Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to interest rate changes, primarily as a result of the ABL Facility which bears interest based on floating rates. In order to manage the volatility relating to the market risk, we entered into interest rate swap agreements to manage our exposure to these fluctuations, as described under the heading “Liquidity and Capital Resources” in Part II, Item 7 of the Form 10-K for the year ended December 31, 2019. We utilize risk management procedures and controls in executing derivative financial instrument transactions. We do not execute transactions or hold derivative financial instruments for trading purposes. Derivative financial instruments related to interest rate sensitivity of debt obligations are used with the goal of mitigating a portion of the exposure when it is cost effective to do so. As of August 30, 2020, our last interest rate swap agreement terminated.
A 1% change in interest rates on variable rate debt in excess of that amount covered by interest rate swaps would have resulted in interest expense fluctuating approximately $1 million in 2020, $3 million in 2019 and $11 million in 2018.
79
Item 8. Financial Statemen ts and Supplementary Data
Index to Financial Statements
Page
Community Health Systems, Inc. Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
81
Consolidated Statements of Income (Loss) for the Years Ended December 31, 2020, 2019 and 2018
83
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2020, 2019 and 2018
84
Consolidated Balance Sheets as of December 31, 2020 and 2019
85
Consolidated Statements of Stockholders’ (Deficit) Equity for the Years Ended December 31, 2020, 2019 and 2018
86
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018
87
Notes to Consolidated Financial Statements
88
80
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Community Health Systems, Inc.
Franklin, TN
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Community Health Systems, Inc. and subsidiaries (the “ Companyˮ) as of December 31, 2020 and 2019, the related consolidated statements of income (loss), comprehensive income (loss), stockholders’ (deficit) equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “ financial statementsˮ). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 18, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company has adopted Accounting Standards Codification Topic 842, “ Leasesˮ, using the modified retrospective adoption method on January 1, 2019.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Patient Accounts Receivable — Refer to Note 1 to the financial statements
Critical Audit Matter Description
Patient accounts receivable are recorded net of implicit price concessions for insured and self-pay patients. Implicit price concessions related to self-pay patients require more extensive judgment and subjective assumptions. Self-pay price concessions relate primarily to amounts due directly from patients and are based upon management’s assessment of historical write-offs and expected net collections, business and economic conditions, trends in federal, state, and private employer health care coverage, and other collection indicators.
81
Auditing management’s estimate of self-pay price concessions was complex and judgmental due to the significant data inputs and subjective assumptions utilized in determining related amounts.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the net realizable value of self-pay accounts receivable included the following, among others:
•
We tested management’s internal controls that address the risks of material misstatement related to the Company’s estimation of implicit self-pay price concessions.
•
We evaluated management’s methodology and related assumptions, including cash collections, by comparing actual results to management’s historical estimates.
•
We tested the underlying data related to the recognition of patient level charges and the subsequent activities, including cash collections and non-cash adjustments.
•
We tested the mathematical accuracy of the estimates applied to period-end accounts receivable.
•
We evaluated the appropriateness of the industry, economic, and Company factors that were used in determining the net realizable value of self-pay accounts receivable.
Professional Liability Claims — Refer to Note 15 to the financial statements
Critical Audit Matter Description
The Company is self-insured for professional liability claims up to certain self-insured retention limits based on the policy year. Professional liabilities consist of the projected settlement value of reported and unreported claims. The self-insurance reserves are estimated based on the Company’s historical claims experience, supplemented with industry experience, as necessary, and is established using actuarial methods followed in the insurance industry.
Auditing management’s professional liability reserves was complex and judgmental due to the significant estimations required in determining the projected settlement value of reported and unreported claims.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the self-insured professional liability claims included the following, among others:
•
We tested management’s internal controls that address the risks of material misstatement related to professional liability claims, including those over the projection of the settlement value of reported and unreported claims.
•
We evaluated the assumptions used by management to estimate the self-insurance reserves by:
-
Testing the underlying data that served as the basis for the actuarial analysis, including historical claims, to test that the inputs to the actuarial estimate were reasonable.
-
Comparing management’s prior-year assumptions of expected development and ultimate loss to actual amounts incurred during the current year to identify potential bias in the determination of the self-insurance reserves.
•
With the assistance of our actuarial specialists, we developed independent estimates of the professional liability claims, including loss data and industry claim development factors, and compared our estimates to management’s estimates.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
February 18, 2021
We have served as the Company’s auditor since 1996.
82
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Year Ended December 31,
2020
2019
2018
(In millions, except share and per share data)
Net operating revenues
$
11,789
$
13,210
$
14,155
Operating costs and expenses:
Salaries and benefits
5,411
5,947
6,384
Supplies
1,963
2,151
2,355
Other operating expenses
2,957
3,303
3,496
Government and other legal settlements and related costs
-
93
11
Electronic health records incentive reimbursement
-
( 1
)
( 4
)
Lease cost and rent
327
321
337
Pandemic relief funds
( 601
)
—
—
Depreciation and amortization
558
608
700
Impairment and (gain) loss on sale of businesses, net
48
138
668
Total operating costs and expenses
10,663
12,560
13,947
Income from operations
1,126
650
208
Interest expense, net of interest income of $ 3 in both 2020 and 2019 and $ 7
in 2018
1,031
1,041
976
(Gain) loss from early extinguishment of debt
( 317
)
54
( 31
)
Equity in earnings of unconsolidated affiliates
( 10
)
( 15
)
( 22
)
Income (loss) before income taxes
422
( 430
)
( 715
)
(Benefit from) provision for income taxes
( 185
)
160
( 11
)
Net income (loss)
607
( 590
)
( 704
)
Less: Net income attributable to noncontrolling interests
96
85
84
Net income (loss) attributable to Community Health Systems, Inc. stockholders
$
511
$
( 675
)
$
( 788
)
Earnings (loss) per share attributable to Community Health Systems,
Inc. common stockholders:
Basic
$
4.43
$
( 5.93
)
$
( 6.99
)
Diluted
$
4.39
( 5.93
)
( 6.99
)
Weighted-average number of shares outstanding:
Basic
115,491,022
113,739,046
112,728,274
Diluted
116,544,561
113,739,046
112,728,274
See accompanying notes to the consolidated financial statements.
83
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31,
2020
2019
2018
(In millions)
Net income (loss)
$
607
$
( 590
)
$
( 704
)
Other comprehensive (loss) income, net of income taxes:
Net change in fair value of interest rate swaps, net of tax of $ 0 , $ 1
and $ 6 for the years ended December 31, 2020, 2019 and 2018,
respectively
( 1
)
( 3
)
20
Net change in fair value of available-for-sale debt securities, net of tax
4
4
( 2
)
Amortization and recognition of unrecognized pension cost
components, net of tax of $ 2 , $ 0 and $ 1 for the years ended
December 31, 2020, 2019, and 2018, respectively
( 7
)
-
( 1
)
Other comprehensive (loss) income
( 4
)
1
17
Comprehensive income (loss)
603
( 589
)
( 687
)
Less: Comprehensive income attributable to noncontrolling interests
96
85
84
Comprehensive income (loss) attributable to Community Health Systems,
Inc. stockholders
$
507
$
( 674
)
$
( 771
)
See accompanying notes to the consolidated financial statements.
84
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2020
December 31,
2019
(In millions, except share data)
ASSETS
Current assets:
Cash and cash equivalents
$
1,676
$
216
Patient accounts receivable (see Note 1)
1,927
2,258
Supplies
335
354
Prepaid income taxes
50
48
Prepaid expenses and taxes
184
193
Other current assets
338
358
Total current assets
4,510
3,427
Property and equipment
Land and improvements
515
560
Buildings and improvements
5,749
5,878
Equipment and fixtures
3,088
3,215
Property and equipment
9,352
9,653
Less accumulated depreciation and amortization
( 4,030
)
( 4,045
)
Property and equipment, net
5,322
5,608
Goodwill
4,219
4,328
Deferred income taxes
59
38
Other assets, net of accumulated amortization of $ 1,118 and $ 981 at December 31, 2020
and 2019, respectively
1,896
2,208
Total assets
$
16,006
$
15,609
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Current maturities of long-term debt
$
123
$
20
Current operating lease liabilities
142
136
Accounts payable
783
811
Accrued liabilities:
Employee compensation
637
594
Accrued interest
150
189
Other
980
532
Total current liabilities
2,815
2,282
Long-term debt
12,093
13,385
Deferred income taxes
29
200
Long-term operating lease liabilities
524
487
Other long-term liabilities
1,599
894
Total liabilities
17,060
17,248
Redeemable noncontrolling interests in equity of consolidated subsidiaries
484
502
Commitments and contingencies (Note 15)
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;
129,612,117 shares issued and outstanding at December 31, 2020, and
117,822,631 shares issued and outstanding at December 31, 2019
1
1
Additional paid-in capital
2,094
2,008
Accumulated other comprehensive loss
( 13
)
( 9
)
Accumulated deficit
( 3,707
)
( 4,218
)
Total Community Health Systems, Inc. stockholders’ deficit
( 1,625
)
( 2,218
)
Noncontrolling interests in equity of consolidated subsidiaries
87
77
Total stockholders’ deficit
( 1,538
)
( 2,141
)
Total liabilities and stockholders’ deficit
$
16,006
$
15,609
See accompanying notes to the consolidated financial statements.
85
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
Community Health Systems, Inc. Stockholders
Redeemable
Noncontrolling
Common Stock
Additional
Paid-in
Accumulated
Other
Comprehensive
Accumulated
Noncontrolling
Total
Stockholders’
(Deficit)
Interests
Shares
Amount
Capital
Income (Loss)
Deficit
Interests
Equity
(In millions, except share data)
Balance, December 31, 2017
$
527
114,651,004
$
1
$
2,014
$
( 21
)
$
( 2,761
)
$
75
$
( 692
)
Comprehensive income (loss)
54
-
-
-
17
( 788
)
30
( 741
)
Adoption of new accounting standards
-
-
-
-
( 6
)
6
-
-
Contributions from noncontrolling interests
3
-
-
-
-
-
-
-
Distributions to noncontrolling interests
( 68
)
-
-
-
-
-
( 28
)
( 28
)
Purchase of subsidiary shares from noncontrolling interests
( 24
)
-
-
( 4
)
-
-
( 3
)
( 7
)
Other reclassifications of noncontrolling interests
1
-
-
-
-
-
( 2
)
( 2
)
Noncontrolling interests in acquired entity
6
-
-
-
-
-
-
-
Adjustment to redemption value of redeemable noncontrolling interests
5
-
-
( 5
)
-
-
-
( 5
)
Cancellation of restricted stock for tax withholdings on vested shares
-
( 293,735
)
-
( 1
)
-
-
-
( 1
)
Income tax payable increase from vesting of restricted shares
-
333
-
-
-
-
-
-
Stock-based compensation
-
1,890,774
-
13
-
-
-
13
Balance, December 31, 2018
504
116,248,376
1
2,017
( 10
)
( 3,543
)
72
( 1,463
)
Comprehensive income (loss)
52
-
-
-
1
( 675
)
33
( 641
)
Contributions from noncontrolling interests
3
-
-
-
-
-
7
7
Distributions to noncontrolling interests
( 68
)
-
-
-
-
-
( 31
)
( 31
)
Purchase of subsidiary shares from noncontrolling interests
( 8
)
-
-
3
-
-
( 6
)
( 3
)
Other reclassifications of noncontrolling interests
( 2
)
-
-
-
-
-
2
2
Adjustment to redemption value of redeemable noncontrolling interests
21
-
-
( 21
)
-
-
-
( 21
)
Cancellation of restricted stock for tax withholdings on vested shares
-
( 298,182
)
-
( 1
)
-
-
-
( 1
)
Income tax payable increase from vesting of restricted shares
-
333
-
-
-
-
-
-
Stock-based compensation
-
1,872,104
-
10
-
-
-
10
Balance, December 31, 2019
502
117,822,631
1
2,008
( 9
)
( 4,218
)
77
( 2,141
)
Comprehensive income (loss)
58
-
-
-
( 4
)
511
38
545
Contributions from noncontrolling interests
-
-
-
-
-
-
15
15
Distributions to noncontrolling interests
( 82
)
-
-
-
-
-
( 34
)
( 34
)
Purchase of subsidiary shares from noncontrolling interests
( 4
)
-
-
3
-
-
-
3
Other reclassifications of noncontrolling interests
9
-
-
-
-
-
( 9
)
( 9
)
Disposition of less-than-wholly owned hospital
( 14
)
-
-
-
-
-
-
Adjustment to redemption value of redeemable noncontrolling interests
15
-
-
( 15
)
-
-
-
( 15
)
Cancellation of restricted stock for tax withholdings on vested shares
-
( 288,859
)
-
( 1
)
-
-
-
( 1
)
Issuance of common stock in connection with the exercise of stock options
-
18,166
-
-
-
-
-
-
Income tax payable increase from vesting of restricted shares
-
333
-
-
-
-
-
-
Section 3(a)(9) exchange
-
10,000,000
86
86
Stock-based compensation
-
2,059,846
-
13
-
-
-
13
Balance, December 31, 2020
$
484
129,612,117
$
1
$
2,094
$
( 13
)
$
( 3,707
)
$
87
$
( 1,538
)
See accompanying notes to the consolidated financial statements.
86
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2020
2019
2018
(In millions)
Cash flows from operating activities:
Net income (loss)
$
607
$
( 590
)
$
( 704
)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization
558
608
700
Deferred income taxes
( 187
)
203
( 3
)
Government and other legal settlements and related costs
-
51
11
Stock-based compensation expense
13
10
13
Impairment and (gain) loss on sale of businesses, net
48
138
668
(Gain) loss from early extinguishment of debt
( 317
)
54
( 31
)
Other non-cash expenses, net
131
182
38
Changes in operating assets and liabilities, net of effects of acquisitions
and divestitures:
Patient accounts receivable
309
93
31
Supplies, prepaid expenses and other current assets
( 15
)
38
16
Medicare accelerated payments
1,158
-
-
Repayment/derecognition of Medicare accelerated payments
( 77
)
-
-
Unrecognized pandemic relief funds
104
-
-
Accounts payable, accrued liabilities and income taxes
( 67
)
( 157
)
( 163
)
Payment of HMA legal settlement
-
-
( 266
)
Other
( 87
)
( 245
)
( 36
)
Net cash provided by operating activities
2,178
385
274
Cash flows from investing activities:
Acquisitions of facilities and other related businesses
( 1
)
( 13
)
( 26
)
Purchases of property and equipment
( 440
)
( 438
)
( 527
)
Proceeds from disposition of hospitals and other ancillary operations
648
604
405
Proceeds from sale of property and equipment
4
3
8
Purchases of available-for-sale debt securities and equity securities
( 178
)
( 80
)
( 78
)
Proceeds from sales of available-for-sale debt securities and equity
securities
194
92
114
Increase in other investments
( 50
)
( 170
)
( 141
)
Net cash provided by (used in) investing activities
177
( 2
)
( 245
)
Cash flows from financing activities:
Repurchase of restricted stock shares for payroll tax withholding
requirements
( 1
)
( 1
)
( 1
)
Deferred financing costs and other debt-related costs
( 156
)
( 46
)
( 96
)
Proceeds from noncontrolling investors in joint ventures
15
10
3
Redemption of noncontrolling investments in joint ventures
( 1
)
( 11
)
( 31
)
Distributions to noncontrolling investors in joint ventures
( 116
)
( 99
)
( 96
)
Proceeds from sale-lease back
2
60
-
Other borrowings
53
37
28
Issuance of long-term debt
4,262
3,042
1,033
Proceeds from ABL Facility
540
202
797
Repayments of long-term indebtedness
( 5,493
)
( 3,557
)
( 2,033
)
Net cash used in financing activities
( 895
)
( 363
)
( 396
)
Net change in cash and cash equivalents
1,460
20
( 367
)
Cash and cash equivalents at beginning of period
216
196
563
Cash and cash equivalents at end of period
$
1,676
$
216
$
196
Supplemental disclosure of cash flow information:
Interest payments
$
( 1,039
)
$
( 1,011
)
$
( 936
)
Income tax refunds (payments), net
$
( 2
)
$
3
$
19
See accompanying notes to the consolidated financial statements.
87
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Business. Community Health Systems, Inc. is a holding company and operates no business in its own name. On a consolidated basis, Community Health Systems, Inc. and its subsidiaries (collectively the “Company”) own, lease and operate general acute care hospitals in communities across the country. As of December 31, 2020, the Company owned or leased 89 hospitals, including two stand-alone rehabilitation or psychiatric hospitals, licensed for 14,110 beds in 16 states. Throughout these notes to the consolidated financial statements, Community Health Systems, Inc. (the “Parent”) and its consolidated subsidiaries are referred to on a collective basis as the “Company.” This drafting style is not meant to indicate that the publicly-traded Parent or any 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, and management services provided, by distinct and indirect subsidiaries of Community Health Systems, Inc.
As of December 31, 2020, Indiana, Florida and Texas represent the only areas of significant geographic concentration. Net operating revenues generated by the Company’s hospitals in Indiana, as a percentage of consolidated net operating revenues, were 15.0 % in 2020, 13.7 % in 2019 and 12.5 % in 2018. Net operating revenues generated by the Company’s hospitals in Florida, as a percentage of consolidated net operating revenues, were 13.0 % in 2020 and 14.3 % in both 2019 and 2018. Net operating revenues generated by the Company’s hospitals in Texas, as a percentage of consolidated net operating revenues, were 12.2 % in both 2020 and 2019 and 11.7 % in 2018.
Use of Estimates . The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results could differ from these estimates under different assumptions or conditions.
Principles of Consolidation . The consolidated financial statements include the accounts of the Parent, its subsidiaries, all of which are controlled by the Parent through majority voting control, and variable interest entities for which the Company is the primary beneficiary. All intercompany accounts, profits and transactions have been eliminated. Noncontrolling interests in less-than-wholly-owned consolidated subsidiaries of the Parent are presented as a component of total equity to distinguish between the interests of the Parent and the interests of the noncontrolling owners. Revenues, expenses and income from these subsidiaries are included in the consolidated amounts as presented on the consolidated statements of income (loss), along with a net income measure that separately presents the amounts attributable to the controlling interests and the amounts attributable to the noncontrolling interests for each of the periods presented. 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 consolidated balance sheets.
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 collectively $ 190 million, $ 184 million and $ 181 million for the years ended December 31, 2020, 2019 and 2018, respectively. Included in these corporate office costs is stock-based compensation of $ 13 million, $ 10 million and $ 13 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Cash Equivalents . The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents.
Supplies. Supplies, principally medical supplies, are stated at the lower of cost (first-in, first-out basis) or market.
Marketable Securities. The Company’s marketable securities consist of debt securities that are classified as trading or available-for-sale and equity securities. Available-for-sale debt securities are carried at fair value as determined by quoted market prices, with unrealized gains and losses reported as a separate component of stockholders’ (deficit) equity. Trading securities are reported at fair value with unrealized gains and losses included in earnings. Other comprehensive loss, net of tax, included an unrealized gain of $ 4 million for both of the years ended December 31, 2020 and 2019, and an unrealized loss of $ 2 million during the year ended December 31, 2018, related to these available-for-sale debt securities.
Property and Equipment . Property and equipment are recorded at cost. Depreciation is recognized using the straight-line method over the estimated useful lives of the land and improvements ( 3 to 20 years ), buildings and improvements ( 5 to 40 years ) and equipment and fixtures ( 3 to 18 years ). Costs capitalized as construction in progress were $ 194 million and $ 219 million at December 31, 2020 and 2019, respectively. Expenditures for renovations and other significant improvements are capitalized; however, maintenance and repairs which do not improve or extend the useful lives of the respective assets are charged to operations as incurred. Interest capitalized related to construction in progress was $ 15 million, $ 20 million and $ 15 million for the years ended December 31,
88
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
20 20 , 201 9 and 201 8 , respectively. Purchases of property and equipment and internal-use software accrued in accounts payable and not yet paid were $ 100 million and $ 93 million at December 31, 20 20 and 201 9 , respectively.
The Company also leases certain facilities and equipment under finance leases (see Note 9). Such assets are amortized on a straight-line basis over the lesser of the term of the lease or the remaining useful lives of the applicable assets. During the year ended December 31, 2020, the Company had non-cash investing activity of $ 22 million related to certain facility and equipment additions that were financed through finance leases and other debt.
Goodwill. Goodwill represents the excess of the fair value of the consideration conveyed in the acquisition over the fair value of net assets acquired. Goodwill arising from business combinations is not amortized. Goodwill is required to be evaluated for impairment at the same time every year and when an event occurs or circumstances change such that it is more likely than not that impairment may exist. The Company performs its annual testing of impairment for goodwill in the fourth quarter of each year. There was no goodwill impairment charge during the years ended December 31, 2020, 2019 and 2018 as a result of the Company’s annual impairment evaluation.
Other Assets. Other assets consist of the insurance recovery receivable from excess insurance carriers related to the Company’s self-insured malpractice general liability and workers’ compensation insurance liability; costs to recruit physicians to the Company’s markets, which are deferred and expensed over the term of the respective physician recruitment contract, generally three years , and included in amortization expense; equity method investments; and capitalized internal-use software costs, which are expensed over the expected useful life, which is generally three years for routine software, and included in amortization expense.
Revenue Recognition. On January 1, 2018, the Company adopted the new revenue recognition accounting standard issued by the Financial Accounting Standards Board (“FASB”) and codified in the FASB Accounting Standards Codification (“ASC”) as topic 606 (“ASC 606”). The revenue recognition standard in ASC 606 outlines a single comprehensive model for recognizing revenue as performance obligations, defined in a contract with a customer as goods or services transferred to the customer in exchange for consideration, are satisfied. The standard also requires expanded disclosures regarding the Company’s revenue recognition policies and significant judgments employed in the determination of revenue.
The Company applied the modified retrospective approach to all contracts when adopting ASC 606. As a result, upon the Company’s adoption of ASC 606 the majority of what was previously classified as the provision for bad debts in the statement of operations is now reflected as implicit price concessions (as defined in ASC 606) and therefore was included as a reduction to net operating revenues in 2019 and 2018. For changes in credit issues not assessed at the date of service, the Company prospectively recognizes those amounts in other operating expenses on the statement of operations.
As part of the adoption of ASC 606, the Company elected two of the available practical expedients provided for in the standard. First, the Company does not adjust the transaction price for any financing components as those were deemed to be insignificant. Additionally, the Company expenses all incremental customer contract acquisition costs as incurred because such costs are not material and would be amortized over a period less than one year.
Net Operating Revenues
Net operating revenues are recorded at the transaction price estimated by the Company to reflect the total consideration due from patients and third-party payors in exchange for providing goods and services in patient care. These services are considered to be a single performance obligation and have a duration of less than one year. Revenues are recorded as these goods and services are provided. The transaction price, which involves significant estimates, is determined based on the Company’s standard charges for the goods and services provided, with a reduction recorded for price concessions related to third party contractual arrangements as well as patient discounts and other patient price concessions. During each of the years ended December 31, 2020, 2019 and 2018, the impact of changes to the inputs used to determine the transaction price was considered immaterial.
Currently, several states utilize supplemental reimbursement programs for the purpose of providing reimbursement to providers that is not specifically tied to an individual’s care, some of which offsets a portion of the cost of providing care to Medicaid and indigent patients. These programs are designed with input from the Centers for Medicare & Medicaid Services (“CMS”) and are funded with a combination of state and federal resources, including, in certain instances, fees or taxes levied on the providers. Under these supplemental programs, the Company recognizes revenue and related expenses in the period in which amounts are estimable and collection is reasonably assured. Reimbursement under these programs is reflected in net operating revenues and fees, taxes or other program-related costs are reflected in other operating expenses.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company’s net operating revenues during the years ended December 31, 2020, 2019 and 2018 have been presented in the following table based on an allocation of the estimated transaction price with the patient between the primary patient classification of insurance coverage (in millions):
Year Ended December 31,
2020
2019
2018
Medicare
$
2,813
$
3,331
$
3,730
Medicaid
1,578
1,736
1,876
Managed Care and other third-party payors
7,400
8,014
8,349
Self-pay
( 2
)
129
200
Total
$
11,789
$
13,210
$
14,155
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, days revenue outstanding, the composition of self-pay receivables between pure self-pay patients and the patient responsibility portion of third-party insured receivables, the impact of recent acquisitions and dispositions and the impact of current economic and other events.
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 $ 98 million and $ 83 million as of December 31, 2020 and December 31, 2019, respectively, and these amounts are included in accrued liabilities-other in the accompanying consolidated balance sheets. Amounts due from third-party payors were $ 136 million and $ 137 million as of December 31, 2020 and December 31, 2019, respectively, and are included in other current assets in the accompanying consolidated balance sheets. Substantially all Medicare and Medicaid cost reports are final settled through 2016.
Charity Care
In the ordinary course of business, the Company renders services to patients who are financially unable to pay for hospital care. The Company’s policy is to not pursue collections for such amounts; therefore, the related charges for those patients who are financially unable to pay and that otherwise do not qualify for reimbursement from a governmental program are not reported in net operating revenues, and are thus classified as charity care. The Company determines amounts that qualify for charity care based on the patient’s household income relative to the federal poverty level guidelines, as established by the federal government. The Company updated its policy during the year ended December 31, 2020 in a manner which increased the number of accounts qualifying for charity care. This resulted in an increase in charity care services during the year ended December 31, 2020 compared to 2019 and previous years.
These charity care services are estimated to be $ 1.0 billion, $ 540 million and $ 491 million for the years ended December 31, 2020, 2019 and 2018, respectively, representing the value (at the Company’s standard charges) of these charity care services that are excluded from net operating revenues. The estimated cost incurred by the Company to provide these charity care services to patients who are unable to pay was approximately $ 122 million, $ 66 million and $ 62 million for the years ended December 31, 2020, 2019 and 2018, respectively. The estimated cost of these charity care services was determined using a ratio of cost to gross charges and applying that ratio to the gross charges associated with providing care to charity patients for the period.
Electronic Health Records Incentive Reimbursement. The federal government has implemented a number of regulations and programs designed to promote the use of electronic health records (“EHR”) technology and, pursuant to the Health Information Technology for Economic and Clinical Health Act (“HITECH”), established requirements for a Medicare and Medicaid incentive
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payments program for eligible hospitals and professionals that adopt and meaningfully use certified EHR technology. The Company utilizes a gain contingency model to recognize EHR incentive payments. Recognition occurs when the eligible hospitals adopt or demonstrate meaningful use of certified EHR technology .
Leases. On January 1, 2019, the Company adopted the cumulative accounting standard updates initially issued by the FASB in February 2016 that amend the accounting for leases and are codified as Accounting Standards Codification Topic 842 (“ASC 842”). These changes to the lease accounting model require operating leases be recorded on the balance sheet through recognition of a liability for the discounted present value of future fixed lease payments and a corresponding right-of-use (“ROU”) asset. The Company’s accounting for finance leases remained substantially unchanged from its prior accounting for capital leases. The ROU asset recorded at commencement of the lease represents the right to use the underlying asset over the lease term in exchange for the lease payments. Leases with an initial term of 12 months or less that do not have an option to purchase the underlying asset that is deemed reasonably certain to be exercised are not recorded on the balance sheet; rather, rent expense for these leases is recognized on a straight-line basis over the lease term, or when incurred if a month-to-month lease. When readily determinable, the Company uses the interest rate implicit in a lease to determine the present value of future lease payments. For leases where the implicit rate is not readily determinable, the Company’s incremental borrowing rate is utilized. The Company calculates its incremental borrowing rate on a quarterly basis using a third-party financial model that estimates the rate of interest the Company would have to pay to borrow an amount equal to the total lease payments on a collateralized basis over a term similar to the lease. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company elected the amended transition requirements allowed for by the FASB in ASU 2018-11, which provide entities relief by allowing them not to recast prior comparative periods from the adoption of ASC 842. As a result, the prior year comparative financial statements have not been restated to reflect the adoption of ASC 842. Additionally, the Company elected the package of practical expedients available in ASC 842 upon adoption whereby an entity need not reassess expired contracts for lease identification or classification as a finance or operating lease, or for the reassessment of initial direct costs. The Company has not elected the practical expedient to use hindsight to determine the lease term for its leases at transition. Certain of the Company’s lease agreements have lease and non-lease components, which for the majority of leases the Company accounts for separately when the actual lease and non-lease components are determinable. For equipment leases with immaterial non-lease components incorporated into the fixed rent payment, the Company accounts for the lease and non-lease components as a single lease component in determining the lease payment. Additionally, for certain individually insignificant equipment leases such as copiers, the Company applies a portfolio approach to effectively record the operating lease liability and ROU asset.
The adoption of ASC 842 had a material impact on the Company’s consolidated balance sheet through the recording of the operating lease liabilities and related ROU assets for leases in effect at January 1, 2019, but the adoption did not have a material impact on the Company’s consolidated statement of income (loss) or consolidated statement of cash flows for the year ended December 31, 2019. The Company recorded approximately $ 673 million of operating lease liabilities and ROU assets on January 1, 2019 upon adoption of ASC 842, with no impact on accumulated deficit.
Physician Income Guarantees . The Company enters into physician recruiting agreements under which it supplements physician income to a minimum amount over a period of time, typically one year , while the physicians establish themselves in the community. As part of the agreements, the physicians are committed to practice in the community for a period of time, typically three years , which extends beyond their income guarantee period. The Company records an asset and liability for the estimated fair value of minimum revenue guarantees on new agreements. Adjustments to the ultimate value of the guarantee paid to physicians are recognized in the period that the change in estimate is identified. The Company amortizes an asset over the life of the agreement. As of December 31, 2020 and 2019, the unamortized portion of these physician income guarantees was $ 16 million and $ 20 million, respectively, and is recorded in other assets in the consolidated balance sheet.
Concentrations of Credit Risk . The Company grants unsecured credit to its patients, most of whom reside in the service area of the Company’s facilities and are insured under third-party payor agreements. Because of the economic diversity of the Company’s facilities and non-governmental third-party payors, Medicare represents the only significant concentration of credit risk from payors. Accounts receivable, net of contractual allowances, from Medicare was $ 232 million and $ 268 million at December 31, 2020 and 2019, respectively, representing 6 % and 5 % of consolidated net accounts receivable at December 31, 2020 and 2019, respectively.
Accounting for the Impairment or Disposal of Long-Lived Assets. During the year ended December 31, 2020, the Company recorded a total combined net impairment charge and loss on disposal of approximately $ 48 million, of which (i) approximately $ 59 million was recorded to reduce the carrying value of closed hospitals and certain hospitals that have been sold or 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 , (ii) approximately $ 74 million was recorded primarily to adjust the carrying value of other long-lived assets at several underperforming hospitals or where the Company was in discussions with potential buyers for divestiture at a sales price that indicated
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
a fair value below carrying value , (iii) approximately $ 3 million was recorded related to a hospital that closed on September 30, 2020, and (iv) approximately $ 1 million was recorded related to a shared service center that closed on July 31, 2020. The impairment charge was partially offset by a gain of approximately $ 89 million related primarily to three hospi tals sold on January 1, 2020, one hospital sold on July 1, 2020 and two hospitals sold on October 27, 2020 . During the year ended December 31, 2020, a net allocation of approximately $ 110 million of goodwill was allocated from the hospital operations reporting unit based on a calculation of each 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 evaluate offers for potential sales. Based on such analysis, additional impairment charges may be recorded in the future.
During the year ended December 31, 2019, the Company recorded a total combined impairment charge and loss on disposal of approximately $ 138 million, of which (i) approximately $ 92 million was recorded to reduce the carrying value of closed hospitals and certain hospitals that have been sold or 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 and (ii) approximately $ 46 million was recorded primarily to adjust the carrying value of other long-lived assets at several underperforming hospitals or where the Company was in discussions with potential buyers for divestiture at a sales price that indicated a fair value below carrying value. During the year ended December 31, 2019, a net allocation of approximately $ 235 million of goodwill was allocated from the hospital operations reporting unit goodwill based on a calculation of each 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 evaluate offers for potential sales. Based on such analysis, additional impairment charges may be recorded in the future .
Income Taxes. The Company accounts for income taxes under the asset and liability method, in which deferred income tax assets and liabilities are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in the consolidated statement of income (loss) during the period in which the tax rate change becomes law.
Comprehensive Loss . Comprehensive loss is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.
Segment Reporting . A public company is required to report annual and interim financial and descriptive information about its reportable operating segments. Operating segments, as defined, are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Aggregation of similar operating segments into a single reportable operating segment is permitted if the businesses have similar economic characteristics and meet the criteria established by U.S. GAAP. The Company operates a single operating segment represented by hospital operations (which includes the Company's acute care hospitals and related healthcare entities that provide inpatient and outpatient healthcare services).
COVID-19 Pandemic. In January 2020, the Secretary of the U.S. Department of Health and Human Services (“HHS”) declared a national public health emergency due to a novel strain of coronavirus. In March 2020, the World Health Organization declared the outbreak of COVID-19, a disease caused by this coronavirus, a pandemic. The resulting measures to contain the spread and impact of COVID-19 and other developments related to COVID-19 have materially affected the Company’s results of operations during 2020. Where applicable, the impact resulting from the COVID-19 pandemic during the year ended December 31, 2020, has been considered, including updated assessments of the recoverability of assets and evaluation of potential credit losses. As a result of the COVID-19 pandemic, federal and state governments have passed legislation, promulgated regulations and taken other administrative actions intended to assist healthcare providers in providing care to COVID-19 and other patients during the public health emergency. Sources of relief include the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020, the Paycheck Protection Program and Health Care Enhancement Act (the “PPPHCE Act”), which was enacted on April 24, 2020, and the Consolidated Appropriations Act, 2021 (the “CAA”), which was enacted on December 27, 2020. In total, the CARES Act, PPPHCE Act and the CAA authorize $ 178 billion in funding to be distributed to hospitals and other healthcare providers through the Public Health and Social Services Emergency Fund (the “PHSSEF”). In addition, the CARES Act provide for an expansion of the Medicare Accelerated and Advance Payment Program whereby inpatient acute care hospitals and other eligible providers were able to request accelerated payment of up to 100 % of their Medicare payment amount for a six-month period to be repaid through withholding of future Medicare fee-for-service payments. Various other state and local programs also exist to provide relief, either independently or through distribution of monies received via the CARES Act. During the year ended December 31, 2020, the Company was a beneficiary of these stimulus measures, including the Medicare Accelerated and Advance Payment Program. The Company’s accounting policies for the recognition of these stimulus monies is as follows:
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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Pandemic Relief Funds
During the year ended December 31, 2020, the Company received approximately $ 705 million in payments through the PHSSEF and various state and local programs , net of amounts that have or will be repaid to HHS and various state and local agencies either voluntarily or in relation to entities that were previously divested. Approximately $ 601 million of the PHSSEF payments were recognized as a reduction in operating costs and expenses during the year ended December 31, 2020, which is denoted by the caption “pandemic relief funds” within the consolidated statements of income (loss). The recognition of amounts received is conditioned upon the provision of care for individuals with possible or actual cases of COVID-19 after January 31, 2020, certification that payment will be used to prevent, prepare for and respond to coronavirus and shall reimburse the recipient only for healthcare-related expenses or lost revenues, as defined by HHS, that are attributable to coronavirus, as well as receipt of the funds. Amounts are recognized as a reduction to operating costs and expenses only to the extent the Company is reasonably assured that underlying conditions have been met.
The Company’s assessment of whether the terms and conditions for amounts received are reasonably assured of having been met considers, among other things, the CARES Act, the CAA and all frequently asked questions and other interpretive guidance issued by HHS, including the Post-Payment Notice of Reporting Requirements issued on January 15, 2021 (the “January 15, 2021 Notice”) and frequently asked questions issued by HHS on January 28, 2021 which clarified previously issued guidance, as well as expenses incurred attributable to the coronavirus and the Company’s results of operations during such period as compared to the Company’s budget. Such guidance, specifically the various Post-Payment Notice of Reporting Requirements and frequently asked questions issued by HHS, set forth the allowable methods for quantifying eligible healthcare related expenses and lost revenues. Only healthcare related expenses attributable to coronavirus that another source has not reimbursed and is not obligated to reimburse are eligible to be claimed. On the basis of guidance available at the time, the Company’s estimate of lost revenues for 2020 was first based on the negative change in year-over-year net patient care operating revenue (year-to-date June 2020), then on the negative change in year-over-year net patient care operating income (year-to-date September 2020) and finally on the difference between budgeted and actual revenue for calendar year 2020 (year-to-date December 2020). The calculation as of December 31, 2020 is in accordance with the CAA which indicates that lost revenues may be calculated pursuant to frequently asked questions published by HHS in June 2020, including the difference between a provider’s budgeted and actual revenue if such budget had been established prior to March 27, 2020. The use of funds calculation as of December 31, 2020 takes into account expenses attributable to each respective entity, which primarily relate to incremental labor and supply costs, as well as lost revenues. General fund distributions were allocated among subsidiaries according to total unreimbursed losses. Targeted distributions were not allocated or transferred among subsidiaries. While the CAA, January 15, 2021 Notice and frequently asked questions published by HHS on January 28, 2021 indicate that targeted distribution payments may be allocated or transferred to subsidiaries, distinct conditions exist for such allocations or transfers including that the parent organization have a “direct ownership relationship” with the subsidiary who received the targeted distribution payment. Additionally, the subsidiary that was the recipient of the targeted distribution payment retains responsibility for reporting to HHS on the use of such funds even if they are transferred or allocated to other subsidiaries. There are significant uncertainties as to the meaning and interpretation of conditions specific to the allocation or transfer of targeted distribution payments such that as of December 31, 2020, the Company is not reasonably assured that it can or will choose to comply with such conditions in order to allocate or transfer targeted distribution payments.
Amounts received through the PHSSEF or state and local programs that have not yet been recognized as a reduction to operating costs and expenses or otherwise have not been refunded to HHS or the various state and local agencies as of December 31, 2020, are reflected within accrued liabilities-other in the consolidated balance sheet, and such unrecognized amounts may be recognized as a reduction in operating costs and expenses in future periods if the underlying conditions for recognition are met. HHS’ interpretation of the underlying terms and conditions of such PHSSEF payments, including auditing and reporting requirements, continues to evolve. Additional guidance or new and amended interpretations of existing guidance on the terms and conditions of such PHSSEF payments may result in changes in the Company’s estimate of amounts for which the terms and conditions are reasonably assured of being met, and any such changes may be material. Additionally, any such changes may result in the Company’s inability to recognize additional PHSSEF payments or may result in the derecognition of amounts previously recognized, which (in any such case) may be material.
Medicare Accelerated Payments
Medicare accelerated payments of approximately $ 1.2 billion were received by the Company in April 2020. No additional Medicare accelerated payments have been received by the Company since such time and approximately $ 77 million of amounts previously received was repaid to CMS or assumed by buyers related to divested entities. Effective October 8, 2020, CMS is no longer accepting new applications for accelerated payments. Accordingly, the Company does not expect to receive additional Medicare accelerated payments. Payments under the Medicare Accelerated and Advance Payment program are advances that must be repaid. Effective October 1, 2020, the program was amended such that providers are required to repay accelerated payments beginning one year after the payment was issued. After such one-year period, Medicare payments owed to providers will be recouped according to
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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
the repayment terms. The repayment terms specify that for the first 11 months after repayment begins, repayment will occur through an automatic recoupment of 25 % of Medicare payments otherwise owed to the provider. At the end of the eleven-month period, recoupment will increase to 50 % for six months. At the end of the six months (or 29 months from the receipt of the initial accelerated payment), Medicare will issue a letter for full repayment of any remaining balance, as applicable. In such event, if payment is not received within 30 days, interest will accrue at the annual percentage rate of four percent ( 4 %) from the date the letter was issued, and will be assessed for each full 30-day period that the balance remains unpaid. As of December 31, 2020, approximately $ 425 million of Medicare accelerated payments are reflected within accrued liabilities-other in the consolidated balance sheet while the remaining approximately $ 656 million are included within other long-term liabilities. The Company’s estimate of the current liability is a function of historical cash receipts from Medicare and the repayment terms set forth above.
New Accounting Pronouncements . In March 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-04, “Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria that reference the London Interbank Offered Rate (“LIBOR”) or another rate that is expected to be discontinued. The amendments in the ASU are effective for all entities as of March 12, 2020 through December 31, 2022. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position or results of operations.
The Company has evaluated all other recently issued, but not yet effective, ASUs and does not expect the eventual adoption of these ASUs to have a material impact on its consolidated financial position or results of operations.
2. ACCOUNTING FOR STOCK-BASED COMPENSATION
Stock-based compensation awards have been granted under the Community Health Systems, Inc. Amended and Restated 2000 Stock Option and Award Plan, amended and restated as of March 20, 2013 (the “2000 Plan”), and the Community Health Systems, Inc. Amended and Restated 2009 Stock Option and Award Plan, which was amended and restated as of March 20, 2020 and approved by the Company’s stockholders at the annual meeting of stockholders held on May 12, 2020 (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 did 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 2000 Plan included the Company’s directors, officers, employees and consultants. All options granted under the 2000 Plan were “nonqualified” stock options for tax purposes. Generally, vesting of these granted options occurred in one-third increments on each of the first three anniversaries of the award date . Options granted since 2008 had a 10 -year contractual term. Pursuant to the amendment and restatement of the 2000 Plan dated March 20, 2013, no further grants will be awarded under the 2000 Plan.
The 2009 Plan provides for the grant of incentive stock options intended to qualify under Section 422 of the IRC and for the grant of stock options which do not so qualify, stock appreciation rights, restricted stock, restricted stock units, performance-based shares or units and other share awards. Persons eligible to receive grants under the 2009 Plan include the Company’s directors, officers, employees and consultants. To date, all options granted under the 2009 Plan have been “nonqualified” stock options for tax purposes. Generally, vesting of these granted options occurs in one-third increments on each of the first three anniversaries of the award date . Options granted in 2011 or later have a 10 -year contractual term. As of December 31, 2020, 10,451,760 shares of unissued common stock were reserved for future grants under the 2009 Plan.
The exercise price of all options granted under the 2000 Plan and the 2009 Plan has been equal to the fair value of the Company’s common stock on the option grant date.
The following table reflects the impact of total compensation expense related to stock-based equity plans on the reported operating results for the respective periods (in millions):
Year Ended December 31,
2020
2019
2018
Effect on income (loss) before income taxes
$
( 13
)
$
( 10
)
$
( 13
)
Effect on net income (loss)
$
( 10
)
$
( 8
)
$
( 10
)
At December 31, 2020, $ 16 million of unrecognized stock-based compensation expense related to outstanding unvested stock options, restricted stock and restricted stock units (the terms of which are summarized below) was expected to be recognized over a weighted-average period of 22 months. Of that amount, $ 3 million related to outstanding unvested stock options was expected to be
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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
recognized over a weighted-average period of 23 months and $ 13 million related to outstanding unvested restricted stock and restricted stock units was expected to be recognized over a weighted-average period of 22 months . There were no modifications to awards during the years ended December 31, 20 20 , 201 9 and 201 8 .
The fair value of stock options was estimated using the Black Scholes option pricing model with the following assumptions and weighted-average fair values during the years ended December 31, 2020, 2019 and 2018:
Year Ended December 31,
2020
2019
2018
Expected volatility
73.5 %
68.4
%
N/A%
Expected dividends
-
-
N/A
Expected term
6.0 years
5.6 years
N/A
Risk-free interest rate
1.0 %
2.6
%
N/A%
In determining the expected term, the Company examined concentrations of option holdings and historical patterns of option exercises and forfeitures, as well as forward-looking factors, in an effort to determine if there were any discernable employee populations. From this analysis, the Company identified two primary employee populations, one consisting of certain senior executives and the other consisting of substantially all other recipients.
The expected volatility rate was estimated based on historical volatility. In determining expected volatility, the Company also reviewed the market-based implied volatility of actively traded options of its common stock and determined that historical volatility utilized to estimate the expected volatility rate did not differ significantly from the implied volatility.
The expected term computation is based on historical exercise and cancellation patterns and forward-looking factors, where present, for each population identified. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The pre-vesting forfeiture rate is based on historical rates and forward-looking factors for each population identified. The Company adjusts the estimated forfeiture rate to its actual experience.
Options outstanding and exercisable under the 2000 Plan and the 2009 Plan as of December 31, 2020, and changes during each of the years in the three-year period prior to December 31, 2020, were as follows (in millions, except share and per share data):
Shares
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value as of
December 31,
2020
Outstanding at December 31, 2017
1,115,667
$
31.56
Granted
-
-
Exercised
-
-
Forfeited and cancelled
( 490,729
)
32.01
Outstanding at December 31, 2018
624,938
31.21
Granted
658,500
4.95
Exercised
-
-
Forfeited and cancelled
( 173,304
)
23.04
Outstanding at December 31, 2019
1,110,134
16.90
Granted
946,500
4.93
Exercised
( 18,166
)
4.99
Forfeited and cancelled
( 220,943
)
33.52
Outstanding at December 31, 2020
1,817,525
$
8.77
7.6 years
$
4
Exercisable at December 31, 2020
455,021
$
20.24
3.7 years
$
-
The weighted-average grant date fair value of stock options granted during the year ended December 31, 2020 and 2019, respectively, was $ 3.17 and $ 3.05 . No stock options were granted during the year ended December 31, 2018. The aggregate intrinsic value (calculated as the number of in-the-money stock options multiplied by the difference between the Company’s closing stock price on the last trading day of the reporting period ($ 7.43 ) 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 December
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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
31, 20 20 . This amount changes based on the market value of the Company’s common stock. The aggregate intrinsic value of op tions exercised during the year ended December 31, 2020 was less than $ 1 million. There were no options exercised during the years ended December 31, 201 9 and 201 8 . The aggregate intrinsic value of options vested and expected to vest approximates that of the outstanding options.
The Company has also awarded restricted stock under the 2009 Plan to employees of certain subsidiaries. With respect to time-based vesting restricted stock that has been awarded under the 2009 Plan, the restrictions on these shares have generally lapsed in one-third increments on each of the first three anniversaries of the award date . In addition, certain of the restricted stock awards granted to the Company’s senior executives have contained performance objectives required to be met in addition to any time-based vesting requirements. If the applicable performance objectives are not attained, these awards will be forfeited in their entirety. For performance-based awards, the performance objectives are measured cumulatively over a three-year period. With respect to performance-based awards, if the applicable target performance objective is met at the end of the three-year period, then the restricted stock award subject to such performance objective will vest in full on the third anniversary of the award date. Additionally, for these performance-based awards, based on the level of achievement for the applicable performance objective within the parameters specified in the award agreement, the number of shares to be issued in connection with the vesting of the award may be adjusted to decrease or increase the number of shares specified in the original award. Notwithstanding the above-mentioned performance objectives and vesting requirements, the restrictions with respect to restricted stock granted under the 2009 Plan may lapse earlier in the event of death, disability or termination of employment by the Company for any reason other than for cause of the holder of the restricted stock, or change in control of the Company. All of the restricted stock awards subject to performance objectives granted on March 1, 2017 were forfeited following the year ended December 31, 2020 as a result of the minimum level of the applicable cumulative performance objectives for the 2017-2019 performance period not having been met. Restricted stock awards subject to performance objectives that have not yet been satisfied are not considered outstanding for purposes of determining earnings per share until the performance objectives have been satisfied.
Restricted stock outstanding under the 2009 Plan as of December 31, 2020, and changes during each of the years in the three-year period prior to December 31, 2020, were as follows:
Shares
Weighted-
Average Grant
Date Fair Value
Unvested at December 31, 2017
2,643,919
$
16.17
Granted
1,987,000
4.54
Vested
( 1,154,670
)
23.22
Forfeited
( 167,342
)
10.29
Unvested at December 31, 2018
3,308,907
7.00
Granted
1,989,000
4.94
Vested
( 1,160,667
)
8.89
Forfeited
( 279,838
)
5.60
Unvested at December 31, 2019
3,857,402
5.47
Granted
2,205,500
4.90
Vested
( 1,123,329
)
5.84
Forfeited
( 383,838
)
8.58
Unvested at December 31, 2020
4,555,735
4.84
Restricted stock units (“RSUs”) have been granted to the Company’s non-management directors under the 2009 Plan. Each of the Company’s then serving non-management directors received grants under the 2009 Plan of 37,118 RSUs, 34,068 RSUs and 34,483 RSUs on March 1, 2018, 2019 and 2020, respectively. Each of the 2018, 2019 and 2020 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. Beginning with grants made during 2020, each non-management director may elect, prior to the beginning of the calendar year in which the award is granted, to defer the receipt of shares of the Company’s common stock issuable upon vesting until either his or her (i) separation from service with the Company or (ii) attainment of an age specified in advance by the non-management director. A total of five directors elected to defer the receipt of RSUs granted on March 1, 2020 to a future date.
96
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
RSUs outstanding under the 2009 Plan as of December 31, 2020, and changes during each of the years in the three-year period prior to December 31, 2020, were as follows:
Shares
Weighted-
Average Grant
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 December 31, 2018
397,906
6.17
Granted
306,612
4.99
Vested
( 162,942
)
7.42
Forfeited
-
-
Unvested at December 31, 2019
541,576
5.13
Granted
310,347
4.93
Vested
( 238,184
)
5.47
Forfeited
-
-
Unvested at December 31, 2020
613,739
4.89
3. ACQUISITIONS AND DIVESTITURES
Acquisitions
The Company accounts for all transactions that represent business combinations using the acquisition method of accounting, where the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquired entity are recognized and measured at their fair values on the date the Company obtains control in the acquiree. Such fair values that are not finalized for reporting periods following the acquisition date are estimated and recorded as provisional amounts. Adjustments to these provisional amounts during the measurement period (defined as the date through which all information required to identify and measure the consideration transferred, the assets acquired, the liabilities assumed and any noncontrolling interests has been obtained, limited to one year from the acquisition date) are recorded when identified. Goodwill is determined as the excess of the fair value of the consideration conveyed in the acquisition over the fair value of the net assets acquired.
Acquisition and integration expenses related to prospective and closed acquisitions included in other operating expenses on the consolidated statements of income (loss) were less than $ 1 million, $ 2 million and $ 3 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Effective June 1, 2019, one or more subsidiaries of the Company completed the acquisition of Northwest Mississippi Medical Center in Clarksdale, Mississippi. This healthcare system includes 181 licensed beds and other outpatient and ancillary services. The total cash consideration paid for operating assets was approximately $ 2 million with additional consideration of $ 9 million in assumed liabilities, for a total consideration of $ 11 million. This hospital was acquired in conjunction with the bankruptcy proceedings for the previous owner that acquired the hospital from the Company in 2017 as part of an agreement with the local county government associated with its lease of the hospital building. Based on the Company’s final purchase price allocation relating to this acquisition as of December 31, 2019, no goodwill has been recorded. Prior to the completion of the acquisition, the Company initiated a plan to sell this hospital and as such the hospital was classified as held for sale at December 31, 2019 and 2020. This disposition was completed on February 1, 2021, as further described below.
Other Acquisitions
During the years ended December 31, 2020, 2019 and 2018, one or more subsidiaries of the Company paid approximately $ 1 million, $ 8 million and $ 26 million, respectively, 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 year ended December 31, 2020, t he Company allocated the majority of the purchase price to goodwill. In connection with these acquisitions, during the year ended December 31, 2019, the Company allocated approximately $ 4 million of the consideration paid to property and equipment and net working capital and the remainder, approximately $ 4 million consisting of intangible assets that do not qualify for separate recognition, to goodwill. In connection with these acquisitions, during the year ended December 31, 2018, the Company allocated approximately $ 10 million of the consideration paid to property and
97
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
equipment and net working capital and the remainder, approximately $ 22 million consisting of intangible assets that do not qualify for separate recognition, to goodwill. The value of noncontrolling interests acquired in these acquisitions was $ 6 million.
Divestitures
The following table provides a summary of hospitals that the Company divested during the years ended December 31, 2020, 2019 and 2018.
Hospital
Buyer
City, State
Licensed
Beds
Effective Date
2020 Divestitures:
Berwick Hospital Center
Fayette Holdings, Inc.
Berwick, PA
90
December 1, 2020
Brownwood Regional Medical Center
Hendrick Health System
Brownwood, TX
188
October 27, 2020
Abilene Regional Medical Center
Hendrick Health System
Abilene, TX
231
October 27, 2020
San Angelo Community Medical Center
Shannon Health System
San Angelo, TX
171
October 24, 2020
Bayfront Health St. Petersburg
Orlando Health, Inc.
St. Petersburg, FL
480
October 1, 2020
Hill Regional Hospital
AHRK Holdings, LLC
Hillsboro, TX
25
August 1, 2020
St. Cloud Regional Medical Center
Orlando Health, Inc.
St. Cloud, FL
84
July 1, 2020
Northern Louisiana Medical Center
Allegiance Health Management, Inc.
Ruston, LA
130
July 1, 2020
Shands Live Oak Regional Medical Center
HCA
Live Oak, FL
25
May 1, 2020
Shands Starke Regional Medical Center
HCA
Starke, FL
49
May 1, 2020
Southside Regional Medical Center
Bon Secours Mercy Health System
Petersburg, VA
300
January 1, 2020
Southampton Memorial Hospital
Bon Secours Mercy Health System
Franklin, VA
105
January 1, 2020
Southern Virginia Regional Medical Center
Bon Secours Mercy Health System
Emporia, VA
80
January 1, 2020
2019 Divestitures:
Bluefield Regional Medical Center
Princeton Community Hospital Association
Bluefield, WV
92
October 1, 2019
Lake Wales Medical Center
Adventist Health System
Lake Wales, FL
160
September 1, 2019
Heart of Florida Regional Medical Center
Adventist Health System
Davenport, FL
193
September 1, 2019
College Station Medical Center
St. Joseph Regional Health Center
College Station, TX
167
August 1, 2019
Tennova Healthcare - Lebanon
Vanderbilt University Medical Center
Lebanon, TN
245
August 1, 2019
Chester Regional Medical Center
Medical University Hospital Authority
Chester, SC
82
March 1, 2019
Carolinas Hospital System - Florence
Medical University Hospital Authority
Florence, SC
396
March 1, 2019
Springs Memorial Hospital
Medical University Hospital Authority
Lancaster, SC
225
March 1, 2019
Carolinas Hospital System - Marion
Medical University Hospital Authority
Mullins, SC
124
March 1, 2019
Memorial Hospital of Salem County
Community Healthcare Associates, LLC
Salem, NJ
126
January 31, 2019
Mary Black Health System - Spartanburg
Spartanburg Regional Healthcare System
Spartanburg, SC
207
January 1, 2019
Mary Black Health System - Gaffney
Spartanburg Regional Healthcare System
Gaffney, SC
125
January 1, 2019
2018 Divestitures:
Sparks Regional Medical Center
Baptist Health
Fort Smith, AR
492
November 1, 2018
Sparks Medical Center - Van Buren
Baptist Health
Van Buren, AR
103
November 1, 2018
AllianceHealth Deaconess
INTEGRIS Health
Oklahoma City, OK
238
October 1, 2018
Munroe Regional Medical Center
Adventist Health System
Ocala, FL
425
August 1, 2018
Tennova Healthcare - Dyersburg Regional
West Tennessee Healthcare
Dyersburg, TN
225
June 1, 2018
Tennova Healthcare - Regional Jackson
West Tennessee Healthcare
Jackson, TN
150
June 1, 2018
Tennova Healthcare - Volunteer Martin
West Tennessee Healthcare
Martin, TN
100
June 1, 2018
Williamson Memorial Hospital
Mingo Health Partners, LLC
Williamson, WV
76
June 1, 2018
Byrd Regional Hospital
Allegiance Health Management
Leesville, LA
60
June 1, 2018
Tennova Healthcare - Jamestown
Rennova Health, Inc.
Jamestown, TN
85
June 1, 2018
Bayfront Health Dade City
Adventist Health System
Dade City, FL
120
April 1, 2018
On September 8, 2020, one or more affiliates of the Company entered into a definitive agreement for the sale of substantially all of the assets of Lea Regional medical Center ( 68 licensed beds) in Hobbs, New Mexico to affiliates of Covenant Health System. This disposition was completed on January 1, 2021, as further described in Note 16 below.
On September 30, 2020, one or more affiliates of the Company entered into a definitive agreement for the sale of substantially all of the assets of each of Tennova Healthcare – Tullahoma ( 135 licensed beds) in Tullahoma, Tennessee and Tennova Healthcare – Shelbyville ( 60 licensed beds) in Shelbyville, Tennessee to Vanderbilt University Medical Center. These dispositions were completed on January 1, 2021, as further described in Note 16 below.
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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
On October 30, 2020, one or more affiliates of the Company entered into a definitive agreement for the sale of substantially all of the assets of Northwest Mississippi Medical Center ( 181 licensed beds) in Clarksdale, Mississippi, to affiliates of Delta Health System. This disposition was completed on February 1, 2021, as further described in Note 16 below.
On December 8, 2020, one or more affiliates of the Company entered into a definitive agreement for the sale of substantially all of the assets of AllianceHealth Midwest ( 255 licensed beds) in Midwest City, Oklahoma, to affiliates of SSM Health Care of Oklahoma, Inc.
The following table discloses amounts included in the consolidated balance sheets for the hospitals classified as held for sale as of December 31, 2020 and December 31, 2019 (in millions). Other assets, net primarily includes the net property and equipment for hospitals held for sale. No divestitures or potential divestitures meet the criteria for reporting as a discontinued operation.
December 31,
2020
2019
Other current assets
$
12
$
25
Other assets, net
11
262
Accrued liabilities
16
43
Financial and statistical data reported in this Annual Report on Form 10-K (“Form 10-K”) includes operating results for hospitals held for sale at December 31, 2020 and for the 36 hospitals that were divested during 2020, 2019 and 2018 through the effective date of each respective transaction. Summary financial results of these hospitals for the periods included in the accompanying consolidated statements of income (loss) are as follows (in millions):
Year Ended December 31,
2020
2019
2018
Loss before income taxes
$
( 144
)
$
( 103
)
$
( 465
)
Less: Loss attributable to noncontrolling interests
( 6
)
( 8
)
( 5 )
Loss from operations before income taxes attributable
to Community Health Systems, Inc. stockholders
$
( 138
)
$
( 95
)
$
( 460
)
The operating results for these held for sale or divested hospitals included impairment charges of approximately $ 41 million, $ 102 million and $ 415 million that were allocated to the divestitures during the years ended December 31, 2020, 2019 and 2018, respectively.
On November 30, 2020, one or more subsidiaries of the Company completed the sale of 50 % ownership interest in Merit Health Biloxi ( 153 licensed beds) and its associated healthcare businesses in Biloxi, Mississippi to Memorial Properties, Inc., an affiliate of Memorial Hospital of Gulfport pursuant to the terms of a definitive agreement which was entered into October 12, 2020 . Merit Health Biloxi and its associated healthcare businesses will remain consolidated entities of the Company.
Other Hospital Closures
Effective September 30, 2020, one or more affiliates of the Company finalized an agreement to terminate the lease and cease operations of Shands Lake Shore Regional Medical Center ( 99 licensed beds) in Lake City, Florida, including transferring leased assets back to the landlord, the Lake Shore Hospital Authority. The Company recorded an impairment charge of approximately $ 3 million during the year ended December 31, 2020 in conjunction with exiting the lease to operate this hospital.
During the three months ended December 31, 2018, the Company completed the planned closure of Tennova – Physicians Regional Medical Center in Knoxville, Tennessee and Tennova – Lakeway Regional Medical Center in Morristown, Tennessee. The Company recorded an impairment charge of $ 27 million during the three months ended December 31, 2018, to adjust the fair value of the supplies, inventory and long-lived assets of these hospitals, including property and equipment and capitalized software costs, based on their estimated fair value and future utilization. During 2019, the Company recorded an impairment charge of approximately $ 9 million to further adjust the fair value of the supplies, inventory and long-lived assets of these hospitals, including property and equipment and capitalized software costs, based on the Company’s updated evaluation of their estimated fair value and future utilization and consideration of costs to dispose of such assets.
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
99
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The changes in the carrying amount of goodwill for the years ended December 31, 2020 and 2019 are as follows (in millions):
Balance, beginning balance
2020
2019
Goodwill
$
7,142
$
7,373
Accumulated impairment losses
( 2,814
)
( 2,814
)
4,328
4,559
Goodwill acquired as part of acquisitions during current year
1
4
Goodwill allocated to hospitals held for sale
( 110
)
( 235
)
Balance, end of year
Goodwill
7,033
7,142
Accumulated impairment losses
( 2,814
)
( 2,814
)
$
4,219
$
4,328
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 segment meets the criteria to be classified as a reporting unit. At December 31, 2020, after giving effect to 2020 divestiture activity, the Company had approximately $ 4.2 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. The Company performed its last annual goodwill impairment evaluation during the fourth quarter of 2020 using an October 31, 2020 measurement date, which indicated no impairment.
The Company estimates the fair value of the reporting unit 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.
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 and 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. A detailed evaluation of potential impairment indicators was performed as of December 31, 2020, which specifically considered the volatility of the fair market value of the Company’s outstanding senior secured and unsecured notes and common stock during the year ended December 31, 2020, as well as declines in patient volumes and net operating revenues resulting from the COVID-19 pandemic. On the basis of available evidence as of December 31, 2020, no indicators of impairment were identified.
Future estimates of fair value could be adversely affected if the actual outcome of one or more of the assumptions described above changes materially in the future, including a decline in the Company’s stock price and the fair value of its long-term debt, an increase in the volatility of the Company’s stock price and the fair value of its long-term debt, lower than expected hospital volumes and/or net operating revenues, higher market interest rates or increased operating costs. Such changes impacting the calculation of fair value, the risks of which are amplified by the COVID-19 pandemic, 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.
100
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Intangible Assets
No intangible assets other than goodwill were acquired during the years ended December 31, 2020 and 2019. The gross carrying amount of the Company’s other intangible assets subject to amortization was $ 1 million at both December 31, 2020 and 2019, and the net carrying amount was less than $ 1 million at December 31, 2020 and 2019. The carrying amount of the Company’s other intangible assets not subject to amortization was $ 53 million and $ 63 million at December 31, 2020 and 2019, respectively. Other intangible assets are included in other assets, net on the Company’s consolidated balance sheets. Substantially all of the Company’s intangible assets are contract-based intangible assets related to operating licenses, management contracts, or non-compete agreements entered into in connection with prior acquisitions.
The weighted-average remaining amortization period for the intangible assets subject to amortization is approximately one year. There are no expected residual values related to these intangible assets. Amortization expense on these intangible assets was less than $ 1 million, $ 1 million and $ 3 million during the years ended December 31, 2020, 2019 and 2018, respectively. Amortization expense on intangible assets is estimated to be less than $ 1 million in 2021.
The gross carrying amount of capitalized software for internal use was approximately $ 1.1 billion at both December 31, 2020 and 2019, and the net carrying amount was approximately $ 251 million and $ 321 million at December 31, 2020 and 2019, respectively. The estimated amortization period for capitalized internal-use software is generally three years . There is no expected residual value for capitalized internal-use software. At December 31, 2020, there were approximately $ 11 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 $ 123 million, $ 121 million and $ 140 million during the years ended December 31, 2020, 2019 and 2018, respectively. Amortization expense on capitalized internal-use software is estimated to be $ 123 million in 2021, $ 75 million in 2022, $ 34 million in 2023, $ 9 million in 2024, $ 7 million in 2025 and $ 3 million thereafter.
5. INCOME TAXES
The (benefit from) provision for income taxes consists of the following (in millions):
Year Ended December 31,
2020
2019
2018
Current:
Federal
$
( 1
)
$
( 38
)
$
1
State
3
( 5
)
( 9
)
2
( 43
)
( 8
)
Deferred:
Federal
( 162
)
179
50
State
( 25
)
24
( 53
)
( 187
)
203
( 3
)
Total (benefit from) provision for income taxes for income (loss)
$
( 185
)
$
160
$
( 11
)
101
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table reconciles the differences between the statutory federal income tax rate and the effective tax rate (dollars in millions):
Year Ended December 31,
2020
2019
2018
Amount
%
Amount
%
Amount
%
Provision for (benefit from) income taxes at statutory federal rate
$
89
21.0
%
$
( 90
)
21.0
%
$
( 150
)
21.0
%
State income taxes, net of federal income tax benefit
( 15
)
( 3.6
)
( 104
)
24.3
( 114
)
16.0
Net income attributable to noncontrolling interests
( 20
)
( 4.7
)
( 18
)
4.2
( 18
)
2.5
Change in valuation allowance
( 267
)
( 63.2
)
340
( 79.2
)
212
( 29.7
)
Change in uncertain tax position
-
-
-
-
9
( 1.3
)
Federal and state tax credits
-
-
-
-
( 17
)
2.4
Nondeductible goodwill
41
9.8
11
( 2.6
)
30
( 4.2
)
Nondeductible settlements
-
-
-
-
22
( 3.1
)
Nondeductible loss on divestiture
( 15
)
( 3.4
)
15
( 3.5
)
-
-
Other
2
0.3
6
( 1.4
)
15
( 2.1
)
(Benefit from) provision for income taxes and effective tax rate for income (loss)
$
( 185
)
( 43.8
)%
$
160
( 37.2
)%
$
( 11
)
1.5
%
The Company’s effective tax rates were ( 43.8 )%, ( 37.2 )% and 1.5 % for the years ended December 31, 2020, 2019 and 2018, respectively. The decrease in the Company’s effective tax rate for the year ended December 31, 2020, when compared to the year ended December 31, 2019, was primarily due to a decrease in the valuation allowance recognized on IRC Section 163(j) interest carryforwards and original issue discount deferred tax asset as a result of (i) an increase to the deductible interest expense allowed for 2019 and 2020 under the CARES Act that was enacted during the three months ended March 31, 2020 and (ii) tax impacts of 2020 financing activity . The decrease in the Company’s effective tax rate for the year ended December 31, 2019, when compared to the year ended December 31, 2018, was primarily due to an increase in the valuation allowance recognized on (i) IRC Section 163(j) interest carryforwards and (ii) original issue discount deferred tax asset generated with the 2019 Exchange Offer.
102
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Deferred income taxes are based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities under the provisions of the enacted tax laws. Deferred income taxes as of December 31, 2020 and 2019 consist of (in millions):
December 31,
2020
2019
Assets
Liabilities
Assets
Liabilities
Net operating loss and credit carryforwards
$
873
$
-
$
775
$
-
Property and equipment
-
300
-
335
Self-insurance liabilities
58
-
48
-
Prepaid expenses
-
29
-
30
Intangibles
-
127
-
149
Investments in unconsolidated affiliates
-
57
-
57
Other liabilities
-
9
-
9
IRC Section 481(a) - mixed service cost
-
106
-
216
Long-term debt and interest
154
-
312
-
Accounts receivable
52
-
62
-
IRC Section 163(j) interest limitation
108
-
296
-
Accrued vacation
22
-
24
-
Accrued bonus
32
-
31
-
Other comprehensive income
6
-
5
-
Right-of-use assets
-
150
-
145
Right-of-use liability
155
-
149
-
Stock-based compensation
4
-
5
-
Deferred compensation
69
-
70
-
Other
57
-
51
-
Total
1,590
778
1,828
941
Valuation allowance
( 781
)
-
( 1,049
)
-
Total deferred income taxes
$
809
$
778
$
779
$
941
The Company believes that the net deferred tax assets will ultimately be realized, except as noted below. Its conclusion is based on its estimate of future taxable income and the expected timing of temporary difference reversals. The Company has gross federal net operating loss carryforwards of approximately $ 881 million and state net operating loss carryforwards of approximately $ 9 billion, which expire from 2021 to 2040. The Company’s tax affected federal and state net operating loss and credit carryforwards are approximately $ 217 million and $ 656 million, respectively. A valuation allowance of approximately $ 781 million has been recognized for state net operating loss carryforwards, state credit carryforwards and federal and state deferred tax assets that the Company does not expect to be able to utilize prior to the expiration of the carryforward period. With respect to the deferred tax liability pertaining to intangibles, as included above, goodwill purchased in connection with certain of the Company’s business acquisitions is amortizable for income tax reporting purposes. However, for financial reporting purposes, there is no corresponding amortization allowed with respect to such purchased goodwill.
The valuation allowance for federal and state jurisdictions where the Company concluded that the associated deferred tax assets would not be realized decreased by $ 265 million and $ 2 million, respectively, for the year ended December 31, 2020, and increased by $ 221 million and $ 127 million, respectively, for the year ended December 31, 2019.
The total amount of unrecognized benefit that would affect the effective tax rate, if recognized, was less than $ 1 million as of December 31, 2020. A total of less than $ 1 million of interest and penalties is included in the amount of the liability for uncertain tax positions at December 31, 2020. It is the Company’s policy to recognize interest and penalties related to unrecognized benefits in its consolidated statements of income (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 consolidated results of operations or consolidated financial position.
103
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following is a tabular reconciliation of the total amount of unrecognized tax benefit for the years ended December 31, 2020, 2019 and 2018 (in millions):
Year Ended December 31,
2020
2019
2018
Unrecognized tax benefit, beginning of year
$
26
$
29
$
18
Gross increases — tax positions in current period
19
10
11
Settlements
-
( 13
)
-
Unrecognized tax benefit, end of year
$
45
$
26
$
29
The Company’s federal income tax returns for the 2009 and 2010 tax years have been settled with the Internal Revenue Service. The results of these examinations were not material to the Company’s consolidated results of operations or consolidated financial position. The Company’s federal income tax returns for the 2014 and 2015 tax years remain under examination by the Internal Revenue Service. The Company believes the results of these examinations will not be material to its consolidated results of operations or consolidated financial position. The Company has extended the federal statute of limitations through December 31, 2021 for Community Health Systems, Inc. for the tax periods ended December 31, 2014 and 2015. The Company’s federal income tax return for the 2018 tax year is under examination by the Internal Revenue Service.
Cash paid for income taxes, net of refunds received, resulted in a net cash paid of $ 2 million during the year ended December 31, 2020, and a net refund of $ 3 million and $ 19 million during the years ended December 31, 2019 and 2018, respectively.
6. LONG-TERM DEBT
Long-term debt, net of unamortized debt issuance costs and discounts or premiums, consists of the following (in millions):
December 31,
2020
2019
5⅛% Senior Secured Notes due 2021
$
-
$
1,000
6⅞% Senior Notes due 2022
126
231
6¼% Senior Secured Notes due 2023
95
3,100
8⅝% Senior Secured Notes due 2024
1,033
1,033
6⅝% Senior Secured Notes due 2025
1,462
-
8 % Senior Secured Notes due 2026
2,101
2,101
8 % Senior Secured Notes due 2027
700
700
5⅝% Senior Secured Notes due 2027
1,900
-
6⅞% Senior Notes due 2028
767
1,700
6 % Senior Secured Notes due 2029
900
-
9⅞% Junior-Priority Secured Notes due 2023
1,769
1,770
8⅛% Junior-Priority Secured Notes due 2024
1,348
1,355
ABL Facility
-
273
Finance lease and financing obligations
239
272
Other
26
17
Less: Unamortized deferred debt issuance costs and note premium
( 250
)
( 147
)
Total debt
12,216
13,405
Less: Current maturities
( 123
)
( 20
)
Total long-term debt
$
12,093
$
13,385
5⅛% Senior Secured Notes due 2021
On January 27, 2014 , CHS completed a private offering of $ 1.0 billion aggregate principal amount of 5⅛% Senior Secured Notes due August 1, 2021 (the “5⅛% Senior Secured Notes due 2021”). The net proceeds from this issuance were used to finance the Company’s acquisition by merger of Health Management Associates, Inc. (“HMA”). The 5⅛% Senior Secured Notes due 2021 bear interest at a rate of 5.125 % per annum, payable semi-annually in arrears on February 1 and August 1 of each year. Interest on the 5⅛% Senior Secured Notes due 2021 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 5⅛% Senior Secured Notes due 2021 are unconditionally guaranteed on a senior-priority
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
secured basis by the Company and each of the CHS current and future domestic subsidiaries that provide guarantees under the ABL Facility, any capital market debt securities of CHS (including CHS᾿ outstanding senior notes) and certain other long-term debt of CHS.
The 5⅛% Senior Secured Notes due 2021 and the related guarantees were secured by shared (i) first-priority liens on the collateral (the “Non-ABL Priority Collateral”) that also secures on a first-priority basis CHS’ senior-priority secured notes and (ii) second-priority liens on the collateral (the “ABL-Priority Collateral”) that secures on a first-priority basis the ABL Facility (and also secures on a second-priority basis CHS’s senior-priority secured notes), in each case subject to permitted liens described in the indenture governing the 5⅛% Senior Secured Notes due 2021.
CHS was entitled, at its option, to redeem all or a portion of the 5⅛% Senior Secured Notes due 2021 upon not less than 30 nor more than 60 days’ notice, at a 100 % redemption price (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).
Pursuant to a registration rights agreement entered into at the time of the issuance of the 5⅛% Senior Secured Notes due 2021, as a result of an exchange offer made by CHS, all of the 5⅛% Senior Secured Notes due 2021 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 5⅛% Senior Secured Notes due 2021 (except that the exchange notes were issued under a registration statement pursuant to the 1933 Act). References to the 5⅛% Senior Secured Notes due 2021 shall be deemed to be the 2021 Exchange Notes unless the context provides otherwise.
On January 23, 2020, CHS commenced a cash tender offer for any and all of the outstanding 5⅛% Senior Secured Notes due 2021 and issued a conditional notice of redemption to redeem all of the 5⅛% Senior Secured Notes due 2021 not purchased by CHS in the tender offer at a redemption price of 100.000 % of the principal amount thereof plus accrued interest to, but not including, February 22, 2020. As noted below, the proceeds from the issuance of the 6⅝% Senior Secured Notes due 2025 were used in February 2020 to (i) purchase any and all of the 5⅛% Senior Secured Notes due 2021 validly tendered and not validly withdrawn in the cash tender offer announced on January 23, 2020, and (ii) redeem all of the 5⅛% Senior Secured Notes due 2021 that were not purchased pursuant to such tender offer.
6⅞% Senior Notes due 2022
On January 27, 2014 , CHS completed a private offering of $ 3.0 billion aggregate principal amount of 6⅞% Senior Notes due February 1, 2022 (the “6⅞% Senior Notes due 2022”). The net proceeds from this issuance were used to finance the HMA merger. The 6⅞% Senior Notes due 2022 bear interest at a rate of 6.875 % per annum, payable semiannually in arrears on February 1 and August 1 of each year. Interest on the 6⅞% Senior Notes due 2022 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 6⅞% Senior Notes due 2022 are unconditionally guaranteed on a senior-priority unsecured basis by the Company and each of the CHS current and future domestic subsidiaries that provide guarantees under the ABL Facility, any capital market debt securities of CHS (including CHS᾿ outstanding senior notes) and certain other long-term debt of CHS.
CHS is entitled, at its option, to redeem all or a portion of the 6⅞% Senior Notes due 2022 upon not less than 30 nor more than 60 days’ notice, at a redemption price of 100 % (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 prior to the maturity date.
Pursuant to a registration rights agreement entered into at the time of the issuance of the 6⅞% Senior Notes due 2022, as a result of an exchange offer made by CHS, all of the 6⅞% Senior Notes due 2022 issued in January 2014 were exchanged in October 2014 for new notes (the “6⅞% Exchange Notes”) having terms substantially identical in all material respects to the 6⅞% Senior Notes due 2022 (except that the exchange notes were issued under a registration statement pursuant to the 1933 Act). References to the 6⅞% Senior Notes due 2022 shall be deemed to be the 6⅞% Exchange Notes unless the context provides otherwise.
On June 22, 2018, CHS issued approximately $ 276 million aggregate principal amount of the 8⅛% Junior-Priority Secured Notes due 2024 in exchange for approximately $ 368 million of 6⅞% Senior Notes due 2022.
On November 19, 2019, CHS issued approximately $ 700 million aggregate principal amount of 8 % Senior Secured Notes due December 15, 2027 (the “8% Senior Secured Notes due 2027”) and approximately $ 1.7 billion aggregate principal amount of 6⅞% Senior Notes due April 1, 2028 (the “6⅞% Senior Notes due 2028”) in exchange for approximately $ 2.4 billion of 6⅞% Senior Notes
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
due 2022 (the “2019 Exchange Offer”). Following the 2019 Exchange Offer, CHS had approximately $ 231 million aggregate principal amount of 6⅞% Senior Notes due 2022 outstanding.
During the year ended December 31, 2020, the Company extinguished $ 34 million in principal related to the 6⅞% Secured Notes due 2022 through open market repurchases and approximately $ 72 million via a tender offer which commenced on October 30, 2020 , and expired on November 30, 2020 .
As described in Note 16, the Company issued a notice of redemption on January 29, 2021 to redeem on February 28, 2021 all of the 6⅞% Secured Notes due 2022 then outstanding at a redemption price of 100 % of the principal amount thereof plus accrued and unpaid interest to, but not including, February 28, 2021.
6¼% Senior Secured Notes due 2023
On March 16, 2017 , CHS completed a public offering of $ 2.2 billion aggregate principal amount of 6¼% Senior Secured Notes due March 31, 2023 (the “6¼% Senior Secured Notes due 2023”). The net proceeds from this issuance were used to finance the purchase or redemption of $ 700 million aggregate principal amount of CHS’ then outstanding 5⅛% Senior Secured Notes due 2018 and related fees and expenses, and the repayment of $ 1.445 billion of the then outstanding Term F Facility. On May 12, 2017, CHS completed a tack-on offering of $ 900 million aggregate principal amount of 6¼% Senior Secured Notes due 2023, increasing the total aggregate principal amount of 6¼% Senior Secured Notes due 2023 to $ 3.1 billion. A portion of the net proceeds from this issuance were used to finance the repayment of approximately $ 713 million aggregate principal amount of CHS’ then outstanding Term A Facility and related fees and expenses. The tack-on notes have identical terms, other than issue date and issue price, as the 6¼% Senior Secured Notes due 2023 issued on March 16, 2017. The 6¼% Senior Secured Notes due 2023 bear interest at a rate of 6.250 % per annum, payable semiannually in arrears on March 31 and September 30 of each year. Interest on the 6¼% Senior Secured Notes due 2023 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 6¼% Senior Secured Notes due 2023 are scheduled to mature on March 31, 2023. The 6¼% Senior Secured Notes due 2023 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 the ABL Facility, any capital market debt securities of CHS (including CHS᾿ outstanding senior notes) and certain other long-term debt of CHS.
The 6¼% Senior Secured Notes due 2023 and the related guarantees are secured by shared (i) first-priority liens on the Non-ABL Priority Collateral that also secures on a first-priority basis CHS’s senior-priority secured notes and (ii) second-priority liens on the ABL Collateral, in each case subject to permitted liens described in the indenture governing the 6¼% Senior Secured Notes due 2023.
CHS is entitled, at its option, to redeem all or a portion of the 6¼% Senior Secured Notes due 2023 at any time prior to March 31, 2020, upon not less than 30 nor more than 60 days’ notice, at a price equal to 100 % of the principal amount of the 6¼% Senior Secured Notes due 2023 redeemed plus accrued and unpaid interest, if any, plus a “make-whole” premium, as described in the indenture governing the 6¼% Senior Secured Notes due 2023. In addition, CHS may redeem up to 40 % of the aggregate principal amount of the 6¼% Senior Secured Notes due 2023 at any time prior to March 31, 2020 using the net proceeds from certain equity offerings at the redemption price of 106.250 % of the principal amount of the 6¼% Senior Secured Notes due 2023 redeemed, plus accrued and unpaid interest, if any.
CHS may redeem some or all of the 6¼% Senior Secured Notes due 2023 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
%
Approximately $ 426 million aggregate principal amount of 6¼% Senior Secured Notes due 2023 were purchased in one or more privately negotiated transactions on February 6, 2020.
On December 28, 2020, the Company redeemed approximately $ 2.579 billion of the 6¼% Senior Secured Notes due 2023 using proceeds from the issuance of $ 1.9 billion aggregate principal amount of 5⅝% Senior Secured Notes due 2027 and $ 900 million aggregate principal amount of 6% Senior Secured Notes due 2029. The remaining principal value of 6¼% Senior Secured Notes due 2023 that were not redeemed on December 28, 2020 were redeemed on January, 28, 2021 as further described in Note 16.
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9⅞% Junior-Priority Secured Notes due 2023
On June 22, 2018 , CHS completed a private offering of $ 1.770 billion aggregate principal amount of the 9⅞% Junior-Priority Secured Notes due June 30, 2023 (the “9⅞% Junior-Priority Secured Notes due 2023”) in exchange for the same amount of 8% Senior Notes due 2019. The 9⅞% Junior-Priority Secured Notes due 2023 bore interest at a rate of 11.000 % per annum, solely for the period from the issue date of such 9⅞% Junior-Priority Secured Notes due 2023 to, but excluding, June 22, 2019, after which they bear interest at a rate of 9.875 % per annum. Interest is payable semi-annually in arrears on June 30 and December 31 of each year. The 9⅞% Junior-Priority Secured Notes due 2023 are scheduled to mature on June 20, 2023. The 9⅞% Junior-Priority Secured Notes due 2023 are unconditionally guaranteed on a junior-priority secured basis by the Company and each of the CHS current and future domestic subsidiaries that provide guarantees under CHS᾿ ABL Facility, any capital market debt securities of CHS (including CHS᾿ outstanding senior notes) and certain other long-term debt of CHS.
The 9⅞% Junior-Priority Secured Notes due 2023 and the related guarantees are secured by shared (i) second-priority liens on the Non-ABL Priority Collateral that secures on a first-priority basis the CHS’s senior-priority secured notes and (ii) third-priority liens on the ABL-Priority Collateral that secures on a first-priority basis the ABL Facility (and also secures on a second-priority basis CHS’s senior-priority secured notes), in each case subject to permitted liens described in the indenture governing the 9⅞% Junior-Priority Secured Notes due 2023.
Prior to June 30, 2020, CHS may redeem some or all of the 9⅞% Junior-Priority Secured Notes due 2023 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 9⅞% Junior-Priority Secured Notes due 2023. In addition, at any time prior to June 30, 2020, CHS may redeem up to 40 % of the aggregate principal amount of the 9⅞% Junior-Priority Secured Notes due 2023 with the proceeds from certain equity offerings at the redemption price of 109.875 %, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.
After June 30, 2020, CHS is entitled, at its option, to redeem all or a portion of the 9⅞% Junior-Priority Secured Notes due 2023 upon not less than 15 nor more than 60 days’ notice, at the following redemption prices (expressed as a percentage of principal amount on the redemption date), plus accrued and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the periods set forth below:
Period
Redemption Price
June 30, 2020 to June 29, 2021
107.406
%
June 30, 2021 to June 29, 2022
103.703
%
June 30, 2022 to June 29, 2023
100.000
%
The Company redeemed approximately $ 2 million of the 9⅞% Junior-Priority Secured Notes due 2023 via a tender offer which commenced on October 30, 2020 , and expired on November 30, 2020 .
As further described in Note 16 and in conjunction with the issuance of $ 1.775 billion aggregate principal amount of 6⅞% Junior-Priority Secured Notes due 2029, all remaining 9⅞% Junior-Priority Secured Notes due 2023 were purchased pursuant to a tender offer on February 2, 2021 or, to the extent not tendered, pursuant to a notice of redemption as completed on February 4, 2021.
8⅛% Junior-Priority Secured Notes due 2024
On June 22, 2018 , CHS completed a private offering of $ 1.355 billion aggregate principal amount of the 8⅛% Junior-Priority Secured Notes due June 30, 2024 (the “8⅛% Junior-Priority Secured Notes due 2024”) in exchange for approximately $ 1.079 billion of 7⅛% Senior Notes due 2020 and approximately $ 368 million of 6⅞% Senior Notes due 2022. The 8⅛% Junior-Priority Secured Notes due 2024 bear interest at a rate of 8.125 % per annum, payable semi-annually in arrears on June 30 and December 31 of each year. The 8⅛% Junior-Priority Secured Notes due 2024 are scheduled to mature on June 20, 2024. The 8⅛% Junior-Priority Secured Notes due 2024 are unconditionally guaranteed on a junior-priority secured basis by the Company and each of the CHS current and future domestic subsidiaries that provide guarantees under CHS᾿ ABL Facility, any capital market debt securities of CHS (including CHS᾿ outstanding senior notes) and certain other long-term debt of CHS.
The 8⅛% Junior-Priority Secured Notes due 2024 and the related guarantees are secured by shared (i) second-priority liens on the Non-ABL Priority Collateral that secures on a first-priority basis the CHS’s senior-priority secured notes and (ii) third-priority liens on the ABL-Priority Collateral that secures on a first-priority basis the ABL Facility (and also secures on a second-priority basis CHS’s
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
senior-priority secured notes), in each case subject to permitted liens described in the indenture governing the 8 ⅛ % Junior-Priority Secured Notes due 2024.
Prior to June 30, 2021, CHS may redeem some or all of the 8⅛% Junior-Priority Secured Notes due 2024 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 8⅛% Junior-Priority Secured Notes due 2024. In addition, at any time prior to June 30, 2021, CHS may redeem up to 40 % of the aggregate principal amount of the 8⅛% Junior-Priority Secured Notes due 2024 with the proceeds from certain equity offerings at the redemption price of 108.125 %, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.
After June 30, 2021, CHS is entitled, at its option, to redeem all or a portion of the 8⅛% Junior-Priority Secured Notes due 2024 upon not less than 15 nor more than 60 days’ notice, at the following redemption prices (expressed as a percentage of principal amount on the redemption date), plus accrued and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the periods set forth below:
Period
Redemption Price
June 30, 2021 to June 29, 2022
104.063
%
June 30, 2022 to June 29, 2023
102.031
%
June 30, 2023 to June 29, 2024
100.000
%
The indentures governing each of the 9⅞% Junior-Priority Secured Notes due 2023 and 8 ⅛ % Junior-Priority Secured Notes due 2024 also prohibited CHS from purchasing, repurchasing, redeeming, defeasing or otherwise acquiring or retiring any outstanding 7⅛% Senior Notes due 2020 with: (a) cash or cash equivalents on hand as of the consummation of such 2018 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 May 15, 2020. CHS received a waiver from requisite holders of each series of the 9⅞% Junior-Priority Secured Notes due 2023 and 8 ⅛ % Junior-Priority Secured Notes due 2024 waiving these restrictions prior to consummating the 2019 Exchange Offer.
During the year ended December 31, 2020, the Company extinguished $ 1 million in principal related to the 8⅛% Junior-Priority Secured Notes due 2024 through open market repurchases and approximately $ 6 million via a tender offer which commenced on October 30, 2020 , and expired on November 30, 2020 .
8⅝% Senior Secured Notes due 2024
On July 6, 2018 , CHS completed a private offering of $ 1.033 billion aggregate principal amount of 8⅝% Senior Secured Notes due January 15, 2024 (the “8⅝% Senior Secured Notes due 2024”). The 8⅝% Senior Secured Notes due 2024 bear interest at a rate of 8.625 % per annum payable semi-annually in arrears on January 15 and July 15 of each year. The 8⅝% Senior Secured Notes due 2024 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᾿ ABL Facility, any capital market debt securities of CHS (including CHS᾿ outstanding senior notes) and certain other long-term debt of CHS.
The 8⅝% Senior Secured Notes due 2024 and the related guarantees are secured by shared (i) first-priority liens on the Non-ABL Priority Collateral and (ii) second-priority liens on the ABL Priority Collateral that secures on a first-priority basis the ABL Facility, in each case subject to permitted liens described in the indenture governing the 8⅝% Senior Secured Notes due 2024.
Prior to January 15, 2021, CHS may redeem some or all of the 8⅝% Senior Secured Notes due 2024 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 8⅝% Senior Secured Notes due 2024. In addition, at any time prior to January 15, 2021, CHS may redeem up to 40 % of the aggregate principal amount of the 8⅝% Senior Secured Notes due 2024 with the proceeds from certain equity offerings at the redemption price of 108.625 %, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.
After January 15, 2021, CHS is entitled, at its option, to redeem all or a portion of the 8⅝% Senior Secured Notes due 2024 upon not less than 15 nor more than 60 days’ notice, at the following redemption prices (expressed as a percentage of principal amount on
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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
the redemption date), plus accrued and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the periods set forth below:
Period
Redemption Price
January 15, 2021 to January 14, 2022
104.313
%
January 15, 2022 to January 14, 2023
102.156
%
January 15, 2023 to January 14, 2024
100.000
%
As further described in Note 16 and in conjunction with the issuance of $ 1.095 billion aggregate principal amount of 4¾% Senior Secured Notes due February 15, 2031, all remaining 8⅝% Senior Secured Notes due 2024 were redeemed on February 9, 2021.
6⅝% Senior Secured Notes due 2025
On February 6, 2020 , CHS/Community Health Systems, Inc. (“CHS”) completed a private offering of $ 1.462 billion aggregate principal amount of 6⅝% Senior Secured Notes due February 15, 2025 (the “6⅝% Senior Secured Notes due 2025”). CHS used the net proceeds of the offering of the 6⅝% Senior Secured Notes due 2025 to (i) purchase any and all of its 5⅛% Senior Secured Notes due 2021 validly tendered and not validly withdrawn in the cash tender offer announced on January 23, 2020, (ii) redeem all of the 5⅛% Senior Secured Notes due 2021 that were not purchased pursuant to such tender offer, (iii) purchase in one or more privately negotiated transactions approximately $ 426 million aggregate principal amount of its 6¼% Senior Secured Notes due 2023 and (iv) pay related fees and expenses.
The 6⅝% Senior Secured Notes due 2025 bear interest at a rate of 6.625 % per annum, payable semi-annually in arrears on February 15 and August 15 of each year, commencing on August 15, 2020. The 6⅝% Senior Secured Notes are scheduled to mature on February 15, 2025. The 6⅝% Senior Secured Notes due 2025 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 the revolving asset-based loan facility (the “ABL Facility”), any capital market debt securities of CHS (including CHS’ outstanding senior notes) and certain other long-term debt of CHS. The 6⅝% Senior Secured Notes due 2025 and the related guarantees are secured by shared (i) first-priority liens on the Non-ABL Priority Collateral and (ii) second-priority liens on the ABL Priority Collateral that secures on a first-priority basis the ABL Facility, in each case subject to permitted liens described in the indenture governing the 6⅝% Senior Secured Notes due 2025.
At any time prior to February 15, 2022, CHS may redeem some or all of the 6⅝% Senior Secured Notes due 2025 at a price equal to 100 % of their principal amount plus accrued and unpaid interest, if any, to, but excluding the applicable redemption date plus a make-whole premium as defined in the indenture agreement dated February 6, 2020. After February 15, 2022, CHS is entitled, at its option, to redeem some or all of the 6⅝% Senior Secured Notes at a redemption price equal to the percentage of principal amount below plus accrued and unpaid interest, if any, to, but excluding the applicable redemption date, if redeemed during the twelve-month period beginning on February 15 of the years set forth below:
Period
Redemption Price
February 15, 2022 to February 14, 2023
103.313
%
February 15, 2023 to February 14, 2024
101.656
%
February 15, 2024 to February 14, 2025
100.000
%
8% Senior Secured Notes due 2026
On March 6, 2019 , CHS completed a private offering of $ 1.601 billion aggregate principal amount of the 8% Senior Secured Notes due March 15, 2026 (the “8% Senior Secured Notes due 2026”). The net proceeds from this issuance were used to finance the repayment of approximately $ 1.557 billion aggregate principal amount of CHS’ then outstanding Term H Facility and related fees and expenses. On November 19, 2019, CHS completed a tack-on offering of $ 500 million aggregate principal amount of the Additional 2026 Notes, increasing the total aggregate principal amount of the 8% Senior Secured Notes due 2026 to $ 2.101 billion. CHS used the proceeds from the Additional 2026 Notes to repay amounts outstanding under the Revolving Facility, redeem all $ 121 million aggregate principal amount of CHS’ then outstanding 7⅛% Senior Notes due 2020 and repay borrowings outstanding under the ABL Facility. The Additional 2026 Notes have identical terms, other than issue date, issue price and the date from which interest initially accrued, as the 8% Senior Secured Notes due 2026 issued on March 6, 2019. The 8% Senior Secured Notes due 2026 bear interest at a rate of 8.000 % per annum, payable semi-annually in arrears on March 15 and September 15 of each year. Interest on the 8% Senior Secured Notes due 2026 accrues from the initial issuance date of the 8% Senior Secured Notes due 2026. Interest is calculated on the
109
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
basis of a 360-day year comprised of twelve 30-day months. The 8% Senior Secured Notes due 2026 are scheduled to mature on March 15, 2026.
The 8% Senior Secured Notes due 2026 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 the ABL Facility, any capital market debt securities of CHS (including CHS᾿ outstanding senior notes) and certain other long-term debt of CHS.
The 8% Senior Secured Notes due 2026 and the related guarantees are secured by shared (i) first-priority liens on the Non-ABL Priority Collateral and (ii) second-priority liens on the ABL Priority Collateral that secures on a first-priority basis the ABL Facility, in each case subject to permitted liens described in the indenture governing the 8% Senior Secured Notes due 2026.
Prior to March 15, 2022, CHS may redeem some or all of the 8% Senior Secured Notes due 2026 at a redemption price equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest, if any, plus a “make-whole” premium, as described in the indenture governing the 8% Senior Secured Notes due 2026. In addition, at any time prior to March 15, 2022, CHS may redeem up to 40 % of the aggregate principal amount of the 8% Senior Secured Notes due 2026 with the proceeds from certain equity offerings at the redemption price of 108.000 %, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.
After March 15, 2022, CHS is entitled, at its option, to redeem all or a portion of the 8% Senior Secured Notes due 2026 upon not less than 15 nor more than 60 days’ notice, at the following redemption prices (expressed as a percentage of principal amount on the redemption date), plus accrued and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the periods set forth below:
Period
Redemption Price
March 15, 2022 to March 14, 2023
104.000
%
March 15, 2023 to March 14, 2024
102.000
%
March 15, 2024 to March 14, 2026
100.000
%
8% Senior Secured Notes due 2027
On November 19, 2019, CHS issued approximately $ 700 million aggregate principal amount of the 8% Senior Secured Notes due December 15, 2027 (the “8% Senior Secured Notes due 2027”) in connection with the 2019 Exchange Offer. No cash proceeds were received from the 2019 Exchange Offer. The 8% Senior Secured Notes due 2027 bear interest at a rate of 8.000 % per annum, payable semi-annually in arrears on June 15 and December 15 of each year. Interest on the 8% Senior Secured Notes due 2027 accrues from the initial issuance date of the 8% Senior Secured Notes due 2027. Interest is calculated on the basis of a 360-day year comprised of twelve 30-day months. The 8% Senior Secured Notes due 2027 are scheduled to mature on December 15, 2027. The 8% Senior Secured Notes due 2027 are unconditionally guaranteed on a senior-priority secured basis by the Company and each of CHS’ current and future domestic subsidiaries that provide guarantees under the ABL Facility, any capital market debt securities of CHS (including CHS᾿ outstanding senior notes) and certain other long-term debt of CHS.
The 8% Senior Secured Notes due 2027 and the related guarantees are secured by shared (i) first-priority liens on the Non-ABL Priority Collateral and (ii) second-priority liens on the ABL Priority Collateral that secures on a first-priority basis the ABL Facility, in each case subject to permitted liens described in the indenture governing the 8% Senior Secured Notes due 2027.
CHS is entitled, at its option, to redeem all or a portion of the 8% Senior Secured Notes due 2027 at any time prior to December 15, 2022, upon not less than 15 nor more than 60 days’ notice, at a price equal to 100 % of the principal amount of the 8% Senior Secured Notes due 2027 redeemed plus accrued and unpaid interest, if any, plus a “make-whole” premium, as described in the indenture governing the 8% Senior Secured Notes due 2027. In addition, CHS may redeem up to 40 % of the aggregate principal amount of the 8% Senior Secured Notes due 2027 at any time prior to December 15, 2022 using the net proceeds from certain equity offerings at the redemption price of 108.000 % of the principal amount of the 8% Senior Secured Notes due 2027 redeemed, plus accrued and unpaid interest, if any.
CHS may redeem some or all of the 8% Senior Secured Notes due 2027 at any time on or after December 15, 2022 upon not less than 15 nor more than 60 days’ notice, at the following redemption prices (expressed as a percentage of principal amount on the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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
December 15, 2022 to December 14, 2023
104.000
%
December 15, 2023 to December 14, 2024
102.000
%
December 15, 2024 to December 14, 2027
100.000
%
5⅝% Senior Secured Notes due 2027
On December 28, 2020 , the Company completed a private offering of $ 1.9 billion aggregate principal amount of 5⅝% Senior Secured Notes due March 15, 2027 (the “5⅝% Senior Secured Notes due 2027”). The proceeds of the offering were used to repurchase approximately $ 2.579 billion of the outstanding principal amount of 6¼% Senior Secured Notes due 2023 that were validly tendered and accepted for purchase pursuant to the early tender deadline of a tender offer that launched on December 11, 2020, and to pay related fees. The remaining principal value of 6¼% Senior Secured Notes due 2023 that were not validly tendered as of the early tender deadline were redeemed or repurchased via the completion of the tender offer on January 11, 2021 or redemption on January, 28, 2021. The 5⅝% Senior Secured Notes due 2027 , which mature on March 15, 2027 , bear interest at a rate of 5⅝% per year payable semi-annually in arrears on March 15 and September 15 of each year, commencing on September 15, 2021. The 5⅝% Senior Secured Notes due 2027 are unconditionally guaranteed on a senior-priority secured basis by the Company and each of CHS’ current and future domestic subsidiaries that provide guarantees under the ABL facility, any capital market debt securities of CHS (including CHS’ outstanding senior notes) and certain other long-term debt of CHS.
The 5⅝% Senior Secured Notes due 2027 and the related guarantees are secured by shared (i) first-priority liens on the Non-ABL Priority Collateral and (ii) second-priority liens on the ABL Priority Collateral that secures on a first-priority basis the ABL Facility, in each case subject to permitted liens described in the indenture governing the 5⅝% Senior Secured Notes due 2027.
CHS is entitled, at its option, to redeem all or a portion of the 5⅝% Senior Secured Notes due 2027 at any time prior to December 15, 2023, upon not less than 15 nor more than 60 days’ notice, at a price equal to 100 % of the principal amount of the 5⅝% Senior Secured Notes due 2027 redeemed plus accrued and unpaid interest, if any, plus a “make-whole” premium, as described in the indenture governing the 5⅝% Senior Secured Notes due 2027. In addition, CHS may redeem up to 40 % of the aggregate principal amount of the 5⅝% Senior Secured Notes due 2027 at any time prior to December 15, 2023 using the net proceeds from certain equity offerings at the redemption price of 105.625 % of the principal amount of the 5⅝% Senior Secured Notes due 2027 redeemed, plus accrued and unpaid interest, if any.
At any time and from time to time on or after December 15, 2023, CHS may redeem the 5⅝% Senior Secured Notes due 2027 in whole or in part, upon not less than 15 no more than 60 days’ prior written notice at a redemption price equal to the percentage of principal amount set forth below plus accrued and unpaid interest, if any, on the 5⅝% Senior Secured Notes due 2027 redeemed, to, but excluding, the applicable date of redemption, if redeemed during the twelve-month period beginning on December 15 of the years indicated below:
Period
Redemption Price
December 15, 2023 to December 14, 2024
102.813
%
December 15, 2024 to December 14, 2025
101.406
%
December 15, 2025 to December 14, 2027
100.000
%
6⅞% Senior Notes due 2028
On November 19, 2019, CHS issued approximately $ 1.7 billion aggregate principal amount of the 6⅞% Senior Notes due April 1, 2028 (“the 6⅞% Senior Notes due 2028”) in connection with the 2019 Exchange Offer. No cash proceeds were received in the 2019 Exchange Offer. The 6⅞% Senior Notes due 2028 bear interest at a rate of 6.875 % per annum, payable semi-annually in arrears on April 1 and October 1 of each year. Interest on the 6⅞% Senior 2028 Notes accrues from the initial issuance date of the 6⅞% Senior Notes due 2028. Interest is calculated on the basis of a 360-day year comprised of twelve 30-day months. The 6⅞% Senior Notes due 2028 are scheduled to mature on April 1, 2028 .
The 6⅞% Senior Notes due 2028 are unconditionally guaranteed on a senior-priority unsecured basis by the Company and each of the CHS current and future domestic subsidiaries that provide guarantees under the ABL Facility, any capital market debt securities of CHS (including CHS᾿ outstanding senior notes) and certain other long-term debt of CHS.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
CHS is entitled, at its option, to redeem all or a portion of the 6⅞% Senior Notes due 2028 at any time prior to April 1, 2023, upon not less than 15 nor more than 60 days’ notice, at a price equal to 100 % of the principal amount of the 6⅞% Senior Notes due 2028 redeemed plus accrued and unpaid interest, if any, plus a “make-whole” premium, as described in the indenture governing the 6⅞% Senior Notes due 2028. In addition, the Issuer may redeem up to 40 % of the aggregate principal amount of the 6⅞% Senior Notes due 2028 at any time prior to April 1, 2023 using the net proceeds from certain equity offerings at the redemption price of 106.875 % of the principal amount of the 6⅞% Senior Notes due 2028 redeemed, plus accrued and unpaid interest, if any.
CHS may redeem some or all of the 6⅞% Senior Notes due 2028 at any time on or after April 1, 2023 upon not less than 15 nor more than 60 days’ notice, at the following redemption prices (expressed as a percentage of principal amount on the redemption date), plus accrued and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the periods set forth below:
Period
Redemption Price
April 1, 2023 to March 31, 2024
103.438
%
April 1, 2024 to March 31, 2025
101.719
%
April 1, 2025 to March 31, 2028
100.000
%
On December 7, 2020, CHS entered into a privately negotiated agreement with a multi-asset investment manager who has certain funds and accounts which are holders (the “Holders”) of the 6⅞% Senior Notes due 2028. Pursuant to the agreement, the Company exchanged $ 700 million aggregate principal amount of the 6⅞% Senior Notes due 2028 for an aggregate consideration of $ 400 million of cash and 10 million newly issued shares of the Company’s common stock. The exchange transaction was completed on December 9, 2020 and the shares of common stock issued in the exchange were not, and are not required to be, registered under the Securities Act of 1933 pursuant to an exemption from registration provisions via Section 3(a)(9) of the Securities Act of 1933. A gain from early extinguishment of debt of approximately $ 205 million was recognized associated with this exchange.
During the year ended December 31, 2020, the Company extinguished $ 226 million in principal of the 6⅞% Senior Notes due 2028 through open market repurchases and approximately $ 7 million via a tender offer which commenced on October 30, 2020 and expired on November 30, 2020 .
6% Senior Secured Notes due 2029
On December 28, 2020, the Company completed a private offering of $ 900 million aggregate principal amount of 6% Senior Secured Notes due January 15, 2029 (the “6% Senior Secured Notes due 2029”). The proceeds of the offering were used, together with proceeds from the 5⅝% Senior Secured Notes due 2027 described above, to repurchase approximately $ 2.579 billion of the outstanding principal amount of 6¼% Senior Secured Notes due 2023 that were validly tendered and accepted for purchase pursuant to the early tender deadline of a tender offer that launched on December 11, 2020, and to pay related fees. The remaining principal value of 6¼% Senior Secured Notes due 2023 that were not validly tendered as of the early tender deadline were redeemed or repurchased via the completion of the tender offer on January 11, 2021 or redemption on January, 28, 2021. The 6% Senior Secured Notes due 2029 , which mature on January 15, 2029 , bear interest at a rate of 6% per year payable semi-annually in arrears on January 15 and July 15 of each year, commencing on July 15, 2021. The 6 % Senior Secured Notes due 2029 are unconditionally guaranteed on a senior-priority secured basis by each of CHS’ current and future domestic subsidiaries that provide guarantees under the ABL facility, any capital market debt securities of CHS (including CHS’ outstanding senior notes) and certain other long-term debt of CHS.
The 6% Senior Secured Notes due 2029 and the related guarantees are secured by shared (i) first-priority liens on the Non-ABL Priority Collateral and (ii) second-priority liens on the ABL Priority Collateral that secures on a first-priority basis the ABL Facility, in each case subject to permitted liens described in the indenture governing the 6% Senior Secured Notes due 2029.
CHS is entitled, at its option, to redeem all or a portion of the 6% Senior Secured Notes due 2029 at any time prior to January 15, 2024, upon not less than 15 nor more than 60 days’ notice, at a price equal to 100 % of the principal amount of the 6% Senior Secured Notes due 2029 redeemed plus accrued and unpaid interest, if any, plus a “make-whole” premium, as described in the indenture governing the 6% Senior Secured Notes due 2029. In addition, CHS may redeem up to 40 % of the aggregate principal amount of the 6% Senior Secured Notes due 2029 at any time prior to January 15, 2024 using the net proceeds from certain equity offerings at the redemption price of 106.000 % of the principal amount of the 6% Senior Secured Notes due 2029 redeemed, plus accrued and unpaid interest, if any.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
At any time and from time to time on or after January 15, 2024, CHS may redeem the 6% Senior Secured Notes due 2029 in whole or in part, upon not less than 15 nor more than 60 days’ prior written notice at a redemption price equal to the percentage of principal amount set forth below plus accrued and unpaid interest, if any, on the 6% Senior Secured Notes due 2029 redeemed, to, but excluding, the applicable date of redemption, if redeemed during the twelve-month period beginning on January 15 of the years indicated below:
Period
Redemption Price
January 15, 2024 to January 14, 2025
103.000
%
January 15, 2025 to January 14, 2026
101.500
%
January 15, 2026 to January14, 2029
100.000
%
ABL Facility
On April 3, 2018, the Company and CHS entered into an asset-based loan (ABL) credit agreement (the “ABL Credit Agreement”) 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. On November 12, 2019, the Company and CHS entered into Amendment No. 2 to the ABL Facility, resulting in an increase of the portion of the commitments under the ABL Facility that are available in the form of letters of credit from $ 50 million to $ 200 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. 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. In connection with entering into the ABL Credit Agreement and the ABL Facility, the Company repaid in full and terminated its accounts receivable loan agreement with a group of lenders and banks. At December 31, 2020, the available borrowing base under the ABL Facility was $ 679 million, of which the Company had no outstanding borrowings and letters of credit issued of $ 150 million. The issued letters of credit were primarily in support of potential insurance-related claims and certain bonds. As further described in Note 16, $ 30 million of our outstanding letters of credit of $150 million was cancelled on January 6, 2021 in relation to a professional liability claim that was settled and funded in the three months ended December 31, 2020.
Borrowings under the ABL Facility bear interest at a rate per annum equal to an applicable percentage, plus, at the Borrower’s option, either (a) an Alternative base rate or (b) a LIBOR rate. From and after December 31, 2018, the applicable percentage under the ABL Facility is determined based on excess availability as a percentage of the maximum commitment amount under the ABL Facility at a rate per annum of 1.25 %, 1.50 % and 1.75 % for loans based on the Alternative base rate and 2.25 %, 2.50 % and 2.75 % for loans based on the LIBOR rate. From and after September 30, 2018, the applicable commitment fee rate under the ABL Facility is determined based on average utilization as a percentage of the maximum commitment amount under the ABL Facility at a rate per annum of either 0.50 % or 0.625 % times the unused portion of the ABL Facility.
Principal amounts outstanding under the ABL Facility will be due and payable in full on April 3, 2023. The ABL Facility includes a 91-day springing maturity applicable if more than $ 250 million in the aggregate principal amount of the 5⅛% Senior Secured Notes due 2021, 6⅞% Senior Notes due 2022 or 6¼% Senior Secured Notes due 2023 or any indebtedness incurred to refinance the foregoing are scheduled to mature or similarly become due on a date prior to April 3, 2023. In such event, principal amounts outstanding under the ABL Facility will be accelerated and all amounts outstanding under the ABL Facility will become immediately due and payable.
The ABL Facility contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting the Company’s ability, subject to certain exceptions, to, among other things (1) declare dividends, make distributions or redeem or repurchase capital stock, (2) prepay, redeem or repurchase other debt, (3) incur liens or grant negative pledges, (4) make loans and investments and enter into acquisitions and joint ventures, (5) incur additional indebtedness or provide certain guarantees, (6) engage in mergers, acquisitions and asset sales, (7) conduct transactions with affiliates, (8) alter the nature of the Company’s, CHS’ or the guarantors’ businesses, (9) grant certain guarantees with respect to physician practices, (10) engage in sale and leaseback transactions or (11) change the Company’s fiscal year. The Company is also required to comply with a consolidated fixed coverage ratio, upon certain triggering events described below, and various affirmative covenants. The consolidated fixed coverage ratio is calculated as the ratio of (x) consolidated EBITDA (as defined in the ABL Facility) less capital expenditures to (y) the sum of consolidated interest expense (as defined in the ABL Facility), scheduled principal payments, income taxes and restricted payments made in cash or in permitted investments. For purposes of calculating the consolidated fixed charge coverage
113
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
ratio, the calculation of consolidated EBITDA as defined in the ABL Facility is a trailing 12-month calculation that begins with the Company’s consolidated net income, with certain adjustments for interest, taxes, depreciation and amortization, net income attributable to noncontrolling interests, stock compensation expense, restructuring costs, and the financial impact of other non-cash or non-recurring items recorded during any such 12-month period. The consolidated fixed charge coverage ratio is a required covenant only in periods where the total borrowings outstanding under the ABL Facility reduce the amount available in the facility to less than the greater of (i) $ 95 million and (ii) 10 % of the calculated borrowing base. As a result, in the event the Company has less than $ 95 million available under the ABL Facility, the Company would need to comply with the consolidated fixed charge cove rage ratio. At December 31, 2020 , the Company is not subject to the consolidated fixed charge coverage ratio as such triggering event had not occurred during the last twelv e months ended December 31, 2020 .
In addition, in the event the amount of borrowings and letters of credit outstanding at any time under the ABL Facility exceeds the borrowing base at such time, the Company will be required to, first, repay outstanding borrowings and, second, replace or cash collateralize outstanding letters of credit, in an aggregate amount sufficient to eliminate such excess.
Events of default under the ABL Facility include, but are not limited to, (1) CHS’ failure to pay principal, interest, fees or other amounts under the ABL Facility Agreement when due (taking into account any applicable grace period), (2) any representation or warranty proving to have been materially incorrect when made, (3) covenant defaults subject, with respect to certain covenants, to an available cure and applicable grace periods, (4) bankruptcy and insolvency events, (5) a cross default to certain other debt, (6) certain undischarged judgments (not paid within an applicable grace period), (7) a change of control (as defined), (8) certain ERISA-related defaults and (9) the invalidity or impairment of specified security interests, guarantees or subordination provisions in favor of the ABL Agent or lenders under the ABL Facility.
Financing and repayment transactions discussed above resulted in a pre-tax and after-tax gain from early extinguishment of debt of $ 317 million and $ 352 million, respectively, for year ended December 31, 2020, a pre-tax and after-tax loss from early extinguishment of $ 54 million and $ 42 million, respectively, for the year ended December 31, 2019, and a pre-tax and after-tax gain from early extinguishment of $ 31 million and $ 23 million, respectively, for the year ended December 31, 2018.
The Company’s single remaining interest rate swap agreement terminated effective August 30, 2020. The Company received a variable rate of interest on this swap based on the three-month LIBOR in exchange for the payment of a fixed rate of interest.
As of December 31, 2020, the scheduled maturities of long-term debt outstanding, including finance lease obligations for each of the next five years and thereafter are as follows (in millions):
Year Ending December 31,
Amount
2021
$
123
2022
137
2023
1,776
2024
2,387
2025
1,469
Thereafter
6,574
Total maturities
12,466
Less: Deferred debt issuance costs
( 230
)
Plus: Unamortized note premium
( 20
)
Total long-term debt
$
12,216
The Company paid interest of $ 1.0 billion on borrowings for both of the years ended December 31, 2020 and 2019 and $ 936 million on borrowings during the year ended December 31, 2018.
Various financing transactions were completed subsequent to December 31, 2020 which are set forth in Note 16.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments has been estimated by the Company using available market information as of December 31, 2020 and 2019, 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):
December 31, 2020
December 31, 2019
Carrying
Estimated
Fair
Carrying
Estimated
Fair
Amount
Value
Amount
Value
Assets:
Cash and cash equivalents
$
1,676
$
1,676
$
216
$
216
Investments in equity securities
129
129
141
141
Available-for-sale debt securities
110
110
101
101
Trading securities
12
12
12
12
Liabilities:
5⅛% Senior Secured Notes due 2021
-
-
990
1,003
6⅞% Senior Notes due 2022
125
125
229
188
6¼% Senior Secured Notes due 2023
95
99
3,074
3,148
8⅝% Senior Secured Notes due 2024
1,025
1,080
1,023
1,099
6⅝% Senior Secured Notes due 2025
1,427
1,543
-
-
8 % Senior Secured Notes due 2026
2,074
2,275
2,070
2,182
8 % Senior Secured Notes due 2027
692
760
691
700
5⅝% Senior Secured Notes due 2027
1,809
2,048
-
-
6⅞% Senior Notes due 2028
758
618
1,678
1,700
6 % Senior Secured Notes due 2029
857
973
-
-
9⅞% Junior-Priority Secured Notes due 2023
1,756
1,861
1,754
1,539
8⅛% Junior-Priority Secured Notes due 2024
1,336
1,408
1,340
1,113
ABL Facility and other debt
23
23
285
285
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 8 . 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 through publicly available subscription services such as Bloomberg to determine fair values where relevant.
Cash and cash equivalents. The carrying amount approximates fair value due to the short-term maturity of these instruments (less than three months).
Investments in equity securities. Estimated fair value is based on closing price as quoted in public markets.
Available-for-sale debt 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.
Senior Notes, Senior Secured Notes and Junior-Priority Secured Notes. Estimated fair value is based on the closing market price for these notes.
ABL Facility and other debt. The carrying amount of the ABL Facility and all other debt approximates fair value due to the nature of these obligations.
The Company’s single remaining interest rate swap terminated effective August 30, 2020. The Company is exposed to certain risks relating to its ongoing business operations. The risk managed by using derivative instruments is interest rate risk. Companies are required to recognize all derivative instruments as either assets or liabilities at fair value in the consolidated statement of financial position. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the
115
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
The following tabular disclosure provides the amount of pre-tax (loss) gain recognized as a component of OCI during the years ended December 31, 2020, 2019 and 2018 (in millions):
Amount of Pre-Tax (Loss) Gain
Recognized in OCI (Effective Portion)
Year Ended December 31,
Derivatives in Cash Flow Hedging Relationships
2020
2019
2019
Interest rate swaps
$
-
$
( 3
)
$
17
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 consolidated statements of income (loss) during the years ended December 31, 2020, 2019 and 2018 (in millions):
Amount of Pre-Tax Loss Reclassified
from AOCL into Income (Effective Portion)
Location of Loss Reclassified from
Year Ended December 31,
AOCL into Income (Effective Portion)
2020
2019
2018
Interest expense, net
$
2
$
-
$
2
8. 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 years ending December 31, 2020 or December 31, 2019.
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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table sets forth, by level within the fair value hierarchy, the financial assets and liabilities recorded at fair value on a recurring basis as of December 31, 2020 and 2019 (in millions):
December 31,
2020
Level 1
Level 2
Level 3
Investments in equity securities
$
129
$
129
$
-
$
-
Available-for-sale debt securities
110
-
110
-
Trading securities
12
-
12
-
Total assets
$
251
$
129
$
122
$
-
December 31,
2019
Level 1
Level 2
Level 3
Investments in equity securities
$
141
$
141
$
-
$
-
Available-for-sale debt securities
101
-
101
-
Trading securities
12
-
12
-
Total assets
$
254
$
141
$
113
$
-
Fair value of interest rate swap agreement
$
2
$
-
$
2
$
-
Total liabilities
$
2
$
-
$
2
$
-
Investments in Equity Securities, Available-for-Sale Debt 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 debt securities and trading securities primarily consisted of bonds and notes issued by the United States government and its agencies and domestic and foreign corporations. The estimated fair values of these securities are determined using various valuation techniques, including a multi-dimensional relational model that incorporates standard observable inputs and assumptions such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids/offers and other pertinent reference data.
Supplemental information regarding the Company’s available-for-sale debt securities (all of which had no withdrawal restrictions) is set forth in the table below (in millions):
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Values
As of December 31, 2020:
Debt securities
Government
$
48
$
2
$
-
$
50
Corporate
38
2
-
40
Mortgage and asset-backed securities
19
1
-
20
Total
$
105
$
5
$
-
$
110
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Values
As of December 31, 2019:
Debt securities
Government
$
54
$
1
$
( 1
)
$
54
Corporate
33
1
-
34
Mortgage and asset-backed securities
13
-
-
13
Total
$
100
$
2
$
( 1
)
$
101
As of December 31, 2020 and 2019, investments with aggregate estimated fair values of approximately $ 7 million ( 11 investments) and $ 51 million ( 71 investments), respectively, generated the gross unrealized losses disclosed in the above table. At each reporting date, the Company performs an evaluation of impaired securities to determine if the unrealized losses are other-than-temporary. This
117
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
evaluation considers a number of factors including, but not limited to, the length of time and extent to which the fair value has been less than cost, and management’s ability and intent to hold the securities until fair value recovers. Based on the results of this evaluation, management concluded that as of December 31, 20 20 , there were no other-than-temporary losses related to available-for-sale debt securities. The recent declines in value of the securities and/or length of time they have been below cost, as well as the Company’s ability and intent to hold the securities for a reasonable period of time sufficient for a projected recovery of fair value, have caused management to conclude that the securities, that have generated gross unrealized losses, were not other-than-temporarily impaired. Management will continue to monitor and evaluate the recoverability of the Company’s available-for-sale debt securities.
The contractual maturities of debt-based securities held by the Company as of December 31, 2020 and 2019, excluding mutual fund holdings, are set forth in the table below (in millions). Expected maturities will differ from contractual maturities because the issuers of the debt securities may have the right to prepay their obligations without prepayment penalties.
December 31, 2020
December 31, 2019
Amortized
Estimated
Amortized
Estimated
Cost
Fair Values
Cost
Fair Values
Within 1 year
$
3
$
3
$
9
$
9
After 1 year and through year 5
26
27
19
20
After 5 years and through year 10
30
32
29
29
After 10 years
46
48
43
43
Gross realized gains and losses on sales of available-for-sale debt securities are summarized in the table below (in millions):
Year Ended December 31,
2020
2019
2018
Realized gains
$
2
$
-
$
-
Realized losses
( 1
)
-
-
Other investment income, which includes interest and dividends, related to all investment securities were $ 6 million, $ 7 million and $ 7 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Net gains and losses recognized during the years ended December 31, 2020 and 2019 for investments in equity securities, which are broken out between investments sold during the year and investments held at the end of the year, are summarized in the table below (in millions):
Year Ended December 31,
2020
2019
Net gains and (losses), beginning of year
$
9
$
15
Less: Net gains and (losses) recognized during the year on equity securities sold during
the year
14
2
Unrealized gains and (losses) recognized during the year on equity securities held, end
of year
$
( 5
)
$
13
9. LEASES
The Company utilizes operating and finance leases for the use of certain hospitals, medical office buildings, and medical equipment. All lease agreements generally require the Company to pay maintenance, repairs, property taxes and insurance costs, which are variable amounts based on actual costs incurred during each applicable period. Such costs are not included in the determination of the ROU asset or lease liability. Variable lease cost also includes escalating rent payments that are not fixed at commencement but are based on an index that is determined in future periods over the lease term based on changes in the Consumer Price Index or other measures of cost inflation. Most leases include one or more options to renew the lease at the end of the initial term, with renewal terms that generally extend the lease at the then market rate of rental payment. Certain leases also include an option to buy the underlying asset at or a short time prior to the termination of the lease. All such options are at the Company’s discretion and are evaluated at the commencement of the lease, with only those that are reasonably certain of exercise included in determining the appropriate lease term. The Company has elected to account for COVID-19 related concessions as though the enforceable rights and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
obligations for those concessions are explicit within the underlying contract. During the year ended December 31, 2020, concessions of approximately $ 7 million were recognized as a reduction to variable rent expense.
The components of lease cost and rent expense for the year ended December 31, 2020 and 2019 are as follows (in millions):
Year Ended December 31,
Lease Cost
2020
2019
Operating lease cost:
Operating lease cost
$
203
$
194
Short-term rent expense
104
114
Variable lease cost
26
18
Sublease income
( 6
)
( 5
)
Total operating lease cost
$
327
$
321
Finance lease cost:
Amortization of right-of-use assets
$
10
$
12
Interest on finance lease liabilities
8
7
Total finance lease cost
$
18
$
19
Supplemental balance sheet information related to leases was as follows (in millions):
Balance Sheet Classification
December 31,
2020
December 31,
2019
Operating Leases:
Operating Lease ROU Assets
Other assets, net
$
642
$
607
Finance Leases:
Finance Lease ROU Assets
Property and equipment
Land and improvements
$
8
$
8
Buildings and improvements
134
154
Equipment and fixtures
8
11
Property and equipment
150
173
Less accumulated depreciation and amortization
( 46
)
( 56
)
Property and equipment, net
$
104
$
117
Current finance lease liabilities
Current maturities of long-term debt
$
5
$
6
Long-term finance lease liabilities
Long-term debt
74
107
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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Supplemental cash flow information related to leases for the year ended December 31, 2020 and 2019 are as follows (in millions):
Year Ended December 31,
Cash flow information
2020
2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases (1)
$
188
$
167
Operating cash flows from finance leases
8
7
Financing cash flows from finance leases
7
9
Right-of-use assets obtained in exchange for new finance lease liabilities
22
2
Right-of-use assets obtained in exchange for new operating lease liabilities
150
122
Weighted-average remaining lease term:
Operating leases
7 years
6 years
Finance leases
19 years
20 years
Weighted-average discount rate:
Operating leases
9.0
%
9.1
%
Finance leases
8.4
%
5.6
%
(1)
Included in the change in other operating assets and liabilities in the consolidated statement of cash flows.
On September 19, 2019, the Company completed the sale and leaseback of four medical office buildings for net proceeds of $ 56 million to Carter Validus Mission Critical REIT II, Inc. The buildings, with a combined total of 285,337 square feet, are located in three states and support a wide array of diagnostic, medical and surgical services in an outpatient setting for the respective nearby hospitals. Based on the Company’s assessment of the control transfer principle in these leased buildings, the transaction did not qualify for sale treatment and the related leases have been recorded as financing obligations in long-term debt in the Company’s consolidated balance sheet at December 31, 2019. In addition, on December 18, 2019, the Company completed the sale and leaseback of one medical office building for net proceeds of approximately $ 4 million to an affiliate of Catalyst Healthcare Real Estate. The 30,000 square foot building is located in Arkansas and supports a wide array of diagnostic, medical and surgical services in an outpatient setting for the nearby hospital. Based on the Company’s assessment of the control transfer principle in this leased building, the transaction does not qualify for sale treatment and the related lease has been recorded as a financing obligation in long-term debt in the accompanying consolidated balance sheet at December 31, 2019.
Commitments relating to noncancellable operating and finance leases and financing obligations for each of the next five years and thereafter are as follows (in millions):
Financing
Year Ending December 31,
Operating
Finance
Obligations
2021
$
193
$
10
$
12
2022
161
9
12
2023
127
8
13
2024
93
8
13
2025
77
8
13
Thereafter
253
150
103
Total minimum future payments
904
193
166
Less: Imputed interest
( 238
)
( 114
)
( 6
)
Total liabilities
666
79
160
Less: Current portion
( 142
)
( 5
)
( 2
)
Long-term liabilities
$
524
$
74
$
158
As of December 31, 2020, there were approximately $ 17 million of assets underlying approved but pending leases that have not yet commenced, primarily for medical equipment.
10. EMPLOYEE BENEFIT PLANS
The Company maintains various benefit plans, including defined contribution plans, defined benefit plans and deferred compensation plans, for which certain of the Company’s subsidiaries are the plan sponsors. The CHS/Community Health Systems, Inc. Retirement Savings Plan is a defined contribution plan which covers the majority of the Company’s employees. Employees at
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
these locations whose employment is covered by collective bargaining agreements are generally eligible to participate in the CHS/Community Health Systems, Inc. Standard 401(k) Plan. Total expense to the Company under the 401(k) plans was $ 74 million, $ 85 million and $ 90 million for the years ended December 31, 20 20 , 201 9 and 201 8 , respectively, and is recorded in salaries and benefits expense on the consolidated statements of income (loss) .
The Company maintains unfunded deferred compensation plans that allow participants to defer receipt of a portion of their compensation. The liability for the deferred compensation plans was $ 176 million and $ 175 million as of December 31, 2020 and 2019, respectively, and is included in other long-term liabilities on the consolidated balance sheets. Assets designated to pay benefits under this plan are discussed below.
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 $ 7 million, $ 7 million and $ 9 million for the years ended December 31, 2020, 2019 and 2018, respectively. The accrued benefit liability for the SERP totaled $ 89 million and $ 72 million at December 31, 2020 and 2019, respectively, and is included in other long-term liabilities on the consolidated balance sheets. The weighted-average assumptions used in determining net periodic cost for the years ended December 31, 2020 and 2019 were a discount rate of 3.1 % and 4.2 % and an annual salary increase of 3.0 %.
During 2018, certain members of executive management of the Company that were participants in the SERP retired and met the requirements for payout of their SERP retirement benefit. The SERP payout provisions require payment to the participant in an actuarially determined lump sum amount six months after the participant retires from the Company. Such amounts were paid out of the rabbi trust. As required by the pension accounting rules in U.S. GAAP, the Company recognized a non-cash settlement loss of approximately $ 2 million during the year ended December 31, 2018. There were no settlement losses during the years ended December 31, 2020 and 2019.
The Company had assets of $ 243 million as of December 31, 2020, in a non-qualified plan trust generally designated to pay benefits of the deferred compensation plans and the SERP, consisting of equity securities of $ 95 million as of December 31, 2020, and company-owned life insurance contracts of $ 148 million as of December 31, 2020.
The Company had assets of $ 153 million as of December 31, 2019, in a non-qualified plan trust generally designated to pay benefits of the deferred compensation plans, consisting of equity securities of $ 23 million as of December 31, 2019, and company-owned life insurance contracts of $ 130 million as of December 31, 2019. The Company had equity securities in a rabbi trust generally designated to pay benefits of the SERP in the amount of $ 84 million as of December 31, 2019.
The Company maintains the CHS/Community Health Systems, Inc. Retirement Income Plan (“Pension Plan”), which is a defined benefit, non-contributory pension plan that covers certain employees at three of its formerly owned hospitals. The Pension Plan provides benefits to covered individuals satisfying certain age and service requirements. Employer contributions to the Pension Plan are in accordance with the minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended. The Company does not expect to make contributions to the Pension Plan in 2021. 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 Pension Plan. Variances from actuarially assumed rates will result in increases or decreases in benefit obligations, net periodic cost and funding requirements in future periods. Benefits expense under the Pension Plan was approximately $ 1 million during the year ended December 31, 2020 and less than $ 1 million for the years ended December 31, 2019 and 2018. The accrued benefit liability for the Pension Plan totaled $ 5 million and $ 12 million at December 31, 2020 and 2019, respectively, and is included in other long-term liabilities on the consolidated balance sheets. The weighted-average assumptions used for determining the net periodic cost for the year ended December 31, 2020 was a discount rate of 3.2 % and the expected long-term rate of return on assets of 6.0 %.
11. 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 December 31, 2020, may be issued in one or more series having such rights, preferences and other provisions as determined by the Board of Directors without approval by the holders of common stock.
The Company is a holding company which operates through its subsidiaries. The Company’s ABL Facility and the indentures governing each series of the Company’s outstanding notes contain various covenants under which the assets of the subsidiaries of the
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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Company are subject to certain restrictions relating to, among other matters, dividends and distributions, as referenced in the paragraph below.
The ABL Facility and the indentures governing each series of the Company’s outstanding notes 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 December 31, 2020, under the most restrictive test in these agreements (and subject to certain exceptions), the Company has approximately $ 200 million of capacity to pay permitted dividends and/or repurchase shares of stock or make other restricted payments.
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):
Year Ended December 31,
2020
2019
2018
Net income (loss) attributable to Community Health Systems,
Inc. stockholders
$
511
$
( 675
)
$
( 788
)
Transfers to the noncontrolling interests:
Net increase (decrease) in Community Health
Systems, Inc. paid-in-capital for
purchase of subsidiary partnership interests
3
3
( 4
)
Net transfers to the noncontrolling interests
3
3
( 4
)
Change to Community Health Systems, Inc.
stockholders’ deficit from net income (loss) attributable to
Community Health Systems, Inc. stockholders
and transfers to noncontrolling interests
$
514
$
( 672
)
$
( 792
)
12. EARNINGS PER SHARE
The following table sets forth the components of the denominator for the computation of basic and diluted earnings per share for net income (loss) attributable to Community Health Systems, Inc. common stockholders:
Year Ended December 31,
2020
2019
2018
Weighted-average number of shares outstanding — basic
115,491,022
113,739,046
112,728,274
Effect of dilutive securities:
Restricted stock awards
905,903
-
-
Employee stock options
122,785
-
-
Other equity-based awards
24,851
-
-
Weighted-average number of shares outstanding — diluted
116,544,561
113,739,046
112,728,274
The Company generated a loss attributable to Community Health Systems, Inc. common stockholders for the years ended December 31, 2019 and 2018, so the effect of dilutive securities is not considered because their effect would be antidilutive. If the Company had generated income during the years ended December 31, 2019 and 2018, the effect of restricted stock awards, employee stock options, and other equity-based awards on the diluted shares calculation would have been an increase in shares of 133,866 and 68,687 , respectively.
Year Ended December 31,
2020
2019
2018
Dilutive securities outstanding not included in the computation of earnings
per share because their effect is antidilutive:
Employee stock options and restricted stock awards
2,821,511
3,508,968
2,152,408
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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
13. EQUITY INVESTMENTS
As of December 31, 2020, the Company owned equity interests of 38.0 % in two hospitals in Macon, Georgia, in which HCA owns the majority interest. On December 31, 2016 , the Company sold 80 % of its ownership interest in the legal entity that owned and operated its home care agency business. As part of the divestiture of its controlling interest in the home care agency business, the Company recorded an equity method investment representing its remaining 20 % ownership. Since December 31, 2016 and primarily in conjunction with the divestiture of hospitals, the Company has divested of its remaining 20 % ownership in certain home care agency businesses.
In March 2005, the Company began purchasing items, primarily medical supplies, medical equipment and pharmaceuticals, under an agreement with HealthTrust Purchasing Group, L.P. (“HealthTrust”), a group purchasing organization in which the Company is a noncontrolling partner. As of December 31, 2020, the Company had a 13.9 % ownership interest in HealthTrust.
The Company’s investment in all of its unconsolidated affiliates was $ 190 million and $ 199 million at December 31, 2020 and 2019, respectively, and is included in other assets, net in the accompanying consolidated balance sheets. Included in the Company’s results of operations is the Company’s equity in pre-tax earnings from all of its investments in unconsolidated affiliates, which was $ 10 million, $ 15 million and $ 22 million for the years ended December 31, 2020, 2019 and 2018, respectively.
14. OTHER COMPREHENSIVE INCOME
The following tables present information about items reclassified out of accumulated other comprehensive loss by component for the years ended December 31, 2020 and 2019 (in millions, net of tax):
Change in
Fair Value of
Change in
Accumulated
Change in Fair
Available-for-Sale
Unrecognized
Other
Value of Interest
Debt
Pension Cost
Comprehensive
Rate Swaps (1)
Securities (1)
Components
(Loss) Income
Balance as of December 31, 2019
$
2
$
( 3
)
$
( 8
)
$
( 9
)
Other comprehensive (loss)
income before reclassifications
( 1
)
6
( 1
)
4
Amounts reclassified from
accumulated other
comprehensive (loss) income
-
( 2
)
( 6
)
( 8
)
Net current-period other
comprehensive (loss) income
( 1
)
4
( 7
)
( 4
)
Balance as of December 31, 2020
$
-
$
2
$
( 15
)
$
( 13
)
(1) Totals may not add due to rounding.
Change in
Change in
Accumulated
Change in Fair
Fair Value of
Unrecognized
Other
Value of Interest
Available-for-Sale
Pension Cost
Comprehensive
Rate Swaps
Debt Securities
Components
(Loss) Income
Balance as of December 31, 2018
$
5
$
( 7
)
$
( 8
)
$
( 10
)
Other comprehensive (loss)
income before reclassifications
( 3
)
5
( 1
)
1
Amounts reclassified from
accumulated other
comprehensive (loss) income
-
( 1
)
1
-
Net current-period other
comprehensive (loss) income
( 3
)
4
-
1
Balance as of December 31, 2019
$
2
$
( 3
)
$
( 8
)
$
( 9
)
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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables present a subtotal for each significant reclassification to net income (loss) out of AOCL and the line item affected in the accompanying consolidated statements of income (loss) for the years ended December 31, 2020 and 2019 (in millions):
Amount reclassified
from AOCL
Affected line item in the
Details about accumulated other
Year Ended
statement where net
comprehensive income (loss) components
December 31, 2020
income (loss) is presented
Amortization of defined benefit pension items
Prior service costs
$
( 1
)
Salaries and benefits
Settlement losses recognized
( 3
)
Salaries and benefits
( 4
)
Total before tax
10
Tax benefit
$
6
Net of tax
Amount reclassified
from AOCL
Affected line item in the
Details about accumulated other
Year Ended
statement where net
comprehensive income (loss) components
December 31, 2019
income (loss) is presented
Gains and losses on cash flow hedges
Interest rate swaps
$
-
Interest expense, net
-
Tax benefit
$
-
Net of tax
Amortization of defined benefit pension items
Prior service costs
$
( 1
)
Salaries and benefits
Settlement losses recognized
-
Salaries and benefits
( 1
)
Total before tax
-
Tax benefit
$
( 1
)
Net of tax
15. COMMITMENTS AND CONTINGENCIES
Construction and Other Capital Commitments. Pursuant to a hospital purchase agreement from our March 1, 2016 acquisition of Northwest Health - La Porte, formerly known as La Porte Hospital, and Northwest Health – Starke, formerly known as Starke Hospital, the Company is committed to build replacement facilities in both La Porte, Indiana and Knox, Indiana. Under the terms of such agreement, construction of the replacement hospital for Northwest Health - La Porte was required to be completed within five years of the date of acquisition, or March 2021 . The completion of the replacement facility for Northwest Health - La Porte in La Porte, Indiana, and transfer of operations, including renaming the hospital to Northwest Health – La Porte, was completed on October 24, 2020. In addition, construction of the replacement facility for Northwest Health - Starke is required to be completed within five years of the date the Company entered into a new lease with Starke County, Indiana, the hospital lessor, or in the event the Company does not enter into a new lease with Starke County, or is required to be completed by September 30, 2026 . The Company has not entered into a new lease with the lessor for Northwest Health - Starke and currently anticipate completing construction of the Northwest Health - Starke replacement facility in 2026. Construction costs, including equipment costs, for the Northwest Health - La Porte totaled approximately $ 126 million as of December 31, 2020. Construction costs for the Northwest Health - Starke replacement facility is currently estimated to be approximately $ 15 million.
Physician Recruiting Commitments. As part of its physician recruitment strategy, the Company provides income guarantee agreements to certain physicians who agree to relocate to its communities and commit to remain in practice there. Under such agreements, the Company is required to make payments to the physicians in excess of the amounts they earned in their practice up to the amount of the income guarantee. These income guarantee periods are typically for 12 months. Such payments are recoverable by the Company from physicians who do not fulfill their commitment period, which is typically three years , to the respective community. At December 31, 2020, the maximum potential amount of future payments under these guarantees in excess of the liability recorded is $ 17 million.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Professional Liability Claims. As part of the Company’s business of owning and operating hospitals, it is subject to legal actions alleging liability on its part. The Company accrues for losses resulting from such liability claims, as well as loss adjustment expenses that are out-of-pocket and directly related to such liability claims. These direct out-of-pocket expenses include fees of outside counsel and experts. The Company does not accrue for costs that are part of corporate overhead, such as the costs of in-house legal and risk management departments. The losses resulting from professional liability claims primarily consist of estimates for known claims, as well as estimates for incurred but not reported claims. The estimates are based on specific claim facts, historical claim reporting and payment patterns, the nature and level of hospital operations and actuarially determined projections. The actuarially determined projections are based on the Company’s actual claim data, including historic reporting and payment patterns which have been gathered over an approximate 20 -year period. As discussed below, since the Company purchases excess insurance on a claims-made basis that transfers risk to third-party insurers, the liability it accrues does include an amount for the losses covered by its excess insurance. The Company also records a receivable for the expected reimbursement of losses covered by excess insurance. Since the Company believes that the amount and timing of its future claims payments are reliably determinable, it discounts the amount accrued for losses resulting from professional liability claims using the risk-free interest rate corresponding to the timing of expected payments.
The net present value of the projected payments was discounted using a weighted-average risk-free rate of 1.8 %, 2.6 % and 3.1 % in 2020, 2019 and 2018, respectively. This liability is adjusted for new claims information in the period such information becomes known. The Company’s estimated liability for professional and general liability claims was $ 602 million and $ 612 million as of December 31, 2020 and 2019, respectively. The estimated undiscounted claims liability was $ 629 million and $ 663 million as of December 31, 2020 and 2019, respectively. The current portion of the liability for professional and general liability claims was $ 177 million and $ 169 million as of December 31, 2020 and 2019, respectively, and is included in other accrued liabilities in the accompanying consolidated balance sheets, with the long-term portion recorded in other long-term liabilities. Professional malpractice expense includes the losses resulting from professional liability claims and loss adjustment expense, as well as paid excess insurance premiums, and is presented within other operating expenses in the accompanying consolidated statements of income (loss).
The Company’s processes for obtaining and analyzing claims and incident data are standardized across all of its hospitals and have been consistent for many years. The Company monitors the outcomes of the medical care services that it provides and for each reported claim, the Company obtains various information concerning the facts and circumstances related to that claim. In addition, the Company routinely monitors current key statistics and volume indicators in its assessment of utilizing historical trends. The average lag period between claim occurrence and payment of a final settlement is between three and four years , although the facts and circumstances of individual claims could result in the timing of such payments being different from this average. Since claims are paid promptly after settlement with the claimant is reached, settled claims represent less than 1.0 % of the total liability at the end of any period.
For purposes of estimating its individual claim accruals, the Company utilizes specific claim information, including the nature of the claim, the expected claim amount, the year in which the claim occurred and the laws of the jurisdiction in which the claim occurred. Once the case accruals for known claims are determined, information is stratified by loss layers and retentions, accident years, reported years, geography and claims relating to the acquired HMA hospitals versus claims relating to the Company’s other hospitals. Several actuarial methods are used against this data to produce estimates of ultimate paid losses and reserves for incurred but not reported claims. Each of these methods uses company-specific historical claims data and other information. This company-specific data includes information regarding the Company’s business, including historical paid losses and loss adjustment expenses, historical and current case loss reserves, actual and projected hospital statistical data, a variety of hospital census information, employed physician information, professional liability retentions for each policy year, geographic information and other data.
Based on these analyses the Company determines its estimate of the professional liability claims. The determination of management’s estimate, including the preparation of the reserve analysis that supports such estimate, involves subjective judgment of the management. Changes in reserving data or the trends and factors that influence reserving data may signal fundamental shifts in the Company’s future claim development patterns or may simply reflect single-period anomalies. Even if a change reflects a fundamental shift, the full extent of the change may not become evident until years later. Moreover, since the Company’s methods and models use different types of data and the Company selects its liability from the results of all of these methods, it typically cannot quantify the precise impact of such factors on its estimates of the liability. Due to the Company’s standardized and consistent processes for handling claims and the long history and depth of company-specific data, the Company’s methodologies have produced reliably determinable estimates of ultimate paid losses. Management considers any changes in the amount and pattern of its historical paid losses up through the most recent reporting period to identify any fundamental shifts or trends in claim development experience in determining the estimate of professional liability claims. However, due to the subjective nature of this estimate and the impact that previously unforeseen shifts in actual claim experience can have, future estimates of professional liability could be adversely impacted when actual paid losses develop unexpectedly based on assumptions and settlement events that were not previously known or anticipated.
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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During the year ended December 31, 2020, the Company incurred expenses in the amount of approximately $ 50 million related to the settlement of a professional liability claim for which the Company’s third-party insurers’ obligation to provide coverage to the Company in connection with the underlying loss is being litigated. In the ordinary course of business, the Company’s expense with respect to professional liability claims, which is actuarially determined, is limited to amounts not covered by third-party insurance policies, which typically provide coverage for professional liability claims. The subject of the litigation for the recovery of the full amount of the $ 50 million settlement is whether the claim is covered under the subject policies. Aside from this matter, there were no significant changes in the Company’s estimate of the reserve for professional liability claims during the year ended December 31, 2020.
During the nine months ended September 30, 2019, the Company experienced a significant increase in the amounts paid to settle outstanding professional liability claims, compared to the same period in the prior year and to previous actuarially determined estimates. This increase in claims paid related to claims incurred in 2016 and prior years and was primarily related to divested hospitals. The settlement of these claims at amounts greater than the previously determined actuarial estimates resulted in the Company recording a $ 70 million change in estimate during the three months ended June 30, 2019, and an additional $ 20 million change in estimate during the three months ended September 30, 2019 based on updated actuarial estimates. No additional change in estimate related to these claims was recorded during the three months ended December 31, 2019.
The Company is primarily self-insured for these claims; however, the Company obtain excess insurance that transfers the risk of loss to a third-party insurer for claims in excess of our self-insured retentions. The Company’s excess insurance is underwritten on a claims-made basis. For claims reported prior to June 1, 2002, substantially all of the Company’s professional and general liability risks were subject to a less than $ 1 million per occurrence self-insured retention and for claims reported from June 1, 2002 through June 1, 2003, these self-insured retentions were $ 2 million per occurrence. Substantially all claims reported after June 1, 2003 and before June 1, 2005 are self-insured up to $ 4 million per claim. Substantially all claims reported on or after June 1, 2005 and before June 1, 2014 are self-insured up to $ 5 million per claim. Substantially all claims reported on or after June 1, 2014 and before June 1, 2018 are self-insured up to $ 10 million per claim. Substantially all claims reported on or after June 1, 2018 are self-insured up to $ 15 million per claim. Management, on occasion, has selectively increased the insured risk at certain hospitals based upon insurance pricing and other factors and may continue that practice in the future. Excess insurance for all hospitals has been purchased through commercial insurance companies and generally covers the Company’s for liabilities in excess of the self-insured retentions. The excess coverage consists of multiple layers of insurance, the sum of which totals up to $ 95 million per occurrence and in the aggregate for claims reported on or after June 1, 2003, up to $ 145 million per occurrence and in the aggregate for claims reported on or after January 1, 2008, up to $ 195 million per occurrence and in the aggregate for claims reported on or after June 1, 2010, and up to at least $ 215 million per occurrence and in the aggregate for claims reported on or after June 1, 2015. In addition, for integrated occurrence malpractice claims, there is an additional $ 50 million of excess coverage for claims reported on or after June 1, 2014 and an additional $ 75 million of excess coverage for claims reported on or after June 1, 2015 through June 1, 2020. The $ 75 million in integrated occurrence coverage will also apply to claims reported between June 1, 2020 and May 31, 2021 for events that occurred prior to June 1, 2020 but which were not previously known or reported . For certain policy years prior to June 1, 2014, if the first aggregate layer of excess coverage becomes fully utilized, then the self-insured retention will increase to $ 10 million per claim for any subsequent claims in that policy year until the Company’s total aggregate coverage is met. Beginning June 1, 2018, this drop-down provision in the excess policies attaches over the $ 15 million per claim self-insured retention.
Effective June 1, 2014, the hospitals acquired from HMA were insured on a claims-made basis as described above and through commercial insurance companies as described above for substantially all claims reported on or after June 1, 2014 except for physician-related claims with an occurrence date prior to June 1, 2014. Prior to June 1, 2014, the former HMA hospitals obtained insurance coverage through a wholly-owned captive insurance subsidiary and a risk retention group subsidiary which are domiciled in the Cayman Islands and South Carolina, respectively. Those insurance subsidiaries, which are collectively referred to as the “Insurance Subsidiaries,” provided (i) claims-made coverage to all of the former HMA hospitals and (ii) occurrence-basis coverage to most of the physicians employed by the former HMA hospitals. The employed physicians not covered by the Insurance Subsidiaries generally maintained claims-made policies with unrelated third party insurance companies. To mitigate the exposure of the program covering the former HMA hospitals and other healthcare facilities, the Insurance Subsidiaries bought claims-made reinsurance policies from unrelated third parties for claims above self-retention levels of $ 10 million or $ 15 million per claim, depending on the policy year.
Effective January 1, 2008, the former Triad hospitals were insured on a claims-made basis as described above and through commercial insurance companies as described above for substantially all claims occurring on or after January 1, 2002 and reported on or after January 1, 2008. Substantially all losses for the former Triad hospitals in periods prior to May 1, 1999 were insured through a wholly-owned insurance subsidiary of HCA, Triad’s owner prior to that time, and excess loss policies maintained by HCA. HCA has agreed to indemnify the former Triad hospitals in respect of claims covered by such insurance policies arising prior to May 1, 1999. From May 1, 1999 through December 31, 2006, the former Triad hospitals obtained insurance coverage on a claims incurred basis from HCA’s wholly-owned insurance subsidiary, with excess coverage obtained from other carriers that is subject to certain
126
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
deductibles. Effective for claims incurred after December 31, 2006, Triad began insuring its claims from $ 1 million to $ 5 million through its wholly-owned captive insurance company, replacing the coverage provided by HCA. Substantially all claims occurring during 2007 were self-insured up to $ 10 million per claim.
Legal Matters. 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 consolidated financial position or liquidity of the Company. However, in light of the inherent uncertainties involved in pending legal, regulatory and governmental matters, some of which are beyond the Company’s control, and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to the Company’s results of operations or cash flows for any particular reporting period.
With respect to all legal, regulatory and governmental proceedings, the Company considers the likelihood of a negative outcome. If the Company determines the likelihood of a negative outcome with respect to any such matter is probable and the amount of the loss can be reasonably estimated, the Company records an accrual for the estimated loss for the expected outcome of the matter. If the likelihood of a negative outcome with respect to material matters is reasonably possible and the Company is able to determine an estimate of the possible loss or a range of loss, whether in excess of a related accrued liability or where there is no accrued liability, the Company discloses the estimate of the possible loss or range of loss. However, the Company is unable to estimate a possible loss or range of loss in some instances based on the significant uncertainties involved in, and/or the preliminary nature of, certain legal, regulatory and governmental matters.
In connection with the spin-off of Quorum Health Corporation (“QHC”), the Company agreed to indemnify QHC for certain liabilities relating to outcomes or events occurring prior to April 29, 2016, the closing date of the spin-off, including (i) certain claims and proceedings that were known to be outstanding at or prior to the consummation of the spin-off and involved multiple facilities and (ii) certain claims, proceedings and investigations by governmental authorities or private plaintiffs related to activities occurring at or related to QHC’s healthcare facilities prior to the closing date of the spin-off, but only to the extent, in the case of clause (ii), that such claims are covered by insurance policies maintained by the Company, including professional liability and employer practices. Notwithstanding the foregoing, the Company is not required to indemnify QHC in respect of any claims or proceedings arising out of or related to the business operations of Quorum Health Resources, LLC at any time or QHC’s compliance with the corporate integrity agreement. Subsequent to the spin-off of QHC, the Office of the Inspector General provided the Company with written assurance that it would look solely at QHC for compliance for its facilities under the Company’s Corporate Integrity Agreement; however, the Office of the Inspector General declined to enter into a separate corporate integrity agreement with QHC.
Summary of Recorded Amounts
The table below presents a reconciliation of the beginning and ending liability balances (in millions) during the years ended December 31, 2020 and 2019, with respect to the Company’s determination of the contingencies of the Company in respect of which an accrual has been recorded. The liability as of December 31, 2020 is comprised of individually insignificant amounts for various matters.
Probable
Contingencies
Balance as of December 31, 2018
$
19
Expense
87
Reserve for insured claim
( 4
)
Cash payments
( 34
)
Balance as of December 31, 2019
68
Expense
14
Reserve for insured claim
11
Cash payments
( 82
)
Balance as of December 31, 2020
$
11
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. Due to
127
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 totaled $ 3 million, $ 21 million and $ 2 million during the years ended December 31, 2020, 2019 and 2018, respectively, and are included in other operating expenses in the accompanying consolidated statements of income (loss).
16. SUBSEQUENT EVENTS
The Company has evaluated all material events occurring subsequent to the balance sheet date for events requiring disclosure or recognition in the consolidated financial statements.
Divestitures:
On January 1, 2021, one or more affiliates of the Company completed the sale of substantially all of the assets of Lea Regional Medical Center ( 68 licensed beds) in Hobbs, New Mexico to affiliates of Covenant Health System pursuant to the terms of a definitive agreement which was entered into September 8, 2020. The net proceeds from this sale were received at a preliminary closing on December 31, 2020.
On January 1, 2021, one or more affiliates of the Company completed the sale of substantially all of the assets of each of Tennova Healthcare - Tullahoma ( 135 licensed beds) in Tullahoma, Tennessee and Tennova Healthcare – Shelbyville ( 60 licensed beds) in Shelbyville, Tennessee to Vanderbilt University Medical Center pursuant to the terms of a definitive agreement which was entered into September 30, 2020. The net proceeds from this sale were received at a preliminary closing on December 31, 2020.
On February 1, 2021, one or more affiliates of the Company completed the sale of substantially all of the assets of Northwest Mississippi Medical Center ( 181 licensed beds) in Clarksdale, Mississippi to affiliates of Delta Health System pursuant to the terms of a definitive agreement which was entered into October 30, 2020, as referenced above.
Financing Transactions:
On January 6, 2021, $ 30 million of the Company’s outstanding letters of credit of $ 150 million issued as of December 31, 2020 was cancelled in relation to a professional liability claim that was settled and funded in the three months ended December 31, 2020.
On January 28, 2021, the remaining principal amount of the 6¼ % Senior Secured Notes due 2023 of approximately $ 95 million was redeemed using proceeds from the issuance of the 5⅝ % Senior Secured Notes due 2027 and 6 % Senior Secured Notes due 2029 which was completed on December 28, 2020.
On January 29, 2021, the Company issued a notice of redemption to redeem on February 28, 2021 all of the 6⅞ % Secured Notes due 2022 then outstanding at a redemption price of 100 % of the principal amount thereof plus accrued and unpaid interest to, but not including, February 28, 2021.
On February 2, 2021 , the Company completed a private offering of $ 1.775 billion aggregate principal amount of 6⅞ % Junior-Priority Secured Notes due April 15, 2029 (the “6⅞% Junior-Priority Secured Notes due 2029”). The proceeds of the offering were used to redeem the 9⅞% Junior-Priority Secured Notes due 2023 via a tender offer which was funded on February 2, 2021, or to the extent not tendered, to fund the redemption of the remaining notes on February 4, 2021. The 6⅞% Junior-Priority Secured Notes due 2029 bear interest at a rate of 6⅞% per year payable semi-annually in arrears on April 15 and October 15 of each year, commencing on October 15, 2021. The 6⅞% Junior-Priority Secured Notes due 2029 are unconditionally guaranteed on a junior-priority secured basis by the Company and each of CHS’ current and future domestic subsidiaries that provide guarantees under the CHS’ ABL Facility, any capital market debt securities of CHS (including CHS’ outstanding senior notes) and certain other long-term debt of CHS.
The 6⅞ % Junior-Priority Secured Notes due 2029 and the related guarantees are secured by shared (i) second-priority liens on the Non-ABL Priority Collateral that secures on a first-priority basis the CHS’s senior-priority secured notes and (ii) third-priority liens on the ABL-Priority Collateral that secures on a first-priority basis the ABL Facility (and also secures on a second-priority basis CHS’s senior-priority secured notes), in each case subject to permitted liens described in the indenture governing the 6⅞ % Junior-Priority Secured Notes due 2029 .
128
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
At any time and from time to time prior to April 15, 2024 , CHS may redeem the 6⅞ % Junior-Priority Secured Notes due 2029 in whole or in part, at its option, upon not less than 15 nor more than 60 days’ prior written notice at a redemption price equal to 100 % of the principal amount of the 6⅞% Junior-Priority Secured Notes due 2029 to be redeemed plus accrued and unpaid interest, if any, plus a “make-whole” premium, as described in the indenture governing the 6⅞% Junior-Priority Secured Notes due 2029 . In addition, CHS may redeem up to 40 % of the aggregate principal amount of the 6⅞% Junior-Priority Secured Notes due 2029 at any time prior to April 15, 2024 using the net proceeds from certain equity offerings at a redemption price of 106.875 % of the principal amount of the 6⅞% Junior-Priority Secured Notes due 2029 redeemed, plus accrued and unpaid interest, if any.
At any time and from time to time on or after April 15, 2024 , CHS may redeem the 6⅞ % Junior-Priority Secured Notes due 2029 in whole or in part, upon not less than 15 nor more than 60 days’ prior written notice at a redemption price equal to the percentage of principal amount set forth below plus accrued and unpaid interest, if any, on the 6⅞% Junior-Priority Secured Notes due 2029 redeemed, to, but excluding, the applicable date of redemption, if redeemed during the twelve-month period beginning on April 15 of the years indicated below:
Period
Redemption Price
April 15, 2024 to April 14, 2025
103.438
%
April 15, 2025 to April 14, 2026
101.719
%
April 15, 2026 to April 14, 2029
100.000
%
On February 9, 2021 , the Company completed a private offering of $ 1.095 billion aggregate principal amount of 4¾ % Senior Secured Notes due February 15, 2031 (the “4¾% Senior Secured Notes due 2031 ”). The proceeds of the offering were used to redeem the 8⅝ % Senior Secured Notes due 2024 on February 9, 2021 . The 4¾% Senior Secured Notes due 2031 bear interest at a rate of 4¾% per year payable semi-annually in arrears on February 15 and August 15, commencing on August 15, 2021 . The 4¾% Senior Secured Notes due 2031 are unconditionally guaranteed on a senior-priority secured basis by each of CHS’ current and future domestic subsidiaries that provide guarantees under the ABL facility, any capital market debt securities of CHS (including CHS’ outstanding senior notes) and certain other long-term debt of CHS.
The 4¾% Senior Secured Notes due 2031 and the related guarantees are secured by shared (i) first-priority liens on the Non-ABL Priority Collateral and (ii) second-priority liens on the ABL Priority Collateral that secures on a first-priority basis the ABL Facility, in each case subject to permitted liens described in the indenture governing the 4¾% Senior Secured Notes due 2031.
CHS is entitled, at its option, to redeem all or a portion of the 4¾ % Senior Secured Notes due 2031 at any time prior to February 15, 2026 , upon not less than 15 nor more than 60 days’ notice, at a price equal to 100 % of the principal amount of the 4¾% Senior Secured Notes due 2031 redeemed plus accrued and unpaid interest, if any, plus a “make-whole” premium, as described in the indenture governing the 4¾% Senior Secured Notes due 2031 .
CHS may redeem up to 40 % of the aggregate principal amount of the 4¾ % Senior Secured Notes due 2031 at any time prior to February 15, 2024 using the net proceeds from certain equity offerings at a redemption price of 104.750 % of the principal amount of the 4¾% Senior Secured Notes due 2031 redeemed, plus accrued and unpaid interest, if any. In addition, any time prior to February 15, 2026, but not more than once during each twelve-month period , the issuer may redeem up to 10 % of the original aggregate principal amount of the 4¾% Senior Secured Notes due 2031 at a redemption price equal to 103 % of the principal amount of the 4¾% Senior Secured Notes due 2031 to be redeemed, plus accrued and unpaid interest, if any.
At any time and from time to time on or after February 15, 2026 , CHS may redeem the 4¾ % Senior Secured Notes due 2031 in whole or in part, upon not less than 15 nor more than 60 days’ prior written notice at a redemption price equal to the percentage of principal amount set forth below plus accrued and unpaid interest, if any, on the 4¾% Senior Secured Notes due 2031 redeemed, to, but excluding, the applicable date of redemption, if redeemed during the twelve-month period beginning on February 15 of the years indicated below:
Period
Redemption Price
February 15, 2026 to February 14, 2027
102.375
%
February 15, 2027 to February 14, 2028
101.583
%
February 15, 2028 to February 14, 2029
100.792
%
February 15, 2029 to February 14, 2031
100.000
%
129
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
17. CONDENSED FINANCIAL INFORMATION OF PARENT
Parent Company Only
Condensed Balance Sheet
(In millions)
December 31,
2020
2019
ASSETS
Prepaid income taxes
$
50
$
48
Total current assets
50
48
Deferred income taxes
59
38
Other assets, net
( 3
)
( 4
)
Total assets
$
106
$
82
LIABILITIES AND (DEFICIT) EQUITY
Intercompany payable
$
1,701
$
2,099
Deferred income taxes
29
200
Other long-term liabilities
1
1
Total liabilities
1,731
2,300
Community Health Systems, Inc. stockholders’ (deficit) equity:
Preferred stock
-
-
Common stock
1
1
Additional paid-in capital
2,094
2,008
Accumulated other comprehensive (loss) income
( 13
)
( 9
)
(Accumulated deficit) retained earnings
( 3,707
)
( 4,218
)
Total Community Health Systems, Inc. stockholders’ (deficit) equity
( 1,625
)
( 2,218
)
Total liabilities and (deficit) equity
$
106
$
82
See note to condensed financial statements of parent company.
130
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Parent Company Only
Condensed Statements of Income (Loss)
(In millions)
Year Ended December 31,
2020
2019
2018
Net operating revenues
$
-
$
-
$
-
Operating costs and expenses:
Salaries and benefits
-
-
-
Supplies
-
-
-
Other operating expenses
-
-
-
Government and other legal settlements and related costs
-
-
-
Electronic health records incentive reimbursement
-
-
-
Lease cost and rent
-
-
-
Pandemic relief funds
-
-
-
Depreciation and amortization
-
-
-
Impairment and (gain) loss on sale of businesses, net
-
-
-
Total operating costs and expenses
-
-
-
Income from operations
-
-
-
Interest expense, net
-
-
-
(Gain) loss from early extinguishment of debt
-
-
-
Equity in earnings of unconsolidated affiliates
( 511
)
675
788
Income (loss) before income taxes
511
( 675
)
( 788
)
(Benefit from) provision for income taxes
-
-
-
Net income (loss)
511
( 675
)
( 788
)
Less: Net income attributable to noncontrolling interests
-
-
-
Net income (loss) attributable to Community Health Systems, Inc. stockholders
$
511
$
( 675
)
$
( 788
)
See note to condensed financial statements of parent company.
131
COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Parent Company Only
Condensed Statements of Comprehensive Income (Loss)
(In millions)
Year Ended December 31,
2020
2019
2018
(In millions)
Net income (loss)
$
511
$
( 675
)
$
( 788
)
Equity in other comprehensive (loss) income of affiliates,
net of income taxes:
Net change in fair value of interest rate swaps, net of tax
( 1
)
( 3
)
20
Net change in fair value of available-for-sale debt securities, net of tax
4
4
( 2
)
Amortization and recognition of unrecognized pension cost
components, net of tax
( 7
)
-
( 1
)
Other comprehensive (loss) income
( 4
)
1
17
Comprehensive income (loss)
507
( 674
)
( 771
)
Less: Comprehensive income attributable to noncontrolling interests
-
-
-
Comprehensive income (loss) attributable to Community Health Systems,
Inc. stockholders
$
507
$
( 674
)
$
( 771
)
See note to condensed financial statements of parent company.
Parent Company Only
Condensed Statements of Cash Flows
(In millions)
Year Ended December 31,
2020
2019
2018
Cash flows from operating activities:
Net cash (used in) provided by operating activities
$
( 12
)
$
( 4
)
$
40
Cash flows from investing activities:
Net cash provided by (used in) investing activities
-
-
-
Cash flows from financing activities:
Repurchase of restricted stock shares for payroll tax withholding
requirements
( 1
)
( 1
)
( 1
)
Changes in intercompany balances with affiliates, net
13
5
( 39
)
Net cash provided by (used in) financing activities
12
4
( 40
)
Net change in cash and cash equivalents
-
-
-
Cash and cash equivalents at beginning of period
-
-
-
Cash and cash equivalents at end of period
$
-
$
-
$
-
See note to condensed financial statements of parent company.
1.
Basis of Presentation
Community Health Systems, Inc. (the “Parent Company”) is a holding company and operates no business in its own name; all of the Company’s business operations are conducted through subsidiaries of the Parent Company. The Company’s outstanding indebtedness restricts the ability of subsidiaries to dividend or otherwise provide funds to the Parent Company. Accordingly, these financial statements have been presented on a “parent-only” basis. Under parent-only presentation, the Parent Company’s investments in its consolidated subsidiaries are presented under the equity method of accounting. These parent-only financial statements should be read in conjunction with consolidated financial statements of Community Health Systems, Inc.
132
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.