November 23, 2016
VIA EDGAR CORRESPONDENCE
Mr. Carlos Pacho
Senior Assistant Chief Accountant
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, NE
Washington, DC 20549
| Re: | Community Health Systems, Inc. |
| Form 10-K for the Fiscal Year Ended December 31, 2015 |
| Filed February 17, 2016 |
| Response dated October 25, 2016 |
| File No. 001-15925 |
Dear Mr. Pacho:
On behalf of Community Health Systems, Inc. (the “Company”), we are writing to respond to the comments of the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) set forth in your letter, dated November 9, 2016, relating to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (the “2015 Form 10-K”) filed with the Commission on February 17, 2016.
To facilitate your review, the Staff’s comments are set forth below and are followed by the Company’s response.
Form 10-K for Fiscal Year ended December 31, 2015
| 1. | We note from your response to our prior comment 3 that a key determining factor for your use of Adjusted EBITDA as a measure of liquidity is the use of a similar measure, Consolidated EBITDA, in your covenant calculations. Please revise this measure to present it as it is calculated in your covenant agreement. If you wish to include a non-GAAP liquidity measure of Adjusted EBITDA in your Form 10-K that is different than the measure in your covenant agreement, please revise your Adjusted EBITDA measure to include all cash settled charges as required by Item 10(e)(1)(ii)(A). Refer to C&DI 102.09. |
Mr. Carlos Pacho
Senior Assistant Chief Accountant
United States Securities and Exchange Commission
November 23, 2016
Page 2
Response:
Consolidated EBITDA, as defined in the debt covenants of the Company’s senior secured credit facility, is a liquidity measure as it is used in the context of our debt capacity and liquidity discussion. Management uses Adjusted EBITDA as a different measure from Consolidated EBITDA. Although Adjusted EBITDA is defined similarly to Consolidated EBITDA, there are key differences. Because of these differences and the way management uses the measure (as further discussed below), the Company believes that Adjusted EBITDA should be presented in its future filings as a performance measure and not a liquidity measure. Therefore, based on our re-evaluation as set forth below, we will clarify our future disclosures in this regard.
The Company has re-evaluated the requirements of Item 10(e) of Regulation S-K and Regulation G, as well as the most recent interpretative guidance issued by the Division of Corporation Finance in the form of the Compliance and Disclosure Interpretations (C&DI) with respect to non-GAAP financial measures updated by the Securities and Exchange Commission in May of this year, regarding whether to present Adjusted EBITDA as a measure of performance or liquidity. As part of this further evaluation, management has considered the following:
| 1. | As discussed in our prior comments in response to the Staff’s questions regarding the Company’s segment reporting, the Company’s CEO, its chief operating decision maker, uses Adjusted EBITDA as one of the primary measures to assess performance of the hospital segment. Additionally, its segment managers use Adjusted EBITDA as one of the primary measures to assess individual hospital performance. |
| 2. | The Company utilizes Adjusted EBITDA as a one of the primary performance metrics to determine the short-term cash incentive compensation payable to the Company’s named executive officers and other senior management. |
| 3. | The Company’s management utilizes Adjusted EBITDA in assessing the Company’s consolidated results of operations and operational performance and in comparing the Company’s results of operations between periods. The Company also believes that Adjusted EBITDA is used by investors and analysts in assessing the Company’s consolidated results of operations and operating performance and in comparing the Company’s operating performance to its peer companies, which (as noted below) utilize similar non-GAAP financial measures in their public filings. |
| 4. | Adjusted EBITDA is a measure generally used by public companies within the hospital industry to assess performance. Other companies in the Company’s peer group utilize a calculation of Adjusted EBITDA similar to the Company’s, and present it as a non-GAAP performance measure with a reconciliation to net income (or related net income measure). |
Mr. Carlos Pacho
Senior Assistant Chief Accountant
United States Securities and Exchange Commission
November 23, 2016
Page 3
After further consideration of these and other factors to determine whether Adjusted EBITDA is a performance or liquidity measure, management has concluded that it is currently used as a measure of the Company’s performance. While Adjusted EBITDA may be viewed as having certain characteristics of a liquidity measure, it is not used by management as the primary means to assess liquidity. Consistent with C&DI 103.02, in future filings the Company will reconcile Adjusted EBITDA to net income attributable to Community Health Systems, Inc. stockholders as presented in its consolidated statement of operations.
The Company’s suggested changes to present Adjusted EBITDA as a performance measure in future filings are set forth below and incorporate the changes proposed in our prior response to comment 1. The proposed revisions to future filings, as if they were made to footnote 8 on page 11 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, are set forth in bold and italicized below, with deleted items marked with a strikethrough:
| (8) | EBITDA, a non-GAAP financial measure, consists of net income attributable to Community Health Systems, Inc. before interest, income taxes, depreciation and amortization. Adjusted EBITDA, also a non-GAAP financial
measure, is EBITDA adjusted to add back net income attributable to noncontrolling interests, and to exclude the effect of discontinued operations, loss from early extinguishment of debt, impairment of
long-lived assets, |
Mr. Carlos Pacho
Senior Assistant Chief Accountant
United States Securities and Exchange Commission
November 23, 2016
Page 4
to a similar metric called Consolidated EBITDA, as defined in our senior secured credit facility, which is a key component in the determination of our compliance with some of the covenants under our senior secured credit facility (including our ability to service debt and incur capital expenditures), and is used to determine the interest rate and commitment fee payable under the senior secured credit facility (although Adjusted EBITDA does not include all of the adjustments described in the senior secured credit facility). For further discussion of Consolidated EBITDA and how that measure is utilized in the calculation of our debt covenants, see the Capital Resources section of Part II, Item 7 of this Form 10-K.
Adjusted EBITDA is not a measurement of financial performance or liquidity under U.S. generally accepted accounting
principles, or GAAP. It should not be considered in isolation or as a substitute for net income, operating income, cash flows from operating, investing or financing activities, or any other performance measure
calculated in accordance with U.S. GAAP. The items excluded from Adjusted EBITDA are significant components in understanding and evaluating financial performance and liquidity. We believe such adjustments are appropriate as
the magnitude and frequency of such items can vary significantly and are not related to the assessment of normal operating performance. Additionally, our calculation of Adjusted EBITDA may not be comparable to similarly titled measures
reported by other companies.
The following table reflects the reconciliation calculation
of Adjusted EBITDA, as defined, to net income attributable to Community Health Systems, Inc. stockholders from (loss) income from continuing operations before income taxes and reconciles adjusted EBITDA, as defined, to our net
cash provided by operating activities as derived directly from our Consolidated Financial Statements for the years ended December 31, 2015, 2014 and 2013 (in millions):
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
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| Net income attributable to Community |
158 | 92 | 141 | |||||||||
| Adjustments: |
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| Provision for income taxes |
116 | 82 | 104 | |||||||||
| Depreciation and amortization |
1,172 | 1,106 | 771 | |||||||||
| Net income attributable to noncontrolling interests |
101 | 111 | 76 | |||||||||
| Loss from discontinued operations |
36 | 57 | 25 | |||||||||
| Amortization of software to be abandoned |
— | 75 | — | |||||||||
| Interest expense, net |
973 | 972 | 613 | |||||||||
| Loss from early extinguishment of debt |
16 | 73 | 1 | |||||||||
| Impairment of long-lived assets |
68 | 41 | 12 | |||||||||
Mr. Carlos Pacho
Senior Assistant Chief Accountant
United States Securities and Exchange Commission
November 23, 2016
Page 5
| Expenses related to the acquisition and integration of HMA |
1 | 69 | 15 | |||||||||
| Expense from government settlement and related costs |
4 | 105 | 102 | |||||||||
| Expense (income) from fair value adjustments and |
8 | (6 | ) | — | ||||||||
| Expenses related to the planned spin-off of Quorum Health Corporation |
17 | — | — | |||||||||
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| Adjusted EBITDA |
$ | 2,670 | $ | 2,777 | $ | 1,860 | ||||||
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* * * * *
Mr. Carlos Pacho
Senior Assistant Chief Accountant
United States Securities and Exchange Commission
November 23, 2016
Page 6
Please do not hesitate to contact the undersigned at the numbers above with any questions or comments you may have regarding this letter.
| Sincerely, |
| /s/ Leigh Walton |
| Leigh Walton
and |
| /s/ Kevin Douglas |
| Kevin Douglas |
| cc: | Wayne T. Smith |
Community Health Systems, Inc.
W. Larry Cash
Community Health Systems, Inc.
Rachel A. Seifert, Esq.
Community Health Systems, Inc.