10-Q 1 d497838d10q.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 June 30, 2018

Commission file number 001-15925

COMMUNITY HEALTH SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   13-3893191

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

4000 Meridian Boulevard

Franklin, Tennessee

 

37067

(Zip Code)

(Address of principal executive offices)    

615-465-7000

(Registrant’s telephone number)

 

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☑     No ☐

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

 

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

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

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

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

 

 

 


Table of Contents

Community Health Systems, Inc.

Form 10-Q

For the Three and Six Months Ended June 30, 2018

 

Part I.

 

Financial Information

    Page  
 

Item 1.

  

Financial Statements:

 
    

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

     
    

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

     
    

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

     
    

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

     
         Notes to Condensed Consolidated Financial Statements (Unaudited)    
 

Item 2.

  

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

    50   
 

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

    77   
 

Item 4.

  

Controls and Procedures

    78   

Part II.

 

Other Information

 
 

Item 1.

  

Legal Proceedings

    78   
 

Item 1A.

  

Risk Factors

    82   
 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

    83   
 

Item 3.

  

Defaults Upon Senior Securities

    83   
 

Item 4.

  

Mine Safety Disclosures

    83   
 

Item 5.

  

Other Information

    83   
 

Item 6.

  

Exhibits

    84   

Signatures

    86   


Table of Contents

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF LOSS

(In millions, except share and per share data)

(Unaudited)

 

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

Operating revenues (net of contractual allowances and discounts)

     $ 4,823     $ 9,991

Provision for bad debts

       679       1,362
    

 

 

     

 

 

 

Net operating revenues (see Note 1)

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

 

 

     

 

 

 

Operating costs and expenses:

        

Salaries and benefits

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

Supplies

     592     697     1,208     1,446

Other operating expenses

     879     1,017     1,789     2,074

Government and other legal settlements and related costs

     1     7     7     (34

Electronic health records incentive reimbursement

     -       (17     (1     (23

Rent

     85     104     173     214

Depreciation and amortization

     177     223     358     458

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

     174     80     202     330
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

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

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     37     113     250     183

Interest expense, net

     235     239     464     468

(Gain) loss from early extinguishment of debt

     (64     10     (59     31

Equity in earnings of unconsolidated affiliates

     (5     (5     (12     (9
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (129     (131     (143     (307

Benefit from income taxes

     (38     (15     (45     (15
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (91     (116     (98     (292
  

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations, net of taxes:

        

Loss from operations of entities sold or held for sale

     -       (1     -       (2

Impairment of hospitals sold or held for sale

     -       (5     -       (5
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of taxes

     -       (6     -       (7
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (91     (122     (98     (299

Less: Net income attributable to noncontrolling interests

     19     15     37     36
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Community Health Systems, Inc. stockholders

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

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Continuing operations

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

Discontinued operations

     -       (0.06     -       (0.06
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

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

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Continuing operations

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

Discontinued operations

     -       (0.06     -       (0.06
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

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

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of shares outstanding:

        

Basic

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

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

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

 

 

   

 

 

   

 

 

   

 

 

 

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

See accompanying notes to the condensed consolidated financial statements.

 

2


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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In millions)

(Unaudited)

 

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

Net loss

   $ (91   $ (122   $ (98   $ (299

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

        

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

     7     (2     25     3

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

     (1     2     (2     5

Amortization and recognition of unrecognized pension cost, net of tax

     1     1     1     1
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     7     1     24     9
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

     (84     (121     (74     (290

Less: Comprehensive income attributable to noncontrolling interests

     19     15     37     36
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to Community Health Systems, Inc. stockholders

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

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

3


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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

(Unaudited)

 

             June 30, 2018                     December 31, 2017          

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 208     $ 563  

Patient accounts receivable (see Note 1)

     2,407       2,384  

Supplies

     432       444  

Prepaid income taxes

     8       17  

Prepaid expenses and taxes

     217       198  

Other current assets

     422       462  
  

 

 

   

 

 

 

Total current assets

     3,694       4,068  
  

 

 

   

 

 

 

Property and equipment

     11,148       11,497  

Less accumulated depreciation and amortization

     (4,399     (4,445
  

 

 

   

 

 

 

Property and equipment, net

     6,749       7,052  
  

 

 

   

 

 

 

Goodwill

     4,653       4,723  
  

 

 

   

 

 

 

Deferred income taxes

     101       62  
  

 

 

   

 

 

 

Other assets, net

     1,597       1,545  
  

 

 

   

 

 

 

Total assets

   $ 16,794     $ 17,450  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

    

Current liabilities:

    

Current maturities of long-term debt

   $ 41     $ 33  

Accounts payable

     839       967  

Accrued liabilities:

    

Employee compensation

     592       685  

Accrued interest

     174       229  

Other

     416       442  
  

 

 

   

 

 

 

Total current liabilities

     2,062       2,356  
  

 

 

   

 

 

 

Long-term debt

     13,673       13,880  
  

 

 

   

 

 

 

Deferred income taxes

     19       19  
  

 

 

   

 

 

 

Other long-term liabilities

     1,329       1,360  
  

 

 

   

 

 

 

Total liabilities

     17,083       17,615  
  

 

 

   

 

 

 

Redeemable noncontrolling interests in equity of consolidated subsidiaries

     514       527  
  

 

 

   

 

 

 

STOCKHOLDERS’ DEFICIT

    

Community Health Systems, Inc. stockholders’ deficit:

    

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

     -       -  

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

     1       1  

Additional paid-in capital

     2,013       2,014  

Accumulated other comprehensive loss

     (9     (21

Accumulated deficit

     (2,884     (2,761
  

 

 

   

 

 

 

Total Community Health Systems, Inc. stockholders’ deficit

     (879     (767

Noncontrolling interests in equity of consolidated subsidiaries

     76       75  
  

 

 

   

 

 

 

Total stockholders’ deficit

     (803     (692
  

 

 

   

 

 

 

Total liabilities and stockholders’ deficit

   $ 16,794     $ 17,450  
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

     Six Months Ended  
     June 30,  
                 2018                             2017              

Cash flows from operating activities:

    

Net loss

   $ (98   $ (299

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

    

Depreciation and amortization

     358       458  

Government and other legal settlements and related costs

     7       6  

Stock-based compensation expense

     7       15  

Impairment of hospitals sold or held for sale

     -       5  

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

     202       330  

(Gain) loss from early extinguishment of debt

     (59     31  

Other non-cash expenses, net

     23       18  

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

    

Patient accounts receivable

     (21     186  

Supplies, prepaid expenses and other current assets

     (15     (55

Accounts payable, accrued liabilities and income taxes

     (308     (126

Other

     (2     (66
  

 

 

   

 

 

 

Net cash provided by operating activities

     94       503  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions of facilities and other related businesses

     (10     (4

Purchases of property and equipment

     (295     (274

Proceeds from disposition of hospitals and other ancillary operations

     88       921  

Proceeds from sale of property and equipment

     4       3  

Purchases of available-for-sale securities and equity securities

     (38     (37

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

     63       47  

Increase in other investments

     (53     (60
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (241     596  
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Repurchase of restricted stock shares for payroll tax withholding requirements

     (1     (5

Deferred financing costs and other debt-related costs

     (54     (62

Proceeds from noncontrolling investors in joint ventures

     1       5  

Redemption of noncontrolling investments in joint ventures

     (6     (4

Distributions to noncontrolling investors in joint ventures

     (52     (53

Borrowings under credit agreements

     26       840  

Issuance of long-term debt

     -       3,100  

Proceeds from ABL and receivables facility

     587       26  

Repayments of long-term indebtedness

     (709     (4,416
  

 

 

   

 

 

 

Net cash used in financing activities

     (208     (569
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (355     530  

Cash and cash equivalents at beginning of period

     563       238  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 208     $ 768  
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Interest payments

   $ (486   $ (409
  

 

 

   

 

 

 

Income tax (payments) refunds, net

   $ 9     $ (6
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

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

Net Operating Revenues

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

 

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Table of Contents

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

 

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

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

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

 

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

Medicare

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

Medicaid

     479        544        938        1,133  

Managed Care and other third-party payors

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

Self-pay

     30        57        109        158  
  

 

 

    

 

 

    

 

 

    

 

 

 

 Total

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

 

 

    

 

 

    

 

 

    

 

 

 

Patient Accounts Receivable

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

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

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

 

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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

 

Charity Care

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

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

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

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

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

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

 

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

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

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

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

2. ACCOUNTING FOR STOCK-BASED COMPENSATION

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

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

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

 

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

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

 

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

Effect on loss from continuing operations before income taxes

   $ (3   $ (6   $ (7   $ (15
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect on net loss

   $ (2   $ (4   $ (4   $ (9
  

 

 

   

 

 

   

 

 

   

 

 

 

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

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

 

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

Exercisable at December 31, 2017

     1,115,667     $ 31.56        

Granted

     -       -        

Exercised

     -       -        

Forfeited and cancelled

     (383,666     32.19        
  

 

 

         

Outstanding at March 31, 2018

     732,001       31.23        

Granted

     -       -        

Exercised

     -       -        

Forfeited and cancelled

     (46,174     32.76        
  

 

 

         

Outstanding at June 30, 2018

     685,827     $ 31.12        2.4 years      $  
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at June 30, 2018

     685,827     $ 31.12        2.4 years      $  
  

 

 

   

 

 

    

 

 

    

 

 

 

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

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

 

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

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

 

           Weighted-  
           Average Grant  
                 Shares                     Date Fair Value      

Unvested at December 31, 2017

     2,643,919     $ 16.17  

Granted

     1,911,000       4.58  

Vested

     (981,326     25.73  

Forfeited

     (88,673     13.24  
  

 

 

   

Unvested at March 31, 2018

     3,484,920       7.20  

Granted

     31,000       3.97  

Vested

     (67,329     9.87  

Forfeited

     (52,355     4.30  
  

 

 

   

Unvested at June 30, 2018

     3,396,236       7.09  
  

 

 

   

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

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

 

           Weighted-  
           Average Grant  
                 Shares                     Date Fair Value      

Unvested at December 31, 2017

     172,078     $ 12.78  

Granted

     296,944       4.58  

Vested

     (71,116     15.51  

Forfeited

     -       -  
  

 

 

   

Unvested at March 31, 2018

     397,906       6.17  

Granted

     -       -  

Vested

     -       -  

Forfeited

     -       -  
  

 

 

   

Unvested at June 30, 2018

     397,906       6.17  
  

 

 

   

 

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3. COST OF REVENUE

Substantially all of the Company’s operating costs and expenses are “cost of revenue” items. Operating costs that could be classified as general and administrative by the Company would include the Company’s corporate office costs at its Franklin, Tennessee office, which were $43 million and $40 million for the three months ended June 30, 2018 and 2017, respectively, and $95 million and $92 million for the six months ended June 30, 2018 and 2017, respectively. Included in these corporate office costs is stock-based compensation of $3 million and $6 million for the three months ended June 30, 2018 and 2017, respectively, and $7 million and $15 million for the six months ended June 30, 2018 and 2017, respectively.

4. USE OF ESTIMATES

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

5. ACQUISITIONS AND DIVESTITURES

Acquisitions

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

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

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

 

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Divestitures

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

 

               Licensed       

Hospital

  

Buyer

  

City, State                

   Beds     

Effective Date    

2018 Divestitures:

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

2017 Divestitures:

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

 

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

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

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

 

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

Net operating revenues

   $ 21     $ 45  
  

 

 

   

 

 

 

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

   $ (2   $ (3

Impairment of hospitals sold or held for sale

     (7     (7

Loss on sale, net

     (1     (1
  

 

 

   

 

 

 

Loss from discontinued operations, before taxes

     (10     (11

Income tax benefit

     (4     (4
  

 

 

   

 

 

 

Loss from discontinued operations, net of taxes

   $ (6   $ (7
  

 

 

   

 

 

 

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

 

                                                                                         
     June 30, 2018      December 31, 2017  

Other current assets

   $ 21      $ 8  

Other assets, net

     132        12  

Accrued liabilities

     5        2  

Other Hospital Closures

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

6. INCOME TAXES

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

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

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

 

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

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

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

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

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

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

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

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

 

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7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

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

 

Balance as of December 31, 2017

  

Goodwill

   $                     7,537  

Accumulated impairment losses

     (2,814
  

 

 

 
     4,723  
  

 

 

 

Goodwill acquired as part of acquisitions during current year

     7  

Goodwill allocated to hospitals held for sale

     (77
  

 

 

 

Balance as of June 30, 2018

  

Goodwill

     7,467  

Accumulated impairment losses

     (2,814
  

 

 

 
   $ 4,653  
  

 

 

 

Goodwill is allocated to each identified reporting unit, which is defined as an operating segment or one level below the operating segment (referred to as a component of the entity). Management has determined that the Company’s operating segments meet the criteria to be classified as reporting units. At June 30, 2018, the Company had approximately $4.7 billion of goodwill recorded.

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

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

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

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

 

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

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

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

Intangible Assets

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

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

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

 

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8. EARNINGS PER SHARE

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

 

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

Numerator:

       

Loss from continuing operations, net of taxes

  $ (91   $ (116   $ (98   $ (292

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

    19       15       37       36  
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (110   $ (131   $ (135   $ (328
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of taxes

  $ -     $ (6   $ -     $ (7

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

    -       -       -       -  
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ -     $ (6   $ -     $ (7
 

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

       

Weighted-average number of shares outstanding — basic

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

Effect of dilutive securities:

       

Restricted stock awards

    -       -       -       -  

Employee stock options

    -       -       -       -  

Other equity-based awards

    -       -       -       -  
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of shares outstanding — diluted

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

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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

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

       

Employee stock options and restricted stock awards

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

 

 

   

 

 

   

 

 

   

 

 

 

 

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9. STOCKHOLDERS’ DEFICIT

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

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

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

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

 

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The following schedule presents the reconciliation of the carrying amount of total equity, equity attributable to the Company, and equity attributable to the noncontrolling interests for the six-month period ended June 30, 2018 (in millions):

 

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

 

Accumulated

Other
 Comprehensive 
Income (Loss)

     Accumulated 
Deficit
     Noncontrolling 
Interest
    Total
  Stockholders’  
Deficit
 

Balance, December 31, 2017

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

Comprehensive income (loss)

    21           -       -       24     (135     16     (95

Adoption of new accounting standards

    -             -       -       (12     12     -       -  

Contributions from noncontrolling interests

    -             -       -       -       -       1     1

Distributions to noncontrolling interests

    (37           -       -       -       -       (15     (15

Purchase of subsidiary shares from noncontrolling interests

    (2           -       (3     -       -       (1     (4

Adjustment to redemption value of redeemable noncontrolling interests

    5           -       (5     -       -       -       (5

Share-based compensation

    -             -       7     -       -       -       7
 

 

 

         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2018

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

 

 

         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

               Six Months Ended            
     June 30, 2018  

Net loss attributable to Community Health Systems, Inc. stockholders

   $ (135

Transfers from the noncontrolling interests:

  

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

     (3
  

 

 

 

Net transfers from the noncontrolling interests

     (3
  

 

 

 

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

   $ (138
  

 

 

 

 

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10. LONG-TERM DEBT

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

 

               June 30,                   December 31,      
     2018     2017  

Credit Facility:

    

Term G Loan

    $ 1,013      $ 1,037  

Term H Loan

     1,857       1,903  

8% Senior Notes due 2019

     155       1,925  

7 18% Senior Notes due 2020

     121       1,200  

5 18% Senior Secured Notes due 2021

     1,000       1,000  

6 78% Senior Notes due 2022

     2,632       3,000  

6 14% Senior Secured Notes due 2023

     3,100       3,100  

Junior-Priority Secured Notes due 2023

     1,770       -  

Junior-Priority Secured Notes due 2024

     1,355       -  

Receivables Facility

     -       565  

ABL Facility

     538       -  

Capital lease obligations

     298       304  

Other

     55       48  

Less: Unamortized deferred debt issuance costs and note premium

     (180     (169
  

 

 

   

 

 

 

Total debt

     13,714       13,913  

Less: Current maturities

     (41     (33
  

 

 

   

 

 

 

Total long-term debt

    $ 13,673      $ 13,880  
  

 

 

   

 

 

 

Credit Facility

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

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

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

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

 

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

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

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

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

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

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

 

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

 

2018 Financing Activity

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

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

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

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

 

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8% Senior Notes due 2019

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

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

 

Period

  

        Redemption Price        

November 15, 2017 to November 14, 2019

   100.000%    

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

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

7 18% Senior Notes due 2020

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

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

 

Period

  

        Redemption Price        

July 15, 2018 to July 14, 2020

   100.000%    

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

 

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5 18% Senior Secured Notes due 2021

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

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

 

Period

  

        Redemption Price        

February 1, 2018 to January 31, 2019

   102.563%    

February 1, 2019 to January 31, 2020

   101.281%    

February 1, 2020 to January 31, 2021

   100.000%    

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

6 78% Senior Notes due 2022

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

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

 

Period

  

        Redemption Price        

February 1, 2018 to January 31, 2019

   103.438%    

February 1, 2019 to January 31, 2020

   101.719%    

February 1, 2020 to January 31, 2022

   100.000%    

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

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

 

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6 14% Senior Secured Notes due 2023

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

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

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

 

Period

  

        Redemption Price        

March 31, 2020 to March 30, 2021

   103.125%    

March 31, 2021 to March 30, 2022

   101.563%    

March 31, 2022 to March 30, 2023

   100.000%    

Junior-Priority Secured Notes due 2023

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

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

 

Period

  

        Redemption Price        

June 30, 2020 to June 30, 2021

   107.406%    

July 1, 2021 to June 30, 2022

   103.703%    

July 1, 2022 to June 30, 2023

   100.000%    

 

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

Junior-Priority Secured Notes due 2024

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

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

 

Period

  

        Redemption Price        

June 30, 2021 to June 30, 2022

   104.063%    

July 1, 2022 to June 30, 2023

   102.031%    

July 1, 2023 to June 30, 2024

   100.000%    

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

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

Receivables Facility

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

 

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(Gain) Loss from Early Extinguishment of Debt

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

Other Debt

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

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

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

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of financial instruments has been estimated by the Company using available market information as of June 30, 2018 and December 31, 2017, and valuation methodologies considered appropriate. The estimates presented in the table below are not necessarily indicative of amounts the Company could realize in a current market exchange (in millions):

 

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

Assets:

       

Cash and cash equivalents

  $ 208     $ 208     $ 563     $ 563  

Investments in equity securities

    141       141       -       -  

Available-for-sale securities

    117       117       252       252  

Trading securities

    -       -       37       37  

Liabilities:

       

Contingent Value Right

    3       3       2       2  

Credit Facility

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

8% Senior Notes due 2019

    155       151       1,922       1,637  

7 18% Senior Notes due 2020

    121       108       1,192       897  

5 18% Senior Secured Notes due 2021

    981       927       978       902  

6 78% Senior Notes due 2022

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

6 14% Senior Secured Notes due 2023

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

Junior-Priority Secured Notes due 2023

    1,749       1,597       -       -  

Junior-Priority Secured Notes due 2024

    1,338       1,119       -       -  

ABL Facility and other debt

    587       587       611       611  

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

ABL Facility and other debt. The carrying amount of the ABL Facility and all other debt (which, at December 31, 2017 includes the Receivables Facility) approximates fair value due to the nature of these obligations.

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

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

 

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

 

                        Asset (Liability)  
       Notional Amount                    Fair Value  

            Swap  #            

   (in millions)        Fixed Interest Rate       

Termination Date

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

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

Assuming no change in interest rates in effect as of June 30, 2018, approximately $2 million of interest expense resulting from the spread between the fixed and floating rates defined in each interest rate swap agreement will be recognized during the next 12 months. If interest rate swaps do not remain highly effective as a cash flow hedge, the derivatives’ gains or losses resulting from the change in fair value reported through OCI will be reclassified into earnings.

The following tabular disclosure provides the amount of pre-tax gain (loss) recognized as a component of OCI during the three and six months ended June 30, 2018 and 2017 (in millions):

 

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

Relationships

          2018                     2017                     2018                     2017          

Interest rate swaps

  $ 6     $ (8   $ 23     $ (8

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

 

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

AOCL into Income (Effective Portion)

          2018                         2017                           2018                           2017              

Interest expense, net

  $ 2     $ 8     $ 7     $ 17  

 

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

 

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

Derivatives designated as hedging instruments

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

12. FAIR VALUE

Fair Value Hierarchy

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

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

 

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

 

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

 

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

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

 

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The following table sets forth, by level within the fair value hierarchy, the financial assets and liabilities recorded at fair value on a recurring basis as of June 30, 2018 and December 31, 2017 (in millions):

 

         June 30, 2018                  Level 1                      Level 2                      Level 3          

Investments in equity securities

   $ 141      $ 141      $ -      $ -  

Available-for-sale securities

     117        -        117        -  

Fair value of interest rate swap agreements

     14        -        14        -  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 272      $ 141      $ 131      $ -  
  

 

 

    

 

 

    

 

 

    

 

 

 

Contingent Value Right (CVR)

   $ 3      $ 3      $ -      $ -  

CVR-related liability

     263        -        -        263  

Fair value of interest rate swap agreements

     1        -        1        -  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 267      $ 3      $ 1      $ 263  
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2017      Level 1      Level 2      Level 3  

Available-for-sale securities

   $ 252      $ 132      $ 120      $ -  

Trading securities

     37        37        -        -  

Fair value of interest rate swap agreements

     1        -        1        -  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 290      $ 169      $ 121      $ -  
  

 

 

    

 

 

    

 

 

    

 

 

 

Contingent Value Right (CVR)

   $ 2      $ 2      $ -      $ -  

CVR-related liability

     256        -        -        256  

Fair value of interest rate swap agreements

     18        -        18        -  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 276      $ 2      $ 18      $ 256  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

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

Contingent Value Right (CVR)

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

 

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CVR-related Liability

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

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

Fair Value of Interest Rate Swap Agreements

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

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

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

 

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13. EMPLOYEE BENEFIT PLANS

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

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

14. CONTINGENCIES

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

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

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

 

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

HMA Legal Matters and Related CVR

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

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

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

 

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

As of December 31, 2017

    $ 64       $ 18       $ 4       $ 42  

Settlements paid

    -       -       -       -  

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

    1       -       1       -  
 

 

 

   

 

 

   

 

 

   

 

 

 

As of June 30, 2018

    $ 65       $ 18       $ 5       $ 42  
 

 

 

   

 

 

   

 

 

   

 

 

 

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

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

 

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

HMA Matters Recorded at Fair Value

Medicare/Medicaid Billing Lawsuits

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

Other Probable Contingencies

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

 

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

Summary of Recorded Amounts

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

 

     CVR-Related     Other  
     Liability     Probable  
             at Fair Value                         Contingencies              

Balance as of December 31, 2017

     $ 256       $ 14  

Expense

     7       5  

Reserve for insured claim

     -       4  

Cash payments

     -       (2
  

 

 

   

 

 

 

Balance as of June 30, 2018

     $ 263       $ 21  
  

 

 

   

 

 

 

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

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

Matters for which an Outcome Cannot be Assessed

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

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

 

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

15. SUBSEQUENT EVENTS

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

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

 

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16. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION     

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

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

 

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

 

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

 

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

 

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

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

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

 

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Condensed Consolidating Statement of Loss

Three Months Ended June 30, 2018

 

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

Net operating revenues

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

Operating costs and expenses:

            

Salaries and benefits

     -       -       810     807     -       1,617

Supplies

     -       -       383     209     -       592

Other operating expenses

     -       -       569     310     -       879

Government and other legal settlements and related costs

     -       -       1     -       -       1

Rent

     -       -       43     42     -       85

Depreciation and amortization

     -       -       109     68     -       177

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

     -       14     4     156     -       174
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     -       (16     228     (175     -       37

Interest expense, net

     -       98     143     (6     -       235

(Gain) loss from early extinguishment of debt

     -       (65     1     -       -       (64

Equity in earnings of unconsolidated affiliates

     110     114     198     -       (427     (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

     (110     (163     (114     (169     427     (129

(Benefit from) provision for income taxes

     -       (53     4     11     -       (38
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (110     (110     (118     (180     427     (91

Discontinued operations, net of taxes:

            

Loss from discontinued operations, net of taxes

     -       -       -       -       -       -  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (110     (110     (118     (180     427     (91

Less: Net income attributable to noncontrolling interests

     -       -       -       19     -       19
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Statement of Loss

Three Months Ended June 30, 2017

 

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

Operating revenues (net of contractual allowances and discounts)

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

Provision for bad debts

     -       -       377     302     -       679
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating revenues

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

Operating costs and expenses:

            

Salaries and benefits

     -       -       897     1,023     -       1,920

Supplies

     -       -       412     285     -       697

Other operating expenses

     -       -       605     412     -       1,017

Government and other legal settlements and related costs

     -       -       7     -       -       7

Electronic health records incentive reimbursement

     -       -       (9     (8     -       (17

Rent

     -       -       51     53     -       104

Depreciation and amortization

     -       -       125     98     -       223

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

     -       -       39     41     -       80
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     -       (6     207     (88     -       113

Interest expense, net

     -       87     150     2     -       239

Loss from early extinguishment of debt

     -       10     -       -       -       10

Equity in earnings of unconsolidated affiliates

     137     50     70     -       (262     (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (137     (153     (13     (90     262     (131

(Benefit from) provision for income taxes

     -       (16     38     (37     -       (15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (137     (137     (51     (53     262     (116

Discontinued operations, net of taxes:

            

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

     -       -       2     (3     -       (1

Impairment of hospitals sold or held for sale

     -       -       (5     -       -       (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of taxes

     -       -       (3     (3     -       (6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (137     (137     (54     (56     262     (122

Less: Net income attributable to noncontrolling interests

     -       -       -       15     -       15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Statement of Loss

Six Months Ended June 30, 2018

 

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

Net operating revenues

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

Operating costs and expenses:

            

Salaries and benefits

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

Supplies

     -       -       783     425     -       1,208

Other operating expenses

     -       -       1,168     621     -       1,789

Government and other legal settlements and related costs

     -       -       7     -       -       7

Electronic health records incentive reimbursement

     -       -       -       (1     -       (1

Rent

     -       -       90     83     -       173

Depreciation and amortization

     -       -       223     135     -       358

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

     -       14     20     168     -       202
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     -       (22     468     (196     -       250

Interest expense, net

     -       189     284     (9     -       464

(Gain) loss from early extinguishment of debt

     -       (61     2     -       -       (59

Equity in earnings of unconsolidated affiliates

     135     80     220     -       (447     (12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (135     (230     (38     (187     447     (143

(Benefit from) provision for income taxes

     -       (95     49     1     -       (45
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (135     (135     (87     (188     447     (98
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of taxes

     -       -       -       -       -       -  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (135     (135     (87     (188     447     (98

Less: Net income attributable to noncontrolling interests

     -       -       -       37     -       37
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Statement of Loss

Six Months Ended June 30, 2017

 

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

Operating revenues (net of contractual allowances and discounts)

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

Provision for bad debts

     -       -       866     496     -       1,362
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating revenues

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

Operating costs and expenses:

            

Salaries and benefits

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

Supplies

     -       -       842     604     -       1,446

Other operating expenses

     -       -       1,203     871     -       2,074

Government and other legal settlements and related costs

     -       -       (34     -       -       (34

Electronic health records incentive reimbursement

     -       -       (11     (12     -       (23

Rent

     -       -       103     111     -       214

Depreciation and amortization

     -       -       248     210     -       458

Impairment of goodwill and long-lived assets

     -       -       80     250     -       330
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     -       (12     470     (275     -       183

Interest expense, net

     -       157     300     11     -       468

Loss from early extinguishment of debt

     -       31     -       -       -       31

Equity in earnings of unconsolidated affiliates

     335     169     236     -       (749     (9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (335     (369     (66     (286     749     (307

(Benefit from) provision for income taxes

     -       (34     107     (88     -       (15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (335     (335     (173     (198     749     (292

Discontinued operations, net of taxes:

            

Loss from operations of entities sold or held for sale

     -       -       (1     (1     -       (2

Impairment of hospitals sold or held for sale

     -       -       (5     -       -       (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of taxes

     -       -       (6     (1     -       (7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (335     (335     (179     (199     749     (299

Less: Net income attributable to noncontrolling interests

     -       -       -       36     -       36
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Statement of Comprehensive Loss

Three Months Ended June 30, 2018

 

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

Net (loss) income

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

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

           

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

    7     7     -       -       (7     7

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

    (1     (1     (1     -       2     (1

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

    1     1     1     -       (2     1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

    7     7     -       -       (7     7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

    (103     (103     (118     (180     420     (84

Less: Comprehensive income attributable to noncontrolling interests

    -       -       -       19     -       19
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Comprehensive Loss

Three Months Ended June 30, 2017

 

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

Net (loss) income

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

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

           

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

    (2     (2     -       -       2     (2

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

    2     2     2     -       (4     2

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

    1     1     1     -       (2     1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

    1     1     3     -       (4     1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

    (136     (136     (51     (56     258     (121

Less: Comprehensive income attributable to noncontrolling interests

    -       -       -       15     -       15
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

44


Table of Contents

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

 

Condensed Consolidating Statement of Comprehensive Loss

Six Months Ended June 30, 2018

 

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

Net (loss) income

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

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

           

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

    25     25     -       -       (25     25

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

    (2     (2     (2     -       4     (2

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

    1     1     1     -       (2     1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

    24     24     (1     -       (23     24
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

    (111     (111     (88     (188     424     (74

Less: Comprehensive income attributable to noncontrolling interests

    -       -       -       37     -       37
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Comprehensive Loss

Six Months Ended June 30, 2017

 

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

Net (loss) income

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

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

           

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

    3     3     -       -       (3     3

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

    5     5     5     -       (10     5

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

    1     1     1     -       (2     1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

    9     9     6     -       (15     9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

    (326     (326     (173     (199     734     (290

Less: Comprehensive income attributable to noncontrolling interests

    -       -       -       36     -       36
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

45


Table of Contents

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

 

Condensed Consolidating Balance Sheet

June 30, 2018

 

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

Current assets:

           

Cash and cash equivalents

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

Patient accounts receivable

    -       -       1,968     439     -       2,407

Supplies

    -       -       290     142     -       432

Prepaid income taxes

    8     -       -       -       -       8

Prepaid expenses and taxes

    -       -       162     55     -       217

Other current assets

    -       1     110     311     -       422
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany receivable

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment, net

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deferred income taxes

    101     -       -       -       -       101
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other assets, net

    -       42     725     830     -       1,597
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment in subsidiaries

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND DEFICIT  

Current liabilities:

           

Current maturities of long-term debt

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

Accounts payable

    -       13     528     298     -       839

Accrued interest

    -       174     -       -       -       174

Accrued liabilities

    -       -       538     470     -       1,008
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    -       187     1,099     776     -       2,062
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt

    -       13,361     211     101     -       13,673
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payable

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deferred income taxes

    19     -       -       -       -       19
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other long-term liabilities

    9     1     934       385       -       1,329
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Redeemable noncontrolling interests in equity of consolidated subsidiaries

    -       -       -       514     -       514
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Deficit:

           

Community Health Systems, Inc. stockholders’ deficit:

           

Common stock

    1     -       -       -       -       1

Additional paid-in capital

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

Accumulated other comprehensive loss

    (9     (9     (8     (11     28     (9

(Accumulated deficit) retained earnings

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Community Health Systems, Inc. stockholders’ deficit

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

Noncontrolling interests in equity of consolidated subsidiaries

    -       -       -       76     -       76
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deficit

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and deficit

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

46


Table of Contents

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

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

 

Condensed Consolidating Balance Sheet

December 31, 2017

 

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

Current assets:

           

Cash and cash equivalents

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

Patient accounts receivable, net of allowance for doubtful accounts

    -       -       1,861     523     -       2,384

Supplies

    -       -       288     156     -       444

Prepaid income taxes

    17     -       -       -       -       17

Prepaid expenses and taxes

    -       -       146     52     -       198

Other current assets

    -       -       152     310     -       462
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany receivable

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment, net

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deferred income taxes

    62     -       -       -       -       62
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other assets, net

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment in subsidiaries

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND DEFICIT  

Current liabilities:

           

Current maturities of long-term debt

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

Accounts payable

    -       -       663     304     -       967

Accrued interest

    -       228     1     -       -       229

Accrued liabilities

    -       -       644     483     -       1,127
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    -       228     1,333     795     -       2,356
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt

    -       12,998     779     103     -       13,880
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payable

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deferred income taxes

    19     -       -       -       -       19
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other long-term liabilities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Redeemable noncontrolling interests in equity of consolidated subsidiaries

    -       -       -       527     -       527