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CH

COMMUNITY HEALTH SYSTEMS INC (CYH)·Q3 2024 Earnings Summary

Executive Summary

  • Q3 2024 revenue was $3.090B (+0.1% YoY) with Adjusted EBITDA of $347M (11.2% margin), as higher same‑store volumes (+2.4% admissions, +2.6% adjusted admissions) were offset by lower surgical acuity, payer denials, and hurricane disruptions .
  • GAAP diluted EPS was $(2.95), pressured by a $267M non‑cash impairment and a $149M increase to professional claims liability; non‑GAAP adjusted diluted EPS was $(0.30), roughly in line with prior‑year adjusted EPS $(0.33) .
  • Guidance lowered: 2024 revenue to $12.45–$12.55B (from $12.50–$12.70B), Adjusted EBITDA to $1.50–$1.54B (from $1.52–$1.60B), and net cash from operations to $400–$500M (from $500–$650M), citing hurricanes, denials, and divestiture timing .
  • Key forward catalysts: CMS approval of Tennessee/New Mexico DPPs (management estimates ~$100–$120M net annual EBITDA, retroactive to 7/1/24 if approved), hurricane business‑interruption insurance recoveries (timing likely 2025), and completing ~$1B divestiture program at ~10x EBITDA multiples .
  • Operating discipline continued: contract labor fell to $41M (–24% YoY) and supplies per adjusted admission improved; however, case mix index fell ~60 bps and denials doubled QoQ, creating a ~$10M EBITDA headwind in Q3 .

What Went Well and What Went Wrong

What Went Well

  • Same‑store volume growth: admissions +2.4%, adjusted admissions +2.6% YoY; surgeries +3.1% (outpatient‑led). CEO: “same‑store volumes improved… 2.4% increase in admissions and a 2.6% increase in adjusted admissions… Surgeries improved 3.1%” .
  • Cost control momentum: contract labor down to $41M (–24% YoY, –$4M QoQ); supplies expense per adjusted admission down ~1.3% same‑store. CFO: “contract labor spend was down 24% YoY… to $41 million… supplies expense… down 1.3% per adjusted admission” .
  • Strategic investments drive volumes: new bed towers (North Knoxville, Baldwin County), new freestanding EDs, and acquisitions (Carbon Health urgent care Tucson) underpin growth. CEO: “All of these projects have resulted in immediate volume growth” .
  • Quality improvements: risk‑adjusted mortality index improved ~20% YoY (top quartile), CMS patient safety/adverse event composite improved ~24% (top 5%). Dr. Benet: “top quartile… top 5%… 27% YoY improvement in precursor safety events” .
  • Liquidity/funding: extinguished $143M of 5⅝% 2027 notes; liquidity available under ABL ($440M borrowing capacity). CFO: “extinguished approximately $143 million… more than adequate liquidity… ~ $440 million of borrowing capacity” .

What Went Wrong

  • Payer denials up sharply: approximate doubling of denials (majority in MA), ~$10M Q3 headwind; adjudication timelines slowing, pressuring cash collections into Q4/Q1. CFO: “approximate doubling of denials… ~$10 million headwind… slowdown in the adjudication process” .
  • Adverse mix/acuity: overall CMI down 60 bps; inpatient surgical acuity softer with continued site‑of‑care migration of total joints to ASCs and softness in elective spine/CVT/vascular .
  • Hurricanes Helene/Milton impacted late Q3/early Q4: ~$7M Q3 pre‑tax impact; Punta Gorda remains closed for Q4; further remediation costs expected; insurance proceeds expected in future periods (timing not in 2024) .
  • Non‑GAAP adjustments masked underlying GAAP weakness: $267M impairment and $149M professional liability accrual increase drove GAAP net loss; adjusted EPS was $(0.30) vs GAAP $(2.95) .

Financial Results

Consolidated Performance (Amounts USD)

MetricQ1 2024Q2 2024Q3 2024
Net Operating Revenues ($B)$3.140 $3.140 $3.090
Adjusted EBITDA ($M)$378 $387 $347
Adjusted EBITDA Margin (%)12.0% 12.3% 11.2%
Diluted EPS (GAAP) ($)N/A (not disclosed in transcript)$(0.10) $(2.95)
Diluted EPS, ex‑adjustments (non‑GAAP) ($)N/A (not disclosed in transcript)$(0.17) $(0.30)
Net Cash from Ops ($M)$96 $101 $67

Notes: Q1 EPS detail not available in the transcript; the company did not provide Q1 2024 EPS figures in the documents reviewed above.

Select YoY Indicators (Q3)

  • Revenue: $3.090B vs $3.086B (+0.1%) .
  • Adjusted EBITDA margin: 11.2% vs 11.7% (–50 bps) .
  • GAAP diluted EPS: $(2.95) vs $(0.69) (impairment + claims accrual) .

Mix and KPIs

KPI (Same‑Store unless noted)Q1 2024Q2 2024Q3 2024
Admissions YoY+3.8% +3.0% +2.4%
Adjusted Admissions YoY+1.9% +3.2% +2.6%
Surgeries YoY+0.4% +0.6% +3.1%
ED Visits YoY+3.4% +1.1% +0.8%
Case Mix Index (direction)N/AN/A–60 bps YoY
Inpatient % of Net Rev (Consol.)N/A47.1% 47.2%
Outpatient % of Net Rev (Consol.)N/A52.9% 52.8%

Non‑GAAP Drivers (Q3 2024)

  • Impairment and (gain) loss on sale of businesses, net: $267M .
  • Change in estimate for professional claims liability: $149M .
  • Adjusted EBITDA excludes these items per company definition .

Guidance Changes

MetricPeriodPrevious Guidance (7/24/24)Current Guidance (10/23/24)Change
Net Operating Revenues ($B)FY 2024$12.50 – $12.70 $12.45 – $12.55 Lowered
Adjusted EBITDA ($B)FY 2024$1.520 – $1.600 $1.500 – $1.540 Lowered
Net Loss per Share – Diluted ($)FY 2024$(0.45) – $(0.30) $(0.60) – $(0.50) Lowered
Net Cash from Ops ($M)FY 2024$500 – $650 $400 – $500 Lowered
Capex ($M)FY 2024$350 – $400 $350 – $400 Maintained
Weighted Avg Diluted Shares (M)FY 2024132 – 133 132 – 133 Maintained

Management cited hurricanes (Helene/Milton), payer denials, and the inclusion of announced divestitures as drivers of the reductions; >50% of the incremental Q4 EBITDA headwind is hurricane‑related, with denial impact similar to Q3 .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 & Q2 2024)Current Period (Q3 2024)Trend
Payer denials/2‑midnightDenials increasing; physician adviser program in place; still seeing MA/commercial scrutiny Approximate doubling of denials; ~$10M EBITDA headwind; adjudication slowing; majority MA; expanded appeals effort Worsening
Hurricanes/WeatherN/A~$7M Q3 impact; Punta Gorda closed in Q4; insurance proceeds expected in future periods (not 2024) New headwind
Volume/acuityStrong volumes, inpatient capacity additions; balanced inpatient/outpatient growth Same‑store admissions +2.4%; lower inpatient surgical acuity; case mix –60 bps; outpatient joints migrating to ASC Mixed
Labor/Contract LaborContract labor $48M in Q1; wage inflation ~3–4% Contract labor $41M; wage +3.9% YoY; anesthesia pressure persists Improving (cost), pressure in anesthesia
ERP/“Project Empower”Rollout progressing; supply chain insights emerging Financial/supply chain live portfolio‑wide; HR/payroll/time tools to complete Q1’25 Executing
Supplemental/Directed PaymentsMS Medicaid expansion benefits in 2H’23/1H’24 TN/NM DPP net EBITDA ~$100–$120M/yr expected if approved; retro to 7/1/24 possible Potential tailwind (2025)
Divestitures/Portfolio$1B program underway; Cleveland, TN announced at ~10x Two divestitures completed (8/1 & 10/1); $1B program on track; ~10x average multiples reiterated Advancing
Supply chain/IV fluidsN/ANo operational disruption from IV shortages; diversified sourcing and inventory mgmt Neutral

Management Commentary

  • CEO on volumes and storms: “same‑store volumes improved… 2.4% increase in admissions and a 2.6% increase in adjusted admissions… I especially want to express gratitude… during back‑to‑back hurricanes” .
  • CFO on denials: “we have experienced an approximate doubling of denials in the quarter… This resulted in an approximate $10 million headwind” .
  • CFO on DPPs: “aggregate EBITDA benefit of approximately $100 million to $120 million annually… net of provider taxes… potentially get 6 months… if CMS approves… in the fourth quarter” .
  • CFO on labor: “Average hourly wage rate increased 3.9%… Contract labor spend… declined… to $41 million” .
  • Dr. Benet on quality: “nearly 20% improvement in our risk‑adjusted mortality index… top quartile… nearly 24% improvement… top 5% of hospitals” .

Q&A Highlights

  • Guidance bridge: ~$18M of the ~$40M EBITDA cut tied to Q3 miss (incl. hurricane), remainder largely Q4 hurricane (Punta Gorda closure) and denials; revenue guidance trimmed ~$100M at midpoint, largely reflecting announced divestitures and storms/denials .
  • Denials scope: Broad‑based across payers, majority MA; appeals win‑rate ~25% for >2‑midnight cases; ~70% of 2024 initial denials not yet finally adjudicated .
  • DPP timing: Not in 2024 guidance pending CMS approval; retroactive 6 months possible if approved in Q4 .
  • Divestiture valuations: ~$1B proceeds at ~10x EBITDA on high single‑digit margin hospitals; leverage and margin profile expected to improve post‑sales .
  • 2025 setup: 2024 a reasonable “jump‑off point”; expect hurricane insurance recoveries and DPPs to support 2025; some divestiture mix effects and timing acknowledged .

Estimates Context

  • Wall Street consensus (S&P Global): We attempted to retrieve Q3 2024 revenue and EPS consensus but hit the S&P Global daily request limit and could not access the figures at this time. As a result, we cannot quantify beats/misses versus consensus for Q3 2024 in this report. Values would be retrieved from S&P Global if available.

Key Takeaways for Investors

  • Core demand resilient but mix softer: Same‑store volumes grew, yet lower surgical acuity and payer denials pressured revenue yield and EBITDA margin (–110 bps vs Q2), highlighting execution risk around mix and utilization management .
  • Transitory storm headwinds: ~$7M Q3 hit and a full‑quarter Q4 impact from Punta Gorda closure; insurance proceeds likely in 2025, creating potential non‑operating tailwinds next year .
  • Policy upside optionality: If TN/NM DPPs are approved, ~$100–$120M net annual EBITDA (potential 2H’24 retro) could offset denial/mix pressures and support 2025 trajectory .
  • Cost discipline gaining traction: Contract labor now $41M with ongoing productivity initiatives and ERP‑driven supply chain visibility—supporting medium‑term margin improvement despite anesthesia/medical specialist fee pressure .
  • Portfolio shaping at attractive multiples: ~$1B of divestitures at ~10x supports deleveraging and improves margin profile; watch timing of closings and working‑capital effects on cash flow .
  • 4Q setup: Management anticipates typical seasonal uptick, though denials likely persist near Q3 levels and hurricane effects will weigh; monitor MA denial trends and case‑mix recovery for near‑term trading .