Company Quick10K Filing
Quick10K
Community Health Systems
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$3.48 118 $411
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-15 Officers
8-K 2019-05-14 Shareholder Vote
8-K 2019-04-30 Earnings, Regulation FD, Exhibits
8-K 2019-02-20 Officers, Exhibits
8-K 2019-02-20 Earnings, Regulation FD, Exhibits
8-K 2019-02-15 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-01-11 Other Events
8-K 2018-12-11 Officers, Exhibits
8-K 2018-12-05 Other Events
8-K 2018-10-29 Earnings, Regulation FD, Exhibits
8-K 2018-09-25 Other Events, Exhibits
8-K 2018-07-26 Earnings, Regulation FD, Exhibits
8-K 2018-07-06 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-06-27 Other Events, Exhibits
8-K 2018-06-22 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-06-20 Other Events, Exhibits
8-K 2018-06-11 Other Events, Exhibits
8-K 2018-06-06 Other Events, Exhibits
8-K 2018-06-04 Other Events, Exhibits
8-K 2018-05-25 Other Events, Exhibits
8-K 2018-05-23 Other Events, Exhibits
8-K 2018-05-18 Other Events, Exhibits
8-K 2018-05-15 Officers, Shareholder Vote, Exhibits
8-K 2018-05-05 Other Events, Exhibits
8-K 2018-05-01 Earnings, Regulation FD, Exhibits
8-K 2018-04-03 Enter Agreement, Leave Agreement, Off-BS Arrangement, Exhibits
8-K 2018-03-23 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-03-20 Regulation FD, Exhibits
8-K 2018-03-15 Regulation FD, Exhibits
8-K 2018-02-26 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-02-21 Officers
WH Wyndham Hotels & Resorts 5,440
AVT Avnet 4,810
EXP Eagle Materials 4,070
SNDX Syndax Pharmaceuticals 208
ALJJ ALJ Regional Holdings 65
PESI Perma Fix Environmental Services 48
FDBL Friendable 0
ANCB Anchor Bancorp 0
DLOC Digital Locations 0
FUTL Futureland 0
CYH 2019-03-31
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
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Community Health Systems Earnings 2019-03-31

CYH 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 d738245d10q.htm FORM 10-Q 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 March 31, 2019

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)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class    Trading Symbol(s)    Name of each exchange on which registered
Common Stock, $.01 par value    CYH    New York Stock Exchange

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 April 25, 2019, there were outstanding 118,062,944 shares of the Registrant’s Common Stock, $0.01 par value.

 

 

 


Table of Contents

Community Health Systems, Inc.

Form 10-Q

For the Three Months Ended March 31, 2019

 

Part I.

  Financial Information      Page  
  Item 1.    Financial Statements:   
     Condensed Consolidated Statements of Loss - Three Months Ended March 31, 2019 and March 31, 2018 (Unaudited)      2  
     Condensed Consolidated Statements of Comprehensive Loss - Three Months Ended March 31, 2019 and March 31, 2018 (Unaudited)      3  
     Condensed Consolidated Balance Sheets - March 31, 2019 and December 31, 2018 (Unaudited)      4  
     Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2019 and March 31, 2018 (Unaudited)      5  
     Notes to Condensed Consolidated Financial Statements (Unaudited)      6  
  Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      48  
  Item 3.    Quantitative and Qualitative Disclosures about Market Risk      71  
  Item 4.    Controls and Procedures      71  

Part II.

  Other Information   
  Item 1.    Legal Proceedings      72  
  Item 1A.    Risk Factors      76  
  Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      77  
  Item 3.    Defaults Upon Senior Securities      77  
  Item 4.    Mine Safety Disclosures      77  
  Item 5.    Other Information      77  
  Item 6.    Exhibits      78  

Signatures

     80  


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
March 31,
 
                 2019                              2018              

Net operating revenues

     $ 3,376       $ 3,689 

Operating costs and expenses:

     

Salaries and benefits

     1,542       1,648 

Supplies

     558       616 

Other operating expenses

     811       911 

Government and other legal settlements and related costs

         

Electronic health records incentive reimbursement

            (1)  

Lease cost and rent

     80       89 

Depreciation and amortization

     153       181 

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

     38       28 
  

 

 

    

 

 

 

Total operating costs and expenses

     3,187       3,477 
  

 

 

    

 

 

 

Income from operations

     189       212 

Interest expense, net

     257       228 

Loss from early extinguishment of debt

     31      

Equity in earnings of unconsolidated affiliates

     (5)        (7)  
  

 

 

    

 

 

 

Loss before income taxes

     (94)        (13)  

Provision for (benefit from) income taxes

          (7)  
  

 

 

    

 

 

 

Net loss

     (101)        (6)  

Less: Net income attributable to noncontrolling interests

     17       19 
  

 

 

    

 

 

 

Net loss attributable to Community Health Systems, Inc. stockholders

     $ (118)        $ (25)  
  

 

 

    

 

 

 

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

     

Basic

     $ (1.04)        $ (0.22)  
  

 

 

    

 

 

 

Diluted

     $ (1.04)        $ (0.22)  
  

 

 

    

 

 

 

Weighted-average number of shares outstanding:

     

Basic

     113,257,608       112,291,496 
  

 

 

    

 

 

 

Diluted

                             113,257,608                               112,291,496 
  

 

 

    

 

 

 

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  
     March 31,  
     2019      2018  

Net loss

   $ (101)      $ (6)  

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

     

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

     (2)        18 

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

          (2)  

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

           
  

 

 

    

 

 

 

Other comprehensive income

            17 
  

 

 

    

 

 

 

Comprehensive (loss) income

     (101)        11 

Less: Comprehensive income attributable to noncontrolling interests

     17       19 
  

 

 

    

 

 

 

Comprehensive loss attributable to Community Health Systems, Inc. stockholders

   $                         (118)      $                         (8)  
  

 

 

    

 

 

 

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)

     March 31, 2019     December 31, 2018  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 277     $ 196  

Patient accounts receivable

     2,360       2,352  

Supplies

     397       402  

Prepaid income taxes

     3       3  

Prepaid expenses and taxes

     197       196  

Other current assets

     361       400  
  

 

 

   

 

 

 

Total current assets

     3,595       3,549  
  

 

 

   

 

 

 

Property and equipment

     10,331       10,301  

Less accumulated depreciation and amortization

     (4,245     (4,162
  

 

 

   

 

 

 

Property and equipment, net

     6,086       6,139  
  

 

 

   

 

 

 

Goodwill

     4,553       4,559  
  

 

 

   

 

 

 

Deferred income taxes

     66       69  
  

 

 

   

 

 

 

Other assets, net

     2,009       1,543  
  

 

 

   

 

 

 

Total assets

   $ 16,309     $ 15,859  
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ DEFICIT     

Current liabilities:

    

Current maturities of long-term debt

   $ 205     $ 204  

Current operating lease liabilities

     143        

Accounts payable

     863       887  

Accrued liabilities:

    

Employee compensation

     628       627  

Accrued interest

     250       206  

Other

     419       468  
  

 

 

   

 

 

 

Total current liabilities

     2,508       2,392  
  

 

 

   

 

 

 

Long-term debt

     13,385       13,392  
  

 

 

   

 

 

 

Deferred income taxes

     29       26  
  

 

 

   

 

 

 

Long-term operating lease liabilities

     495       -  
  

 

 

   

 

 

 

Other long-term liabilities

     977       1,008  
  

 

 

   

 

 

 

Total liabilities

     17,394       16,818  
  

 

 

   

 

 

 

Redeemable noncontrolling interests in equity of consolidated subsidiaries

     505       504  
  

 

 

   

 

 

 

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; 118,073,278 shares issued and outstanding at March 31, 2019, and 116,248,376 shares issued and outstanding at December 31, 2018

     1       1  

Additional paid-in capital

     2,007       2,017  

Accumulated other comprehensive loss

     (10     (10

Accumulated deficit

     (3,661     (3,543
  

 

 

   

 

 

 

Total Community Health Systems, Inc. stockholders’ deficit

     (1,663     (1,535

Noncontrolling interests in equity of consolidated subsidiaries

     73       72  
  

 

 

   

 

 

 

Total stockholders deficit

     (1,590     (1,463
  

 

 

   

 

 

 

Total liabilities and stockholders deficit

   $                         16,309     $                         15,859  
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

4


Table of Contents

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

     Three Months Ended  
     March 31,  
     2019     2018  

Cash flows from operating activities:

    

Net loss

   $ (101   $ (6

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

    

Depreciation and amortization

     153       181  

Government and other legal settlements and related costs

     5       5  

Stock-based compensation expense

     3       4  

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

     38       28  

Loss from early extinguishment of debt

     31       4  

Other non-cash expenses, net

     36       12  

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

    

Patient accounts receivable

     (10     (66

Supplies, prepaid expenses and other current assets

     14       (21

Accounts payable, accrued liabilities and income taxes

     23       (33

Other

     (59     (2
  

 

 

   

 

 

 

Net cash provided by operating activities

     133       106  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions of facilities and other related businesses

     (4     (8

Purchases of property and equipment

     (121     (170

Proceeds from disposition of hospitals and other ancillary operations

     161       11  

Proceeds from sale of property and equipment

           3  

Purchases of available-for-sale securities and equity securities

     (15     (19

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

     32       34  

Increase in other investments

     (34     (28
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     19       (177
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Repurchase of restricted stock shares for payroll tax withholding requirements

     (1     (1

Deferred financing costs and other debt-related costs

     (25     (11

Proceeds from noncontrolling investors in joint ventures

     1        

Redemption of noncontrolling investments in joint ventures

     (1     (3

Distributions to noncontrolling investors in joint ventures

     (27     (23

Borrowings under credit agreements

     12       10  

Issuance of long-term debt

     1,840        

Proceeds from ABL facility

     25       49  

Repayments of long-term indebtedness

     (1,895     (89
  

 

 

   

 

 

 

Net cash used in financing activities

     (71     (68
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     81       (139

Cash and cash equivalents at beginning of period

     196       563  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 277     $ 424  
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Interest payments

   $                         (189   $                         (212
  

 

 

   

 

 

 

Income tax refunds (payments), net

   $     $  
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

5


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 March 31, 2019 and December 31, 2018 and for the three-month periods ended March 31, 2019 and 2018, have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for such periods. All intercompany transactions and balances have been eliminated. The results of operations for the three months ended March 31, 2019, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2019. 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, 2018, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 21, 2019 (“2018 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, upon the Company’s 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 is included as a reduction to net operating revenues. For changes in credit issues not assessed at the date of service, the Company prospectively recognizes those amounts in other operating expenses on the statement of operations. Other than these changes in presentation on the consolidated statement of operations, the adoption of ASC 606 did not have a material impact on the consolidated results of operations for the year ended December 31, 2018 or the three months ended March 31, 2019, and the Company does not expect it to have a material impact on its consolidated results of operations 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 because such costs are not material and would be amortized over a period less than one year.

 

6


Table of Contents

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

 

Net Operating Revenues

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 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 year ended December 31, 2018 and the three months ended March 31, 2019, 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 (“CMS”) and are funded with a combination of state and federal resources, including, in certain instances, fees or taxes levied on the providers. Under these supplemental programs, the Company recognizes revenue and related expenses in the period in which amounts are estimable and collection is reasonably assured. Reimbursement under these programs is reflected in net operating revenues and fees, taxes or other program-related costs are reflected in other operating expenses.

The Company’s net operating revenues during the three months ended March 31, 2019 and 2018 have been presented in the following table based on an allocation of the estimated transaction price with the patient between the primary patient classification of insurance coverage (in millions):

 

     Three Months Ended  
     March 31,  
     2019      2018  

Medicare

   $ 889      $ 1,033  

Medicaid

     428        459  

Managed Care and other third-party payors

     2,025        2,117  

Self-pay

     34        80  
  

 

 

    

 

 

 

Total

   $                         3,376      $                         3,689  
  

 

 

    

 

 

 

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 $148 million and $144 million as of March 31, 2019 and December 31, 2018, respectively, and these amounts are included in accrued liabilities-other in the accompanying condensed consolidated balance sheets. Amounts due from third-party payors were $142 million and $155 million as of March 31, 2019 and December 31, 2018, 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 2015.

 

7


Table of Contents

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 are 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 $141 million and $114 million for the three months ended March 31, 2019 and 2018, 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 $15 million and $14 million during the three months ended March 31, 2019 and 2018, 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.

Leases. On January 1, 2019, the Company adopted the cumulative accounting standard updates initially issued by the FASB in February 2016 that amend the accounting for leases and are codified as ASC 842. These changes to the lease accounting model require operating leases be recorded on the balance sheet through recognition of a liability for the discounted present value of future fixed lease payments and a corresponding right-of-use (“ROU”) asset. The Company’s accounting for finance leases remained substantially unchanged from its prior accounting for capital leases. The ROU asset recorded at commencement of the lease represents the right to use the underlying asset over the lease term in exchange for the lease payments. Leases with an initial term of 12 months or less and do not have an option to purchase the underlying asset that is deemed reasonably certain to exercise are not recorded on the balance sheet; rather, rent expense for these leases is recognized on a straight-line basis over the lease term, or when incurred if a month-to-month lease. When readily determinable, the Company uses the interest rate implicit in a lease to determine the present value of future lease payments. For leases where the implicit rate is not readily determinable, the Company’s incremental borrowing rate is utilized. The Company calculates its incremental borrowing rate on a quarterly basis using a third-party financial model that estimates the rate of interest the Company would have to pay to borrow an amount equal to the total lease payments on a collateralized basis over a term similar to the lease. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The Company elected the amended transition requirements allowed for by the FASB in Accounting Standards Update (“ASU”) 2018-11, which provide entities relief by allowing them not to recast prior comparative periods from the adoption of ASC 842. As a result, the prior year comparative financial statements have not been restated to reflect the adoption of ASC 842. Additionally, the Company elected the package of practical expedients available in ASC 842 upon adoption whereby an entity need not reassess expired contracts for lease identification or classification as a finance or operating lease, or for the reassessment of initial direct costs. The Company has not elected the practical expedient to use hindsight to determine the lease term for its leases at transition. Certain of the Company’s lease agreements have lease and non-lease components, which for the majority of leases the Company accounts for separately when the actual lease and non-lease components are determinable. For equipment leases with immaterial non-lease components incorporated into the fixed rent payment, the Company accounts for the lease and non-lease components as a single lease component in determining the lease payment. Additionally, for certain equipment leases such as copiers, the Company applies a portfolio approach to effectively record the operating lease liability and ROU asset.

The adoption of ASC 842 had a material impact on the Company’s condensed consolidated balance sheet through the recording of the operating lease liabilities and related ROU assets for leases in effect at January 1, 2019, but the adoption did not have a material impact on the Company’s condensed consolidated statement of loss or condensed consolidated statement of cash flows for the three months ended March 31, 2019. The Company recorded approximately $673 million of operating lease liabilities and ROU assets on January 1, 2019 upon adoption of ASC 842, with no impact on accumulated deficit.

Accounting for the Impairment or Disposal of Long-Lived Assets.    During the three months ended March 31, 2019, the Company recorded a total combined impairment charge and loss on disposal of approximately $38 million to reduce the carrying value of closed hospitals and certain hospitals that have been deemed held for sale based on the difference between the carrying value of the hospital disposal groups compared to estimated fair value less costs to sell. Included in the carrying value of the hospital disposal groups at March 31, 2019 is a net allocation of approximately $8 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 sales. Based on such analysis, additional impairment charges may be recorded in the future.

 

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During the three months ended March 31, 2018, the Company recorded a total combined impairment charge and loss on disposal of approximately $28 million to reduce the carrying value of certain hospitals that have been deemed held for sale based on the difference between the carrying value of the hospital disposal groups compared to estimated fair value less costs to sell. Included in the carrying value of the hospital disposal groups at March 31, 2018 is a net allocation of approximately $25 million of goodwill allocated from the hospital operations reporting unit goodwill based on a calculation of the disposal groups’ relative fair value compared to the total reporting unit.

New Accounting Pronouncements.    In August 2018, the FASB issued ASU 2018-15 to provide guidance on the accounting for implementation costs incurred in a cloud computing arrangement that is accounted for as a service contract. This ASU requires entities to account for such costs consistent with the guidance on capitalizing costs associated with developing or obtaining internal-use software. The ASU is effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact that adoption of this ASU will have on its consolidated financial position and results of operations.

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 since 2008 have a 10-year contractual term. 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 March 31, 2019, 4,948,119 shares of unissued common stock were reserved for future grants under the 2009 Plan.

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

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

 

             Three Months Ended        
March 31,
 
     2019      2018  

Effect on loss before income taxes

   $                     (3)      $                     (4)  
  

 

 

    

 

 

 

Effect on net loss

   $ (2)      $ (3)  
  

 

 

    

 

 

 

 

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At March 31, 2019, $22 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 28 months. Of that amount, $2 million related to outstanding unvested stock options was expected to be recognized over a weighted-average period of 35 months and $20 million related to outstanding unvested restricted stock and restricted stock units was expected to be recognized over a weighted-average period of 27 months. There were no modifications to awards during the three months ended March 31, 2019 and 2018.

The fair value of stock options was estimated using the Black Scholes option pricing model with the following assumptions and weighted-average fair values during the three months ended March 31, 2019:

 

                         Three Months  Ended                    
March 31, 2019
 

Expected volatility

     66.6%          

Expected dividends

     -              

Expected term

     6 years              

Risk-free interest rate

     2.6%          

In determining the expected term, the Company examined concentrations of option holdings and historical patterns of option exercises and forfeitures, as well as forward-looking factors, in an effort to determine if there were any discernable employee populations. From this analysis, the Company identified two primary employee populations, one consisting of certain senior executives and the other consisting of substantially all other recipients.

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

The expected term computation is based on historical exercise and cancellation patterns and forward-looking factors, where present, for each population identified. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The pre-vesting forfeiture rate is based on historical rates and forward-looking factors for each population identified. The Company adjusts the estimated forfeiture rate to its actual experience.

 

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Options outstanding and exercisable under the 2000 Plan and the 2009 Plan as of March 31, 2019, and changes during the three-month period following December 31, 2018, were as follows (in millions, except share and per share data):

 

            Weighted-
Average
    

Weighted-

Average

Remaining
        Contractual        

    

Aggregate

Intrinsic
        Value as of        
March 31,

 
         Shares              Exercise Price          Term      2019  

Outstanding at December 31, 2018

     624,938       $                 31.21         

Granted

     646,500         4.99         

Exercised

                   

Forfeited and cancelled

     (92,301)        25.57         
  

 

 

          

Outstanding at March 31, 2019

                 1,179,137       $ 17.27                 6.2 years              $ -  
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable at March 31, 2019

     532,637       $ 32.18         1.8 years              $                 -  
  

 

 

    

 

 

    

 

 

    

 

 

 

The weighted-average grant date fair value of stock options granted during the three months ended March 31, 2019 was $3.08. No stock options were granted during the three months ended March 31, 2018. 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 ($3.73) and the exercise price of the respective stock options) in the table above represents the amount that would have been received by the option holders had all option holders exercised their options on March 31, 2019. This amount changes based on the market value of the Company’s common stock. There were no options exercised during the three months ended March 31, 2019 and 2018. 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 2009 Plan to employees of certain subsidiaries. With respect to time-based vesting restricted stock that has been awarded under the 2009 Plan, the restrictions on these shares have generally lapsed in one-third increments on each of the first three anniversaries of the award date. In addition, certain of the restricted stock awards granted to the Company’s senior executives have contained performance objectives required to be met in addition to any time-based vesting requirements. If the applicable performance objectives are not attained, these awards will be forfeited in their entirety. For such performance-based awards granted prior to March 1, 2017, performance objectives were measured over a one-year period, and, provided the target performance objective was attained, restrictions lapsed in one-third increments on each of the first three anniversaries of the award date. For performance-based awards granted on or after March 1, 2017, the performance objectives have been measured cumulatively over a three-year period. With respect to performance-based awards granted on or after March 1, 2017, if the applicable target performance objective is met at the end of the three-year period, then the portion of the restricted stock award subject to such performance objective will vest in full on the third anniversary of the award date. Additionally, for these awards, based on the level of achievement for the applicable performance objective within the parameters specified in the award agreement, the number of shares to be issued in connection with the vesting of the award may 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 2009 Plan may 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 objectives 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 2009 Plan as of March 31, 2019, and changes during the three-month period following December 31, 2018, were as follows:

 

         Shares          Weighted-
      Average Grant      
Date Fair Value
 

Unvested at December 31, 2018

     3,308,907       $                             7.00    

Granted

     1,958,000         4.97    

Vested

     (983,986)        9.17    

Forfeited

     (57,335)        6.37    
  

 

 

    

Unvested at March 31, 2019

                     4,225,586         5.56    
  

 

 

    

 

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Restricted stock units (“RSUs”) have been granted to the Company’s outside directors under the 2000 Plan and the 2009 Plan. On March 1, 2018, each of the Company’s outside directors received a grant under the 2009 Plan of 37,118 RSUs. On March 1, 2019, each of the Company’s outside directors received a grant under the 2009 Plan of 34,068 RSUs. Each of the 2018 and 2019 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 2009 Plan as of March 31, 2019, and changes during the three-month period following December 31, 2018, were as follows:

 

                 Shares                  Weighted-
Average Grant
        Date Fair Value        
 

Unvested at December 31, 2018

     397,906       $                                 6.17    

Granted

     306,612         4.99    

Vested

                 (162,942)        7.42    

Forfeited

            -    
  

 

 

    

Unvested at March 31, 2019

     541,576         5.13    
  

 

 

    

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 $51 million for the three months ended March 31, 2019 and 2018, respectively. Included in these corporate office costs is stock-based compensation of $3 million and $4 million for the three months ended March 31, 2019 and 2018, respectively.

4. USE OF ESTIMATES

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

 

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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.

Acquisition and integration expenses related to prospective and closed acquisitions included in other operating expenses on the condensed consolidated statements of loss were $1 million and less than $1 million for the three months ended March 31, 2019 and 2018, respectively.

During the three months ended March 31, 2019, one or more subsidiaries of the Company paid approximately $4 million to acquire the operating assets and related businesses of certain physician practices, clinics and other ancillary businesses that operate within the communities served by the Company’s affiliated hospitals. In connection with these acquisitions, during the three months ended March 31, 2019, the Company allocated approximately $2 million of the consideration paid to property and equipment and net working capital and the remainder, approximately $2 million consisting of intangible assets that do not qualify for separate recognition, to goodwill. No hospitals were acquired in 2018 or during the three months ended March 31, 2019.

Divestitures

The following table provides a summary of hospitals that the Company divested during the three months ended March 31, 2019 and the year ended December 31, 2018:

 

Hospital

  

Buyer

  

City, State

   Licensed
Beds
    

Effective Date

2019 Divestitures:

           

Chester Regional Medical Center

   Medical University Hospital Authority    Chester, SC      82      March 1, 2019

Carolinas Hospital System - Florence

   Medical University Hospital Authority    Florence, SC      396      March 1, 2019

Springs Memorial Hospital

   Medical University Hospital Authority    Lancaster, SC      225      March 1, 2019

Carolinas Hospital System - Marion

   Medical University Hospital Authority    Mullins, SC      124      March 1, 2019

Memorial Hospital of Salem County

   Community Healthcare Associates, LLC    Salem, NJ      126      January 31, 2019

Mary Black Health System - Spartanburg

   Spartanburg Regional Healthcare System    Spartanburg, SC      207      January 1, 2019

Mary Black Health System - Gaffney

   Spartanburg Regional Healthcare System    Gaffney, SC      125      January 1, 2019

2018 Divestitures:

           

Sparks Regional Medical Center

   Baptist Health    Fort Smith, AR      492      November 1, 2018

Sparks Medical Center - Van Buren

   Baptist Health    Van Buren, AR      103      November 1, 2018

AllianceHealth Deaconess

   INTEGRIS Health    Oklahoma City, OK      238      October 1, 2018

Munroe Regional Medical Center

   Adventist Health System    Ocala, FL      425      August 1, 2018

Tennova Healthcare - Dyersburg Regional

   West Tennessee Healthcare    Dyersburg, TN      225      June 1, 2018

Tennova Healthcare - Regional Jackson

   West Tennessee Healthcare    Jackson, TN      150      June 1, 2018

Tennova Healthcare - 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

 

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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 three months ended March 31, 2019 and 2018.

The following table discloses amounts included in the condensed consolidated balance sheet for the hospitals classified as held for sale as of March 31, 2019 and December 31, 2018 (in millions):

 

               March 31, 2019                          December 31, 2018            

Other current assets

   $ 4      $ 21  

Other assets, net

     14        154  

Accrued liabilities

     -        44  

Other Hospital Closures

During the three months ended December 31, 2018, the Company completed the planned closure of Tennova – Physicians Regional Medical Center in Knoxville, Tennessee and Tennova – Lakeway Regional Medical Center in Morristown, Tennessee. The Company recorded an impairment charge of approximately $12 million during the three months ended March 31, 2019 to further adjust the fair value of the supplies, inventory and long-lived assets of these hospitals, including property and equipment and capitalized software costs, based on the Company’s updated evaluation of their estimated fair value and future utilization and consideration of costs to dispose of such assets.

6. INCOME TAXES

The total amount of unrecognized benefit that would affect the effective tax rate, if recognized, was approximately $7 million as of March 31, 2019. A total of approximately $4 million of interest and penalties is included in the amount of the liability for uncertain tax positions at March 31, 2019. 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’s federal income tax returns for the 2009 and 2010 tax years have been settled with the Internal Revenue Service. The results of these examinations were not material to the Company’s consolidated results of operations or consolidated financial position. The Company’s federal income tax returns for the 2014 and 2015 tax years remain 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 June 30, 2019 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.

The Company’s effective tax rates were (7.4)% and 53.8% for the three months ended March 31, 2019 and 2018, respectively. The difference in the Company’s effective tax rate for the three months ended March 31, 2019, when compared to the three months ended March 31, 2018, was primarily due to the increase in valuation allowance recognized on IRC Section 163(j) interest carryforwards.

Cash paid for income taxes, net of refunds received, resulted in a net refund of less than $1 million during both of the three-month periods ended March 31, 2019 and 2018.

 

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7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The changes in the carrying amount of goodwill for the three months ended March 31, 2019 are as follows (in millions):

 

Balance, as of December 31, 2018

  

Goodwill

   $                         7,373   

Accumulated impairment losses

     (2,814)  
  

 

 

 
     4,559   
  

 

 

 

 

Goodwill acquired as part of acquisitions during current year

  

 

 

 

 

 

Goodwill allocated to hospitals held for sale

     (8)  
  

 

 

 

Balance, as of March 31, 2019

  

Goodwill

     7,367   

Accumulated impairment losses

     (2,814)  
  

 

 

 
   $ 4,553   
  

 

 

 

Goodwill is allocated to each identified reporting unit, which is defined as an operating segment or one level below the operating segment (referred to as a component of the entity). Management has determined that the Company’s operating segments meet the criteria to be classified as reporting units. At March 31, 2019, the Company had approximately $4.6 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 early 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. The Company performed its annual goodwill impairment evaluation during the fourth quarter of 2018 using the October 31, 2018 measurement date, which evaluation indicated no impairment. The next annual goodwill evaluation will be performed during the fourth quarter of 2019 with an October 31, 2019 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.

While no impairment was indicated in the Company’s most recent annual goodwill evaluation as of the October 31, 2018 measurement date, the reduction in the Company’s fair value and the resulting goodwill impairment charges recorded in 2016 and 2017 reduced the carrying value of the Company’s hospital operations reporting unit to an amount equal to its estimated fair value. This increases the risk that future declines in fair value could result in goodwill impairment. The determination of fair value in the Company’s goodwill impairment analysis is based on an estimate of fair value for each reporting unit utilizing known and estimated inputs at the evaluation date. Some of those inputs include, but are not limited to, the most recent price of the Company’s common stock or fair value of long-term debt, estimates of future revenue and expense growth, estimated market multiples, expected capital expenditures, income tax rates, and costs of invested capital. Future estimates of fair value could be adversely affected if the actual outcome of one or more of these assumptions changes materially in the future, including further decline in the Company’s stock price or fair value of long-term debt, lower than expected hospital volumes, higher market interest rates or increased operating costs. Such changes impacting the calculation of fair value could result in a material impairment charge in the future.

 

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Intangible Assets

No intangible assets other than goodwill were acquired during the three months ended March 31, 2019. The gross carrying amount of the Company’s other intangible assets subject to amortization was $1 million at both March 31, 2019 and December 31, 2018, and the net carrying amount was less than $1 million at both March 31, 2019 and December 31, 2018. The carrying amount of the Company’s other intangible assets not subject to amortization was $66 million and $67 million at March 31, 2019 and December 31, 2018, 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 two years. There are no expected residual values related to these intangible assets. Amortization expense on these intangible assets was less than $1 million for both of the three-month periods ended March 31, 2019 and 2018. Amortization expense on intangible assets is estimated to be less than $1 million for the remainder of 2019 and in 2020 through 2022.

The gross carrying amount of capitalized software for internal use was approximately $1.2 billion at both March 31, 2019 and December 31, 2018, and the net carrying amount was approximately $339 million and $355 million at March 31, 2019 and December 31, 2018, respectively. The estimated amortization period for capitalized internal-use software is generally three years, except for capitalized costs related to significant system conversions, which is generally eight to ten years. There is no expected residual value for capitalized internal-use software. At March 31, 2019, there was approximately $52 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 $30 million and $36 million during the three months ended March 31, 2019 and 2018, respectively. Amortization expense on capitalized internal-use software is estimated to be $87 million for the remainder of 2019, $107 million in 2020, $58 million in 2021, $36 million in 2022, $25 million in 2023, $14 million in 2024 and $12 million thereafter.

8. EARNINGS PER SHARE

The following table sets forth the components of the denominator for the computation of basic and diluted (loss) earnings per share attributable to Community Health Systems, Inc. common stockholders:

 

                     Three Months Ended                 
March 31,
 
     2019     2018  

Weighted-average number of shares outstanding — basic

     113,257,608        112,291,496   

Effect of dilutive securities:

    

Restricted stock awards

            

Employee stock options

            

Other equity-based awards

            
  

 

 

   

 

 

 

Weighted-average number of shares outstanding — diluted

     113,257,608        112,291,496   
  

 

 

   

 

 

 

The Company generated a loss attributable to Community Health Systems, Inc. common stockholders for the three-month periods ended March 31, 2019 and 2018, so the effect of dilutive securities is not considered because their effect would be antidilutive. If the Company had generated income, the effect of restricted stock awards on the diluted shares calculation would have been an increase of 59,261 shares and 73,361 shares during the three months ended March 31, 2019 and 2018, respectively.

 

                     Three Months Ended                 
March 31,
 
     2019     2018  

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

    

Employee stock options and restricted stock awards

     3,273,866        1,920,349   
  

 

 

   

 

 

 

 

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

 

9. STOCKHOLDERS’ DEFICIT

Authorized capital shares of the Company include 400,000,000 shares of capital stock consisting of 300,000,000 shares of common stock and 100,000,000 shares of preferred stock. Each of the aforementioned classes of capital stock has a par value of $0.01 per share. Shares of preferred stock, none of which were outstanding as of March 31, 2019, 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.

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 $100 million in the aggregate. 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 March 31, 2019, under the most restrictive test in these agreements (and subject to certain exceptions), the Company has approximately $100 million available with which to pay permitted dividends and/or repurchase shares of stock or make other restricted payments.

 

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

 

The following schedules present the reconciliation of the carrying amount of total equity, equity attributable to the Company, and equity attributable to the noncontrolling interests for the three months ended March 31, 2019 and 2018 (in millions):

 

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

Capital
    Accumulated
Other
  Comprehensive  
Loss
    Accumulated
Deficit
    Noncontrolling
Interest
    Total
Stockholders’
Deficit
 

Balance, December 31, 2018

  $             504    $             1    $             2,017    $         (10)     $             (3,543)     $             72    $             (1,463)  

Comprehensive income (loss)

                          (118)           (110)  

Contributions from noncontrolling interests

                                      -  

Distributions to noncontrolling interests

    (19)                               (8)       (8)  

Purchase of subsidiary shares from noncontrolling interests

    (1)                                     -  

Other reclassifications of noncontrolling interests

    (1)                                   1

Adjustment to redemption value of redeemable noncontrolling interests

    12            (12)                         (12)  

Cancellation of restricted stock for tax withholdings on vested shares

                (1)                         (1)  

Share-based compensation

                                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2019

  $ 505    $   $ 2,007    $ (10)     $ (3,661)     $ 73    $ (1,590)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

Capital
    Accumulated
Other
Comprehensive
Loss
    Accumulated
Deficit
    Noncontrolling
Interest
    Total
Stockholders’
Deficit
 

Balance, December 31, 2017

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

Comprehensive income (loss)

    13                  17      (25)           (2)  

Adoption of new accounting standards

                      (12)       12             

Distributions to noncontrolling interests

    (17)                               (6)       (6)  

Purchase of subsidiary shares from noncontrolling interests

    (1)             (2)                         (2)  

Other reclassifications of noncontrolling interests

                                (1)       (1)  

Cancellation of restricted stock for tax withholdings on vested shares

                (2)                         (2)  

Share-based compensation

                                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2018

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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

 

     Three Months Ended  
     March 31,  
     2019      2018  

Net loss attributable to Community Health Systems, Inc. stockholders

   $                     (118)       $                     (25)  

Transfers from the noncontrolling interests:

     

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

            (2)  
  

 

 

    

 

 

 

Net transfers from the noncontrolling interests

            (2)  
  

 

 

    

 

 

 

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

   $ (118)       $ (27)  
  

 

 

    

 

 

 

10. LONG-TERM DEBT

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

 

     March 31,      December 31,  
     2019      2018  

Credit Facility:

     

Term H Loan

    $       $ 1,622   

Revolving Credit Facility

             

8% Senior Notes due 2019

     155         155   

718% Senior Notes due 2020

     121         121   

518% Senior Secured Notes due 2021

     1,000         1,000   

678% Senior Notes due 2022

     2,632         2,632   

614% Senior Secured Notes due 2023

     3,100         3,100   

858% Senior Secured Notes due 2024

     1,033         1,033   

8% Senior Secured Notes due 2026

     1,601          

Junior-Priority Secured Notes due 2023

     1,770         1,770   

Junior-Priority Secured Notes due 2024

     1,355         1,355   

ABL Facility

     723         698   

Finance lease and financing obligations

     228         231   

Other

     44         43   

Less: Unamortized deferred debt issuance costs and note premium

     (172)        (164)  
  

 

 

    

 

 

 

Total debt

     13,590         13,596   

Less: Current maturities

     (205)        (204)  
  

 

 

    

 

 

 

Total long-term debt

    $                 13,385        $                 13,392   
  

 

 

    

 

 

 

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, 2018 included (i) a revolving credit facility with commitments through January 27, 2021 of $425 million (the “Revolving Facility”), and (ii) a Term H facility due 2021 (the “Term H Facility). The Revolving Facility includes a subfacility for letters of credit.

 

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The loans under the Credit Facility bore 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 is subject to adjustment determined by reference to a leverage-based pricing grid. Based on the Company’s 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 refinancing discussed below, the Term H Loan accrued interest at a rate per annum 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 borrowings. The Term H Loan was subject to a 1.00% LIBOR floor and a 2.00% Alternate Base Rate floor.

The term loan facility was required to be prepaid in an amount equal to (1) 100% of the net cash proceeds of certain asset sales and dispositions by the Company and its subsidiaries, subject to certain exceptions and reinvestment rights (as further described below), (2) 100% of the net cash proceeds of issuances of certain debt obligations or receivables-based financing by the Company and its subsidiaries, subject to certain exceptions, and (3) 75%, subject to reduction to a lower percentage based on the Company’s first lien net leverage ratio (as defined in the Credit Facility generally as the ratio of first lien net debt on the date of determination to the Company’s consolidated EBITDA, as defined, for the four quarters most recently ended prior to such date), of excess cash flow (as defined) for any year, subject to certain exceptions. Voluntary prepayments and commitment reductions were permitted in whole or in part, without any premium or penalty, subject to minimum prepayment or reduction requirements. There were no scheduled principal amortization payments on the Term H Facility after December 31, 2018.

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. Such assets constitute substantially the same assets, subject to certain exceptions, that secure (i) on a first lien basis CHS’ obligations under the 518% Senior Secured Notes, the 6¼% Senior Secured Notes, the 858% Senior Secured Notes and the 8% Senior Secured Notes (in each case, as defined below) and (ii) on a junior-priority basis the 2023 Junior-Priority Notes and the 2024 Junior-Priority Notes (in each case, as defined below).

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

The Credit Facility contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting the Company’s and its subsidiaries’ ability, subject to certain exceptions, to, among other things (1) declare dividends, make distributions or redeem or repurchase capital stock, (2) prepay, redeem or repurchase other debt, (3) incur liens or grant negative pledges, (4) make loans and investments and enter into acquisitions and joint ventures, (5) incur additional indebtedness or provide certain guarantees, (6) make capital expenditures, (7) engage in mergers, acquisitions and asset sales, (8) conduct transactions with affiliates, (9) alter the nature of the Company’s businesses, (10) grant certain guarantees with respect to physician practices, (11) engage in sale and leaseback transactions or (12) change the Company’s fiscal year. The Company is also required to comply with specified financial covenants (consisting of a first lien net debt to consolidated EBITDA leverage ratio) and various affirmative covenants. Under the Credit Facility, the first lien net debt to consolidated EBITDA ratio is calculated as the ratio of total first lien debt, less unrestricted cash and cash equivalents, to consolidated EBITDA, as defined in the Credit Facility. The calculation of consolidated EBITDA as defined in the Credit Facility is a trailing 12-month calculation that begins with net income attributable to the Company, with certain pro forma adjustments to consider the impact of material acquisitions or divestitures, and adjustments for interest, taxes, depreciation and amortization, net income attributable to noncontrolling interests, stock compensation expense, restructuring costs, and the financial impact of other non-cash or non-recurring items recorded during any such 12-month period. For the 12-month period ended March 31, 2019, 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 1.0. The Company was in compliance with all such covenants at March 31, 2019, with a first lien net debt to consolidated EBITDA ratio of approximately 4.98 to 1.0.

 

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

As of March 31, 2019, the availability for additional borrowings under the Credit Facility, subject to certain limitations as set forth in the Credit Facility, was approximately $385 million pursuant to the Revolving Facility, of which no borrowings were outstanding. As of March 31, 2019, the Company had letters of credit issued, primarily in support of potential insurance-related claims and certain bonds, of approximately $120 million. CHS has the ability to amend the Credit Facility to provide for one or more tranches of term loans or increases in the Revolving Facility in an aggregate principal amount of up to $500 million. As of March 31, 2019, the weighted-average interest rate under the Credit Facility, excluding swaps, was 7.0%.

On February 15, 2019, the Company and CHS entered into Amendment No. 1 (the “Agreement”), among the Company, CHS, the subsidiary guarantors party thereto, the lenders party thereto and Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent, to the Credit Facility. The Credit Facility was amended by the Agreement, with requisite covenant lender approval, to amend the first lien net debt to EBITDA ratio financial covenant and to reduce the extended revolving credit commitments to $385 million. The amended financial covenant provides for a maximum first lien net debt to EBITDA ratio of 5.00 to 1.0 from July 1, 2018 through December 31, 2018, 5.25 to 1.0 from January 1, 2019 through December 31, 2019, 5.00 to 1.00 from January 1, 2020 through June 30, 2020, 4.50 to 1.00 from July 1, 2020 through September 30, 2020, and 4.25 to 1.0 thereafter. In addition, CHS agreed pursuant to the Agreement to further restrict its ability to make restricted payments. The revolving credit commitments will terminate on January 27, 2021. The amended Credit Facility includes a 91-day springing maturity date applicable if more than $250 million in the aggregate principal amount of our 8% Senior Notes, 71/8% Senior Notes, Term H Facility or refinancings thereof are scheduled to mature or similarly become due within 91 days of such date.

On March 6, 2019, CHS completed a private offering of $1.601 billion aggregate principal amount of 8% Senior Secured Notes due March 15, 2026 (the “8% Senior Secured Notes”). The terms of the 8% Senior Secured Notes are discussed below. Using the proceeds from the offering, the Company repaid the outstanding balance owed under the Term H Loan and paid fees and expenses related to the offering.

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 November 15, 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 878% 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 878% 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 par, 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).

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.

 

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On June 22, 2018, CHS issued approximately $1.770 billion aggregate principal amount of new Junior-Priority Secured Notes due June 30, 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.

718% Senior Notes due 2020

On July 18, 2012, CHS completed a public offering of 718% Senior Notes due July 15, 2020 (the “718% 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 878% 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 718% Senior Notes bear interest at 7.125% per annum, payable semiannually in arrears on July 15 and January 15. Interest on the 718% 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 718% Senior Notes upon not less than 30 nor more than 60 days’ notice at par, 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).

On June 22, 2018, CHS issued approximately $1.079 billion aggregate principal amount of new Junior-Priority Secured Notes due June 30, 2024 (the “2024 Junior-Priority Notes”) in exchange for the same amount of 718% Senior Notes. The terms of the 2024 Junior-Priority Notes are described below. Following this exchange, CHS had $121 million aggregate principal amount of 718% Senior Notes outstanding.

518% Senior Secured Notes due 2021

On January 27, 2014, CHS completed a private offering of $1.0 billion aggregate principal amount of 518% Senior Secured Notes due August 1, 2021 (the “518% Senior Secured Notes”). The net proceeds from this issuance were used to finance the Company’s acquisition by merger of Health Management Associates (“HMA”). The 518% Senior Secured Notes bear interest at 5.125% per annum, payable semiannually in arrears on February 1 and August 1. Interest on the 518% 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 518% Senior Secured Notes and the related guarantees are secured by (i) first-priority liens on the collateral (the “Non-ABL Priority Collateral”) that also secures on a first-priority basis the Credit Facility (subject to certain exceptions), the 6¼% Senior Secured Notes, the 858% Senior Secured Notes and the 8% Senior Secured Notes and (ii) second-priority liens on the collateral (the “ABL-Priority Collateral”) that secures on a first-priority basis the ABL Facility (and also secures on a second-priority basis the Credit Facility and the 6¼% Senior Secured Notes, the 858% Senior Secured Notes and the 8% Senior Secured Notes), in each case subject to permitted liens described in the indenture governing the 518% Senior Secured Notes.

CHS is entitled, at its option, to redeem all or a portion of the 518% 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, 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 518% Senior Secured Notes, as a result of an exchange offer made by CHS, all of the 518% 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 518% Senior Secured Notes (except that the exchange notes were issued under a registration statement pursuant to the 1933 Act). References to the 518% Senior Secured Notes shall be deemed to be the 2021 Exchange Notes unless the context provides otherwise.

 

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678% Senior Notes due 2022

On January 27, 2014, CHS completed a private offering of $3.0 billion aggregate principal amount of 678% Senior Notes due February 1, 2022 (the “678% Senior Notes”). The net proceeds from this issuance were used to finance the HMA merger. The 678% Senior Notes bear interest at 6.875% per annum, payable semiannually in arrears on February 1 and August 1. Interest on the 678% 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 678% 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, 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 678% Senior Notes, as a result of an exchange offer made by CHS, all of the 678% Senior Notes issued in January 2014 were exchanged in October 2014 for new notes (the “678% Exchange Notes”) having terms substantially identical in all material respects to the 678% Senior Notes (except that the exchange notes were issued under a registration statement pursuant to the 1933 Act). References to the 678% Senior Notes shall be deemed to be the 678% 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 678% Senior Notes. Following this exchange, CHS had $2.632 billion aggregate principal amount of 678% Senior Notes outstanding.

614% Senior Secured Notes due 2023

On March 16, 2017, CHS completed a public offering of $2.2 billion aggregate principal amount of 6¼% Senior Secured Notes due March 31, 2023 (the “6¼% 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 6¼% Senior Secured Notes, increasing the total aggregate principal amount of 6¼% 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 6¼% Senior Secured Notes issued on March 16, 2017. The 6¼% Senior Secured Notes bear interest at 6.250% per annum, payable semiannually in arrears on March 31 and September 30. Interest on the 6¼% 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 614% Senior Secured Notes and the related guarantees are secured by (i) first-priority liens on the Non-ABL Priority Collateral that also secures on a first-priority basis the Credit Facility (subject to certain exceptions), the 518% Senior Secured Notes, the 858% Senior Secured Notes and the 8% Senior Secured Notes and (ii) second-priority liens on the ABL-Priority Collateral that secures on a first-priority basis the ABL Facility (and also secures on a second-priority basis the Credit Facility and the 518% Senior Secured Notes, the 858% Senior Secured Notes and the 8% Senior Secured Notes), in each case subject to permitted liens described in the indenture governing the 614% Senior Secured Notes.

CHS is entitled, at its option, to redeem all or a portion of the 6¼% 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 6¼% Senior Secured Notes redeemed plus accrued and unpaid interest, if any, plus a “make-whole” premium, as described in the indenture governing the 6¼% Senior Secured Notes. In addition, CHS may redeem up to 40% of the aggregate principal amount of the 6¼% 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 6¼% Senior Secured Notes redeemed, plus accrued and unpaid interest, if any.

 

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CHS may redeem some or all of the 6¼% 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) 978% per annum from June 22, 2019 until maturity, payable semiannually in arrears on June 30 and December 31.

The 2023 Junior-Priority Notes and the related guarantees are secured by (i) second-priority liens on the Non-ABL Priority Collateral that secures on a first-priority basis the Credit Facility (subject to certain exceptions), the 518% Senior Secured Notes, the 614% Senior Secured Notes, the 858% Senior Secured Notes and the 8% Senior Secured Notes and (ii) third-priority liens on the ABL-Priority Collateral that secures on a first-priority basis the ABL Facility (and also secures on a second-priority basis the Credit Facility, the 518% Senior Secured Notes, the 614% Senior Secured Notes, the 858% Senior Secured Notes and the 8% Senior Secured Notes), in each case subject to permitted liens described in the indenture governing the 2023 Junior-Priority Notes.

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. 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.

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 15 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 29, 2021

     107.406  %    

June 30, 2021 to June 29, 2022

     103.703  %    

June 30, 2022 to June 29, 2023

     100.000  %    

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 718% Senior Notes and approximately $368 million of 678% Senior Notes. The 2024 Junior-Priority Notes bear interest at a rate of 818% per annum, payable semiannually in arrears on June 30 and December 31.

 

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The 2024 Junior-Priority Notes and the related guarantees are secured by (i) second-priority liens on the Non-ABL Priority Collateral that secures on a first-priority basis the Credit Facility (subject to certain exceptions), the 518% Senior Secured Notes, the 614% Senior Secured Notes, the 858% Senior Secured Notes and the 8% Senior Secured Notes and (ii) third-priority liens on the ABL-Priority Collateral that secures on a first-priority basis the ABL Facility (and also secures on a second-priority basis the Credit Facility, the 518% Senior Secured Notes, the 614% Senior Secured Notes, the 858% Senior Secured Notes and the 8% Senior Secured Notes), in each case subject to permitted liens described in the indenture governing the 2024 Junior-Priority Notes.

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. 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.

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 15 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 29, 2022

             104.063 %      

June 30, 2022 to June 29, 2023

             102.031 %      

June 30, 2023 to June 29, 2024

             100.000 %      

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 718% Senior Notes with: (a) cash or cash equivalents on hand as of the consummation of the 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 718% Senior Notes, as applicable.

858% Senior Secured Notes due 2024

On July 6, 2018, CHS completed a private offering of $1.033 billion aggregate principal amount of 858% Senior Secured Notes due January 15, 2024 (the “858% Senior Secured Notes”). The terms of the 858% 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 858% Senior Secured Notes bear interest at a rate of 858% 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.

The 858% Senior Secured Notes and the related guarantees are secured by (i) first-priority liens on the Non-ABL Priority Collateral that also secures on a first-priority basis the Credit Facility (subject to certain exceptions), the 518% Senior Secured Notes, the 614% Senior Secured Notes and the 8% Senior Secured Notes and (ii) second-priority liens on the ABL-Priority Collateral that secures on a first-priority basis the ABL Facility (and also secures on a second-priority basis the Credit Facility and the 518% Senior Secured Notes, the 614% Senior Secured Notes and the 8% Senior Secured Notes), in each case subject to permitted liens described in the indenture governing the 858% Senior Secured Notes.

 

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Prior to January 15, 2021, CHS may redeem some or all of the 858% Senior Secured 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 858% Senior Secured Notes. In addition, at any time prior to January 15, 2021, CHS may redeem up to 40% of the aggregate principal amount of the 858% Senior Secured Notes with the proceeds of certain equity offerings at 108.625%, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.

After January 15, 2021, CHS is entitled, at its option, to redeem all or a portion of the 858% Senior Secured Notes upon not less than 15 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           

January 15, 2021 to January 14, 2022

             104.313 %      

January 15, 2022 to January 14, 2023

             102.156 %      

January 15, 2023 to January 14, 2024

             100.000 %      

8% Senior Secured Notes due 2026

On March 6, 2019, CHS completed a private offering of $1.601 billion aggregate principal amount of the 8% Senior Secured Notes. The terms of the 8% Senior Secured Notes are governed by an indenture, dated as of March 6, 2019, among CHS, the Company, the subsidiary guarantors party thereto, Regions Bank, as trustee and Credit Suisse AG, as collateral agent. The 8% Senior Secured Notes bear interest at a rate of 8% per year payable semi-annually in arrears on March 15 and September 15 of each year, commencing on September 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.

The 8% Senior Secured Notes and the related guarantees are secured by (i) first-priority liens on the Non-ABL Priority Collateral that also secures on a first-priority basis the Credit Facility (subject to certain exceptions), the 518% Senior Secured Notes, the 614% Senior Secured Notes, and the 858% Senior Secured Notes and (ii) second-priority liens on the ABL-Priority Collateral that secures on a first-priority basis the ABL Facility (and also secures on a second-priority basis the Credit Facility and the 518% Senior Secured Notes, the 614% Senior Secured Notes, and the 858% Senior Secured Notes), in each case subject to permitted liens described in the indenture governing the 8% Senior Secured Notes.

Prior to March 15, 2022, CHS may redeem some or all of the 8% Senior Secured 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 8% Senior Secured Notes. In addition, at any time prior to March 15, 2022, CHS may redeem up to 40% of the aggregate principal amount of the 8% Senior Secured Notes with the proceeds of certain equity offerings at 108.000%, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.

After March 15, 2022, CHS is entitled, at its option, to redeem all or a portion of the 8% Senior Secured Notes upon not less than 15 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 15, 2022 to March 14, 2023

             104.000 %      

March 15, 2023 to March 14, 2024

             102.000 %      

March 15, 2024 to March 14, 2026

             100.000 %      

 

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ABL Facility

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 March 31, 2019 totaled $723 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 December 31, 2018, 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 September 30, 2018, the applicable commitment fee rate under the ABL Facility is 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. The Company is also required to comply with a consolidated fixed coverage ratio, upon certain triggering events described below, 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. The consolidated fixed charge coverage ratio is a required covenant only in periods where the total borrowings outstanding under the ABL Facility reduce the amount available in the facility to less than the greater of (i) $95 million and (ii) 10% of the calculated borrowing base. At March 31, 2019, the Company is not subject to the consolidated fixed charge coverage ratio as such triggering event had not occurred during the last twelve months ended March 31, 2019.

 

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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.

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.

Loss from Early Extinguishment of Debt

The financing and repayment transactions discussed above resulted in a loss from early extinguishment of debt of $31 million and $4 million for the three months ended March 31, 2019 and 2018, respectively, and an after-tax loss of $23 million and $3 million for the three months ended March 31, 2019 and 2018, respectively.

Other Debt

As of March 31, 2019, 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 three separate interest swap agreements in effect at March 31, 2019, with an aggregate notional amount for currently effective swaps of $700 million. 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 $189 million and $212 million on borrowings during the three months ended March 31, 2019 and 2018, respectively.

 

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11.   FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of financial instruments has been estimated by the Company using available market information as of March 31, 2019 and December 31, 2018, and valuation methodologies considered appropriate. The estimates presented in the table below are not necessarily indicative of amounts the Company could realize in a current market exchange (in millions):

 

    March 31, 2019     December 31, 2018  
          Carrying      
      Amount       
      Estimated Fair  
Value
          Carrying      
Amount
      Estimated Fair  
Value
 

Assets:

       

Cash and cash equivalents

  $ 277     $ 277     $ 196     $ 196  

Investments in equity securities

    131       131       137       137  

Available-for-sale securities

    95       95       93       93  

Trading securities

    11       11       11       11  

Liabilities:

       

Contingent Value Right

    -       -       -       -  

Credit Facility

    -       -       1,602       1,564  

8% Senior Notes due 2019

    155       153       155       146  

718% Senior Notes due 2020

    121       115       121       100  

518% Senior Secured Notes due 2021

    985       983       984       934  

678% Senior Notes due 2022

    2,596       1,745       2,593       1,175  

614% Senior Secured Notes due 2023

    3,069       2,919       3,067       2,819  

858% Senior Secured Notes due 2024

    1,022       1,034       1,021       1,025  

8% Senior Secured Notes due 2026

    1,572       1,536       -       -  

Junior-Priority Secured Notes due 2023

    1,751       1,444       1,750       1,380  

Junior-Priority Secured Notes due 2024

    1,339       1,011       1,338       976  

ABL Facility and other debt

    762       762       734       734  

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

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

Investments in equity securities. Estimated fair value is based on closing price as quoted in public markets. Prior to the adoption of ASU 2016-01 on January 1, 2018, such investments were classified as either available-for-sale or trading securities.

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.

718% Senior Notes due 2020. Estimated fair value is based on the closing market price for these notes.

 

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518% Senior Secured Notes due 2021. Estimated fair value is based on the closing market price for these notes.

678% Senior Notes due 2022. Estimated fair value is based on the closing market price for these notes.

614% Senior Secured Notes due 2023. Estimated fair value is based on the closing market price for these notes.

858% Senior Secured Notes due 2024. Estimated fair value is based on the closing market price for these notes.

8% Senior Secured Notes due 2026. 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 approximates fair value due to the nature of these obligations.

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

The Company assesses the effectiveness of its hedge instruments on a quarterly basis. For the three months ended March 31, 2019 and 2018, 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 by such counterparties. However, at March 31, 2019, the Company does not anticipate nonperformance by these 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 March 31, 2019:

 

        Swap #         

          Notional Amount        
(in millions)
        Fixed Interest Rate             Termination Date                 Asset (Liability)        
Fair Value
(in millions)
 

1

  $             200       2.515  %       August 30, 2019     $             -  

2

    200       2.613  %       August 30, 2019       -  

3

    300       2.892  %       August 30, 2020       (2

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 March 31, 2019, approximately $3 million of interest income resulting from the spread between the fixed and floating rates defined in each interest rate swap agreement will be recognized during the next 12 months. If interest rate swaps do not remain highly effective as a cash flow hedge, the derivatives’ gains or losses resulting from the change in fair value reported through OCI will be reclassified into earnings.

The following tabular disclosure provides the amount of pre-tax (loss) gain recognized as a component of OCI during the three months ended March 31, 2019 and 2018 (in millions):

 

    Amount of Pre-Tax (Loss) Gain
         Recognized in OCI (Effective Portion)        
 
Derivatives in Cash Flow Hedging           Three Months Ended March 31,          

Relationships

  2019     2018  

Interest rate swaps

  $         (2)     $         17  

The following tabular disclosure provides the location of the effective portion of the pre-tax (gain) loss reclassified from accumulated other comprehensive loss (“AOCL”) into interest expense on the condensed consolidated statements of loss during the three months ended March 31, 2019 and 2018 (in millions):

 

    Amount of Pre-Tax (Gain) Loss Reclassified
         from AOCL into Income (Effective Portion)        
 
Location of (Gain) Loss Reclassified from           Three Months Ended March 31,          

AOCL into Income (Effective Portion)

  2019     2018  

Interest expense, net

  $         (1)     $         5  

 

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

 

The fair values of derivative instruments in the condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018 were as follows (in millions):

 

    

Asset Derivatives

    

Liability Derivatives

 
    

March 31, 2019

    

December 31, 2018

    

March 31, 2019

    

December 31, 2018

 
    

Balance
Sheet
  Location  

     Fair Value       

Balance
Sheet
  Location  

     Fair Value       

Balance
Sheet
  Location  

     Fair Value       

Balance
Sheet
  Location  

     Fair Value    

Derivatives designated as hedging instruments

   Other assets, net    $         -      Other assets, net    $         3      Other
long-term liabilities
   $         2      Other
long-term liabilities
   $         2  

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 three-month periods ended March 31, 2019 or March 31, 2018.

 

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

 

The following table sets forth, by level within the fair value hierarchy, the financial assets and liabilities recorded at fair value on a recurring basis as of March 31, 2019 and December 31, 2018 (in millions):

 

        March 31, 2019             Level 1             Level 2             Level 3      

Investments in equity securities

  $         131     $                                 131     $                                      -     $                                      -  

Available-for-sale securities

    95       -       95       -  

Trading securities

    11       -       11       -  

Fair value of interest rate swap agreements

    -       -       -       -  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 237     $ 131     $ 106     $ -  
 

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of interest rate swap agreements

  $ 2     $ -     $ 2     $ -  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $ 2     $ -     $ 2     $ -  
 

 

 

   

 

 

   

 

 

   

 

 

 
        December 31, 2018             Level 1             Level 2             Level 3      

Investments in equity securities

  $ 137     $ 137     $ -     $ -  

Available-for-sale securities

    93       -       93       -  

Trading securities

    11       -       11       -  

Fair value of interest rate swap agreements

    3       -       3       -  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 244     $ 137     $ 107     $ -  
 

 

 

   

 

 

   

 

 

   

 

 

 

Contingent Value Right (CVR)

  $ -     $ -     $ -     $ -  

Fair value of interest rate swap agreements

    2       -       2       -  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $ 2     $ -     $ 2     $ -  
 

 

 

   

 

 

   

 

 

   

 

 

 

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 and trading 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 CVRs represented the estimate of the fair value for the contingent consideration paid to HMA shareholders as part of the HMA merger. The CVRs were listed on the Nasdaq and the valuation of the CVRs was based on the quoted trading price for the CVRs on the last day of the period. Changes in the estimated fair value of the CVRs were recorded through the condensed consolidated statements of loss. In January 2019, the CVRs were terminated and removed from listing with Nasdaq after the determination that no amount was payable under the CVR agreement.

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.

 

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

 

The Company incorporates CVAs to appropriately reflect both its own nonperformance or credit risk and the respective counterparty’s nonperformance or credit risk in the fair value measurements. In adjusting the fair value of its interest rate swap agreements for the effect of nonperformance or credit risk, the Company has considered the impact of any netting features included in the agreements. The CVA on the Company’s interest rate swap agreements had an immaterial effect on the fair value of the related asset or liability at March 31, 2019 and December 31, 2018.

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.

13.   LEASES

The Company utilizes operating and finance leases for the use of certain hospitals, medical office buildings, and medical equipment. All lease agreements generally require the Company to pay maintenance, repairs, property taxes and insurance costs, which are variable amounts based on actual costs incurred during each applicable period. Such costs are not included in the determination of the ROU asset or lease liability. Variable lease cost also includes escalating rent payments that are not fixed at commencement but are based on an index that is determined in future periods over the lease term based on changes in the Consumer Price Index or other measure of cost inflation. Most leases include one or more options to renew the lease at the end of the initial term, with renewal terms that generally extend the lease at the then market rate of rental payment. Certain leases also include an option to buy the underlying asset at or a short time prior to the termination of the lease. All such options are at the Company’s discretion and are evaluated at the commencement of the lease, with only those that are reasonably certain of exercise included in determining the appropriate lease term. The components of lease cost and rent expense for the three months ended March 31, 2019 are as follows (in millions):

 

     Three Months Ended  

Lease Cost

           March 31, 2019          

Operating lease cost:

  

Operating lease cost

   $         48   

Short-term rent expense

     30   

Variable lease cost

      

Sublease income

     (1)  
  

 

 

 

Total operating lease cost

   $ 80   
  

 

 

 

Finance lease cost:

  

Amortization of right-of-use assets

   $  

Interest on finance lease liabilities

      
  

 

 

 

Total finance lease cost

   $  
  

 

 

 

 

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

 

Supplemental balance sheet information related to leases was as follows (in millions):

 

    

Balance Sheet Classification

      March 31, 2019      

Operating Leases:

    

Operating Lease ROU Assets

   Other assets, net   $             623  

Finance Leases:

    

Finance Lease ROU Assets

   Property and equipment     187  

Accumulated amortization

   Accumulated depreciation and amortization     (57

Current finance lease liabilities

   Current maturities of long-term debt     8  

Long-term finance lease liabilities

   Long-term debt     118  

Supplemental cash flow and other information related to leases as of and for the three months ended March 31, 2019 are as follows (dollars in millions):

 

     Three Months Ended  

Other information

           March 31, 2019          

Cash paid for amounts included in the measurement of lease liabilities:

  

Operating cash flows from operating leases

   $             35  

Operating cash flows from finance leases

     2  

Financing cash flows from finance leases

     3  

Right-of-use assets obtained in exchange for new finance lease liabilities

     1  

Right-of-use assets obtained in exchange for new operating lease liabilities

     15  

Weighted-average remaining lease term:

  

Operating leases

     6 years  

Finance leases

     20 years  

Weighted-average discount rate:

     9.3

Operating leases

     5.7

Finance leases

  

On December 22, 2016, the Company completed the sale and leaseback of ten medical office buildings for net proceeds of $159 million to HCP, Inc. The buildings, with a combined total of 756,183 square feet, are located in five states and support a wide array of diagnostic, medical and surgical services in an outpatient setting for the respective nearby hospitals. Because of the Company’s continuing involvement in these leased buildings, the transaction did not qualify for sale treatment and the related leases have been recorded as financing obligations in the Company’s condensed consolidated balance sheet at December 31, 2018. Upon adoption of ASC 842 on January 1, 2019, the Company reevaluated the classification of these financing arrangements utilizing the new accounting requirements for sale-leasebacks in ASC 842, concluding that these financing arrangements continue to not qualify for sale treatment and therefore should continue to be classified as financing obligations. At March 31, 2019, six of these financing obligations remain outstanding and are included in the table below, with the other four divested in conjunction with the sale of the related hospital entity.

 

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

 

Commitments relating to noncancellable operating and finance leases and financing obligations for each of the next five years and thereafter are as follows (in millions):

 

Year Ending December 31,

   Operating      Finance      Financing
Obligations
 

2019 (remaining nine months)

   $ 157       $ 12       $  

2020

     170         12          

2021

     123         11          

2022

     100         10          

2023

     79         16          

Thereafter

     231         164         119   
  

 

 

    

 

 

    

 

 

 

Total minimum future payments

     860         225         154   

Less: Imputed interest

     (222)        (99)        (52)  
  

 

 

    

 

 

    

 

 

 

Total liabilities

     638         126         102   

Less: Current portion

     (143)        (8)        (3)  
  

 

 

    

 

 

    

 

 

 

Long-term liabilities

   $                     495       $                     118       $                     99   
  

 

 

    

 

 

    

 

 

 

As previously disclosed in our 2018 Annual Report on Form 10-K, which followed the lease accounting prior to adoption of ASC 842, future commitments relating to noncancellable operating and capital leases and financing obligations for the five years and period thereafter as of December 31, 2018 were as follows (in millions):

 

Year Ending December 31,

   Operating (1)      Capital      Financing
Obligations
 

2019

   $                     188       $ 12       $ 12   

2020

     157         10          

2021

     121                10   

2022

     98                10   

2023

     79         14         10   

Thereafter

     234         121         106   
  

 

 

    

 

 

    

 

 

 

Total minimum future payments

   $ 877         172         157   
  

 

 

       

Less: Imputed interest

        (80)        (18)  
     

 

 

    

 

 

 

Total capital lease and financing obligations

        92         139   

Less: Current portion

        (8)        (5)  
     

 

 

    

 

 

 

Long-term capital lease and financing obligations

      $                     84       $                     134   
     

 

 

    

 

 

 

(1)     Minimum lease payments have not been reduced by minimum sublease rentals due in the future, which are considered immaterial.

As of March 31, 2019, there were approximately $10 million of assets underlying approved but pending leases that have not yet commenced, primarily for medical equipment.

 

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14.   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 for both of the three-month periods ended March 31, 2019 and 2018. The accrued benefit liability for the SERP totaled $67 million and $66 million at March 31, 2019 and December 31, 2018, 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 March 31, 2019 and March 31, 2018 were a discount rate of 4.2% and 3.4%, respectively, and an annual salary increase of 3.0% and 2.0%, respectively. The Company had equity investment securities in a rabbi trust generally designated to pay benefits of the SERP in the amounts of $78 million and $74 million at March 31, 2019 and December 31, 2018, respectively. These amounts are included in other assets, net on the condensed consolidated balance sheets.

During 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. As required by the pension accounting rules in U.S. GAAP, the Company recognized a loss of less than $1 million during the three months ended March 31, 2018. There was no settlement loss during the three months ended March 31, 2019.

15.   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. Notwithstanding the foregoing, the Company is not required to indemnify QHC in respect of any claims or proceedings arising out of or related to the business operations of Quorum Health Resources, LLC at any time or QHC’s compliance with the corporate integrity agreement. Subsequent to the spin-off of QHC, the Office of the Inspector General provided the Company with written assurance that it would look solely at QHC for compliance for its facilities under the Company’s Corporate Integrity Agreement; however, the Office of the Inspector General declined to enter into a separate corporate integrity agreement with QHC.

 

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

 

Probable Contingencies

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

The table below presents a reconciliation of the beginning and ending liability balances (in millions) during the three months ended March 31, 2019, with respect to the Company’s determination of the contingencies of the Company in respect of which an accrual has been recorded.

Summary of Recorded Amounts

 

           Probable      
         Contingencies        
 

Balance as of December 31, 2018

       $  19    

Expense

     -    

Reserve for insured claim

     -    

Cash payments

     -    
  

 

 

 

Balance as of March 31, 2019

       $ 19    
  

 

 

 

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 condensed consolidated balance sheet and are included in the table above. 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 condensed consolidated balance sheet.

In the aggregate, attorneys’ fees and other costs incurred but not included in the table above related to probable contingencies, totaled less than $1 million for both of the three-month periods ended March 31, 2019 and 2018, 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.

 

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Class Action Shareholder Federal Securities Cases. Three purported class action cases have been filed in the United States District Court for the Middle District of Tennessee; namely, Norfolk County Retirement System v. Community Health Systems, Inc., et al., filed May 9, 2011; De Zheng v. Community Health Systems, Inc., et al., filed May 12, 2011; and Minneapolis Firefighters Relief Association v. Community Health Systems, Inc., et al., filed June 21, 2011. All three seek class certification on behalf of purchasers of the Company’s common stock between July 27, 2006 and April 11, 2011 and allege that misleading statements resulted in artificially inflated prices for the Company’s common stock. In December 2011, the cases were consolidated for pretrial purposes and NYC Funds and its counsel were selected as lead plaintiffs/lead plaintiffs’ counsel. In lieu of ruling on the Company’s motion to dismiss, the court permitted the plaintiffs to file a first amended consolidated class action complaint, which was filed on October 5, 2015. The Company’s motion to dismiss was filed on November 4, 2015 and oral argument was held on April 11, 2016. The Company’s motion to dismiss was granted on June 16, 2016 and on June 27, 2016, the plaintiffs filed a notice of appeal to the Sixth Circuit Court of Appeals. The matter was heard on May 3, 2017. On December 13, 2017, the Sixth Circuit reversed the trial court’s dismissal of the case and remanded it to the District Court. The Company filed a renewed partial motion to dismiss on February 9, 2018, which was denied by the District Court on September 24, 2018. The Company also 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 United States Supreme Court denied the petition for a writ of certiorari on October 1, 2018. Plaintiff’s motion for class certification is pending. The Company believes this consolidated matter is without merit and will vigorously defend this case.

 

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

 

16.   SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The Senior Notes due 2019, 2020 and 2022, which are senior unsecured obligations of CHS, the 518% Senior Secured Notes due 2021, and the 6¼% Senior Secured Notes due 2023 (collectively, “the Notes”) are guaranteed on a senior basis by the Company and by certain of its existing and subsequently acquired or organized 100% owned domestic subsidiaries. In addition, equity interests held by the Company in non-guarantor subsidiaries have been pledged as collateral under the Notes, except for equity interests held in three hospitals owned jointly with a non-profit, health organization. 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 ABL Facility and Receivables Facility that are further discussed in Note 10. The Company’s subsidiaries generally do not purchase services from one another; thus, the intercompany transactions do not represent revenue generating transactions. All intercompany transactions eliminate in consolidation.

From time to time, subsidiaries of the Company sell and/or repurchase noncontrolling interests in consolidated subsidiaries, which may change subsidiaries between guarantors and non-guarantors. Amounts for prior periods have been revised to reflect the status of guarantors and non-guarantors as of March 31, 2019.

 

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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

 

Condensed Consolidating Statement of Loss

Three Months Ended March 31, 2019

 

     Parent
    Guarantor    
         Issuer          Other
Guarantors
     Non -
    Guarantors    
         Eliminations              Consolidated      
    

              (In millions)

 

        

Net operating revenues

     $        $ 42       $ 2,073       $ 1,261       $        $ 3,376 

Operating costs and expenses:

                 

Salaries and benefits

                   801       741              1,542 

Supplies

                   373       185              558 

Other operating expenses

                   529       282              811 

Government and other legal settlements and related costs

                                     

Electronic health records incentive reimbursement

                                         

Lease cost and rent

                   41       39              80 

Depreciation and amortization

                   94       59              153 

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

                   24       14              38 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating costs and expenses

                   1,867       1,320              3,187 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from operations

            42       206       (59)               189 

Interest expense, net

            138       136       (17)               257 

Loss from early extinguishment of debt

            31                            31 

Equity in earnings of unconsolidated affiliates

     118       (2)        77              (198)        (5)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(Loss) income before income taxes

     (118)        (125)        (7)        (42)        198       (94)  

(Benefit from) provision for income taxes

            (7)        (1)        15             
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net (loss) income

     (118)        (118)        (6)        (57)        198       (101)  

Less: Net income attributable to noncontrolling interests

                          17              17 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net (loss) income attributable to Community Health

                 

Systems, Inc. stockholders

     $ (118)        $ (118)        $ (6)        $ (74)        $ 198       $ (118)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

 

Condensed Consolidating Statement of Loss

Three Months Ended March 31, 2018

 

     Parent
    Guarantor    
         Issuer          Other
    Guarantors    
     Non -
    Guarantors    
         Eliminations              Consolidated      
    

                    (In millions)

 

        

Net operating revenues

     $ -        $ (5)        $ 2,285       $ 1,409       $ -        $ 3,689 

Operating costs and expenses:

                 

Salaries and benefits

     -        -        847       801       -        1,648 

Supplies

     -        -        406       210       -        616 

Other operating expenses

     -        -        607       304       -        911 

Government and other legal settlements and related costs

     -        -             -        -       

Electronic health records incentive reimbursement

     -        -        (1)        -        -        (1)  

Lease cost and rent

     -        -        47       42       -        89 

Depreciation and amortization

     -        -        116       65       -        181 

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

     -        -        16       12       -        28 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating costs and expenses

     -        -        2,043       1,434       -        3,477 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(Loss) income from operations

     -        (5)        242       (25)        -        212 

Interest expense, net

     -        91       143       (6)        -        228 

Loss from early extinguishment of debt

     -             -        -        -       

Equity in earnings of unconsolidated affiliates

     25       (34)        22       -        (20)        (7)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(Loss) income before income taxes

     (25)        (66)        77       (19)        20       (13)  

(Benefit from) provision for income taxes

     -        (41)        44       (10)        -        (7)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net (loss) income

     (25)        (25)        33       (9)        20       (6)  

Less: Net income attributable to noncontrolling interests

     -        -        -        19       -        19 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net (loss) income attributable to Community Health

                 

Systems, Inc. stockholders

     $ (25)        $ (25)        $ 33       $ (28)        $ 20       $ (25)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

 

Condensed Consolidating Statement of Comprehensive Loss

Three Months Ended March 31, 2019

 

     Parent
    Guarantor    
         Issuer          Other
    Guarantors    
     Non -
    Guarantors    
         Eliminations              Consolidated      
    

(In millions)

 

 

Net (loss) income

     $ (118)        $ (118)        $ (6)        $ (57)        $ 198       $ (101)  

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

                 

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

     (2)        (2)        -        -             (2)  

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

                    -        (4)       

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

     -                                -        -        -        -        -  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss)

     -        -             -        (2)        -  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive (loss) income

     (118)        (118)        (4)        (57)        196      (101)  

Less: Comprehensive income attributable to noncontrolling interests

     -        -        -        17       -        17 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

     $ (118)        $ (118)        $ (4)        $ (74)        $ 196       $ (118)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Condensed Consolidating Statement of Comprehensive Loss

Three Months Ended March 31, 2018

 

     Parent
    Guarantor    
             Issuer              Other
    Guarantors    
     Non -
    Guarantors    
         Eliminations              Consolidated      
    

(In millions)

 

 

Net (loss) income

     $ (25)        $ (25)        $ 33       $ (9)        $ 20       $ (6)  

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

                 

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

     18       18       -        -        (18)        18 

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

     (2)        (2)        (2)        -             (2)  

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

                    -        (2)       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss)

     17       17       (1)        -        (16)        17 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive (loss) income

     (8)        (8)        32       (9)             11 

Less: Comprehensive income attributable to noncontrolling interests

     -        -        -        19       -        19 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

     $ (8)        $ (8)        $ 32       $ (28)        $      $ (8)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

 

Condensed Consolidating Balance Sheet

March 31, 2019

 

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

Current assets:

                 

Cash and cash equivalents

     $ -        $ -        $ 217       $ 60       $ -        $ 277 

Patient accounts receivable

     -        -        1,974       386      -        2,360 

Supplies

     -        -        258       139       -        397 

Prepaid income taxes

          -        -        -        -       

Prepaid expenses and taxes

     -        -        147       50       -        197 

Other current assets

     -        -        100       261       -        361 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

          -        2,696       896       -        3,595 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Intercompany receivable

     -        12,566       4,896       6,178       (23,640)        -  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Property and equipment, net

     -        -        3,948       2,138       -        6,086 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Goodwill

     -        -        2,754       1,799       -        4,553 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Deferred income taxes

     66       -        -        -        -        66 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other assets, net

     -        22       1,114       873       -        2,009 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net investment in subsidiaries

     -        21,884       11,716       -        (33,600)        -  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $ 69       $ 34,472       $ 27,124       $ 11,884       $ (57,240)        $ 16,309 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

                         LIABILITIES AND DEFICIT

 

Current liabilities:

                 

Current maturities of long-term debt

     $ -        $ 155      $ 25      $ 25       $ -        $ 205 

Current operating lease liabilities

     -        -        77      66       -        143 

Accounts payable

     -        3      559      301       -        863 

Accrued interest

     -        250      -        -        -        250 

Accrued liabilities

     -        1      595      451       -        1,047 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities

     -        409      1,256      843       -        2,508 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Long-term debt

     -        13,163      146      76       -        13,385 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Intercompany payable

     1,694       22,481      24,648      11,722       (60,545)        -  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Deferred income taxes

     29       -        -        -        -        29 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Long-term operating lease liabilities

     -        -        252      243       -        495 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other long-term liabilities

          2      690      276       -        977 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     1,732       36,055      26,992      13,160       (60,545)        17,394 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Redeemable noncontrolling interests in equity of consolidated subsidiaries

     -        -        -        505       -        505 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Deficit:

                 

Community Health Systems, Inc. stockholders’ deficit:

                 

Common stock

          -        -        -        -       

Additional paid-in capital

     2,007       (354)        161       (583)        776       2,007 

Accumulated other comprehensive loss

     (10)        (10)        (11)        (2)        23       (10)  

(Accumulated deficit) retained earnings

     (3,661)        (1,219)        (18)        (1,269)        2,506       (3,661)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Community Health Systems, Inc. stockholders’ (deficit) equity

     (1,663)        (1,583)        132       (1,854)        3,305       (1,663)  

Noncontrolling interests in equity of consolidated subsidiaries

     -        -        -        73       -        73 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total (deficit) equity

     (1,663)        (1,583)        132       (1,781)        3,305       (1,590)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities and deficit

     $                 69       $             34,472       $             27,124       $             11,884      $ (57,240)        $                 16,309 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

 

Condensed Consolidating Balance Sheet

December 31, 2018

 

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

                         ASSETS

 

Current assets:

                 

Cash and cash equivalents

     $ -        $ -        $ 135       $ 61       $ -        $ 196 

Patient accounts receivable

     -        -        1,972       380       -        2,352 

Supplies

     -        -        261       141       -        402 

Prepaid income taxes

          -        -        -        -       

Prepaid expenses and taxes

     -        -        132       64       -        196 

Other current assets

     -        -        120       280       -        400 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

     3      -        2,620       926       -        3,549 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Intercompany receivable

     -        12,698       4,875       6,316       (23,889)        -  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Property and equipment, net

     -        -        3,992       2,147       -        6,139 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Goodwill

     -        -        2,760       1,799       -        4,559 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Deferred income taxes

     69       -        -        -        -        69 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other assets, net

     -        25       956       562       -        1,543 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net investment in subsidiaries

     -        21,519       11,698       -        (33,217)        -  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $ 72       $ 34,242       $ 26,901       $ 11,750       $ (57,106)        $ 15,859 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

                                 LIABILITIES AND DEFICIT

 

Current liabilities:

                 

Current maturities of long-term debt

     $ -        $ 155       $ 22       $ 27       $ -        $ 204 

Accounts payable

     -        -        593       294       -        887 

Accrued interest

     -        206       -        -        -        206 

Accrued liabilities

     -        -        635       460       -        1,095 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities

     -        361       1,250       781       -        2,392 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Long-term debt

     -        13,167       147       78       -        13,392 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Intercompany payable

     1,572       22,178       24,646       11,819       (60,215)        -  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Deferred income taxes

     26       -        -        -        -        26 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other long-term liabilities

               714       283       -        1,008 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     1,607       35,708       26,757       12,961       (60,215)        16,818 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Redeemable noncontrolling interests in equity of consolidated subsidiaries

     -        -        -        504       -        504 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Deficit:

                 

Community Health Systems, Inc. stockholders’ deficit:

                 

Common stock

          -        -        -        -       

Additional paid-in capital

     2,017       (327)        162       (566)        731       2,017 

Accumulated other comprehensive loss

     (10)        (10)        (5)        (9)        24       (10)  

(Accumulated deficit) retained earnings

     (3,543)        (1,129)        (13)        (1,212)        2,354       (3,543)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Community Health Systems, Inc. stockholders’ (deficit) equity

     (1,535)        (1,466)        144       (1,787)        3,109       (1,535)  

Noncontrolling interests in equity of consolidated subsidiaries

     -        -        -        72       -        72 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total (deficit) equity

     (1,535)        (1,466)        144       (1,715)        3,109       (1,463)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities and deficit

     $ 72       $ 34,242       $ 26,901       $ 11,750       $ (57,106)        $ 15,859 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

 

Condensed Consolidating Statement of Cash Flows

Three Months Ended March 31, 2019

 

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

Net cash (used in) provided by operating activities

   $ -      $ (59)      $ 130     $ 62     $ -      $ 133 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash flows from investing activities:

                 

Acquisitions of facilities and other related businesses

     -        -        (3)        (1)        -        (4)  

Purchases of property and equipment

     -        -        (102)        (19)        -        (121)  

Proceeds from disposition of hospitals and other ancillary operations

     -        18       138            -        161 

Purchases of available-for-sale securities and equity securities

     -        -        (9)        (6)        -        (15)  

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

     -        -        20       12       -        32 

Increase in other investments

     -        -        (32)        (2)        -        (34)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net cash provided by (used in) investing activities

     -        18       12       (11)        -        19 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

     -        (25)        -        -        -        (25)  

Proceeds from noncontrolling investors in joint ventures

     -        -        -             -       

Redemption of noncontrolling investments in joint ventures

     -        -        -        (1)        -        (1)  

Distributions to noncontrolling investors in joint ventures

     -        -        -        (27)        -        (27)  

Changes in intercompany balances with affiliates, net

          83       (62)        (22)        -        -  

Borrowings under credit agreements

     -        -        12       -        -        12 

Issuance of long-term debt

     -        1,840       -        -        -        1,840 

Proceeds from ABL facility

     -        25       -        -        -        25 

Repayments of long-term indebtedness

     -        (1,882)        (10)        (3)        -        (1,895)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net cash provided by (used in) financing activities

     -        41       (60)        (52)        -        (71)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net change in cash and cash equivalents

     -        -        82       (1)        -        81 

Cash and cash equivalents at beginning of period

     -        -        135       61       -        196 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ -      $ -      $ 217     $ 60     $ -      $ 277 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

 

Condensed Consolidating Statement of Cash Flows

Three Months Ended March 31, 2018

 

     Parent
    Guarantor    
         Issuer          Other
    Guarantors    
     Non -
    Guarantors    
         Eliminations              Consolidated      
    

(In millions)

 

 

Net cash provided by (used in) operating activities

     $  26       $  (58)        $ 108         $  30       $  -        $  106 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash flows from investing activities:

                 

Acquisitions of facilities and other related businesses

     -        -        (3)        (5)        -        (8)  

Purchases of property and equipment

     -        -        (119)        (51)        -        (170)  

Proceeds from disposition of hospitals and other ancillary operations

     -        -        10            -        11 

Proceeds from sale of property and equipment

     -        -                  -       

Purchases of available-for-sale securities and equity securities

     -        -        (11)        (8)        -        (19)  

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

     -        -        28            -        34 

Increase in other investments

     -        -        (14)        (14)        -        (28)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net cash used in investing activities

     -        -        (108)        (69)        -        (177)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash flows from financing activities:

                 

Repurchase of restricted stock shares for payroll tax withholding requirements

     (1)        -        -        -        -        (1)  

Deferred financing costs and other debt-related costs

     -        -        (11)        -        -        (11)  

Proceeds from noncontrolling investors in joint ventures

     -        -        -        -        -        -  

Redemption of noncontrolling investments in joint ventures

     -        -        -        (3)        -        (3)  

Distributions to noncontrolling investors in joint ventures

     -        -        -        (23)        -        (23)  

Changes in intercompany balances with affiliates, net

     (25)        69       (136)        92         -        -  

Borrowings under credit agreements

     -        -        10       -        -        10 

Issuance of long-term debt

     -        -        -        -        -        -  

Proceeds from ABL facility

     -        -        49       -        -        49 

Repayments of long-term indebtedness

     -        (11)        (76)        (2)        -        (89)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net cash (used in) provided by financing activities

     (26)        58       (164)        64         -        (68)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net change in cash and cash equivalents

     -        -        (164)        25       -        (139)  

Cash and cash equivalents at beginning of period

     -        -        499       64       -        563 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of period

     $ -        $ -        $  335       $  89       $ -        $  424 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

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

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

Executive Overview

We are one of the largest publicly traded hospital companies in the United States and a leading operator of general acute care hospitals and outpatient facilities in communities across the country. We provide healthcare services through the hospitals that we own and operate and affiliated businesses in non-urban and selected urban markets throughout the United States. We generate revenues by providing a broad range of general and specialized hospital healthcare services and outpatient services to patients in the communities in which we are located. As of March 31, 2019, we owned or leased 106 hospitals, comprised of 104 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.

Completed Divestiture and Acquisition Activity

During the three months ended March 31, 2019, we completed the divestiture of seven hospitals, including two hospitals the divestiture of which closed effective January 1, 2019 (for these hospitals, we received the net proceeds at a preliminary closing on December 31, 2018). These seven hospitals represented annual net operating revenues in 2018 of approximately $620 million, and we received total net proceeds of approximately $209 million in connection with the disposition of these hospitals.

During 2018, we completed the divestiture of 11 hospitals. These 11 hospitals represented annual net operating revenues in 2017 of approximately $950 million, and we received total net proceeds of approximately $405 million in connection with the disposition of these hospitals.

 

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The following table provides a summary of hospitals that we divested during the three months ended March 31, 2019 and the year ended December 31, 2018:

 

Hospital

 

Buyer

  City, State