, some of which are beyond our control, and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to our results of operations or cash flows for any particular reporting period. Settlements of suits involving Medicare and Medicaid issues routinely require both monetary payments as well as corporate integrity agreements. Additionally, qui tam or “whistleblower” actions initiated under the civil False Claims Act may be pending but placed under seal by the court to comply with the False Claims Act’s requirements for filing such suits. In September 2014, the Criminal Division of the United States Department of Justice, or DOJ, announced that all qui tam cases will be shared with their Division to determine if a parallel criminal investigation should be opened. The Criminal Division has also frequently stated an intention to pursue corporations in criminal prosecutions. From time to time, we detect issues of non-compliance with Federal healthcare laws pertaining to claims submission and reimbursement practices and/or financial relationships with physicians. We avail ourselves of various mechanisms to address potential overpayments arising out of these issues, including repayment of claims, rebilling of claims, and participation in voluntary disclosure protocols offered by the Centers for Medicare and Medicaid Services and the Office of the Inspector General. Participating in voluntary repayments and voluntary disclosure protocols can have the potential for significant settlement obligations or even enforcement action.

The following legal proceedings are described in detail because, although they may not be required to be disclosed in this Part II, Item 1 under SEC rules, due to the nature of the business of the Company, we believe that the following discussion of these matters may provide useful information to security holders. This discussion does not include claims and lawsuits covered by medical malpractice, general liability or employment practices insurance and risk retention programs, none of which claims or lawsuits would in any event be required to be disclosed in this Part II, Item 1 under SEC rules. Certain of the matters referenced below are also discussed in the Notes to Condensed Consolidated Financial Statements at Part I, Item 1 under Note 14 “Contingencies.”

 

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Community Health Systems, Inc. Legal Proceedings

Shareholder Litigation

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

Other Government Investigations

Dothan, Alabama – Independent Lab Billing. On February 12, 2015, our hospital in Dothan, Alabama received a Civil Investigative Demand, or CID, from the United States Department of Justice for information concerning its status as a “covered hospital” under certain lab billing regulations. These regulations discuss permissible billing of the technical component of lab tests performed for hospital patients by an independent laboratory. The CID seeks documentation and explanation whether the hospital qualifies as a covered hospital for billing purposes under the applicable regulations. The hospital received a second CID on April 25, 2018 seeking documents relating to the number of tests performed by a third-party laboratory on behalf of the hospital. However, the Department of Justice has agreed at this time that the hospital need not respond to this second CID. We are cooperating fully with this investigation.

St. Petersburg, Florida – On September 14, 2017, our hospital in St. Petersburg, Florida received a CID from the United States Department of Justice for information concerning its participation in the Florida Low Income Pool Program. The Low Income Pool Program, or LIP, is a funding pool to support healthcare providers that provide uncompensated care to Florida residents who are uninsured or underinsured. The CID seeks documentation related to agreements between the hospital and Pinellas County. We are cooperating fully with this investigation.

Commercial Litigation and Other Lawsuits

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

Cyber Attack. As previously disclosed on a Current Report on Form 8-K filed by us on August 18, 2014, our computer network was the target of an external, criminal cyber-attack that we believe occurred between April and June, 2014. We and Mandiant (a FireEye Company), the forensic expert engaged by us in connection with this matter, believe the attacker was a foreign “Advanced Persistent Threat” group who used highly sophisticated malware and technology to attack our systems. The attacker was able to

 

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bypass our security measures and successfully copy and transfer outside the Company certain non-medical patient identification data (such as patient names, addresses, birthdates, telephone numbers and social security numbers), but not including patient credit card, medical or clinical information. We worked closely with federal law enforcement authorities in connection with their investigation and possible prosecution of those determined to be responsible for this attack. Mandiant has conducted a thorough investigation of this incident and continues to advise us regarding security and monitoring efforts. We have provided appropriate notification to affected patients and regulatory agencies as required by federal and state law. We have offered identity theft protection services to individuals affected by this attack.

We have incurred certain expenses to remediate and investigate this matter. In addition, multiple purported class action lawsuits have been filed against us and certain subsidiaries. These lawsuits allege that sensitive information was unprotected and inadequately encrypted by us. The plaintiffs claim breach of contract and other theories of recovery, and are seeking damages, as well as restitution for any identity theft. On February 4, 2015, the United States Judicial Panel on Multidistrict Litigation ordered the transfer of the purported class actions pending outside of the District Court for the Northern District of Alabama to the District Court for the Northern District of Alabama for coordinated or consolidated pretrial proceedings. A consolidated complaint was filed and we filed a motion to dismiss on September 21, 2015, which was partially argued on February 10, 2016. In an oral ruling from the bench, the court greatly limited the potential class by ruling only plaintiffs with specific injury resulting from the breach had standing to sue. Further, on jurisdictional grounds, the court dismissed Community Health Systems, Inc. from all non-Tennessee based cases. Finally, the court set April 15, 2016 for further argument on whether the remaining plaintiffs have sufficiently stated a cause of action to continue their cases. On April 15, 2016 in an oral ruling from the bench, the court dismissed additional claims and following this oral ruling only eight of the forty plaintiffs remained with significant limitations imposed on their ability to assert claims for damages. These oral rulings were confirmed in a written order filed on September 12, 2016. On October 20, 2016, the plaintiffs filed a renewed motion for interlocutory appeal from the motion to dismiss ruling and on February 15, 2017 this motion was denied. Plaintiffs refiled their motion for permission to seek interlocutory appeal on March 15, 2017, and that motion was also denied. At this time, we are unable to predict the outcome of this litigation or determine the potential impact, if any, that could result from this litigation, but we intend to vigorously defend these lawsuits. This matter may subject us to additional litigation, potential governmental inquiries, potential reputational damage, and additional remediation, operating and other expenses.

Empire Health Foundation v. CHS/Community Health Systems, Inc., CHS Washington Holdings, LLC, Spokane Washington Hospital Company, LLC, Spokane Valley Washington Hospital Company, LLC. This suit was filed on June 12, 2017 by Empire Health Foundation claiming Deaconess and Valley Hospitals failed to abide by charity care obligations allegedly existing in the 2008 Asset Purchase Agreement between Empire Health System and Company affiliates. The court granted in part and denied in part the hospitals’ motion to dismiss on October 11, 2017. We believe these claims are without merit and will vigorously defend the case.

Mounce v. CHSPSC, LLC, et al. This case is a purported class action lawsuit filed in the United States District Court for the Western District of Arkansas and served on July 29, 2015, claiming our affiliated Arkansas hospitals violated payor contracts by allegedly improperly asserting hospital liens against third-party tortfeasors and seeking class certifications for any similarly situated plaintiffs at any affiliated Arkansas hospital. The court has certified a class. We have reached a tentative settlement with plaintiffs in this case. We are awaiting the trial court’s approval of the settlement.

Gibson v. Byrd Regional Medical Center. This case is a purported class action lawsuit filed in the 30th Judicial District Court for the State of Louisiana and served on August 3, 2016, claiming our affiliated Leesville, Louisiana hospital violated payor contracts by allegedly improperly asserting hospital liens against third-party tortfeasors and seeking class certifications for any similarly situated plaintiffs. The court has certified a class and denied our motion for summary judgment. We have appealed both rulings to the Louisiana Third Circuit Court of Appeals. That appeal is pending. We believe these claims are without merit and will vigorously defend the case.

Zwick Partners, LP and Aparna Rao, individually and on behalf of all others similarly situated v. Quorum Health Corporation, Community Health Systems, Inc., Wayne T. Smith, W. Larry Cash, Thomas D. Miller, and Michael J. Culotta. This purported class action lawsuit previously filed in the United States District Court, Middle District of Tennessee was amended on April 17, 2017 to include Community Health Systems, Inc., Wayne T. Smith and W. Larry Cash as additional defendants. The plaintiffs seek to represent a class of QHC shareholders and allege that the failure to record a goodwill and long-lived asset impairment charge against QHC at the time of the spin-off of QHC violated federal securities laws. The District Court denied all defendants’ motions to dismiss on April 20, 2018. We believe the claims are without merit and will vigorously defend the case.

 

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R2 Investments v Quorum Health Corporation; Community Health Systems, Inc.; Wayne T. Smith; W. Larry Cash; Thomas D. Miller; Michael J. Culotta; John A. Clerico; James S. Ely, III; John A. Fry; William Norris Jennings; Julia B. North; H. Mitchell Watson, Jr.; H. James Williams. This case is pending in the Circuit Court for Williamson County, Tennessee and was served on October 26, 2017. The plaintiff alleges common law fraud and violation of Tennessee securities fraud statutes in connection with its purchase of QHC stock and QHC senior secured notes. The court granted in part and denied in part the director defendants’ motion to dismiss and denied the remaining defendants’ motions to dismiss on May 11, 2018. We believe the claims are without merit and will vigorously defend the case.

Microsoft Corporation v Community Health Systems, Inc. This case is pending in the District Court for the Middle District of Tennessee and was served on March 16, 2018. The plaintiff alleges willful copyright infringement, contributing copyright infringement, breach of contract, and breach of the implied covenant of good faith and fair dealing in connection with the alleged use of certain Microsoft products by the Company related to certain of our divestitures. We have answered the complaint. We believe the claims are without merit and will vigorously defend the case.

Revenue Cycle Service Center and CHSPSC, LLC v QHCCS, LLC, Quorum Health Corporation and QHCCS, LLC v Community Health Systems, Inc. This case is pending in arbitration and was initiated by the Company on August 4, 2017. The Company is seeking unpaid amounts due from QHC related to a Computer Data Processing Transition Services Agreement and a Shared Services Transition Services Agreement (the “TSAs”) entered into between QHC and the Company in connection with the spin-off of QHC. QHC filed a counterclaim, claiming breach of contract and tortious interference, among others. The arbitration began on June 18, 2018 and continued through June 27, 2018. It will reconvene on October 1, 2018. On June 25, 2018, the arbitration panel issued a partial order that the TSAs were enforceable contracts and would continue by their terms until their expiration in April 2021. QHC had attempted to challenge the legal enforceability of both of those agreements. We believe the counterclaim is without merit and will vigorously defend against it.

Certain Legal Proceedings Related to HMA

Medicare/Medicaid Billing Lawsuits

Beginning during the week of December 16, 2013 eleven qui tam lawsuits filed by private individuals against HMA were unsealed in various United States district courts. The United States has elected to intervene in all or part of eight of these matters; namely U.S. ex rel. Craig Brummer v. Health Management Associates, Inc. et al. (Middle District Georgia) (“Brummer”); U.S. ex rel. Ralph D. Williams v. Health Management Associates, Inc. et al. (Middle District Georgia) (“Williams”); U.S. ex rel. Scott H. Plantz, M.D. et al. v. Health Management Associates, Inc., et al. (Northern District Illinois) (“Plantz”); U.S. ex rel. Thomas L. Mason, M.D. et al. v. Health Management Associates, Inc. et al. (Western District North Carolina) (“Mason”); U.S. ex rel. Jacqueline Meyer, et al. v. Health Management Associates, Inc., Gary Newsome et al. (“Jacqueline Meyer”) (District of South Carolina); U.S. ex rel. George Miller, et al. v. Health Management Associates, Inc. (Eastern District of Pennsylvania) (“Miller”); U.S. ex rel. Bradley Nurkin v. Health Management Associates, Inc. et al. (Middle District of Florida) (“Nurkin”); and U.S. ex rel. Paul Meyer v. Health Management Associates, Inc. et al. (Southern District Florida) (“Paul Meyer”). The United States has elected to intervene with respect to allegations in these cases that certain HMA hospitals inappropriately admitted patients and then submitted reimbursement claims for treating those individuals to federal healthcare programs in violation of the False Claims Act or that certain HMA hospitals had inappropriate financial relationships with physicians which violated the Stark law, the Anti-Kickback Statute, and the False Claims Act. Certain of these complaints also allege the same actions violated various state laws which prohibit false claims. The United States has declined to intervene in three of the eleven matters, namely U.S. ex rel. Anita France, et al. v. Health Management Associates, Inc. (Middle District Florida) (“France”) which involved allegations of wrongful billing and was settled; U.S. ex rel. Sandra Simmons v. Health Management Associates, Inc. et al. (Eastern District Oklahoma) (“Simmons”) which alleges unnecessary surgery by an employed physician and which was settled as to all allegations except alleged wrongful termination; and U.S. ex rel. David Napoliello, M.D. v. Health Management Associates, Inc. (Middle District Florida) (“Napoliello”) which alleges inappropriate admissions. On April 3, 2014, the Multi District Litigation Panel ordered the transfer and consolidation for pretrial proceedings of the eight intervened cases, plus the Napoliello matter, to the District of the District of Columbia under the name In Re: Health Management Associates, Inc. Qui Tam Litigation. On June 2, 2014, the court entered a stay of this matter until October 6, 2014, which was subsequently extended until February 27, 2015, May 27, 2015, September 25, 2015, January 25, 2016, May 25, 2016, September 26, 2016, December 27, 2016, April 27, 2017, August 28, 2017, December 18, 2017, March 19, 2018, June 18, 2018 and now until September 18, 2018. We intend to defend against the allegations in these matters, but have also been cooperating with the government in the ongoing investigation of these allegations. We have been in discussions with the Civil Division of the DOJ regarding the resolution of these matters. During the first quarter of 2015, we were informed the Criminal Division continues to investigate former executive-level employees of HMA and continues to consider whether any HMA entities should be held criminally

 

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liable for the acts of the former HMA employees. We are voluntarily cooperating with these inquiries and have not been served with any subpoenas or other legal process.

Qui Tam Matters Where the Government Declined Intervention

U.S. and the State of Mississippi ex rel. W. Blake Vanderlan, M.D. v. Jackson HMA, LLC d/b/a Central Mississippi Medical Center and Merit Health Central (SD Mississippi). By order filed on August 31, 2017, the court ordered the unsealing of this matter. The unsealing revealed that on August 31, 2017 the United States had declined to intervene in the allegations that certain alleged EMTALA violations at the hospital resulted in a violation of the False Claims Act. The hospital’s motion to dismiss is pending. We believe this matter is without merit and will vigorously defend this case.

Securities and Exchange Commission Investigations

On April 25, 2013, HMA received a subpoena from the SEC, issued pursuant to an investigation, requesting documents related to accounts receivable, billing write-downs, contractual adjustments, reserves for doubtful accounts, and accounts receivable aging, and revenue from Medicare, Medicaid and from privately insured or uninsured patients. On June 5, 2013, HMA received a supplemental subpoena from the SEC which requests additional financial reports. Subsequent subpoenas have been directed to us, our accountants, the former accountants for HMA and certain individuals. On July 17, 2014, we received an additional subpoena from the SEC seeking numerous categories of documents relating to the financial statement adjustments taken in the fourth quarter of 2013 in the areas described above. This investigation is ongoing and we are unable to determine the potential impact, if any, of this investigation.

Management of Significant Legal Proceedings

In accordance with our governance documents, including our Governance Guidelines and the charter of the Audit and Compliance Committee, our management of significant legal proceedings is overseen by the independent members of the Board of Directors and, in particular, the Audit and Compliance Committee. The Audit and Compliance Committee is charged with oversight of compliance, regulatory and litigation matters, and enterprise risk management. Management has been instructed to refer all significant legal proceedings and allegations of financial statement fraud, error, or misstatement to the Audit and Compliance Committee for its oversight and evaluation. Consistent with New York Stock Exchange, Nasdaq and Sarbanes-Oxley independence requirements, the Audit and Compliance Committee is comprised entirely of individuals who are independent of our management, and all four members of the Audit and Compliance Committee are “audit committee financial experts” as defined in the Securities Exchange Act of 1934, as amended.

In addition, the Audit and Compliance Committee and the other independent members of the Board of Directors oversee the functions of the voluntary compliance program, including its auditing and monitoring functions and confidential disclosure program. In recent years, the voluntary compliance program has addressed the potential for a variety of billing errors that might be the subject of audits and payment denials by the CMS Recovery Audit Contractors’ permanent project, including MS-DRG coding, outpatient hospital and physician coding and billing, and medical necessity for services (including a focus on hospital stays of very short duration). Efforts by management, through the voluntary compliance program, to identify and limit risk from these government audits have included significant policy and guidance revisions, training and education, and auditing. The Board of Directors now oversees and reviews periodic reports of our compliance with the Corporate Integrity Agreement, or CIA, that we entered into with the United States Department of Health and Human Services Office of the Inspector General during 2014.

Item 1A. Risk Factors

There have been no material changes with regard to the risk factors previously disclosed in the 2017 Form 10-K.

 

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Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

The following table contains information about our purchases of common stock during the three months ended June 30, 2018.

 

                     Period                    

   Total Number of Shares
Purchased (a)
     Average Price Paid per
Share
     Total Number of Shares
Purchased as Part of Publicly
Announced Plans  or
Programs(b)
     Maximum Number of Shares
That May Yet Be Purchased
Under the Plans  or
Programs(b)
 

April 1, 2018 -

           

April 30, 2018

     3,254      $ 4.16               9,467,812  

May 1, 2018 -

           

May 31, 2018

     -        -               9,467,812  

June 1, 2018 -

           

June 30, 2018

     15,712        3.97               9,467,812  
  

 

 

       

 

 

    

Total

     18,966      $ 4.00               9,467,812  
  

 

 

       

 

 

    

 

  (a) Includes 18,966 shares withheld by us to satisfy the payment of tax obligations related to the vesting of restricted stock awards.

 

  (b) On November 9, 2015, we announced the adoption of a new open market repurchase program for up to 10,000,000 shares of our common stock, not to exceed $300 million in repurchases. The new repurchase program will expire on the earlier of November 5, 2018, when the maximum number of shares has been repurchased, or when the maximum dollar amount has been expended. No shares were repurchased under this program during the three months ended June 30, 2018.

With the exception of a special cash dividend of $0.25 per share paid by us in December 2012, historically, we have not paid any cash dividends. Subject to certain exceptions, our Credit Facility limits the ability of our subsidiaries to pay dividends and make distributions to us, and limits our ability to pay dividends and/or repurchase stock, to an amount not to exceed $200 million in the aggregate plus an additional $25 million in any particular year plus the aggregate amount of proceeds from the exercise of stock options. The indentures governing each series of our outstanding notes also restrict our subsidiaries from, among other matters, paying dividends and making distributions to us, which thereby limits our ability to pay dividends and/or repurchase stock. As of June 30, 2018, under the most restrictive test in these agreements (and subject to certain exceptions), we have approximately $225 million available with which to pay permitted dividends and/or repurchase shares of our stock.

Item 3. Defaults Upon Senior Securities

None.

Item  4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

 

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Item 6. Exhibits

 

      No.                   

Description

4.1

      

Indenture, dated as of June 22, 2018, among CHS/Community Health Systems, Inc., Community Health Systems, Inc., the guarantors party thereto, Regions Bank, as trustee and as collateral agent, relating to the Junior-Priority Secured Notes due 2023 (incorporated by reference to Exhibit 4.01 to Community Health Systems, Inc.’s Current Report on Form 8-K filed June 22, 2018 (No. 001-15925))

4.2

      

Indenture, dated as of June 22, 2018, among CHS/Community Health Systems, Inc., Community Health Systems, Inc., the guarantors party thereto, Regions Bank, as trustee and as collateral agent, relating to the 8.125% Junior-Priority Secured Notes due 2024 (incorporated by reference to Exhibit 4.02 to Community Health Systems, Inc.’s Current Report on Form 8-K filed June 22, 2018 (No. 001-15925))

4.3

      

Junior-Priority Collateral Agreement, dated as of June 22, 2018, among CHS/Community Health Systems, Inc., Community Health Systems, Inc., the subsidiaries party thereto and Regions Bank, as junior-priority collateral agent (incorporated by reference to Exhibit 4.03 to Community Health Systems, Inc.’s Current Report on Form 8-K filed June 22, 2018 (No. 001-15925))

4.4

      

Amended and Restated ABL Intercreditor Agreement, dated as of June 22, 2018, among JPMorgan Chase Bank, N.A., as ABL Agent, Credit Suisse AG, as senior-priority collateral agent, Credit Suisse AG, as senior-priority non-ABL loan agent, Regions Bank, as 2021 secured notes trustee, as 2023 secured notes trustee, as junior-priority collateral agent and as trustee under the Indentures, CHS/Community Health Systems, Inc., Community Health Systems, Inc., the subsidiary guarantors party thereto and each additional agent from time to time party thereto (incorporated by reference to Exhibit 4.04 to Community Health Systems, Inc.’s Current Report on Form 8-K filed June 22, 2018 (No. 001-15925))

4.5

      

Senior-Junior Lien Intercreditor Agreement, dated as of June 22, 2018, among CHS/Community Health Systems, Inc., Community Health Systems, Inc., the subsidiaries party thereto, Credit Suisse AG, Cayman Islands Branch, as initial senior-priority collateral agent, Regions Bank, as initial junior-priority collateral agent and each additional agent from time to time party thereto (incorporated by reference to Exhibit 4.05 to Community Health Systems, Inc.’s Current Report on Form 8-K filed June 22, 2018 (No. 001-15925))

4.6

      

Junior-Priority Lien Pari Passu Intercreditor Agreement, dated as of June 22, 2018, among Regions Bank, as collateral agent, Regions Bank, in its capacity as trustee under the 2023 Notes Indenture, Regions Bank, in its capacity as trustee under the 2024 Notes Indenture and each additional authorized representative from time to time party thereto (incorporated by reference to Exhibit 4.06 to Community Health Systems, Inc.’s Current Report on Form 8-K filed June 22, 2018 (No. 001-15925))

4.7

      

Indenture, dated as of July 6, 2018, among CHS/Community Health Systems, Inc., Community Health Systems, Inc., the guarantors party thereto, Regions Bank, as trustee, and Credit Suisse AG, as collateral agent, relating to the 8.625% Senior Secured Notes due 2024 (incorporated by reference to Exhibit 4.1 to Community Health Systems, Inc.’s Current Report on Form 8-K filed July 6, 2018 (No. 001-15925))

10.1

      

ABL Credit Agreement, dated as of April 3, 2018, among CHS/Community Health Systems, Inc., as the Borrower, Community Health Systems, Inc., as the Parent, the subsidiaries of the Borrower party thereto, the lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent (incorporated by reference to Exhibit 10.1 to Community Health Systems, Inc.’s Current Report on Form 8-K filed April 3, 2018 (No. 001-15925))

 

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10.2

      

Guarantee and Collateral Agreement to ABL Credit Agreement, dated as of April 3, 2018, among CHS/Community Health Systems, Inc., as the Borrower, Community Health Systems, Inc., as the Parent, the subsidiaries of the Borrower party thereto, and JPMorgan Chase Bank, N.A., as Collateral Agent (incorporated by reference to Exhibit 10.4 to Community Health Systems, Inc.’s Quarterly Report on Form 10-Q filed May 2, 2018 (No. 001-15925))

10.3

 

    

Community Health Systems, Inc. 2009 Stock Option and Award Plan, as amended and restated as of March 14, 2018 (incorporated by reference to Exhibit 10.1 to Community Health Systems, Inc.’s Current Report on Form 8-K filed May 15, 2018 (No. 001-15925)

10.4

   

*

  

Amendment No. 1 to ABL Credit Agreement, dated as of May  3, 2018, among CHS/Community Health Systems, Inc., as the Borrower, Community Health Systems, Inc., as the Parent, the subsidiaries of the Borrower party thereto, the lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent

10.5

 

 

*

  

CHS/Community Health Systems, Inc. 2018 Supplemental Executive Retirement Plan, effective January 1, 2018 (in which certain executive officers, but not any current named executive officers, participate)

12

   

*

  

Computation of Ratio of Earnings to Fixed Charges

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

101.INS

   

*

   XBRL Instance Document

101.SCH

   

*

   XBRL Taxonomy Extension Schema

101.CAL

   

*

   XBRL Taxonomy Extension Calculation Linkbase

101.DEF

   

*

   XBRL Taxonomy Extension Definition Linkbase

101.LAB

   

*

   XBRL Taxonomy Extension Label Linkbase

101.PRE

   

*

   XBRL Taxonomy Extension Presentation Linkbase

 

 

 

* Filed herewith.
** Furnished herewith
Indicates a management contract or compensatory plan or arrangement

 

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SIGNATURES

Pursuant to the requirements of section 13 or 15(d) 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.

 

 

COMMUNITY HEALTH SYSTEMS, INC.                

                                   (Registrant)

  By:   

/s/   Wayne T. Smith                             

     Wayne T. Smith
     Chairman of the Board and
     Chief Executive Officer
     (principal executive officer)
  By:   

/s/   Thomas J. Aaron                                

     Thomas J. Aaron
     Executive Vice President and
     Chief Financial Officer
     (principal financial officer)
  By:   

/s/   Kevin J. Hammons                     

     Kevin J. Hammons
     Senior Vice President, Assistant Chief Financial
     Officer and Chief Accounting Officer
     (principal accounting officer)

Date: July 27, 2018

 

86

EX-10.4

EXHIBIT 10.4

AMENDMENT NO. 1 dated as of May 3, 2018 (this “Amendment”), to the ABL Credit Agreement dated as of April 3, 2018 (as heretofore amended, supplemented, amended and restated or otherwise modified, the “ABL Credit Agreement”), among CHS/COMMUNITY HEALTH SYSTEMS, INC., a Delaware corporation (the “Borrower”), COMMUNITY HEALTH SYSTEMS, INC., a Delaware corporation (“Parent”), the lenders party thereto (the “Lenders”) and JPMORGAN CHASE BANK, N.A., as administrative agent (in such capacity, the “Administrative Agent”) and as collateral agent for the Lenders.

PRELIMINARY STATEMENT

SECTION 1. Defined Terms. Capitalized terms used but not otherwise defined herein (including the Preliminary Statement hereto) shall have the meanings assigned thereto in the ABL Credit Agreement. The provisions of Section 1.02 of the ABL Credit Agreement are hereby incorporated by reference herein, mutatis mutandis. This Amendment shall be a “Loan Document” for all purposes of the ABL Credit Agreement and the other Loan Documents.

SECTION 2. Amendments to the ABL Credit Agreement. Subject to the satisfaction of the conditions set forth in Section 4 hereof, the ABL Credit Agreement is hereby amended as follows, effective as of the Amendment No. 1 Effective Date (as defined below):

Section 6.01(x) of the ABL Credit Agreement is hereby amended and restated in its entirety as follows:

(x) Other Junior Secured Debt of Loan Parties (and not guaranteed by any entities that are not Loan Parties), provided that (x) 100% of the Net Cash Proceeds of such Other Junior Secured Debt refinances or replaces any existing Indebtedness of Loan Parties (including unpaid accrued interest and fees on such Indebtedness and other reasonable amounts paid and fees and expenses incurred in connection with such refinancing or replacement) or (y) such Other Junior Secured Debt is exchanged for existing Indebtedness of Loan Parties (in each case other than Indebtedness incurred pursuant to Section 6.01(o)), provided further that neither the final maturity nor the weighted average life to maturity of such Other Junior Secured Debt is shorter than the applicable Indebtedness being refinanced, replaced or exchanged.

SECTION 3. Representations and Warranties. To induce the other parties hereto to enter into this Amendment, each of Parent and the Borrower hereby represents and warrants to each of the Lenders party hereto, the Administrative Agent, the Issuing Banks and the Collateral Agent that, after giving effect to this Amendment:


(a) The representations and warranties set forth in Article III of the ABL Credit Agreement and in each other Loan Document are true and correct in all material respects (or, in the case of representations and warranties qualified by materiality or Material Adverse Effect, in all respects) on and as of the Amendment No. 1 Effective Date with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall have been true and correct in all material respects (or, in the case of the representations and warranties qualified by materiality or Material Adverse Effect, in all respects) as of such earlier date.

(b) No Default or Event of Default has occurred and is continuing.

(c) None of the Security Documents in effect on the Amendment No. 1 Effective Date will be rendered invalid, non-binding or unenforceable against any Loan Party as a result of this Amendment. The Guarantees created under such Security Documents will continue to guarantee the Obligations to the same extent as they guaranteed the Obligations immediately prior to the Amendment No. 1 Effective Date. The Liens created under such Security Documents will continue to secure the Obligations, and will continue to be perfected, in each case, to the same extent as they secured the Obligations or were perfected immediately prior to the Amendment No. 1 Effective Date.

SECTION 4. Effectiveness. This Amendment shall become effective on and as of the date on which the Administrative Agent shall have received duly executed and delivered counterparts of this Amendment that, when taken together, bear the signatures of Parent, the Borrower and the Required Lenders (such date, the “Amendment No. 1 Effective Date”).

SECTION 5. Miscellaneous. Except as expressly set forth herein, this Amendment shall not constitute a waiver or amendment of, or otherwise affect the rights and remedies of the Administrative Agent, the Lenders or any other Secured Party under the ABL Credit Agreement or any other Loan Document. From and after the Amendment No. 1 Effective Date, any reference to the ABL Credit Agreement shall mean the ABL Credit Agreement as modified by this Amendment. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Delivery by electronic transmission (e.g., “pdf”) of an executed counterpart of a signature page to this Amendment shall be effective as delivery of an original executed counterpart of this Amendment. This amendment shall be governed by, and construed in accordance with, the laws of the State of New York.

[Remainder of page intentionally left blank]

 

2


IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers as of the date first above written.

 

  CHS/COMMUNITY HEALTH SYSTEMS, INC.,
      By:   
           /s/ Edward W. Lomicka                        
     Name: Edward W. Lomicka
     Title: Vice President and Treasurer
  COMMUNITY HEALTH SYSTEMS, INC.,
      By:   
           /s/ Edward W. Lomicka                        
     Name: Edward W. Lomicka
     Title: Vice President and Treasurer

 

[Signature Page to Amendment No. 1 to the ABL Credit Agreement]


   JPMORGAN CHASE BANK, N.A.,

as a Lender, an Issuing Bank and the Administrative Agent and Collateral Agent

   By:   
            /s/ Dawn Lee Lum                                               
      Name: Dawn Lee Lum
      Title:   Executive Director

 

[Signature Page to Amendment No. 1 to the ABL Credit Agreement]


  CITIBANK, N.A.,

as a Lender and an Issuing Bank

  By:   
         /s/ Christopher Marino                                       
     Name: Christopher Marino
     Title:   Vice President and Director

 

[Signature Page to Amendment No. 1 to the ABL Credit Agreement]


  CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH,

as a Lender and an Issuing Bank

  By:   
         /s/ John D. Toronto                                              
     Name: John D. Toronto
     Title:   Authorized Signatory
  By:   
         /s/ Warren Van Heyst                                          
     Name: Warren Van Heyst
     Title:   Authorized Signatory

 

[Signature Page to Amendment No. 1 to the ABL Credit Agreement]


   BANK OF AMERICA, N.A.,

as a Lender and an Issuing Bank

   By:   
          /s/ Steven L. Hipsman                                         
      Name: Steven L. Hipsman
      Title:   Senior Vice President

 

[Signature Page to Amendment No. 1 to the ABL Credit Agreement]


   ROYAL BANK OF CANADA,

as a Lender and an Issuing Bank

   By:  
         /s/ Farhan Lodhi                                                       
     Name: Farhan Lodhi
     Title:   Attorney In Fact
   By:  
     /s/ Anna Bernat                                                             
     Name: Anna Bernat
     Title:   Attorney In Fact

 

[Signature Page to Amendment No. 1 to the ABL Credit Agreement]


  WELLS FARGO BANK, NATIONAL ASSOCIATION,

as a Lender and an Issuing Bank

  By:  
        /s/ Dhaval Tejani                                                         
    Name: Dhaval Tejani
    Title:   Duly Authorized Signatory

 

[Signature Page to Amendment No. 1 to the ABL Credit Agreement]


  LENDER SIGNATURE PAGE TO THE CHS/COMMUNITY HEALTH SYSTEMS, INC. ABL CREDIT AGREEMENT*
  Name of Lender:
                                                                                           
  By:  
                                                                                            
    Name:                                                                       
    Title:                                                                         
  For Lenders requiring a second signature line:
  By:  
                                                                                            
    Name:                                                                       
    Title:                                                                         

 

* on file with Agent

 

[Signature Page to Amendment No. 1 to the ABL Credit Agreement]

EX-10.5

Exhibit 10.5

 

 

 

CHS/COMMUNITY HEALTH SYSTEMS, INC.

2018 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

 

 

 

January 1, 2018


TABLE OF CONTENTS

 

        Page 
1.   PURPOSE   1  
2.   DEFINITIONS AND CONSTRUCTION   1  
  2.1   Definitions   1  
  2.2   Captions; Section References   5  
  2.3   Severability   5  
3.   ADMINISTRATION   5  
  3.1   The Committee   5  
  3.2   Authority of the Committee   5  
  3.3   Decisions Binding   5  
  3.4   Plan Administrator   5  
  3.5   Costs and Expenses   6  
  3.6   Indemnification   6  
4.   PARTICIPATION IN THE PLAN   6  
  4.1   Notification of Participation   6  
  4.2   Termination of Participation   6  
5.   BENEFITS UPON SEPARATION FROM SERVICE OR DEATH   6  
  5.1   Normal Retirement Benefit   6  
  5.2   Early Retirement Benefit   7  
  5.3   Disability Benefit   8  
  5.4   Death Benefit   8  
  5.5   Intentionally omitted   8  
6.   BENEFITS UPON CHANGE IN CONTROL   8  
  6.1   Change in Control Benefit   8  
  6.2   Participants Under Age 55   8  
  6.3   Additional Years of Service   9  
  6.4   Certain Terminations of Employment   9  
7.   BENEFICIARIES   9  
8.   RABBI TRUST   9  
9.   WITHHOLDING   9  
10.   MODIFICATION AND TERMINATION   9  
  10.1   Amendment and Termination   9  
  10.2   Effect on Participants   9  
  10.3   No Obligation to Continue Plan   10  

 

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TABLE OF CONTENTS

(continued)

 

        Page 
11.   CLAIMS AND REVIEW PROCEDURES   10  
12.   MISCELLANEOUS PROVISIONS   10  
  12.1   Non-Transferability   10  
  12.2   Payment of Benefits   10  
  12.3   No Rights of Employment   10  
  12.4   Applicable Law   11  
  12.5   Payment to Minors   11  
EXHIBIT A     Date of Hire for Certain Plan Participants   12  

 

- ii -


CHS/COMMUNITY HEALTH SYSTEMS, INC.

2018 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

WHEREAS, CHS/Community Health Systems, Inc. (the “Company”) maintains the CHS/Community Health Systems, Inc. Amended and Restated Supplemental Executive Retirement Plan (the “Original Plan”); and

WHEREAS, the Original Plan, as amended, continues in full force and effect; and

WHEREAS, the Company, in order to more closely align with competitive market levels for certain employees of affiliates of the Company, now wishes to establish the CHS/Community Health Systems, Inc. 2018 Supplemental Executive Retirement Plan (the “Plan”), effective January 1, 2018.

NOW, THEREFORE, the Plan shall provide as follows:

1.         Purpose. The purpose of this Plan is to advance the interests of CHS by encouraging officers and other key employees of the Company and its subsidiaries who will largely be responsible for the long-term success and development of CHS to continue their employment with the Company and its subsidiaries by providing retirement benefits for them. The Plan is also intended to assist the Company and its subsidiaries in attracting and retaining such employees and stimulating their efforts on behalf of the Company and its subsidiaries.

2.         Definitions and Construction.

2.1    Definitions. As used in the Plan, terms defined parenthetically immediately after their use shall have the respective meanings provided by such definitions, and the following words and phrases shall have the meanings specified below (in either case, such terms shall apply equally to both the singular and plural forms of the terms defined), unless a different meaning is plainly required by the context:

(a)        “Actuarial Equivalent” shall mean a benefit of equivalent value calculated based on the Uninsured Pensioners 1994 Mortality Table including Projections to 2003 using 50% of the Male Rates and 50% of the Female Rates as prescribed for qualified retirement plans under the General Agreement on Trades and Tariffs (GATT) and a discount rate equal to the yield on 10-Year Treasury Bonds for the twenty-four (24) months preceding the last day of the previous month (as determined by the Committee in good faith), but in no event greater than 4% per annum.

(b)        “Annual Retirement Benefit” shall mean an amount equal to a Participant’s Final Average Earnings multiplied by the lesser of (i) 60%, or (ii) a percentage equal to 2% multiplied by the Participant’s years of Service.

(c)        “Beneficiary” shall mean the person or persons designated by a Participant pursuant to Section 7 to receive the benefits to which a Participant is entitled upon the death of a Participant.

 

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(d)        “Board” shall mean the Board of Directors of the Company or, as the context requires, CHS.

(e)        Intentionally omitted.

(f)        Change in Control” shall mean the occurrence of any of the following events, but only to the extent such event would constitute a change in the ownership or effective control of CHS, or in the ownership of a substantial portion of the assets of CHS, as set forth in Code Section 409A(a)(2)(A)(v) and defined in regulations promulgated by the U.S. Department of Treasury thereunder:

(1)        An acquisition (other than directly from CHS) of any voting securities of CHS (“Voting Securities”) by any Person (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”)) immediately after which such Person has Beneficial Ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the then-outstanding shares of Common Stock of CHS (“Shares”) or the combined voting power of CHS’ then-outstanding Voting Securities; provided, however, in determining whether a Change in Control has occurred pursuant to this Section 2.1(f)(1), Shares or Voting Securities which are acquired in a Non-Control Acquisition (as hereinafter defined) shall not constitute an acquisition that would cause a Change in Control. A “Non-Control Acquisition” shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof) maintained by the Company or any Subsidiary, (ii) CHS or any Subsidiary, or (iii) any Person in connection with a Non-Control Transaction (as hereinafter defined);

(2)        The individuals who, as of the date hereof, are members of the Board of CHS (“Incumbent Board”), cease for any reason to constitute at least a majority of the members of the Board of CHS or, following a Merger (as hereinafter defined) that results in CHS having a Parent Corporation (as hereinafter defined), the board of directors of the ultimate Parent Corporation; provided, however, that if the election, or nomination for election, by the CHS common stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board of CHS, such new director shall, for purposes of the Plan, be considered as a member of the Incumbent Board of CHS; provided further, however, that no individual shall be considered a member of the Incumbent Board of CHS if such individual initially assumed office as a result of either an actual or threatened Election Contest (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of CHS (“Proxy Contest”), including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or

(3)        The consummation of:

(A)        A merger, consolidation or reorganization with or into the Company or in which securities of the Company are issued (“Merger”), unless such Merger, is a Non-Control Transaction. A Non-Control Transaction shall mean a Merger where:

(i)        the stockholders of CHS immediately before such Merger own, directly or indirectly, immediately following such Merger, at least 50% of the combined voting power of the outstanding voting securities of (x) the corporation resulting from such Merger (“Surviving Corporation”), if 50% or more of the combined voting power of the then outstanding voting securities of the Surviving Corporation is not Beneficially Owned, directly or indirectly, by

 

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another Person (“Parent Corporation”), or (y) if there are one or more Parent Corporations, the ultimate Parent Corporation; and

(ii)        the individuals who were members of the Incumbent Board of CHS immediately prior to the execution of the agreement providing for such Merger, constitute at least a majority of the members of the board of directors of (x) the Surviving Corporation, if there is no Parent Corporation, or (y) if there are one or more Parent Corporations, the ultimate Parent Corporation.

(B)        A complete liquidation or dissolution of CHS; or

(C)        The sale or other disposition of all, or substantially all, of the assets of CHS to any Person (other than a transfer to a Subsidiary or under conditions that would constitute a Non-Control Transaction with the disposition of assets being regarded as a Merger for this purpose or the distribution to the CHS’ stockholders of the stock of a Subsidiary or any other assets).

Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (“Subject Person”) acquired Beneficial Ownership of more than the permitted amount of the then-outstanding Shares or Voting Securities as a result of the acquisition of Shares or Voting Securities by CHS which, by reducing the number of Shares or Voting Securities then-outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Shares or Voting Securities by CHS, and after such share acquisition by CHS the Subject Person becomes the Beneficial Owner of any additional Shares or Voting Securities which increases the percentage of the then-outstanding Shares or Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur.

(g)        “CHS” shall mean Community Health Systems, Inc., a Delaware corporation.

(h)        “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor thereto.

(i)        “Committee” shall mean the Compensation Committee of the Board of CHS.

(j)        “Company” shall mean CHS/Community Health Systems, Inc., a Delaware corporation.

(k)        “Compensation” shall mean only the salary plus the bonus paid to a Participant.

(l)        “Disabled Participant” shall mean any Participant who has been credited with five years of Service and who Separates from Service by reason of being Totally and Permanently Disabled.

(m)        “Early Retirement Date” shall mean the date a Participant has been credited with at least five years of Service and is at least 55 years old.

(n)        “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.

(o)        “Final Average Earnings” shall mean an amount equal to (i) the sum of a Participant’s Compensation for the highest three years out of the last ten full years of Service

 

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preceding a Participant’s termination of employment with the Company and its Subsidiaries, divided by (ii) three.

(p)        “Key Employee” shall mean an employee (other than an Officer) of CHS, the Company, or a Subsidiary who has been selected by the Committee to be a Participant.

(q)        “Monthly Retirement Income” shall mean a monthly income computed as provided in the Plan.

(r)        “Normal Retirement Date” shall mean the day of a Participant’s 65th birthday.

(s)        “Officer” shall mean all employees of CHS, the Company, or a Subsidiary who have been duly elected as officers of CHS by the Board of CHS.

(t)        “Participant” shall mean any Officer or Key Employee.

(u)        “Primary Insurance Amount” as of any date shall mean the monthly amount of Social Security old age and survivor disability insurance benefits received or receivable by a Participant commencing at the Participant’s unreduced Social Security retirement age. The amount will be calculated based on the Social Security Act in effect as of the date of calculation, without regard to any dependent benefits.

(v)        “Rabbi Trust” shall mean the trust to be established by the Company in accordance with the provisions of Section 8.

(w)        “Retired Participant” shall mean any Participant who has ceased to be an employee of the Company or a Subsidiary and who is entitled to receive a benefit under Section 5 of the Plan.

(x)        “Separation from Service” or “Separate from Service” means a separation from service as set forth in Code Section 409A(a)(2)(A)(i) and Treasury Regulation Section 1.409A-1(h), provided, however, that a Participant shall not be deemed to have Separated from Service on account of a leave of absence until the first date immediately following the end of a 29-month period of leave (if the employment relationship is not terminated sooner) where such leave is due to any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than six months and where such impairment causes the Participant to be unable to perform the duties of his or her position of employment or any substantially similar position of employment.

(y)        “Service” shall mean one of the following: (i) in the case of an Officer, all years and completed months of service with the Company and any Subsidiary, whether before or after the adoption of the Plan, but not beginning earlier than January 1, 1997 (as indicated for some Participants in Exhibit A hereto) or, in the alternative, if the Committee so specifies for a designated Participant, additional years and months of service, provided, however, such additional years and months of service shall not exceed two years for every year of completed service and two months for every one month of completed service with the Company, but not beginning before January 1, 1997, and (ii) in the case of an Officer or Key Employee who becomes a Participant after January 1, 2003, all years and completed months of service following the date the person becomes a Participant. If a Participant’s name is not listed on Exhibit A, such Participant’s Service shall begin on the date described in clause (ii) above.

 

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(z)        “Specified Employee” means “specified employee” as defined in Code Section 409A(a)(2)(B)(i) and Treasury Regulation Section 1.409A-1(i).

(aa)     “Subsidiary” shall mean, with respect to CHS or the Company, as applicable, any corporation or other entity of which a majority of its voting power, equity securities or equity interests is owned, directly or indirectly, by CHS or the Company, as applicable.

(bb)     “Total and Permanent Disability” shall mean a physical or mental condition that renders a Participant eligible for disability benefits under the long-term disability insurance program in effect at the Company as of January 1, 2009, even if such Participant no longer participates in such long-term disability program on the date such physical or mental condition occurs.

2.2      Captions; Section References. Section titles or captions contained in the Plan are inserted only as a matter of convenience and reference, and in no way define, limit, extend or describe the scope of the Plan, or the intent of any provision hereof. All references herein to Sections shall refer to Sections of the Plan unless the context clearly requires otherwise.

2.3      Severability. If any provision of the Plan, or the application thereof to any person, entity or circumstances, shall be invalid or unenforceable to any extent, the remainder of the Plan, and the application of such provision to other persons, entities or circumstances, shall not be affected thereby and the Plan shall be enforced to the greatest extent permitted by law.

3.          Administration.

3.1      The Committee. The Plan shall be administered by the Committee. The Committee shall meet at such times and places as it determines and may meet through a telephone conference call.

3.2      Authority of the Committee. Subject to the provisions of the Plan, the Committee shall have full authority to:

(a)      Select Key Employees.

(b)      Construe and interpret the Plan.

(c)      Establish, amend and rescind rules and regulations for the Plan’s administration.

(d)      Make all other determinations which may be necessary or advisable for the administration of the Plan.

To the extent permitted by law, the Committee may delegate its authority as identified hereunder.

3.3      Decisions Binding. All determinations and decisions made by the Committee pursuant to the provisions of the Plan, and all related orders or resolutions of the Board, shall be final, conclusive and binding upon all persons, including the Company, its stockholders, employees, Participants and their estates and Beneficiaries.

3.4      Plan Administrator. For purposes of ERISA, the Committee is the Plan administrator. Any claim for benefits under the Plan shall be made in writing to the Committee.

 

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The Committee and the claimant shall follow the claims procedures set forth in Department of Labor Regulation §2560.503-1.

3.5    Costs and Expenses. In discharging their duties under the Plan, the Committee may employ such counsel, accountants and consults as it deems necessary or appropriate. The Company shall pay all costs of such third parties and any other expenses incurred by the Committee with respect to the Plan.

3.6    Indemnification. No member of the Committee, nor any officer or employee acting on behalf of the Committee, CHS, the Company, or its Subsidiaries shall be personally liable for any action, determination or interpretation taken or made in good faith with respect to the Plan, and all members of the Committee, and each and every officer or employee of CHS, the Company, or its Subsidiaries acting on their behalf, shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action, determination or interpretation.

4.          Participation in the Plan.

4.1    Notification of Participation. Each Officer and Key Employee shall be notified that they are a Participant under the Plan.

4.2    Termination of Participation. A Participant who ceases to be an Officer or a Key Employee of the Company (as determined by the Committee), or who terminates employment with the Company and all Subsidiaries for any reason other than death or Total and Permanent Disability, shall not be entitled to any benefits hereunder unless that change of status occurs after the Participant has reached their Early Retirement Date.

5.          Benefits Upon Separation from Service or Death.

5.1    Normal Retirement Benefit. A Participant (including, without limitation, a Specified Employee) who has been credited with at least five years of Service and Separates from Service by reason of retirement on or after the Participant’s Normal Retirement Date shall receive a single lump-sum payment, commencing on the day immediately following the date that is six (6) months after the date of the Participant’s Separation from Service, in an amount that is the result of “A.” MINUS “B.,” as described below:

 

  “A.”

Cumulative Benefit: An amount equal to the Actuarial Equivalent of a Monthly Retirement Income equal to:

(i) one-twelfth of the Participant’s Annual Retirement Benefit, reduced by

(ii) the Primary Insurance Amount.

MINUS

 

  “B”

Original Plan Benefit: The amount payable to the Participant under Section 5.1 of the Original Plan, as in effect on November 9, 2017, as set forth in Exhibit A of this Plan.

In order to avoid any misunderstanding, it is the specific intent of the Company that the Original Plan Benefit payable to a Participant reduce the Participant’s Normal Retirement Benefit payable

 

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under this Plan on a dollar-for-dollar basis. By way of example, if a Participant’s Cumulative Benefit (“A,” above) is $10,000 per month, and the Participant’s Original Plan Benefit (“B,” above) is $4,000 per month, the Participant’s Normal Retirement Benefit under this Plan would be (“A” $10,000 MINUS “B” $4,000=) $6,000 per month.

Notwithstanding the foregoing, a Participant may instead elect, at any time, to receive the benefit calculated under this Section 5.1 as an amount that is the Actuarial Equivalent of the Monthly Retirement Income as calculated pursuant to this Section 5.1 above as of the later of the Participant’s Eligibility Date (as defined below) or the Participant’s Election Date (as defined below), with interest thereon until such Participant’s Separation from Service in an amount equal to the average yield on 10-Year Treasury Bonds for the twenty-four (24) months preceding, calculated and compounded on a quarterly basis, but in no event greater than 4% per annum. For the sake of clarity, an election described in this paragraph made by a Participant who does not become an Eligible Participant (as defined below) shall be disregarded and such Participant shall receive the benefit, if any, to which such Participant is otherwise entitled under this Plan. For purposes hereof, (i) an “Eligible Participant” is a Participant who has attained the Normal Retirement Date (i.e., has reached the age of 65) and has completed or been credited with at least twenty-five (25) years of Service, (ii) the “Eligibility Date” is the date a Participant becomes an Eligible Participant and (iii) the “Election Date” is the date a Participant makes the election described in this paragraph. An election made pursuant to this paragraph shall be made in writing delivered to the Secretary of the CHS/Community Health Systems, Inc. and once made, shall be final and irrevocable.

If a Participant who has had a Separation from Service and is entitled to a Normal Retirement Benefit under this Section 5.1 dies prior to the date of such payment, such payment shall be made, instead, to the Participant’s Beneficiary on the date that it otherwise would have been made to the Participant, or as soon as administratively feasible thereafter within the same taxable year (or, if later, by the 15th day of the third calendar month following the date the payment otherwise would have been made to the Participant, provided that neither the Participant nor Beneficiary shall be permitted, directly or indirectly, to designate the taxable year of payment).

5.2      Early Retirement Benefit. A Participant (including, without limitation, a Specified Employee) who Separates from Service by reason of retirement after attaining age 55 and who has been credited with at least five years of Service shall receive a single lump-sum payment, commencing on the day immediately following the date that is six (6) months after the date of the Participant’s Separation from Service, in an amount that is the Actuarial Equivalent of a Monthly Retirement Income computed in the manner set forth in Section 5.1, except that the amount set forth in Section 5.1 shall be reduced by two/twelfths of one percent (.001667) of that amount for each month that payments commence prior to the Participant’s Normal Retirement Date. The reduction referred to in the immediately preceding sentence shall not apply in the event of a Change in Control. If a Participant who has had a Separation from Service and is entitled to an Early Retirement Benefit under this Section 5.2 dies prior to the date of such payment, such payment shall be made, instead, to the Participant’s Beneficiary on the date that it otherwise would have been made to the Participant, or as soon as administratively feasible thereafter within the same taxable year (or, if later, by the 15th day of the third calendar month following the date the payment otherwise would have been made to the Participant, provided that neither the Participant nor Beneficiary shall be permitted, directly or indirectly, to designate the taxable year of payment).

 

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5. 3      Disability Benefit .

(a)      A Disabled Participant (including, without limitation, a Specified Employee) shall receive a single lump-sum payment, commencing on the later of (i) the day immediately following the date that is six (6) months after the date of the Participant’s Separation from Service by reason of becoming Totally and Permanently Disabled, or (ii) the first day of the month following the Participant’s 55th birthday, in an amount that is the Actuarial Equivalent of a Monthly Retirement Income computed in the manner set forth in Section 5.1. This benefit shall be payable at the time prescribed in this Section 5.3(a) regardless of whether the Participant recovers from the disability before payment is due.

(b)      If a Disabled Participant dies before the payment of the benefit described in Section 5.3(a), a death benefit shall be payable to the Disabled Participant’s Beneficiary. Such death benefit shall be a single lump-sum payment equal to the Actuarial Equivalent present value of a Monthly Retirement Income as of the Participant’s date of death, computed in accordance with the provisions of Section 5.3(a). Such death benefit shall be paid to the Participant’s Beneficiary no later than ninety (90) days after the date of death (provided that neither the Participant nor Beneficiary shall be permitted, directly or indirectly, to designate the taxable year of payment).

5.4      Death Benefit. If a Participant who has been credited with five or more years of Service dies prior to incurring a Separation from Service, a single, lump-sum death benefit shall be paid to the deceased Participant’s Beneficiary. Such death benefit shall be the Actuarial Equivalent of the Participant’s Monthly Retirement Income as of the Participant’s date of death, computed in the same manner as provided in Section 5.3(a) in the case of a Disabled Participant. Such death benefit shall be paid to the deceased Participant’s Beneficiary no later than ninety (90) days after the date of death (provided that neither the Participant nor Beneficiary shall be permitted, directly or indirectly, to designate the taxable year of payment).

5.5      Intentionally omitted.

6.        Benefits Upon Change in Control.

6.1      Change in Control Benefit. In the event of a Change in Control, the benefit of any Participant with five years or more of Service but not yet otherwise entitled to a benefit under the other provisions of this Plan shall be fully vested and shall be paid out as soon as administratively feasible but no later than ninety (90) days after the Change in Control (provided that the Participant shall not be permitted, directly or indirectly, to designate the taxable year of payment) in a single lump-sum payment pursuant to the applicable provisions in Section 5. Upon such payment to all Participants, the Plan shall terminate.

6.2      Participants Under Age 55. Any Participant who has been credited with five years or more years of Service on the date of the Change in Control who is under age 55 will be deemed to be age 55 solely for purposes of determining if the Participant is eligible for benefits under the Plan but, in computing the lump sum payment provided for in Section 6.1 and the applicable provisions of Section 5, the Monthly Retirement Income shall be deemed payable based upon the Participant’s actual age on the date of the Change in Control.

 

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6.3      Additional Years of Service. All Participants who have been credited with five years or more of Service as of a Change in Control will be credited with an additional three years of Service as a result of a Change in Control.

6.4      Certain Terminations of Employment. If a Participant’s employment is terminated by the Company prior to the date of a Change in Control, but the Participant reasonably demonstrates to the satisfaction of the Committee that the termination (i) was at the request of a third party who has indicated an intention to, or has taken steps reasonably calculated to, effect a Change in Control, or (ii) otherwise arose in connection with, or in anticipation of, a Change in Control which has been threatened or proposed, such termination shall be deemed to have occurred after a Change in Control for purposes of the Plan, provided a Change in Control actually occurs. Such a Participant shall be entitled to receive the same benefits under the Plan as if the Participant had been an employee of the Company or a Subsidiary on the date the Change in Control actually occurs. Notwithstanding the foregoing, no payment under this Section 6.4 shall be made before the date that is six (6) months after the date of the Participant’s actual Separation from Service.

7.      Beneficiaries. Each Participant shall have the right, by giving written notice to the Committee on such form as the Committee shall adopt, to designate a Beneficiary or Beneficiaries to receive payments which become available under the Plan should the Participant die. A Participant may change the designated Beneficiary by filing a new beneficiary designation form with the Committee. If a Participant dies and has not designated a Beneficiary, or if the Beneficiary predeceases the Participant, the estate of the deceased Participant shall be deemed to be the Beneficiary.

8.      Rabbi Trust. The Company intends to establish a Rabbi Trust with a commercial bank or other financial or trust institution of which the Company would be considered the owner for Federal income tax purposes. The Rabbi Trust will be established to provide a source of funds to enable the Company to make payments to the Participants and their Beneficiaries pursuant to the terms of the Plan and will be administered in a manner consistent with the requirements of Code Section 409A. Payments to which Participants are entitled under the terms of the Plan shall be paid out of the Rabbi Trust to the extent of the assets therein. The assets of the Rabbi Trust will be subject to the claims of general creditors of the Company.

9.      Withholding. The Company shall have the right to withhold from the payments to be made to any Participant or Beneficiary hereunder all amounts required to be so withheld under applicable law.

10.      Modification and Termination.

10.1      Amendment and Termination. The Company reserves the right at any time, by action of the Board, to modify or amend, in whole or in part, any or all of the provisions of the Plan, or to terminate the Plan. In the event of Plan termination, benefits shall be payable at the time and in the manner provided in Sections 5 and 6; however, the Company may accelerate the time and form of payment pursuant to a termination and liquidation of the Plan in accordance with Code Section 409A and the regulations thereunder.

10.2      Effect on Participants. Notwithstanding the provisions of Section 10.1, no amendment, modification or termination of the Plan shall adversely affect:

 

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(a)      The Monthly Retirement Income of any Participant, or the Beneficiary of any Participant, who has Separated from Service or died prior thereto.

(b)      The right of any Participant then employed by the Company or a Subsidiary who has been credited with at least five years of Service to receive upon death, Separation from Service (including Separation from Service by reason of Total and Permanent Disability) or Change in Control, the benefit to which such person would have been entitled under the Plan prior to the amendment, modification or termination, provided, however, that the Company may accelerate the time and form of payment pursuant to a termination and liquidation of the Plan in accordance with Code Section 409A and the regulations thereunder.

10.3      No Obligation to Continue Plan. Although it is the intention of the Company that the Plan shall be continued indefinitely, the Plan is entirely voluntary on the part of the Company, and the continuance of the Plan is not a contractual obligation of the Company.

11.       Claims and Review Procedures. The Committee shall establish and maintain reasonable procedures governing the filing of claims, notification of benefit determinations, and appeal of adverse benefit determinations in accordance with applicable law. Such procedures shall provide for adequate notice in writing to any Participant or Beneficiary whose claim for benefits under the Plan has been denied, setting forth the specific reasons for such denial and written in a manner calculated to be understood by the Participant or Beneficiary. Such procedures shall also afford a reasonable opportunity to any Participant or Beneficiary whose claim for benefits has been denied for a full and fair review by the Committee of the decision denying the claim.

12.       Miscellaneous Provisions.

12.1       Non-Transferability. Neither the interest of a Participant or any other person in the Plan, nor the benefits payable hereunder, shall be subject to the claim of creditors of a Participant or their Beneficiaries and will not be subject to attachment, garnishment or any other legal process. Neither a Participant nor a Beneficiary may assign, sell, pledge or otherwise encumber any of their beneficial interest in the Plan, nor shall any such benefits be in any manner liable for, or subject to, the deeds, contracts, liabilities, engagements or torts of any Participant or their Beneficiary. All such payments and rights thereto are expressly declared to be non-assignable and non-transferable, and in the event of any attempted assignment or transfer (whether voluntary or involuntary) by a Participant or a Beneficiary, the Company shall have no further liability hereunder to such Participant or Beneficiary.

12.2      Payment of Benefits. Although the Company intends to establish the Rabbi Trust to fund its obligations under the Plan, the rights of Participants and Beneficiaries to receive payments under the Plan shall constitute only a general claim against the Company and will not be a lien or claim on any specific assets of the Company.

12.3      No Rights of Employment. The Plan shall not be deemed to constitute a contract of employment between a Participant and the Company or a Subsidiary. Nothing contained in the Plan shall be deemed to give any Participant the right to be retained in the employment of the Company or a Subsidiary. The Plan shall not interfere in any way with the Company’s or a Subsidiary’s right to discharge a Participant at any time, regardless of the effect which such discharge would have upon such Participant under the Plan, and such actions by the Company or

 

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a Subsidiary in discharging any Participant shall not be deemed a breach of contract, nor give rise to any rights or actions in favor of such Participant.

12.4      Applicable Law. The Plan shall be governed by, and construed in accordance with, the laws of the State of Tennessee without regard to its conflict of laws rules. It is intended that the Plan be an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of highly compensated employees of the Company. As such, the Plan is intended to be exempt from certain otherwise applicable provisions of Title I of ERISA, and any ambiguities in construction shall be resolved in favor of an interpretation which will effectuate such intention. The Plan is intended to comply with Code Section 409A and the Treasury Regulations promulgated thereunder as applicable to nonqualified deferred compensation plans and shall be construed in furtherance of such intent.

12.5      Payment to Minors. In making any payment to or for the benefit of any minor or incompetent Beneficiary, the Committee, in its sole, absolute and uncontrolled discretion, may, but need not, make such payment to a legal or natural guardian or other relative of such minor or court appointed committee of such incompetent, or to any adult with whom such minor or incompetent temporarily or permanently resides, and the receipt by such guardian, committee, relative or other person shall be a complete discharge of the Company, without any responsibility on its part or on the part of the Committee to see to the application thereof.

IN WITNESS WHEREOF, the Company has caused the Plan to be executed by its duly authorized officer the 15th day of May, 2018 effective as set forth herein.

 

CHS/COMMUNITY HEALTH SYSTEMS, INC.
By:  

    /s/ Benjamin C. Fordham

      Benjamin C. Fordham,
Title:  

Executive Vice President, General Counsel and Assistant Secretary

 

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EX-12

Exhibit 12

STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

(DOLLARS IN MILLIONS)

 

           Six Months Ended        
     June 30, 2018  

Earnings

  

Loss from continuing operations before benefit from income taxes

   $ (143

Income from equity investees

     (12

Distributed income from equity investees

     4  

Interest and amortization of deferred finance costs

     464  

Amortization of capitalized interest

     6  

Implicit rental interest expense

     43  
  

 

 

 

Total Earnings

   $ 362  
  

 

 

 

Fixed Charges

  

Interest and amortization of deferred finance costs

   $ 464  

Capitalized interest

     8  

Implicit rental interest expense

     43  
  

 

 

 

Total Fixed Charges

   $ 515  
  

 

 

 

Ratio of Earnings to Fixed Charges

     *  
  

 

 

 

 

* For the six months ended June 30, 2018, earnings were insufficient to cover fixed charges by approximately $153 million.
EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

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 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 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 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.

 

  

/s/ Wayne T. Smith

                   
  

Wayne T. Smith

Chairman of the Board

and Chief Executive Officer

  

Date: July 27, 2018

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Thomas J. Aaron, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Community Health Systems, Inc.;

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 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 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.

 

  

/s/ Thomas J. Aaron     

                   
  

Thomas J. Aaron

Executive Vice President and

Chief Financial Officer

  

Date: July 27, 2018

EX-32.1

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 ended June 30, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Wayne T. Smith, Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 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 results of operations of the Company.

 

 

/s/  Wayne T. Smith

  
  Wayne T. Smith   
  Chairman of the Board and   
  Chief Executive Officer   

July 27, 2018

EX-32.2

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 ended June 30, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas J. Aaron, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 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 results of operations of the Company.

 

 

/s/  Thomas J. Aaron

  
  Thomas J. Aaron   
  Executive Vice President and   
  Chief Financial Officer   

July 27, 2018