10-Q 1 d617984d10q.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 September 30, 2013

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
(Address of principal executive offices)   (Zip Code)

615-465-7000

(Registrant’s telephone number)

 

 

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

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

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

 

Large accelerated filer x    Accelerated filer ¨    Non-accelerated filer ¨        Smaller reporting company ¨
  

 (Do not check if a smaller reporting company)

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

As of October 25, 2013, there were outstanding 94,972,160 shares of the Registrant’s Common Stock, $0.01 par value.

 

 

 


Table of Contents

Community Health Systems, Inc.

Form 10-Q

For the Three and Nine Months Ended September 30, 2013

 

 

Part I.

   Financial Information    Page
   Item 1.      Financial Statements:   
        Condensed Consolidated Balance Sheets - September 30, 2013 and December 31, 2012 (Unaudited)    2
       

Condensed Consolidated Statements of Income - Three and Nine Months Ended September 30, 2013 and September 30, 2012 (Unaudited)

   3
       

Condensed Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2013 and September 30, 2012 (Unaudited)

   4
       

Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2013 and September 30, 2012 (Unaudited)

   5
        Notes to Condensed Consolidated Financial Statements (Unaudited)    6
   Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations    47
   Item 3.      Quantitative and Qualitative Disclosures about Market Risk    69
   Item 4.      Controls and Procedures    69

Part II.

   Other Information
   Item 1.      Legal Proceedings    69
   Item 1A.      Risk Factors    74
   Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds    75
   Item 3.      Defaults Upon Senior Securities    75
   Item 4.      Mine Safety Disclosures    75
   Item 5.      Other Information    75
   Item 6.      Exhibits    76
Signatures    77
Index to Exhibits    78

 

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Table of Contents

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

       September 30, 2013            December 31, 2012      

ASSETS

     

Current assets

     

Cash and cash equivalents

   $ 143,605       $ 387,813   

Patient accounts receivable, net of allowance for doubtful accounts of $2,390,567 and $2,201,875 at September 30, 2013 and December 31, 2012, respectively

     2,298,619         2,067,379   

Supplies

     377,909         368,172   

Prepaid income taxes

     26,730         49,888   

Deferred income taxes

     117,045         117,045   

Prepaid expenses and taxes

     148,762         126,561   

Other current assets

     333,612         302,284   
  

 

 

    

 

 

 

Total current assets

     3,446,282         3,419,142   
  

 

 

    

 

 

 

Property and equipment

     10,439,250         10,145,408   

Less accumulated depreciation and amortization

     (3,370,689)         (2,993,535)   
  

 

 

    

 

 

 

Property and equipment, net

     7,068,561         7,151,873   
  

 

 

    

 

 

 

Goodwill

     4,437,260         4,408,138   
  

 

 

    

 

 

 

Other assets, net

     1,770,140         1,627,182   
  

 

 

    

 

 

 

Total assets

   $ 16,722,243       $ 16,606,335   
  

 

 

    

 

 

 

LIABILITIES AND EQUITY

     

Current liabilities

     

Current maturities of long-term debt

   $ 180,386       $ 89,911   

Accounts payable

     743,776         825,914   

Accrued interest

     107,463         110,702   

Accrued liabilities

     1,077,882         1,116,693   
  

 

 

    

 

 

 

Total current liabilities

     2,109,507         2,143,220   
  

 

 

    

 

 

 

Long-term debt

     9,368,293         9,451,394   
  

 

 

    

 

 

 

Deferred income taxes

     808,489         808,489   
  

 

 

    

 

 

 

Other long-term liabilities

     1,016,203         1,039,045   
  

 

 

    

 

 

 

Total liabilities

     13,302,492         13,442,148   
  

 

 

    

 

 

 

Redeemable noncontrolling interests in equity of consolidated subsidiaries

     366,787         367,666   
  

 

 

    

 

 

 

EQUITY

     

Community Health Systems, Inc. stockholders equity

     

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

               

Common stock, $.01 par value per share, 300,000,000 shares authorized; 95,918,306 shares issued and 94,942,757 shares outstanding at September 30, 2013, and 92,925,715 shares issued and 91,950,166 shares outstanding at December 31, 2012

     959         929   

Additional paid-in capital

     1,231,186         1,138,274   

Treasury stock, at cost, 975,549 shares at September 30, 2013 and December 31, 2012

     (6,678)         (6,678)   

Accumulated other comprehensive loss

     (92,515)         (145,310)   

Retained earnings

     1,857,014         1,743,992   
  

 

 

    

 

 

 

Total Community Health Systems, Inc. stockholders’ equity

     2,989,966         2,731,207   

Noncontrolling interests in equity of consolidated subsidiaries

     62,998         65,314   
  

 

 

    

 

 

 

Total equity

     3,052,964         2,796,521   
  

 

 

    

 

 

 

Total liabilities and equity

   $                   16,722,243       $                   16,606,335   
  

 

 

    

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share data)

(Unaudited)

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
          2013                 2012                 2013                 2012        

Operating revenues (net of contractual allowances and discounts)

  $ 3,766,833        $         3,696,661        $         11,334,783        $         11,226,580   

Provision for bad debts

    548,602        484,631        1,568,411        1,474,541   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net operating revenues

    3,218,231        3,212,030        9,766,372        9,752,039   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

       

Salaries and benefits

    1,541,692        1,525,111        4,674,791        4,547,532   

Supplies

    486,374        484,212        1,482,245        1,472,520   

Other operating expenses

    721,957        694,857        2,159,728        2,140,025   

Government settlement and related costs reserve

    98,000               98,000          

Electronic health records incentive reimbursement

    (65,007)        (30,622)        (110,307)        (73,592)    

Rent

    71,646        68,637        215,020        202,324   

Depreciation and amortization

    195,841        182,207        582,604        536,362   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

              3,050,503        2,924,402        9,102,081        8,825,171   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    167,728        287,628        664,291        926,868   

Interest expense, net

    154,329        158,565        465,735        462,347   

Loss from early extinguishment of debt

           52,024        1,295        115,453   

Equity in earnings of unconsolidated affiliates

    (11,641)        (7,419)        (36,375)        (32,613)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

    25,040        84,458        233,636        381,681   

Provision for income taxes

    3,442        25,700        68,630        121,038   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    21,598        58,758        165,006        260,643   
 

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations, net of taxes:

       

Loss from operations of entities sold

                         (466)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of taxes

                         (466)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    21,598        58,758        165,006        260,177   

Less: Net income attributable to noncontrolling interests

    17,503        14,525        51,984        57,111   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Community Health Systems, Inc. stockholders

  $ 4,095      $ 44,233      $ 113,022      $ 203,066   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

       

Continuing operations

  $ 0.04      $ 0.50      $ 1.22      $ 2.29   

Discontinued operations

                         (0.01)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 0.04      $ 0.50      $ 1.22      $ 2.28   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

       

Continuing operations

  $ 0.04      $ 0.49      $ 1.21      $ 2.27   

Discontinued operations

                         (0.01)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 0.04      $ 0.49      $ 1.21      $ 2.27   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of shares outstanding:

       

Basic

    93,259,027        89,259,950        92,384,270        89,028,249   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    94,483,596        90,009,113        93,516,158        89,464,987   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

See accompanying notes to the condensed consolidated financial statements.

 

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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
           2013                  2012                  2013                  2012        

Net income

   $ 21,598       $ 58,758       $ 165,006       $ 260,177   

Other comprehensive income, net of income taxes:

           

Net change in fair value of interest rate swaps

     10,850         8,254         47,759         28,766   

Net change in fair value of available-for-sale securities

     1,171         1,370         2,841         3,509   

Amortization and recognition of unrecognized pension cost components

     731         1,202         2,195         3,483   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income

     12,752         10,826         52,795         35,758   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income

     34,350         69,584         217,801         295,935   

Less: Comprehensive income attributable to noncontrolling interests

     17,503         14,525         51,984         57,111   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income attributable to Community Health Systems, Inc. stockholders

   $           16,847       $ 55,059       $ 165,817       $ 238,824   
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Nine Months Ended
September 30,
 
                      2013                                       2012                  

Cash flows from operating activities

     

Net income

   $ 165,006       $ 260,177   

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

     

Depreciation and amortization

     582,604         536,362   

Government settlement and related costs reserve

     98,000           

Stock-based compensation expense

     28,943         30,708  

Loss from early extinguishment of debt

     1,295         115,453   

Excess tax benefit relating to stock-based compensation

     (6,573)         (1,545)   

Other non-cash expenses, net

     48,387         22,482   

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

     

Patient accounts receivable

     (231,134)         (227,814)   

Supplies, prepaid expenses and other current assets

     (60,062)         (68,247)   

Accounts payable, accrued liabilities and income taxes

     (205,913)         103,156  

Other

     20,547         7,133   
  

 

 

    

 

 

 

Net cash provided by operating activities

     441,100         777,865   
  

 

 

    

 

 

 

Cash flows from investing activities

     

Acquisitions of facilities and other related equipment

     (33,935)         (312,927)   

Purchases of property and equipment

     (420,917)         (557,469)   

Proceeds from sale of property and equipment

     4,185         4,808   

Increase in other investments

     (234,099)         (222,164)   
  

 

 

    

 

 

 

Net cash used in investing activities

     (684,766)         (1,087,752)   
  

 

 

    

 

 

 

Cash flows from financing activities

     

Proceeds from exercise of stock options

     108,546         5,750   

Repurchase of restricted stock shares for payroll tax withholding requirements

     (14,696)         (9,165)   

Stock buy-back

     (27,133)           

Deferred financing costs

     (12,960)         (135,647)   

Excess tax benefit relating to stock-based compensation

     6,573         1,545   

Proceeds from noncontrolling investors in joint ventures

     64         535   

Redemption of noncontrolling investments in joint ventures

     (5,720)         (39,709)   

Distributions to noncontrolling investors in joint ventures

     (60,282)         (60,676)   

Borrowings under credit agreements

     813,732        3,974,399   

Issuance of long-term debt

             3,825,000   

Proceeds from receivables facility

     320,000         300,000   

Repayments of long-term indebtedness

     (1,128,666)         (7,441,360)   
  

 

 

    

 

 

 

Net cash (used in) provided by financing activities

     (542)         420,672   
  

 

 

    

 

 

 

Net change in cash and cash equivalents

     (244,208)         110,785   

Cash and cash equivalents at beginning of period

     387,813         129,865   
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 143,605       $ 240,650   
  

 

 

    

 

 

 

Supplemental disclosure of cash flow information:

     

Interest payments

   $                       446,124       $                       461,604   
  

 

 

    

 

 

 

Income tax paid, net of refunds received

   $ 72,482       $ 55,404   
  

 

 

    

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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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. and its subsidiaries (the “Company”) as of September 30, 2013 and December 31, 2012 and for the three-month and nine-month periods ended September 30, 2013 and September 30, 2012, have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for such periods. All intercompany transactions and balances have been eliminated. The results of operations for the three and nine months ended September 30, 2013, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2013. Certain information and disclosures normally included in the notes to consolidated financial statements have been condensed or omitted as permitted by the rules and regulations of the Securities and Exchange Commission (the “SEC”). The Company believes the disclosures are adequate to make the information presented not misleading. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2012, contained in the Company’s Annual Report on Form 10-K.

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

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

Allowance for Doubtful Accounts. Accounts receivable are reduced by an allowance for amounts that could become uncollectible in the future. Substantially all of the Company’s receivables are related to providing healthcare services to its hospitals’ patients.

The Company estimates the allowance for doubtful accounts by reserving a percentage of all self-pay accounts receivable without regard to aging category, based on collection history, adjusted for expected recoveries and, if present, anticipated changes in trends. For all other non-self-pay payor categories, the Company reserves 100% of all accounts aging over 365 days from the date of discharge. The percentage used to reserve for all self-pay accounts is based on the Company’s collection history. The Company collects substantially all of its third-party insured receivables, which include receivables from governmental agencies.

Collections are impacted by the economic ability of patients to pay and the effectiveness of the Company’s collection efforts. Significant changes in payor mix, business office operations, economic conditions or trends in federal and state governmental healthcare coverage could affect the Company’s collection of accounts receivable and the estimates of the collectability of future accounts receivable. The process of estimating the allowance for doubtful accounts requires the Company to estimate the collectability of self-pay accounts receivable, which is primarily based on its collection history, adjusted for expected recoveries and, if present, anticipated changes in collection trends. The Company also continually reviews its overall reserve adequacy by monitoring historical cash collections as a percentage of trailing net revenue less provision for bad debts, as well as by analyzing current period net revenue and admissions by payor classification, aged accounts receivable by payor, days revenue outstanding, and the impact of recent acquisitions and dispositions.

 

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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – CONTINUED

 

Operating revenues, net of contractual allowances and discounts (but before the provision for bad debts), recognized during the three and nine months ended September 30, 2013 and 2012, were as follows (in thousands):

 

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
             2013                      2012                      2013                      2012          

Medicare

   $ 910,767       $ 953,603       $ 2,835,547       $ 2,968,647   

Medicaid

     394,403         387,034         1,122,792         1,098,691   

Managed Care and other third-party payors

     1,937,042         1,862,657         5,819,906         5,681,006   

Self-pay

     524,621         493,367         1,556,538         1,478,236   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $     3,766,833       $     3,696,661       $     11,334,783       $     11,226,580   
  

 

 

    

 

 

    

 

 

    

 

 

 

Electronic Health Records Incentive Reimbursement. The American Recovery and Reinvestment Act of 2009 included provisions for implementing health information technology under the Health Information Technology for Economic and Clinical Health Act (“HITECH”). These provisions were designed to increase the use of electronic health records (“EHR”) technology and establish the requirements for a Medicare and Medicaid incentive payments program beginning in 2011 for eligible hospitals and providers that adopt and meaningfully use certified EHR technology. The Company utilizes a gain contingency model to recognize EHR incentive payments. Recognition occurs when our eligible hospitals adopt or demonstrate meaningful use of certified EHR technology for the applicable payment period and have available the Medicare cost report information for the relevant full cost report year used to determine the final incentive payment.

Medicaid EHR incentive payments are calculated based on prior period Medicare cost report information available at the time when eligible hospitals adopt, implement or demonstrate meaningful use of certified EHR technology. Since the information for the relevant full Medicare cost report year is available, the incentive income from resolving the gain contingency is recognized when eligible hospitals adopt, implement or demonstrate meaningful use of certified EHR technology.

Medicare EHR incentive payments are calculated based on the Medicare cost report information for the full cost report year that began during the federal fiscal year in which meaningful use is demonstrated. Since the necessary information is only available at the end of the relevant full Medicare cost report year, the incentive income from resolving the gain contingency is recognized when eligible hospitals demonstrate meaningful use of certified EHR technology and the information for the applicable full Medicare cost report year to determine the final incentive payment is available.

In some instances, the Company may receive estimated Medicare EHR incentive payments prior to when the Medicare cost report information used to determine the final incentive payment is available. In these instances, recognition of the gain for EHR incentive payments is deferred until all recognition criteria described above are met.

Eligibility for annual Medicare incentive payments is dependent on providers demonstrating meaningful use of EHR technology. Initial Medicaid incentive payments were available to providers that adopt, implement or upgrade certified EHR technology; however, providers must demonstrate meaningful use of such technology in subsequent years to qualify for additional incentive payments. Medicaid EHR incentive payments are fully funded by the federal government and administered by the states; however, the states are not required to offer EHR incentive payments to providers.

 

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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – CONTINUED

 

The Company recognized approximately $65.0 million and $30.6 million for the three months ended September 30, 2013 and 2012, respectively, and $110.3 million and $73.6 million for the nine months ended September 30, 2013 and 2012, respectively, of incentive reimbursement for HITECH incentives from Medicare and Medicaid related to certain of the Company’s hospitals and for certain of the Company’s employed physicians that have demonstrated meaningful use of certified EHR technology or have completed attestations to their adoption or implementation of certified EHR technology. These incentive reimbursements are presented as a reduction of operating costs and expenses on the condensed consolidated statements of income. The Company received cash related to the incentive reimbursement for HITECH incentives of approximately $22.6 million and $12.8 million for the three months ended September 30, 2013 and 2012, respectively, and $105.3 million and $41.6 million for the nine months ended September 30, 2013 and 2012, respectively. As of September 30, 2013 and 2012, $52.6 million and $6.5 million, respectively, were recorded as deferred revenue as all criteria for gain recognition had not been met.

Reimbursement Settlement. Included in net operating revenues for the nine months ended September 30, 2012 on a non-same store basis is approximately $101.8 million of net operating revenues from an industry-wide settlement with the United States Department of Health and Human Services and Centers for Medicare and Medicaid Services, based on a claim that acute-care hospitals in the U.S. were underpaid from the Medicare inpatient prospective payment system in federal fiscal years 1999 through 2011. The underpayments resulted from calculations related to the rural floor budget neutrality adjustments implemented in connection with the Balanced Budget Act of 1997. During the nine months ended September 30, 2012, the Company received approximately $101.8 million of cash from this settlement. Also included in net operating revenues for the nine months ended September 30, 2012 is an unfavorable adjustment of approximately $21.0 million related to the revised Supplemental Security Income ratios issued for federal fiscal years 2006 through 2009 utilized for calculating Medicare Disproportionate Share Hospital reimbursements.

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. 2009 Stock Option and Award Plan, amended and restated as of March 20, 2013 (the “2009 Plan”).

The 2000 Plan allowed for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code (the “IRC”), as well as stock options which do not so qualify, stock appreciation rights, restricted stock, restricted stock units, performance-based shares or units and other share awards. Prior to being amended in 2009, the 2000 Plan also allowed for the grant of phantom stock. Persons eligible to receive grants under the 2000 Plan include the Company’s directors, officers, employees and consultants. All options granted under the 2000 Plan have been “nonqualified” stock options for tax purposes. Generally, vesting of these granted options occurs in one-third increments on each of the first three anniversaries of the award date. Options granted prior to 2005 have a 10-year contractual term, options granted in 2005 through 2007 have an eight-year contractual term and options granted in 2008 through 2011 have a 10-year contractual term. The Company has not granted stock option awards under the 2000 Plan since 2011. Since the Company’s stockholders approved the March 20, 2013 amendment and restatement of the 2009 Plan, 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 September 30, 2013, 4,134,303 shares of unissued common stock were reserved for future grants under the 2009 Plan.

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

 

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

 

     Three Months  Ended
September 30,
     Nine Months  Ended
September 30,
 
           2013                  2012                  2013                  2012        

Effect on income from continuing operations before income taxes

   $         (9,514)       $         (10,084)       $         (28,943)       $         (30,708)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Effect on net income

   $ (5,975)       $ (6,403)       $ (18,176)       $ (19,500)   
  

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2013, $39.7 million of unrecognized stock-based compensation expense was expected to be recognized over a weighted-average period of 23 months. Of that amount, $2.9 million related to outstanding unvested stock options was expected to be recognized over a weighted-average period of 10 months and $36.8 million related to outstanding unvested restricted stock and restricted stock units was expected to be recognized over a weighted-average period of 24 months. There were no modifications to awards during the three and nine months ended September 30, 2013.

No stock options were granted during the three and nine months ended September 30, 2013. The fair value of stock options granted during the three and nine months ended September 30, 2012 was estimated using the Black Scholes option pricing model with the following assumptions:

 

           Three Months Ended      
September 30, 2012
           Nine Months Ended      
September 30, 2012
 

Expected volatility

     59.8 %           57.8 %     

Expected dividends

     -                -          

Expected term

     4 years              4.1 years        

Risk-free interest rate

     0.5 %           0.7 %     

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 discernible employee populations. From this analysis, the Company identified two primary employee populations, one consisting of certain senior executives and the other one 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 September 30, 2013, and changes during each of the three-month periods following December 31, 2012, were as follows (in thousands, except share and per share data):

 

              Shares                Weighted-
Average
    Exercise Price    
    Weighted-
Average
Remaining
        Contractual        
Term
  Aggregate
Intrinsic
Value as of
  September 30,  
2013
 

Outstanding at December 31, 2012

    7,104,113       $ 34.25        

Granted

                 

Exercised

    (2,248,891)        32.53        

Forfeited and cancelled

    (20,010)        35.93        
 

 

 

       

Outstanding at March 31, 2013

    4,835,212         34.98        

Granted

                 

Exercised

    (842,834)        35.73        

Forfeited and cancelled

    (7,339)        33.39        
 

 

 

       

Outstanding at June 30, 2013

    3,985,039         34.80        

Granted

                 

Exercised

    (143,670)        34.25        

Forfeited and cancelled

    (23,683)        33.52        
 

 

 

       

Outstanding at September 30, 2013

    3,817,686       $ 34.83       4.4 years   $ 25,449   
 

 

 

   

 

 

   

 

 

 

 

 

Exercisable at September 30, 2013

                  3,237,644       $                     35.53       3.7 years   $                     19,322   
 

 

 

   

 

 

   

 

 

 

 

 

The weighted-average grant date fair value of stock options granted during the three and nine months ended September 30, 2012 was $12.51 and $9.19, respectively. No stock options were granted during the three and nine months ended September 30, 2013. The aggregate intrinsic value (the number of in-the-money stock options multiplied by the difference between the Company’s closing stock price on the last trading day of the reporting period ($41.50) 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 September 30, 2013. This amount changes based on the market value of the Company’s common stock. The aggregate intrinsic value of options exercised during the three months ended September 30, 2013 and 2012 was $1.5 million and $1.8 million, respectively. The aggregate intrinsic value of options exercised during the nine months ended September 30, 2013 and 2012 was $30.4 million and $2.2 million, respectively. The aggregate intrinsic value of options vested and expected to vest approximates that of the outstanding options.

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

 

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Restricted stock outstanding under the 2000 Plan and the 2009 Plan as of September 30, 2013, and changes during each of the three-month periods following December 31, 2012, were as follows:

 

                Shares                  Weighted-
Average  Grant
      Date Fair Value      
 

Unvested at December 31, 2012

    1,744,564       $                              30.50    

Granted

    786,588         41.49    

Vested

    (913,970)        32.38    

Forfeited

             
 

 

 

   

Unvested at March 31, 2013

    1,617,182         34.79    

Granted

             

Vested

    (7,053)        28.52    

Forfeited

    (4,355)        34.47    
 

 

 

   

Unvested at June 30, 2013

    1,605,774         34.81    

Granted

    37,500         43.44    

Vested

    (10,756)        28.24    

Forfeited

    (3,689)        34.86    
 

 

 

   

Unvested at September 30, 2013

                        1,628,829         35.06    
 

 

 

   

Restricted stock units (“RSUs”) have been granted to the Company’s outside directors under the 2000 Plan and the 2009 Plan. On February 23, 2011, each of the Company’s outside directors received a grant under the 2009 Plan of 3,688 RSUs. On February 16, 2012, each of the Company’s outside directors received a grant under the 2009 Plan of 6,645 RSUs. On February 27, 2013, each of the Company’s outside directors received a grant under the 2009 Plan of 3,596 RSUs. Vesting of these shares of RSUs occurs in one-third increments on each of the first three anniversaries of the award date.

RSUs outstanding under the 2000 Plan and the 2009 Plan as of September 30, 2013, and changes during each of the three-month periods following December 31, 2012, were as follows:

 

                Shares                  Weighted-
Average  Grant
      Date Fair Value      
 

Unvested at December 31, 2012

    62,886       $                              26.72    

RSUs Granted

    21,576         41.71    

Vested

    (28,926)        29.04    

Forfeited

             
 

 

 

   

Unvested at March 31, 2013

    55,536         31.33    

RSUs Granted

             

Vested

             

Forfeited

             
 

 

 

   

Unvested at June 30, 2013

    55,536         31.33    

RSUs Granted

             

Vested

             

Forfeited

             
 

 

 

   

Unvested at September 30, 2013

                            55,536         31.33    
 

 

 

   

 

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

 

     Three Months  Ended
September 30,
     Nine Months Ended
September 30,
 
               2013                           2012                           2013                           2012             

Directors’ fees earned and deferred into plan

   $ 33        $ 28        $ 98        $ 83    
  

 

 

    

 

 

    

 

 

    

 

 

 

Share equivalent units

     783          944          2,162          3,161    
  

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2013, a total of 30,231 share equivalent units were deferred in the plan with an aggregate fair value of $1.3 million, based on the closing market price of the Company’s common stock at September 30, 2013 of $41.50.

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 $44.8 million and $49.4 million for the three months ended September 30, 2013 and 2012, respectively, and $137.8 million and $153.6 million for the nine months ended September 30, 2013 and 2012, respectively. Included in these amounts is stock-based compensation expense of $9.5 million and $10.1 million for the three months ended September 30, 2013 and 2012, respectively, and $28.9 million and $30.7 million for the nine months ended September 30, 2013 and 2012, respectively.

4.  USE OF ESTIMATES

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

5.  ACQUISITIONS AND DIVESTITURES

Acquisitions

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

 

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Effective July 1, 2012, one or more subsidiaries of the Company completed the acquisition of Memorial Health Systems in York, Pennsylvania. This healthcare system includes Memorial Hospital (100 licensed beds), the Surgical Center of York, and other outpatient and ancillary services. As part of this purchase agreement, the Company has agreed to spend at least $75.0 million to build a replacement hospital within five years of the closing date. The total cash consideration paid for fixed assets and working capital was approximately $45.0 million and $2.6 million, respectively, with additional consideration of $12.5 million assumed in liabilities, for a total consideration of $60.1 million. Based upon the Company’s final purchase price allocation relating to this acquisition as of September 30, 2013, approximately $10.9 million of goodwill has been recorded.

Effective March 5, 2012, one or more subsidiaries of the Company completed a merger with Diagnostic Clinic of Longview, P.A., which is a multi-specialty clinic serving residents of Longview, Texas and surrounding East Texas communities. This merger was accounted for as a purchase business combination. The total cash consideration paid for the business, including net working capital, was approximately $52.3 million, with additional consideration of $6.9 million assumed in liabilities, for a total consideration of $59.2 million. Based upon the Company’s final purchase price allocation relating to this acquisition, approximately $41.8 million of goodwill has been recorded.

Effective March 1, 2012, one or more subsidiaries of the Company completed the acquisition of MetroSouth Medical Center (330 licensed beds) located in Blue Island, Illinois. The total cash consideration paid for fixed assets was approximately $39.3 million with additional consideration of $5.8 million assumed in liabilities as well as a credit applied at closing of $0.9 million for negative acquired working capital, for a total consideration of $44.2 million. Based upon the Company’s final purchase price allocation relating to this acquisition as of September 30, 2013, no goodwill has been recorded.

Effective January 1, 2012, one or more subsidiaries of the Company completed the acquisition of Moses Taylor Healthcare System based in Scranton, Pennsylvania, which is a healthcare system comprised of two acute care hospitals and other healthcare providers. This healthcare system includes Moses Taylor Hospital (217 licensed beds) located in Scranton, Pennsylvania, and Mid-Valley Hospital (25 licensed beds) located in Peckville, Pennsylvania. The total cash consideration paid for fixed assets and working capital was approximately $151.1 million and $13.1 million, respectively, with additional consideration of $9.4 million assumed in liabilities, for a total consideration of $173.6 million. Based upon the Company’s final purchase price allocation relating to this acquisition, approximately $54.6 million of goodwill has been recorded.

Additionally, during the nine months ended September 30, 2013, the Company paid approximately $28.8 million and assumed $4.6 million of noncontrolling interests in acquiring the operating assets and related businesses of certain physician practices, home care agencies, clinics and other ancillary businesses that operate within the communities served by its hospitals. In connection with these acquisitions, the Company allocated approximately $5.9 million of the consideration paid to property and equipment, assumed $0.2 million of negative net working capital, and the remainder, approximately $28.9 million consisting of intangible assets that do not qualify for separate recognition, was allocated to goodwill. These acquisition transactions were accounted for as purchase business combinations.

Approximately $5.4 million and $2.5 million of acquisition costs related to prospective and closed acquisitions were expensed during the three months ended September 30, 2013 and 2012, respectively, and approximately $10.1 million and $9.1 million of such costs were expensed during the nine months ended September 30, 2013 and 2012, respectively, and are included in other operating expenses on the condensed consolidated statements of income. For the three and nine months ended September 30, 2013, these acquisition costs include $4.2 million and $5.3 million, respectively, of expenses related to the anticipated acquisition of Health Management Associates, Inc.

 

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6.  INCOME TAXES

The total amount of unrecognized benefit that would affect the effective tax rate, if recognized, was approximately $0.5 million as of September 30, 2013. A total of approximately $0.4 million of interest and penalties is included in the amount of the liability for uncertain tax positions at September 30, 2013. It is the Company’s policy to recognize interest and penalties related to unrecognized benefits in its condensed consolidated statements of income as income tax expense. During the nine months ended September 30, 2013, the Company decreased liabilities for uncertain tax positions by $0.4 million.

The Company, or one of its subsidiaries, files income tax returns in the United States federal jurisdiction and various state jurisdictions. The Company has extended the federal statute of limitations through December 31, 2013 for Triad Hospitals, Inc. (“Triad”) for the tax periods ended December 31, 1999, December 31, 2000, April 30, 2001, June 30, 2001, December 31, 2001, December 31, 2002, December 31, 2003, December 31, 2004, December 31, 2005, December 31, 2006 and July 25, 2007. With few exceptions, the Company is no longer subject to state income tax examinations for years prior to 2009. The Company’s federal income tax returns for the 2009 and 2010 tax years are currently under examination by the Internal Revenue Service (“IRS”). The Company believes the results of these examinations will not be material to its consolidated results of operations or consolidated financial position. During the three months ended June 30, 2013, the IRS concluded its examination of the federal tax return of Community Health Systems, Inc. for the tax periods ended December 31, 2007 and 2008. The results of these examinations did not have a material effect on the Company’s consolidated results of operations or consolidated financial position. The Company has extended the federal statute of limitations through April 30, 2014 for Community Health Systems, Inc. for the tax periods ended December 31, 2007 and 2008, and through July 18, 2014 for the tax period ended December 31, 2009.

Cash paid for income taxes, net of refunds received, resulted in net cash paid of $2.1 million and $33.4 million for the three months ended September 30, 2013 and 2012, respectively, and $72.5 million and $55.4 million during the nine months ended September 30, 2013 and 2012, respectively.

7.  GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the nine months ended September 30, 2013 are as follows (in thousands):

 

Balance as of December 31, 2012

   $ 4,408,138    

Goodwill acquired as part of acquisitions during current year

     28,878    

Consideration and purchase price allocation adjustments for prior year’s acquisitions and other adjustments

     244    
  

 

 

 

Balance as of September 30, 2013

   $             4,437,260    
  

 

 

 

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 and hospital management services operations meet the criteria to be classified as reporting units. At September 30, 2013, the hospital operations reporting unit, the home care agency operations reporting unit, and the hospital management services reporting unit had approximately $4.4 billion, $43.7 million and $33.3 million, respectively, of goodwill.

 

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Goodwill is evaluated for impairment at the same time every year and when an event occurs or circumstances change that, more likely than not, reduce the fair value of the reporting unit below its carrying value. There is a two-step method for determining goodwill impairment. Step one is to compare the fair value of the reporting unit with the unit’s carrying amount, including goodwill. If this test indicates the fair value is less than the carrying value, then step two is required to compare the implied fair value of the reporting unit’s goodwill with the carrying value of the reporting unit’s goodwill. The Company performed its last annual goodwill evaluation during the fourth quarter of 2012. No impairment was indicated by this evaluation. The next annual goodwill evaluation will be performed during the fourth quarter of 2013.

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

Approximately $1.1 million of intangible assets other than goodwill were acquired during the nine months ended September 30, 2013. The gross carrying amount of the Company’s other intangible assets subject to amortization was $53.8 million at September 30, 2013 and $61.9 million at December 31, 2012, and the net carrying amount was $21.7 million at September 30, 2013 and $26.3 million at December 31, 2012. The carrying amount of the Company’s other intangible assets not subject to amortization was $49.5 million at September 30, 2013 and $48.1 million at December 31, 2012. Other intangible assets are included in other assets, net on the Company’s consolidated balance sheets. Substantially all of the Company’s intangible assets are contract-based intangible assets related to operating licenses, management contracts, or non-compete agreements entered into in connection with prior acquisitions.

The weighted-average amortization period for the intangible assets subject to amortization is approximately eight years. There are no expected residual values related to these intangible assets. Amortization expense on these intangible assets was $1.4 million and $2.0 million for the three months ended September 30, 2013 and 2012, respectively, and $4.3 million and $5.7 million during the nine months ended September 30, 2013 and 2012, respectively. Amortization expense on intangible assets is estimated to be $1.3 million for the remainder of 2013, $3.7 million in 2014, $3.3 million in 2015, $2.5 million in 2016, $2.2 million in 2017, $2.0 million in 2018 and $6.7 million thereafter.

The gross carrying amount of capitalized software for internal use was approximately $878.5 million and $654.4 million at September 30, 2013 and December 31, 2012, respectively, and the net carrying amount considering accumulated amortization was approximately $488.5 million and $354.4 million at September 30, 2013 and December 31, 2012, 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 September 30, 2013, there was approximately $156.5 million of capitalized costs for internal-use software that is currently in the development stage and will begin amortization once the software project is complete and ready for its intended use. Amortization expense on capitalized internal-use software was $34.6 million and $22.8 million for the three months ended September 30, 2013 and 2012, respectively, and $99.7 million and $64.2 million during the nine months ended September 30, 2013 and 2012, respectively. Amortization expense on capitalized internal-use software is estimated to be $34.9 million for the remainder of 2013, $148.5 million in 2014, $113.4 million in 2015, $70.7 million in 2016, $31.7 million in 2017, $25.5 million in 2018 and $63.8 million thereafter.

 

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8.  EARNINGS PER SHARE 

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

 

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
              2013                         2012                         2013                         2012            

Numerator:

           

Income from continuing operations, net of taxes

   $ 21,598        $ 58,758        $ 165,006        $ 260,643    

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

     17,503          14,525          51,984          57,111    
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 4,095        $ 44,233        $ 113,022        $ 203,532    
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss from discontinued operations, net of taxes

   $       $       $       $ (466)   

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

                               
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $       $       $       $ (466)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Weighted-average number of shares outstanding — basic

     93,259,027          89,259,950          92,384,270          89,028,249    

Effect of dilutive securities:

           

Restricted stock awards

     521,460          449,811          381,893          210,418    

Employee stock options

     681,991          280,495          733,923          214,082    

Other equity-based awards

     21,118          18,857          16,072          12,238    
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average number of shares
outstanding — diluted

         94,483,596              90,009,113              93,516,158              89,464,987    
  

 

 

    

 

 

    

 

 

    

 

 

 
     Three Months  Ended
September 30,
     Nine Months  Ended
September 30,
 
              2013                         2012                         2013                         2012            

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

           

Employee stock options and restricted stock awards

           -                  6,529,182                -                  6,776,487    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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9.  STOCKHOLDERS’ EQUITY

Authorized capital shares of the Company include 400,000,000 shares of capital stock consisting of 300,000,000 shares of common stock and 100,000,000 shares of preferred stock. Each of the aforementioned classes of capital stock has a par value of $0.01 per share. Shares of preferred stock, none of which were outstanding as of September 30, 2013, may be issued in one or more series having such rights, preferences and other provisions as determined by the Board of Directors without approval by the holders of common stock.

On December 14, 2011, the Company adopted an open market repurchase program for up to 4,000,000 shares of the Company’s common stock, not to exceed $100 million in repurchases. The repurchase program will conclude at the earliest of three years from the commencement date, when the maximum number of shares has been repurchased, or when the maximum dollar amount of repurchases has been expended. During the three months ended September 30, 2013, no shares were repurchased under this program. During the nine months ended September 30, 2013, the Company repurchased and retired 706,023 shares at a weighted-average price of $38.39 per share, which is the cumulative number of shares repurchased and retired under this program. No shares were repurchased under this program during the three and nine months ended September 30, 2012.

Historically, the Company has not paid any cash dividends. In December 2012, the Company declared and paid a special dividend of $0.25 per share to holders of its common stock at the close of business as of December 17, 2012, which totaled approximately $23.0 million. In the foreseeable future, the Company does not anticipate the payment of any other cash dividends. The Company’s Credit Facility limits the Company’s ability to pay dividends and/or repurchase stock to an amount not to exceed $150 million in the aggregate plus the aggregate amount of proceeds from the exercise of stock options. The indentures governing the 8% Senior Notes due 2019 and the 7 1/8% Senior Notes due 2020 (collectively, the “Senior Notes”) and the 5 1/8% Senior Secured Notes due 2018 also limit the Company’s ability to pay dividends and/or repurchase stock. As of September 30, 2013, under the most restrictive test under these agreements, the Company has approximately $259.8 million remaining available with which to pay permitted dividends and/or repurchase shares of stock or its Senior Notes.

 

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The following schedule presents the reconciliation of the carrying amount of total equity, equity attributable to the Company, and equity attributable to the noncontrolling interests for the nine-month period ended September 30, 2013 (in thousands):

 

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

 

Accumulated
Other
Comprehensive
Income (Loss)

    Retained
Earnings
    Noncontrolling
Interest
    Total
Stockholders’
Equity
 

Balance, December 31, 2012

  $ 367,666      $ 929      $ 1,138,274      $ (6,678)      $ (145,310)      $ 1,743,992      $ 65,314      $ 2,796,521   
 

Comprehensive income

    34,924                             52,795        113,022        17,060        182,877   
 

Distributions to noncontrolling interests, net of contributions

    (39,041)                                           (21,177)        (21,177)   
 

Purchase of subsidiary shares from noncontrolling interests

    (4,410)               (804)                             (507)        (1,311)   
 

Other reclassifications of noncontrolling interests

    2,291                                           (2,291)        (2,291)   
 

Noncontrolling interests in acquired entity

                                              4,599        4,599   
 

Adjustment to redemption value of redeemable noncontrolling interests

    5,357               (5,357)                                    (5,357)   
 

Repurchases of common stock

           (7)        (27,133)                                    (27,140)   
 

Issuance of common stock in connection with the exercise of stock options

           32        108,527                                    108,559   
 

Cancellation of restricted stock for tax withholdings on vested shares

           (3)        (14,696)                                    (14,699)   
 

Excess tax benefit from exercise of stock options

                  3,432                                    3,432   
 

Share-based compensation

                 28,943                                    28,951   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

Balance, September 30, 2013

  $               366,787      $         959      $      1,231,186      $      (6,678)      $       (92,515)      $              1,857,014      $                 62,998      $         3,052,964   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

     Nine Months  Ended
September 30, 2013
 

Net income attributable to Community Health Systems, Inc. stockholders

   $ 113,022    

Transfers to the noncontrolling interests:

  

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

     (804)   
  

 

 

 

Net transfers to the noncontrolling interests

     (804)   
  

 

 

 

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

   $                            112,218    
  

 

 

 

10.  EQUITY INVESTMENTS

As of September 30, 2013, the Company owned equity interests of 27.5% in four hospitals in Las Vegas, Nevada, and 26.1% in one hospital in Las Vegas, Nevada, in which Universal Health Systems, Inc. owns the majority interest, and an equity interest of 38.0% in three hospitals in Macon, Georgia, in which HCA Inc. owns the majority interest.

Summarized combined financial information for these unconsolidated entities in which the Company owns an equity interest is as follows (in thousands):

 

 

     Three Months  Ended
September 30,
     Nine Months  Ended
September 30,
 
     2013      2012      2013      2012  

Revenues

   $             306,336        $             294,461        $             942,013        $             926,886    

Operating costs and expenses

     284,105          266,012          835,533          817,572    

Income from continuing operations before taxes

     22,204          28,421          106,405          109,238    

The summarized financial information was derived from the unaudited financial information provided to the Company by those unconsolidated entities.

The Company’s investment in all of its unconsolidated affiliates was $423.2 million and $432.1 million at September 30, 2013 and December 31, 2012, respectively, and is included in other assets, net in the accompanying condensed consolidated balance sheets. Included in the Company’s results of operations is the Company’s equity in pre-tax earnings from all of its investments in unconsolidated affiliates, which was $11.6 million and $7.4 million for the three months ended September 30, 2013 and 2012, respectively, and $36.4 million and $32.6 million for the nine months ended September 30, 2013 and 2012, respectively.

 

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11.  LONG-TERM DEBT

Long-term debt consists of the following (in thousands):

 

       September 30, 2013          December 31, 2012    

Credit Facility:

     

Term loan A

   $ 656,250        $ 712,500    

Term loan B

     3,412,584          3,619,062    

Revolving credit loans

     87,000            

8% Senior Notes due 2019

     2,020,986          2,022,829    

7 1/8% Senior Notes due 2020

     1,200,000          1,200,000    

5 1/8% Senior Secured Notes due 2018

     1,600,000          1,600,000    

Receivables Facility

     482,000          300,000    

Capital lease obligations

     47,857          47,951    

Other

     42,002          38,963    
  

 

 

    

 

 

 

Total debt

     9,548,679          9,541,305    

Less current maturities

     (180,386)         (89,911)   
  

 

 

    

 

 

 

Total long-term debt

   $                     9,368,293        $                     9,451,394    
  

 

 

    

 

 

 

Credit Facility

The Company’s wholly-owned subsidiary CHS/Community Health Systems, Inc. (“CHS”) has obtained senior secured financing under a credit facility (the “Credit Facility”) with a syndicate of financial institutions led by Credit Suisse, as administrative agent and collateral agent. The Credit Facility includes a $750 million revolving credit facility for working capital and general corporate purposes. The revolving credit facility also includes a subfacility for letters of credit and a swingline subfacility. The Credit Facility requires quarterly amortization payments of each term loan B facility equal to 0.25% of the outstanding amount of such term loans. On November 5, 2010, CHS entered into an amendment and restatement of the Credit Facility. The amendment extended by two and a half years, until January 25, 2017, the maturity date of $1.5 billion of the existing term loans under the Credit Facility and increased the pricing on these term loans to LIBOR plus 350 basis points. The amendment also increased CHS’ ability to issue additional indebtedness under the uncommitted incremental facility to $1.0 billion from $600 million, permitted CHS to issue term loan A loans under the incremental facility, and provided up to $2.0 billion of borrowing capacity from receivable transactions, an increase of $0.5 billion, of which $1.7 billion would be required to be used for repayment of existing term loans. On February 2, 2012, CHS completed a second amendment and restatement of the Credit Facility to extend an additional $1.6 billion of the term loans due 2014 under the Credit Facility to match the maturity date and interest rate margins of the term loans due January 25, 2017.

On August 3, 2012, CHS entered into Amendment No. 1 to the Credit Facility to provide increased flexibility for refinancing and repayment of the term loans due 2014 and amend certain other terms. On August 17, 2012, the Company made a prepayment of $1.6 billion on the term loans due July 25, 2014, utilizing the proceeds from the issuance of $1.6 billion of 5 1/8% Senior Secured Notes due 2018. On August 22, 2012, CHS entered into a loan modification agreement with respect to the Credit Facility to extend approximately $340 million of the term loans due 2014 to match the maturity date and interest rate margins of the term loans due January 25, 2017.

 

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On November 27, 2012, CHS entered into Amendment No. 2 to the Credit Facility to provide increased flexibility for the Company to make investments and restricted payments, incur debt related to acquisitions, amend certain other terms of the Credit Facility, including the maximum leverage ratio and interest coverage ratio financial coverage levels, and add a one year 1% prepayment premium payable in connection with a repricing of the term loans due in 2017. During the nine months ended September 30, 2013, the Company paid down $206.5 million of the term loans due 2014. The July 25, 2014 maturity date of the balance of the remaining non-extended term loans at September 30, 2013 of approximately $59.6 million remains unchanged.

On August 12, 2013, CHS entered into Amendment No. 3 to the Credit Facility to provide increased flexibility for CHS to incur debt by amending certain terms of the Credit Facility, including the maximum leverage ratio and secured leverage ratio covenant levels. In addition, the amendment includes pricing protection for certain term loans due January 25, 2017, which specifies an increased margin in certain instances. The amendment also provides for a total leverage-based step-up to the applicable margin of the term loans due January 25, 2017 and the term loans due July 25, 2014. The pricing of the loans under the Credit Facility will otherwise remain unchanged.

Effective March 6, 2012, the Company obtained a new $750 million senior secured revolving credit facility (the “Replacement Revolver Facility”) and a new $750 million incremental term loan A facility (the “Incremental Term Loan”) subject to the terms and conditions set forth in the Credit Facility. The Replacement Revolver Facility replaced in full the existing revolving credit facility under the Credit Facility. The net proceeds of the Incremental Term Loan were used to repay the same amount of the existing term loans under the Credit Facility. Both the Replacement Revolver Facility and the Incremental Term Loan have a maturity date of October 25, 2016, subject to customary acceleration events and to earlier maturity if the repayment, extension or refinancing with longer maturity debt of substantially all of the Company’s then outstanding term loans maturing July 25, 2014 and the now fully redeemed 8 7/8% Senior Notes does not occur by April 25, 2014. The pricing on each of the Replacement Revolver Facility and the Incremental Term Loan is initially LIBOR plus a margin of 250 basis points, subject to adjustment based on the Company’s leverage ratio. The Incremental Term Loan amortizes at 5% in year one, 10% in years two and three, 15% in year four and 60% in year five.

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

The obligor under the Credit Facility is CHS. All of the obligations under the Credit Facility are unconditionally guaranteed by the Company and certain 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.

The loans under the Credit Facility bear interest on the outstanding unpaid principal amount at a rate equal to an applicable percentage plus, at CHS’ option, either (a) an Alternate Base Rate (as defined) determined by reference to the greater of (1) the Prime Rate (as defined) announced by Credit Suisse or (2) the Federal Funds Effective 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) a reserve adjusted LIBOR for dollars (Eurodollar rate) (as defined). The applicable percentage for Alternate Base Rate loans is 1.25% for term loans due 2014 and is 2.50% for term loans due 2017. The applicable percentage for Eurodollar rate loans is 2.25% for term loans due 2014 and 3.50% for term loans due 2017. The applicable percentage for revolving loans and the Incremental Term Loan is 1.50% for Alternate Base Rate loans and 2.50% for Eurodollar loans. The applicable percentage for the loans under the Credit Facility is subject to adjustment based on the Company’s leverage ratio. Loans under the swingline subfacility bear interest at the rate applicable to Alternate Base Rate loans under the Credit Facility.

 

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CHS has agreed to pay letter of credit fees equal to the applicable percentage then in effect with respect to Eurodollar rate loans under the revolving credit facility times the maximum aggregate amount available to be drawn under all letters of credit outstanding under the subfacility for letters of credit. The issuer of any letter of credit issued under the subfacility for letters of credit will also receive a customary fronting fee and other customary processing charges. CHS is obligated to pay commitment fees of 0.50% per annum (subject to reduction based upon the Company’s leverage ratio) on the unused portion of the revolving credit facility. For purposes of this calculation, swingline loans are not treated as usage of the revolving credit facility.

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

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

As of September 30, 2013, the availability for additional borrowings under the Credit Facility, after consideration of the $87.0 million outstanding at that date, was approximately $663.0 million pursuant to the Replacement Revolver Facility, of which $19.3 million was set aside for outstanding letters of credit. CHS has the ability to amend the Credit Facility to provide for one or more tranches of term loans in an aggregate principal amount of $1.0 billion, which CHS has not yet accessed. As of September 30, 2013, the weighted-average interest rate under the Credit Facility, excluding swaps, was 4.2%.

As of September 30, 2013, the Company had letters of credit issued, primarily in support of potential insurance-related claims and certain bonds, of approximately $19.3 million.

Subsequent to the issuance of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012, the Company determined that the conversion of the term loans due 2014 to extended term loans resulting from the second amendment and restatement of its Credit Facility on February 2, 2012 and the loan modification agreement on August 22, 2012 should be presented as net financing activities in the condensed consolidated statement of cash flows. Such activities were presented in the previously issued Quarterly Report on Form 10-Q for the nine months ended September 30, 2012 as a gross-up of borrowings and repayments of debt in the condensed consolidated statement of cash flows. There was no impact on net cash flows provided by financing activities as previously presented. This correction is reflected in the consolidated statement of cash flows in this Quarterly Report on Form 10-Q. Management does not believe such correction is material to the previously issued condensed consolidated financial statements.

8 7/8% Senior Notes due 2015

On July 25, 2007, CHS completed its offering of approximately $3.0 billion aggregate principal amount of 8 7/8% Senior Notes due 2015 (the “8 7/8% Senior Notes”), which were issued in a private placement. The 8 7/8% Senior Notes were to mature on July 15, 2015. The 8 7/8% Senior Notes bore interest at the rate of 8.875% per annum, payable semiannually in arrears on January 15 and July 15, commencing January 15, 2008. Interest on the 8 7/8% Senior Notes accrued from the date of original issuance. Interest was calculated on the basis of a 360-day year comprised of twelve 30-day months.

 

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Pursuant to a registration rights agreement entered into at the time of the issuance of the 8 7/8% Senior Notes, as a result of an exchange offer made by CHS, substantially all of the 8 7/8% Senior Notes issued in July 2007 were exchanged in November 2007 for new notes (the “8 7/8% Exchange Notes”) having terms substantially identical in all material respects to the 8 7/8% Senior Notes (except that the 8 7/8% Exchange Notes were issued under a registration statement pursuant to the 1933 Act). References to the 8 7/8% Senior Notes shall also be deemed to include the 8 7/8% Exchange Notes unless the context provides otherwise.

On March 21, 2012, CHS completed the cash tender offer for $850 million of the then $1.8 billion aggregate outstanding principal amount of the 8 7/8% Senior Notes.

On July 18, 2012, CHS completed the cash tender offer for $639.7 million of the then $934.3 million aggregate outstanding principal amount of the 8 7/8% Senior Notes. On August 17, 2012, pursuant to its redemption option, CHS redeemed the remaining $294.6 million outstanding principal of the 8 7/8% Senior Notes.

8% Senior Notes due 2019

On November 22, 2011, CHS completed its offering of $1.0 billion aggregate principal amount of 8% Senior Notes due 2019 (the “8% Senior Notes”), which were issued in a private placement. The net proceeds from this issuance, together with available cash on hand, were used to finance the purchase of up to $1.0 billion aggregate principal amount of CHS’ then outstanding 8 7/8% Senior Notes and related fees and expenses. On March 21, 2012, CHS completed the secondary offering of $1.0 billion aggregate principal amount of 8% Senior Notes, which were issued in a private placement (at a premium of 102.5%). The net proceeds from this issuance were used to finance the purchase of approximately $850 million aggregate principal amount of CHS’ then outstanding 8 7/8% Senior Notes, 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, commencing May 15, 2012. 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.

Except as set forth below, CHS is not entitled to redeem the 8% Senior Notes prior to November 15, 2015.

Prior to November 15, 2014, CHS is entitled, at its option, to redeem a portion of the 8% Senior Notes (not to exceed 35% of the outstanding principal amount) at a redemption price equal to 108% of the principal amount of the notes redeemed plus accrued and unpaid interest, with the proceeds from certain public equity offerings. Prior to November 15, 2015, CHS may redeem some or all of the 8% Senior 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 8% Senior Notes indenture. On and after November 15, 2015, CHS is entitled, at its option, to redeem all or a portion of the 8% Senior Notes upon not less than 30 nor more than 60 days’ notice, at the following redemption prices (expressed as a percentage of principal amount on the redemption date), plus accrued and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the periods set forth below:

 

Period

           Redemption Price           

November 15, 2015 to November 14, 2016

     104.000 %       

November 15, 2016 to November 14, 2017

     102.000 %       

November 15, 2017 to November 15, 2019

     100.000 %       

Pursuant to a registration rights agreement entered into at the time of the issuance of the 8% Senior Notes, as a result of an exchange offer made by CHS, substantially all of the 8% Senior Notes issued in November 2011 and March 2012 were exchanged in May 2012 for new notes (the “8% Exchange Notes”) having terms substantially identical in all material respects to the 8% Senior Notes (except that the 8% Exchange Notes were issued under a registration statement pursuant to the 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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7 1/8% Senior Notes due 2020

On July 18, 2012, CHS completed an underwritten public offering under its automatic shelf registration filed with the SEC of $1.2 billion aggregate principal amount of 7 1/8% Senior Notes due 2020 (the “7 1/8% Senior Notes”). The net proceeds from this issuance were used to finance the purchase of $934.3 million aggregate principal amount of CHS’ outstanding 8 7/8% Senior Notes and related fees and expenses and for general corporate purposes. The 7 1/8% Senior Notes bear interest at 7.125% per annum, payable semiannually in arrears on July 15 and January 15, commencing January 15, 2013. Interest on the 7 1/8% 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.

Except as set forth below, CHS is not entitled to redeem the 7 1/8% Senior Notes prior to July 15, 2016.

Prior to July 15, 2015, CHS is entitled, at its option, to redeem a portion of the 7 1/8% Senior Notes (not to exceed 35% of the outstanding principal amount) at a redemption price equal to 107.125% of the principal amount of the notes redeemed plus accrued and unpaid interest, with the proceeds from certain public equity offerings. Prior to July 15, 2016, CHS may redeem some or all of the 7 1/8% Senior 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 7 1/8% Senior Notes indenture. On and after July 15, 2016, CHS is entitled, at its option, to redeem all or a portion of the 7 1/8% Senior Notes upon not less than 30 nor more than 60 days’ notice, at the following redemption prices (expressed as a percentage of principal amount on the redemption date), plus accrued and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the periods set forth below:

 

Period

           Redemption Price           

July 15, 2016 to July 14, 2017

     103.563 %       

July 15, 2017 to July 14, 2018

     101.781 %       

July 15, 2018 to July 15, 2020

     100.000 %       

5  1/8% Senior Secured Notes due 2018

On August 17, 2012, CHS completed an underwritten public offering under its automatic shelf registration filed with the SEC of $1.6 billion aggregate principal amount of 5 1/8% Senior Secured Notes due 2018 (the “5 1/8% Senior Secured Notes”). The net proceeds from this issuance, together with available cash on hand, were used to finance the prepayment of $1.6 billion of the outstanding term loans due 2014 under the Credit Facility and related fees and expenses. The 5 1/8% Senior Secured Notes bear interest at 5.125% per annum, payable semiannually in arrears on August 15 and February 15, commencing February 15, 2013. Interest on the 5 1/8% 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 5 1/8% Senior Secured Notes are secured by a first-priority lien subject to a shared lien of equal priority with certain other obligations, including obligations under the Credit Facility, and subject to prior ranking liens permitted by the indenture governing the 5 1/8% Senior Secured Notes on substantially the same assets, subject to certain exceptions, that secure CHS’ obligations under the Credit Facility.

Except as set forth below, CHS is not entitled to redeem the 5 1/8% Senior Secured Notes prior to August 15, 2015.

 

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Prior to August 15, 2015, CHS is entitled, at its option, to redeem a portion of the 5 1/8% Senior Secured Notes (not to exceed 35% of the outstanding principal amount) at a redemption price equal to 105.125% of the principal amount of the notes redeemed plus accrued and unpaid interest, with the proceeds from certain public equity offerings. Prior to August 15, 2015, CHS may redeem some or all of the 5 1/8% 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 5 1/8% Senior Secured Notes indenture. On and after August 15, 2015, CHS is entitled, at its option, to redeem all or a portion of the 5 1/8% 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           

August 15, 2015 to August 14, 2016

     102.563 %       

August 15, 2016 to August 14, 2017

     101.281 %       

August 15, 2017 to August 15, 2018

     100.000 %       

Receivables Facility

On March 21, 2012, CHS and certain of its subsidiaries entered into 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, and The Bank of Nova Scotia, as a managing agent. On March 7, 2013, CHS and certain of its subsidiaries amended the Receivables Facility to add an additional managing agent, The Bank of Tokyo-Mitsubishi UFJ, Ltd., to increase the size of the facility from $300 million to $500 million and to extend the scheduled termination date. Additional subsidiaries of the Company also agreed to participate in the Receivables Facility as of that date. The existing and future non-self pay patient-related accounts receivable (the “Receivables”) for certain of the Company’s hospitals serves as collateral for the outstanding borrowings under the Receivables Facility. The interest rate on the borrowings is based on the commercial paper rate plus an applicable interest rate spread. Unless earlier terminated or subsequently extended pursuant to its terms, the Receivables Facility will expire on March 21, 2015, subject to customary termination events that could cause an early termination date. The Company maintains effective control over the Receivables because, pursuant to the terms of the Receivables Facility, the Receivables are sold from certain of the Company’s subsidiaries to CHS, which then sells or contributes the Receivables to a special-purpose entity that is wholly-owned by CHS. The wholly-owned special-purpose entity in turn grants security interests in the Receivables in exchange for borrowings obtained from the group of third-party lenders and banks of up to $500 million outstanding from time to time based on the availability of eligible Receivables and other customary factors. The group of third-party lenders and banks do not have recourse to the Company or its subsidiaries beyond the assets of the wholly-owned special-purpose entity that collateralizes the loan. The Receivables and other assets of the wholly-owned special-purpose entity will be available first and foremost to satisfy the claims of the creditors of such entity. The outstanding borrowings pursuant to the Receivables Facility at September 30, 2013 totaled $482.0 million and are classified as long-term debt on the condensed consolidated balance sheet. At September 30, 2013, the carrying amount of Receivables included in the Receivables Facility totaled approximately $994.4 million and is included in patient accounts receivable on the condensed consolidated balance sheet.

Loss from Early Extinguishment of Debt

The financing transactions discussed above relating to the repayment of the Company’s term loans under the Credit Facility and the 8 7/8% Senior Notes due 2015 resulted in a loss from early extinguishment of debt of $1.3 million and $115.5 million for the nine months ended September 30, 2013 and 2012, respectively, and an after-tax loss of $0.8 million and $72.8 million for the nine months ended September 30, 2013 and 2012, respectively. The loss from early extinguishment of debt and the after-tax loss was $52.0 million and $33.2 million for the three months ended September 30, 2012, respectively. There was no loss from early extinguishment of debt during the three months ended September 30, 2013.

 

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Other Debt

As of September 30, 2013, other debt consisted primarily of the mortgage obligation on the Company’s corporate headquarters and other obligations maturing in various installments through 2020.

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 18 separate interest swap agreements in effect at September 30, 2013, with an aggregate notional amount of $2.4 billion. On each of these swaps, the Company receives a variable rate of interest based on the three-month LIBOR in exchange for the payment of a fixed rate of interest. The Company currently pays, on a quarterly basis, a margin above LIBOR of 225 basis points for the outstanding balance of term loans due in 2014, 250 basis points for the Replacement Revolver Facility and the Incremental Term Loan and 350 basis points for term loans due in 2017 under the Credit Facility. See Note 12 for additional information regarding these swaps.

The Company paid interest of $149.9 million and $130.4 million for the three months ended September 30, 2013 and 2012, respectively, and $446.1 million and $461.6 million on borrowings during the nine months ended September 30, 2013 and 2012, respectively.

12.  FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of financial instruments has been estimated by the Company using available market information as of September 30, 2013 and December 31, 2012, and valuation methodologies considered appropriate. The estimates presented are not necessarily indicative of amounts the Company could realize in a current market exchange (in thousands):

 

 

     September 30, 2013      December 31, 2012  
             Carrying        
Amount
         Estimated Fair    
Value
             Carrying        
Amount
         Estimated Fair    
Value
 

Assets:

           

Cash and cash equivalents

   $                 143,605         $                 143,605         $                 387,813         $                 387,813     

Available-for-sale securities

     61,714           61,714           56,376           56,376     

Trading securities

     39,072           39,072           34,696           34,696     

Liabilities:

           

Credit Facility

     4,155,834           4,157,984           4,331,562           4,357,910     

8% Senior Notes

     2,020,986           2,108,800           2,022,829           2,185,220     

7 1/8% Senior Notes

     1,200,000           1,216,836           1,200,000           1,285,848     

5 1/8% Senior Secured Notes

     1,600,000           1,632,608           1,600,000           1,674,480     

Receivables Facility and other debt

     524,002           524,002           338,963           338,963     

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 13. 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, which are validated 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).

 

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

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

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

8% Senior Notes. Estimated fair value is based on the average bid and ask price as quoted by the bank who served as underwriters in the sale of these notes.

7 1/8% Senior Notes. Estimated fair value is based on the average bid and ask price as quoted by the bank who served as underwriters in the sale of these notes.

5 1/8% Senior Secured Notes. Estimated fair value is based on the average bid and ask price as quoted by the bank who served as underwriters in the sale of these notes.

Receivables Facility and other debt. The carrying amount of the Receivables 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 and nine months ended September 30, 2013 and 2012, the Company completed an assessment of the cash flow hedge instruments and determined the hedges to be highly effective. The Company has also determined that the ineffective portion of the hedges do not have a material effect on the Company’s consolidated financial position, operations or cash flows. The counterparties to the interest rate swap agreements expose the Company to credit risk in the event of nonperformance. However, at September 30, 2013, each swap agreement entered into by the Company was in a net liability position so that the Company would be required to make the net settlement payments to the counterparties; the Company does not anticipate nonperformance by those counterparties. The Company does not hold or issue derivative financial instruments for trading purposes.

 

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Interest rate swaps consisted of the following at September 30, 2013:

 

          Swap #                Notional Amount  
(in 000’s)
     Fixed Interest Rate                Termination Date                Fair Value of
 Liability (in 000’s) 
 
1     $                  50,000         3.586 %           October 23, 2013         $                        103    
2     50,000         3.524 %           October 23, 2013        101    
3     100,000         5.050 %           November 30, 2013        783    
4     200,000         2.070 %           December 19, 2013        791    
5     100,000         5.231 %           July 25, 2014        4,050    
6     100,000         5.231 %           July 25, 2014        4,050    
7     200,000         5.160 %           July 25, 2014        7,983    
8     75,000         5.041 %           July 25, 2014        2,920    
9     125,000         5.022 %           July 25, 2014        4,847    
10     100,000         2.621 %           July 25, 2014        1,906    
11     100,000         3.110 %           July 25, 2014        2,307    
12     100,000         3.258 %           July 25, 2014        2,429    
13     200,000         2.693 %           October 26, 2014        5,120    
14     300,000         3.447 %           August 8, 2016        23,323    
15     200,000         3.429 %           August 19, 2016        15,543    
16     100,000         3.401 %           August 19, 2016        7,695    
17     200,000         3.500 %           August 30, 2016        16,055    
18     100,000         3.005 %           November 30, 2016        6,855    

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 September 30, 2013 interest rates, approximately $65.6 million of interest expense resulting from the spread between the fixed and floating rates defined in each interest rate swap agreement will be recognized during the next 12 months. If interest rate swaps do not remain highly effective as a cash flow hedge, the derivatives’ gains or losses resulting from the change in fair value reported through OCI will be reclassified into earnings.

 

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The following tabular disclosure provides the amount of pre-tax loss recognized as a component of OCI during the three and nine months ended September 30, 2013 and 2012 (in thousands):

 

    Amount of Pre-Tax Loss Recognized in  OCI (Effective Portion)  

Derivatives in Cash Flow Hedging
Relationships

  Three Months Ended September 30,     Nine Months Ended September 30,  
    2013     2012     2013     2012  

Interest rate swaps

  $ (8,034   $ (20,689   $ (4,380   $ (65,515

The following tabular disclosure provides the location of the effective portion of the pre-tax loss reclassified from accumulated other comprehensive loss (“AOCL”) into interest expense on the condensed consolidated statements of income during the three and nine months ended September 30, 2013 and 2012 (in thousands):

 

    Amount of Pre-Tax Loss Reclassified from  AOCL
into Income (Effective Portion)
 

Location of Loss Reclassified from AOCL
into Income (Effective Portion)

  Three Months Ended September 30,     Nine Months Ended September 30,  
    2013     2012     2013     2012  

Interest expense, net

  $ 25,013       $ 33,606       $ 79,120       $ 110,532    

The fair values of derivative instruments in the condensed consolidated balance sheets as of September 30, 2013 and December 31, 2012 were as follows (in thousands):

 

     Asset Derivatives      Liability Derivatives  
          September 30, 2013                December 31, 2012                September 30, 2013                December 31, 2012       
     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
  $                 -          

 

Other long-
term
liabilities

  $      106,861          

 

Other long-
term
liabilities

  $      181,600       

13.  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).

 

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

 

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

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

The following table sets forth, by level within the fair value hierarchy, the financial assets and liabilities recorded at fair value on a recurring basis as of September 30, 2013 and December 31, 2012 (in thousands):

 

       September 30,  
2013
             Level 1                      Level 2                      Level 3          

Available-for-sale securities

   $ 61,714        $ 61,714        $       $   

Trading securities

     39,072          39,072                    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 100,786        $ 100,786        $       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair value of interest rate swap agreements

   $ 106,861        $       $ 106,861        $   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 106,861        $       $ 106,861        $   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31,
2012
     Level 1      Level 2      Level 3  

Available-for-sale securities

   $ 56,376        $ 56,376        $       $   

Trading securities

     34,696          34,696                    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 91,072        $ 91,072        $       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair value of interest rate swap agreements

   $ 181,600        $       $ 181,600        $   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 181,600        $       $ 181,600        $   
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities and trading securities classified as Level 1 are measured using quoted market prices.

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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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 at September 30, 2013 resulted in a decrease in the fair value of the related liability of $1.7 million and an after-tax adjustment of $1.1 million to OCI. The CVA on the Company’s interest rate swap agreements at December 31, 2012 resulted in a decrease in the fair value of the related liability of $3.6 million and an after-tax adjustment of $2.3 million to OCI.

The majority of the inputs used to value its 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.

14.  OTHER COMPREHENSIVE INCOME

The following tables present information about items reclassified out of accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2013 (in thousands, net of tax):

 

     Change in Fair
Value of Interest
Rate Swaps
     Change in Fair
Value of Available
for Sale Securities
     Change in
Unrecognized
Pension Cost
Components
     Accumulated Other
Comprehensive
Income (Loss)
 

Balance as of June 30, 2013

    $ (79,473)        $ 6,258        $ (32,052)        $ (105,267)   

Other comprehensive (loss) income before reclassifications

     (5,134)         1,171                  (3,963)   

Amounts reclassified from accumulated other comprehensive income (loss)

     15,984                  731          16,715    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net current-period other comprehensive income

     10,850          1,171         731          12,752    
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of September 30, 2013

    $ (68,623)        $ 7,429         $ (31,321)        $ (92,515)   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Change in Fair
Value of Interest
Rate Swaps
     Change in Fair
Value of Available
for Sale Securities
     Change in
Unrecognized
Pension Cost
Components
     Accumulated Other
Comprehensive
Income (Loss)
 

Balance as of December 31, 2012

    $ (116,382)        $ 4,588         $ (33,516)        $ (145,310)   

Other comprehensive (loss) income before reclassifications

     (2,798)         2,841                  43    

Amounts reclassified from accumulated other comprehensive income (loss)

     50,557                  2,195          52,752    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net current-period other comprehensive income

     47,759          2,841          2,195          52,795    
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of September 30, 2013

    $ (68,623)        $ 7,429         $ (31,321)        $ (92,515)   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table presents a subtotal for each significant reclassification to net income out of accumulated other comprehensive income (loss) and the line item affected in the condensed consolidated statement of income during the three and nine months ended September 30, 2013 (in thousands):

 

    Amount Reclassified from AOCL     Affected line item in  the
statement where net
income is presented

Details about accumulated other comprehensive
income (loss) components

  Three Months Ended
September 30, 2013
    Nine Months Ended
September 30, 2013
   

Gains and losses on cash flow hedges

     

Interest rate swaps

  $ (25,013   $ (79,120   Interest expense, net
    9,029         28,563       Tax benefit
 

 

 

   

 

 

   
  $ (15,984   $ (50,557   Net of tax
 

 

 

   

 

 

   

Amortization of defined benefit pension items

     

Prior service costs

  $ (286   $ (858   Salaries and benefits

Actuarial losses

    (879     (2,637   Salaries and benefits
 

 

 

   

 

 

   
    (1,165     (3,495   Total before tax
    434         1,300       Tax benefit
 

 

 

   

 

 

   
  $ (731   $ (2,195   Net of tax
 

 

 

   

 

 

   

15.  SEGMENT INFORMATION

Prior to the quarter ended March 31, 2013, the Company operated in three distinct operating segments, represented by hospital operations (which includes its general acute care hospitals and related healthcare entities that provide inpatient and outpatient healthcare services), home care agency operations (which provide in-home outpatient care), and hospital management services (which provides executive management and consulting services to non-affiliated acute care hospitals). During the quarter ended March 31, 2013, the chief operating decision maker stopped receiving discrete financial information for the hospital management services, so it no longer meets the criteria as a separate operating segment. The Company operates in two operating segments, hospital operations and home care agency operations. Financial information for hospital management services is now presented as a component of the hospital operations segment. The financial information from prior years has been revised to reflect the change in the composition of the Company’s operating segments. Consistent with 2012, the Company presents two reportable segments, as noted below.

Only the hospital operations segment meets the criteria as a separate reportable segment. The financial information for the home care agency segment does not meet the quantitative thresholds for a separate identifiable reportable segment and is combined into the corporate and all other reportable segment.

 

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The distribution between reportable segments of the Company’s net operating revenues and income from continuing operations before income taxes is summarized in the following tables (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013      2012      2013      2012  

Net operating revenues:

           

Hospital operations

   $ 3,170,427        $ 3,169,622        $ 9,629,555        $ 9,625,299    

Corporate and all other

     47,804          42,408          136,817          126,740    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $     3,218,231        $     3,212,030        $     9,766,372        $     9,752,039    
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations before income taxes:

           

Hospital operations

   $ 84,104        $ 143,474        $ 405,832        $ 560,032    

Corporate and all other

     (59,064)         (59,016)         (172,196)         (178,351)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 25,040        $ 84,458        $ 233,636        $ 381,681    
  

 

 

    

 

 

    

 

 

    

 

 

 

16.  CONTINGENCIES

The Company is a party to various legal proceedings incidental to its business. In the opinion of management, any ultimate liability with respect to these actions will not have a material adverse effect on the Company’s consolidated financial position, cash flows or results of operations. With respect to all litigation matters, the Company considers the likelihood of a negative outcome. If the Company determines the likelihood of a negative outcome is probable and the amount of the loss can be reasonably estimated, the Company records an estimated loss for the expected outcome of the litigation and discloses that fact together with the amount accrued, if it was estimable. If the likelihood of a negative outcome is reasonably possible and the Company is able to determine an estimate of the possible loss or a range of loss, the Company discloses that fact together with the estimate of the possible loss or range of loss. However, it is difficult to predict the outcome or estimate a possible loss or range of loss in some instances because litigation is subject to significant uncertainties.

Reasonably Possible Contingencies

For the legal matter below, the Company believes that a negative outcome is reasonably possible, but the Company is unable to determine an estimate of the possible loss or a range of loss.

U.S. ex rel. Baker vs. Community Health Systems, Inc. (United States District Court for the District of New Mexico)

The Company’s knowledge of this matter originated in early 2006 with correspondence from the Civil Division of the Department of Justice requesting documents in an investigation it was conducting involving the Company. The inquiry related to the way in which different state Medicaid programs apply to the federal government for matching or supplemental funds that are ultimately used to pay for a small portion of the services provided to Medicaid and indigent patients. These programs are referred to by different names, including “intergovernmental payments,” “upper payment limit programs,” and “Medicaid disproportionate share hospital payments.” For approximately three years, the Company provided the Department of Justice with requested documents, met with its personnel on numerous occasions and otherwise cooperated in its investigation. During the course of the investigation, the Civil Division notified the Company that it believed that the Company and three of its New Mexico hospitals caused the State of New Mexico to submit improper claims for federal funds, in violation of the Federal False Claims Act. This investigation has culminated in the federal government’s intervention in the referenced qui tam lawsuit, which alleges that the Company’s New Mexico hospitals “caused to be filed” false claims from the period of August 2000 through June 2011. Two of the parent company’s subsidiaries are also defendants in this lawsuit. The Company continues to vigorously defend this action. The current posture of this case is that discovery is closed and both parties’ motions for summary judgment are pending. There is currently no hearing date on these motions and no trial date has been set.

 

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Probable Contingencies

Department of Justice Investigation of Medicare Short-Stay Admissions from Emergency Departments

In April 2011, the Company received a document subpoena from the United States Department of Health and Human Services (“OIG”) in connection with an investigation of possible improper claims submitted to Medicare and Medicaid. The subpoena was directed to all of the Company’s hospitals and requested documents concerning emergency department processes and procedures, including the hospitals’ use of the Pro-MED Clinical Information System, a third-party software system that assists with the management of patient care and provides operational support and data collection for emergency department management. The subpoena also sought information about the Company’s relationships with emergency department physicians, including financial arrangements. This investigation is being led by the Department of Justice. The Company is continuing to cooperate with the government with the ongoing document production, as well as conducting a joint medical necessity review of a sampling of medical records at a small number of hospitals. In 2013, the Company has met with the government twice to review and discuss the investigation. On July 9, 2013, shortly after a second meeting with the government, the Company was served with an additional document subpoena, as well as civil investigative demands to interview two of the Company’s current executives. In further discussions with the government, these additional requests do not reflect an expansion of the pending investigation. The Company will continue to cooperate with the government in their investigative efforts.

We are currently in negotiations with the Department of Justice about resolving its claims in connection with the Department’s investigation into the Company’s short stay hospital admissions for the years 2005-2010, as well as their investigation at our hospital in Laredo, Texas. Based on those negotiations, which are not final, we believe that a reserve of $98 million is sufficient to cover the federal government’s claims for Medicare admissions (including the claims described in the Legal Proceedings section in Part II Item 1 of this Form 10-Q related to United States ex rel. and Reuille vs. Community Health Systems Professional Services Corporation and Lutheran Musculoskeletal Center, LLC d/b/a Lutheran Hospital (United States District Court for the Northern District of Indiana, Fort Wayne Division) and the May 2011 subpoena identified as “Shelbyville, Tennessee OIG Subpoena”), certain claims specifically related to our hospital in Laredo, Texas, and on other related legal expenses. This reserve is not meant to include claims in this investigation arising from Tricare, Medicaid, or third party legal expense (including, without limitation, the matter identified in the Legal Proceedings section in Part II Item 1 of this Form 10-Q as “Texas Attorney General Investigation of Emergency Department Procedures and Billing”).

There are a number of other legal matters for which, based on information currently available, the Company believes that a negative outcome is known or is probable. In the aggregate, including the matter above, an estimate of these losses has been accrued in the amount of $112.2 million and $22.6 million at September 30, 2013 and December 31, 2012, respectively, and is included in accrued liabilities in the accompanying condensed consolidated balance sheets. Due to the uncertainties and difficulty in predicting the ultimate resolution of these contingencies, the actual amount could differ from the estimated amount; however, the Company does not believe a change in estimate for any of these matters would be material.

Matters for which an Outcome Cannot be Assessed

For all of the legal matters below, 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. Because the investigations are at a preliminary stage, there are not sufficient facts available to make these assessments.

 

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Multi-provider National Department of Justice Investigations

Implantable Cardioverter Defibrillators (“ICDs”). The Company was first made aware of this investigation in September 2010, when the Company received a letter from the Civil Division of the United States Department of Justice. The letter advised the Company that an investigation was being conducted to determine whether certain hospitals have improperly submitted claims for payment for ICDs. The period of time covered by the investigation was 2003 to 2010. The Company continues to fully cooperate with the government in this investigation and has provided requested records and documents. On August 30, 2012, the Department of Justice issued a document entitled, “Medical Review Guidelines/Resolution Model,” which sets out, for the purposes of this investigation, the patient conditions and criteria for the medical necessity of the implantation of ICDs in Medicare beneficiaries and how the Department of Justice will enforce the repayment obligations of hospitals. The Company is in the process of reviewing its medical records in light of the guidance contained in this document.

Investigations and Litigation Related to the Department of Justice Investigation of Medicare Short-Stay Admissions from Emergency Departments

SEC Subpoena. In May 2011, the Company received a subpoena from the SEC requesting documents related to or requested in connection with the various inquiries, lawsuits and investigations regarding, generally, emergency room admissions or observation practices at the Company’s hospitals. The subpoena also requested documents relied upon by the Company in responding to the Tenet litigation, as well as other communications about the Tenet litigation. As with all government investigations, the Company is cooperating fully with the SEC.

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. The Company’s motion to dismiss this case has been fully briefed and is pending before the court. The Company believes this consolidated matter is without merit and will vigorously defend this case.

Shareholder Derivative Actions. Three purported shareholder derivative actions have also been filed in the United States District Court for the Middle District of Tennessee; Plumbers and Pipefitters Local Union No. 630 Pension Annuity Trust Fund v. Wayne T. Smith, et al., filed May 24, 2011; Roofers Local No. 149 Pension Fund v. Wayne T. Smith, et al., filed June 21, 2011; and Lambert Sweat v. Wayne T. Smith, et al., filed October 5, 2011. These three cases allege breach of fiduciary duty arising out of allegedly improper inpatient admission practices, mismanagement, waste and unjust enrichment. These cases have been consolidated into a single, consolidated action. The plaintiffs filed an operative amended derivative complaint in these three consolidated actions on March 15, 2012. The Company’s motion to dismiss was argued on June 13, 2013. On September 27, 2013, the court issued an order granting in part and denying in part the Company’s motion to dismiss. On October 14, 2013, the Company filed for a Motion for Reconsideration of the Order Granting in Part and Denying in Part the Motion to Dismiss, a Motion to Stay Discovery, and an unopposed Motion for Extension of Time to File an Answer. The Company believes all of the plaintiffs’ claims are without merit and will vigorously defend them.

The Company incurred the following pre-tax charges in connection with the government investigations and shareholder lawsuits of possible improper claims submitted to Medicare and Medicaid during the three and nine months ended September 30, 2013 and 2012 (in thousands):

 

                   Three Months Ended           
September 30,
               Nine Months Ended           
September 30,
 
                 2013                          2012                      2013                          2012          

Professional fees and other related costs

     $             99,979          $                 1,558        $             104,412          $                 3,006    
    

 

 

      

 

 

    

 

 

      

 

 

 

 

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17.  SUBSEQUENT EVENTS

Except for the events disclosed in Note 16 related to the Company’s negotiations with the Department of Justice in connection with its investigation of Medicare short stay admissions, the Company evaluated all material events occurring subsequent to the balance sheet date noting no events requiring disclosure or recognition in the condensed consolidated financial statements.

18.  SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The Senior Notes, which are senior unsecured obligations of CHS, and the 5 1/8% Senior Secured 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. The Senior Notes and the 5 1/8% Senior Secured 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’ equity. As this approach represents an allocation, the income tax expense allocation is considered non-cash for statement of cash flow purposes.

 

   

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

The Company’s intercompany activity consists primarily of daily cash transfers for purposes of cash management, the allocation of certain expenses and expenditures paid for by the parent on behalf of its subsidiaries, and the push down of investment in its subsidiaries. This activity also includes the intercompany transactions between consolidated entities as part of the Receivables Facility that is further discussed in Note 11. 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, the Company sells and/or repurchases noncontrolling interests in consolidated subsidiaries, which may change subsidiaries between guarantors and non-guarantors. Amounts for prior periods are revised to reflect the status of guarantors or non-guarantors as of September 30, 2013.

 

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Condensed Consolidating Balance Sheet

September 30, 2013

 

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

Current assets:

                 

Cash and cash equivalents

     $         $         $ 16,995         $ 126,610         $         $ 143,605   

Patient accounts receivable, net of allowance for doubtful accounts

                     855,534         1,443,085                 2,298,619   

Supplies

                     259,939         117,970                 377,909   

Prepaid income taxes

     26,730                                         26,730   

Deferred income taxes

     117,045                                         117,045   

Prepaid expenses and taxes

             160         117,535         31,067                 148,762   

Other current assets

                     254,263         79,349                 333,612   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

     143,775         160         1,504,266         1,798,081                 3,446,282   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Intercompany receivable

     518,789          9,629,656         4,573,210         3,643,775         (18,365,430)           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Property and equipment, net

                     4,662,040         2,406,521                 7,068,561   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Goodwill

                     2,547,402         1,889,858                 4,437,260   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other assets, net

             152,731         1,314,567         797,202         (494,360)         1,770,140   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net investment in subsidiaries

     3,140,780          9,049,963          3,862,410                 (16,053,153)           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $ 3,803,344         $ 18,832,510          $ 18,463,895         $ 10,535,437         $ (34,912,943)         $ 16,722,243   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

LIABILITIES AND EQUITY

  

Current liabilities:

                 

Current maturities of long-term debt

     $         $ 161,020         $ 17,001         $ 2,365         $         $ 180,386   

Accounts payable

             11         563,886         179,879                 743,776   

Accrued interest

             106,926         120         417                 107,463   

Accrued liabilities

     4,178                 769,703         304,001                 1,077,882   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities

     4,178         267,957         1,350,710         486,662                 2,109,507   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Long-term debt

             8,816,478         52,220         499,595                 9,368,293   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Intercompany payable

             6,006,078          12,797,953          8,220,831         (27,024,862)           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Deferred income taxes

     808,489                                         808,489   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other long-term liabilities

     711         601,220         694,607         214,025         (494,360)         1,016,203   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     813,378         15,691,733          14,895,490          9,421,113         (27,519,222)         13,302,492   

Redeemable noncontrolling interests in equity of consolidated subsidiaries

                             366,787                 366,787   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity:

                 

Community Health Systems, Inc. stockholders’ equity:

                 

Preferred stock

                                               

Common stock

     959                               (3)         959   

Additional paid-in capital

     1,231,186         1,138,420          1,267,786          549,584         (2,955,790)         1,231,186   

Treasury stock, at cost

     (6,678)                                         (6,678)   

Accumulated other comprehensive (loss) income

     (92,515)         (92,515)         (23,891)                 116,406         (92,515)   

Retained earnings

     1,857,014         2,094,872          2,324,509          134,953         (4,554,334)         1,857,014   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Community Health Systems, Inc. stockholders’ equity

     2,989,966         3,140,777         3,568,405          684,539         (7,393,721)         2,989,966   

Noncontrolling interests in equity of consolidated subsidiaries

                             62,998                 62,998   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total equity

     2,989,966         3,140,777         3,568,405          747,537         (7,393,721)         3,052,964   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities and equity

     $ 3,803,344         $ 18,832,510          $ 18,463,895         $ 10,535,437         $ (34,912,943)         $ 16,722,243   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Condensed Consolidating Balance Sheet

December 31, 2012

 

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

Current assets:

                 

Cash and cash equivalents

     $         $         $ 271,559         $ 116,254         $         $ 387,813   

Patient accounts receivable, net of allowance for doubtful accounts

                     676,649         1,390,730                 2,067,379   

Supplies

                     254,853         113,319                 368,172   

Prepaid income taxes

     49,888                                         49,888   

Deferred income taxes

     117,045                                         117,045   

Prepaid expenses and taxes

             115         86,628         39,818                 126,561   

Other current assets

                     222,424         79,860                 302,284   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

     166,933         115         1,512,113         1,739,981                 3,419,142   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Intercompany receivable

     406,534         9,837,904         3,723,120         3,262,823         (17,230,381)           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Property and equipment, net

                     4,660,557         2,491,316                 7,151,873   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Goodwill

                     2,544,195         1,863,943                 4,408,138   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other assets, net

             165,236         1,273,347         816,373         (627,774)         1,627,182   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net investment in subsidiaries

     2,974,965         8,686,242         3,427,182                 (15,088,389)           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $ 3,548,432         $ 18,689,497         $ 17,140,514         $ 10,174,436         $ (32,946,544)         $ 16,606,335   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

LIABILITIES AND EQUITY

  

Current liabilities:

                 

Current maturities of long-term debt

     $         $ 75,679         $ 11,103         $ 3,129         $         $ 89,911   

Accounts payable

             74         583,865         241,975                 825,914   

Accrued interest

             110,091         295         316                 110,702   

Accrued liabilities

     7,580                 748,010         361,103                 1,116,693   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities

     7,580         185,844         1,343,273         606,523                 2,143,220   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Long-term debt

             9,079,392         53,201         318,801                 9,451,394   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Intercompany payable

             5,639,928         11,693,119         7,822,313         (25,155,360)           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Deferred income taxes

     808,489                                         808,489   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other long-term liabilities

     1,156         809,372         675,341         180,950         (627,774)         1,039,045   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     817,225         15,714,536         13,764,934         8,928,587         (25,783,134)         13,442,148   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Redeemable noncontrolling interests in equity of consolidated subsidiaries

                             367,666                 367,666   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity:

                 

Community Health Systems, Inc. stockholders’ equity:

                 

Preferred stock

                                               

Common stock

     929                               (3)         929   

Additional paid-in capital

     1,138,274         1,176,342         1,283,499         690,929         (3,150,770)         1,138,274   

Treasury stock, at cost

     (6,678)                                         (6,678)   

Accumulated other comprehensive (loss) income

     (145,310)         (145,310)         (28,927)                 174,237         (145,310)   

Retained earnings

     1,743,992         1,943,929         2,121,007         121,938         (4,186,874)         1,743,992   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Community Health Systems, Inc. stockholders’ equity

     2,731,207         2,974,961         3,375,580         812,869         (7,163,410)         2,731,207   

Noncontrolling interests in equity of consolidated subsidiaries

                             65,314                 65,314   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total equity

     2,731,207         2,974,961         3,375,580         878,183         (7,163,410)         2,796,521   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities and equity

     $ 3,548,432         $ 18,689,497         $ 17,140,514         $ 10,174,436         $ (32,946,544)         $ 16,606,335   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

38


Table of Contents

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – CONTINUED

 

Condensed Consolidating Statement of Income

Three Months Ended September 30, 2013

 

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

Operating revenues (net of contractual allowances and discounts)

     $         $ (3,845)         $ 2,420,377         $ 1,350,301         $         $ 3,766,833   

Provision for bad debts

                     373,258         175,344                 548,602   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net operating revenues

             (3,845)         2,047,119         1,174,957                 3,218,231   

Operating costs and expenses:

                 

Salaries and benefits

                     908,651         633,041                 1,541,692   

Supplies

                     316,598         169,776                 486,374   

Other operating expenses

                     468,293         253,664                 721,957   

Government settlement and related costs reserve

                     98,000                         98,000   

Electronic health records incentive reimbursement

                     (48,771)         (16,236)                 (65,007)   

Rent

                     40,627         31,019                 71,646   

Depreciation and amortization

                     133,773         62,068                 195,841   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating costs and expenses

                     1,917,171         1,133,332                 3,050,503   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

             (3,845)         129,948         41,625                 167,728   

Interest expense, net

             (1,470)         139,796         16,003                 154,329   

Loss from early extinguishment of debt

                                               

Equity in earnings of unconsolidated affiliates

     (4,095)         (77,763)         (14,207)                 84,424         (11,641)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations before income taxes

     4,095         75,388         4,359         25,622         (84,424)         25,040   

Provision for (benefit from) income taxes

             71,293         (70,777)         2,926                 3,442   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations

     4,095         4,095         75,136         22,696         (84,424)         21,598   

Discontinued operations, net of taxes:

                 

Loss from operations of entities sold