Back to GetFilings.com

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, 2003

Commission file number 001-15925

COMMUNITY HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

        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, and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes ý    No o

        As of May 5, 2003, there were outstanding 98,249,308 shares of the Registrant's Common Stock, $.01 par value.

Community Health Systems, Inc.

Form 10-Q

For the Quarter Ended March 31, 2003

PART I FINANCIAL INFORMATION

Item 1.    Financial Statements

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

See accompanying notes.

2

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
(Unaudited)

See accompanying notes.

3

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

See accompanying notes.

4

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.    BASIS OF PRESENTATION

        The unaudited condensed consolidated financial statements of Community Health Systems, Inc. and its subsidiaries (the "Company") as of and for the three months ended March 31, 2003 and March 31, 2002, have been prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for such periods. All intercompany transactions and balances have been eliminated. The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2003.

        Certain information and disclosures normally included in the notes to consolidated financial statements have been condensed or omitted as permitted by the rules and regulations of the Securities and Exchange Commission, although the Company believes the disclosure is adequate to make the information presented not misleading. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2002 contained in the Company's Annual Report on Form 10-K.

2.    USE OF ESTIMATES

        The preparation of financial statements in conformity with generally accepted accounting principles requires management of the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results could differ from the estimates.

3.    ACCOUNTING FOR STOCK-BASED COMPENSATION

        The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Compensation cost, which the Company has substantially none, is measured as the excess of the fair value of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," established accounting and disclosure requirements using a fair value based method of accounting for stock-based employee compensation plans; however, it allows an entity to continue to measure compensation for those plans using the intrinsic value method of accounting prescribed by APB Opinion No. 25. The Company has elected to continue to measure compensation under the method of accounting as described above, and has adopted the disclosure requirements of SFAS No. 123 and SFAS No. 148.

        Had the fair value based method under SFAS No. 123 been used to value options granted and compensation expense recognized on a straight line basis over the vesting period of the grant, the

5

Company's net income and income per share would have been reduced to the pro forma amounts indicated below (in thousands except per share data):

4.    RECENT ACCOUNTING PRONOUNCEMENT

        In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities ("VIE's")" ("FIN No. 46"). This interpretation clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN NO. 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. Effective with the quarter beginning July 1, 2003, the interpretation applies immediately to VIE's created before January 31, 2003, and to interest obtained in VIE's before January 31, 2003. The Company does not expect the adoption of this interpretation to have a material effect on our consolidated financial position or consolidated results of operations. As of March 31, 2003 the Company has no investments in VIE's.

5.    ACQUISITIONS

        Effective January 1, 2003, the Company acquired seven hospitals from Methodist Healthcare of Memphis, Tennessee. The consideration for the seven hospitals totaled approximately $149 million of which approximately $141 million was paid in cash and approximately $8 million was assumed in liabilities. Combined licensed beds at these seven facilities total 676.

        On January 14, 2003, the Company announced the execution of a definitive agreement to acquire Southside Regional Medical Center (408 beds) in Petersburg, Virginia. The hospital is a sole provider located 25 miles south of Richmond, Virginia. As part of the transaction, which is subject to regulatory approvals, the Company has agreed to build a replacement hospital.

6

6.    GOODWILL AND OTHER INTANGIBLE ASSETS

        The changes in the carrying amount of goodwill for the three months ended March 31, 2003, are as follows (in thousands):

        The Company completed its annual goodwill impairment test as required by SFAS No. 142, using a measurement date of September 30, 2002. Based on the results of the impairment test, the Company was not required to recognize an impairment of goodwill.

        The gross carrying amount of the Company's other intangible assets was $4.2 million as of March 31, 2003 and $3.7 million as of December 31, 2002, and the net carrying amount was $2.9 million and $2.6 million as of March 31, 2003 and December 31, 2002, respectively. Other intangible assets are included in Other assets, net on the Company's balance sheet.

        The weighted average amortization period for the intangible assets subject to amortization is approximately 6 years. There are no expected residual values related to these intangible assets. Amortization expense on intangible assets during the three months ended March 31, 2003 was $0.1 million. Amortization expense on intangible assets is estimated to be $0.3 million for the remainder of 2003, $0.4 million in fiscal 2004, $0.3 million in fiscal 2005, $0.2 million in fiscal 2006, $0.1 million in fiscal 2007, and $0.1 million in fiscal 2008.

7

7.    EARNINGS PER SHARE

        The following table sets forth the computation of basic and diluted earnings per share (in thousands, except share and per share data):

        Since the net income per share impact of the conversion of the convertible notes is less than the basic net income per share for the three months ended March 31, 2003 and March 31, 2002, the convertible notes are dilutive and accordingly, must be included in the fully diluted calculation.

8.    STOCKHOLDER'S EQUITY

        On January 23, 2003, the Company announced an open market share repurchase program for up to five million shares of its common stock. The share repurchase program will conclude at the earlier of three years or when the maximum number of shares have been repurchased. As of March 31, 2003, the Company has repurchased 570,000 shares at an average cost of $18.04 per share.

9.    SUBSEQUENT EVENTS

        On April 25, 2003, the Company announced the execution of a definitive agreement to acquire Pottstown Memorial Medical Center located in Pottstown, Pennsylvania, located approximately 50 miles west of Philadelphia and 25 miles east of Reading, Pennsylvania. The hospital, which has a total of 299 beds, is being acquired from a local not-for-profit organization. The transaction is subject to regulatory approvals.

8

Item 2.    Management's Discussion And Analysis Of Financial Condition And Results Of Operations

        This discussion should be read in conjunction with the unaudited Condensed Consolidated Financial Statements included herein.

Acquisitions

        Effective January 1, 2003, we acquired seven hospitals from Methodist Healthcare Corporation of Memphis, Tennessee in a single purchase transaction. The aggregate consideration for the seven hospitals totaled approximately $149 million of which $141 million was paid in cash and $8 million was assumed in liabilities.

        On January 14, 2003, the Company announced the execution of a definitive agreement to acquire Southside Regional Medical Center in Petersburg, Virginia. This hospital is a sole provider located 25 miles south of Richmond, Virginia. As part of the transaction, which is subject to regulatory approvals, we have agreed to build a replacement hospital.

        On April 25, 2003, the Company announced the execution of a definitive agreement to acquire Pottstown Memorial Medical Center located in Pottstown, Pennsylvania, approximately 50 miles west of Philadelphia and 25 miles east of Reading, Pennsylvania. The hospital, which has a total of 299 beds, is being acquired from a local not-for-profit organization. The transaction is subject to regulatory approvals.

Sources of Revenue

        Net operating revenues include amounts estimated by management to be reimbursable by Medicare and Medicaid under prospective payment systems and provisions of cost-reimbursement and other payment methods. Approximately 44% and 45% of net operating revenues for the three month periods ended March 31, 2003 and March 31, 2002, respectively, are related to services rendered to patients covered by the Medicare and Medicaid programs. In addition, we are reimbursed by non-governmental payors using a variety of payment methodologies. Amounts we receive for treatment of patients covered by these programs are generally less than the standard billing rates. We account for the differences between the estimated program reimbursement rates and the standard billing rates as contractual adjustments, which we deduct from gross revenues to arrive at net operating revenues. Final settlements under some of these programs are subject to adjustment based on administrative review and audit by third parties. We account for adjustments to previous program reimbursement estimates as contractual adjustments and report them in the periods that such adjustments become known. Adjustments related to final settlements or appeals that increased revenue were insignificant in each of the three month periods ended March 31, 2003 and 2002.

        We expect the percentage of revenues received from the Medicare program to increase due to the general aging of the population and the restoration of some payments under the Balanced Budget Refinement Act of 1999 and Benefit and Improvement Protection Act of 2000. The payment rates under the Medicare program for inpatients are based on a prospective payment system, based upon the diagnosis of a patient's condition. While these rates are indexed for inflation annually, the increases have historically been less than actual inflation. Reductions in the rate of increase in Medicare reimbursement may have an adverse impact on our net operating revenue growth. Effective April 1, 2002, Centers for Medicare and Medicaid Services implemented changes to the Medicare outpatient prospective payment system. Although these changes have resulted in reductions to Medicare outpatient payments, these reductions, as well as changes to the Medicare system caused by the Benefit Improvement and Protection Act of 2000, should not materially effect our net operating revenue growth.

        In addition, certain managed care programs, insurance companies, and employers are actively negotiating the amounts paid to hospitals. The trend toward increased enrollment in managed care may adversely affect our net operating revenue growth.

9

Results of Operations

        Our hospitals offer a variety of services involving a broad range of inpatient and outpatient medical and surgical services. These include orthopedics, cardiology, OB/GYN, occupational medicine, diagnostic services, emergency services, rehabilitation treatment, home health, and skilled nursing. The strongest demand for hospital services generally occurs during January through April and the weakest demand for these services occurs during the summer months. Accordingly, eliminating the effect of new acquisitions, our net operating revenues and earnings are generally highest during the first quarter and lowest during the third quarter.

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

(a)

Operating expenses include salaries and benefits, provision for bad debts, supplies, rent, and other operating expenses, and exclude the items that are excluded for purposes of determining EBITDA as discussed in Footnote (b) below.

10

(b)

EBITDA consists of income before interest, income taxes, depreciation and amortization, and minority interest in earnings. EBITDA should not be considered a measure of financial performance under generally accepted accounting principles. Items excluded from EBITDA are significant components in understanding and assessing financial performance. EBITDA is an analytical indicator used by management and the health care industry to evaluate hospital performance, allocate resources and measure leverage and debt service capacity. EBITDA should not be considered in isolation or as an alternative to net income, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, EBITDA as presented may not be comparable to other similarly titled measures of other companies. We believe that income from operations is the financial measure calculated and presented in accordance with generally accepted accounting principles that is most directly comparable to EBITDA, as defined. The following table reconciles EBITDA, as defined, with our income from operations as derived directly from our financial statements for the three months ended March 31, 2003 and 2002:

(c)

Adjusted admissions is a general measure of combined inpatient and outpatient volume. We computed adjusted admissions by multiplying admissions by gross patient revenues and then dividing that number by gross inpatient revenues.

(d)

Includes acquired hospitals to the extent we operated them during comparable periods in both years.

Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002

        Net operating revenues increased by 23.6% to $659.3 million for the three months ended March 31, 2003 from $533.5 million for the three months ended March 31, 2002. Of the $125.8 million increase in net operating revenues, the eleven hospitals we acquired in 2003 and 2002, which are not yet included in same store revenues, contributed approximately $82 million, and hospitals we owned throughout both periods contributed $43.8 million, an increase of 8.2%. Of the increase from hospitals owned throughout both periods, approximately 80% was attributable to rate increases, payor mix and intensity of services, and approximately 20% was attributable to volume increases in inpatient and outpatient surgeries, and increases from government reimbursement and other sources offset by a decrease in inpatient admissions.

        Inpatient admissions increased by 15.2%. Adjusted admissions increased by 15.0%. Adjusted admissions is a general measure of combined inpatient and outpatient volume. We computed adjusted admissions by multiplying admissions by gross patient revenues and then dividing that number by gross inpatient revenues. Average length of stay increased by 2.6%. On a same-store basis, inpatient admissions decreased by 0.4%, adjusted admissions decreased by 1.0% and patient days increased 0.8%. The decrease in same-hospital inpatient admissions and adjusted admissions was due primarily to a mild flu season effecting respiratory admissions, and extreme winter weather conditions in some of our markets that prohibited access to our hospitals. Excluding respiratory related admissions and comparative admissions for those days impacted by extreme winter weather, same store admissions

11

increased 2.6% over the same period in the prior year. On a same store basis net inpatient revenues increased 8.7% and net outpatient revenues increased 8.0%.

        Operating expenses, as a percentage of net operating revenues, increased from 82.7% for the three months ended March 31, 2002 to 83.8% for the three months ended March 31, 2003. Salaries and benefits, as a percentage of net operating revenues, increased from 40.7% for the three months ended March 31, 2002 to 40.8% for the three months ended March 31, 2003, primarily as a result of the acquisitions in 2002 and 2003 having higher salaries and benefits as a percentage of net operating revenues for which reductions have not yet been realized, offset by improvements at hospitals owned throughout both periods. Provision for bad debts, as a percentage of net revenues, increased from 9.4% for the three months ended March 31, 2002 to 9.5% for the three months ended March 31, 2003 primarily as a result of increased bad debt expense at recent acquisition offset by improvements at hospitals owned throughout both periods. Supplies, as a percentage of net operating revenues, decreased from 12.0% for the three months ended March 31, 2002 to 11.7% for the three months ended March 31, 2003, primarily as a result of improved management of inventory and continued expansion of our Broadlane group purchasing arrangement. Rent and other operating expenses, as a percentage of net operating revenues, increased from 20.6% for the three months ended March 31, 2002 to 22.0% for the three months ended March 31, 2003. This increase was caused primarily by an increase of 0.3% of net operating revenue in contract labor, primarily nursing, and an increase of 0.5% of net operating revenue in malpractice expense. These net increased costs have led to EBITDA margins decreasing from 17.3% for the three months ended March 31, 2002 to 16.2% for the three months ended March 31, 2003.

        On a same-store basis, operating expenses, as a percentage of net operating revenues, decreased from 82.7% for the three months ended March 31, 2002 to 82.6% for the three months ended March 31, 2003, resulting in an increase in our same-hospital EBITDA margin from 17.3% for the three months ended March 31, 2002 to 17.4% for the three months ended March 31, 2003. We achieved this reduction through efficiency and productivity gains in payroll and reductions in supplies expense, offset by an increase in bad debt expense and other operating expenses.

        Depreciation and amortization increased by $4.7 million from $28.5 million for the three months ended March 31, 2002 to $33.2 million for the three months ended March 31, 2003. The four hospitals acquired in 2002 and seven hospitals acquired in 2003 accounted for $3.8 million of the increase, while facility renovations and purchases of equipment, information systems upgrades, and other deferred items accounted for the remaining $0.9 million.

        The net increased operating costs and increased depreciation and amortization expense have lead to income from operations decreasing from 11.8% of net operating revenues for the three months ended March 31, 2002 to 11.1% of net operating revenues for the three months ended March 31, 2003. On a same store basis, the improvements made at those hospitals owned throughout both periods led to income from operations increasing from 11.8% of net operating revenue for the three months ended March 31, 2002 to 12.2% of net operating revenue for the three months ended March 31, 2003.

        Interest, net increased by $0.3 million from $16.7 million for the three months ended March 31, 2002 to $17.0 million for the three months ended March 31, 2003. The increase in average debt balance during the three months ended March 31, 2003 as compared to the three months ended March 31, 2002, due primarily to borrowings to make acquisitions in 2002 and the first quarter of 2003, accounted for a $2.3 million increase offset by a decrease of $2.0 million resulting from the decrease in interest rates during the three months ended March 31, 2003 as compared to the three months ended March 31, 2002.

        Income before income taxes increased from $46.4 million for the three months ended March 31, 2002 to $55.9 million for the three months ended March 31, 2003 primarily as a result of the

12

continuing execution of our operating strategy and results from hospitals acquired during 2002 and 2003.

        Provision for income taxes increased from $19.3 million for the three months ended March 31, 2002 to $22.4 million for the three months ended March 31, 2003 as a result of the increase in pre-tax income. Our effective tax rate decreased approximately 1.3% due to a decrease in our blended state tax rate.

        Net income was $33.5 million for the three months ended March 31, 2003 compared to net income of $27.2 million for the three months ended March 31, 2002.

Liquidity and Capital Resources

        Net cash provided by operating activities decreased $40.4 million to $8.5 million for the three months ended March 31, 2003 from $48.9 million for the three months ended March 31, 2002. This decrease is attributable to an increase in accounts receivable of $37.3 million at the seven hospitals acquired in the first quarter of 2003 and one hospital acquired in the fourth quarter of 2002 where we did not purchase accounts receivable, an increase in tax payments of $6.5 million, and a $7.8 million payment on cost report sett