Community Health Systems : Announces Fourth Quarter 2014 Results with Net Operating Revenues of $4.918 Billion

Community Health Systems, Inc. (NYSE: CYH) (the “Company”) today announced financial and operating results for the three months and year ended December 31, 2014.

Financial and statistical data reported in this earnings release includes Health Management Associates, Inc.’s (“HMA”) operating results from January 27, 2014, the date the Company completed its acquisition of HMA. Prior period consolidated results and statistical data reflect only the Company and its subsidiaries for the period prior to the HMA acquisition. Same-store operating results and statistical data include comparable information for hospitals acquired as a result of the HMA acquisition for the months of February through December 2014 and 2013.

Net operating revenues for the three months ended December 31, 2014, totaled $4.918 billion, a 54.1 percent increase compared with $3.191 billion for the same period in 2013. Income from continuing operations attributable to Community Health Systems, Inc. common stockholders increased to $129 million, or $1.12 per share (diluted), for the three months ended December 31, 2014, compared with income from continuing operations attributable to Community Health Systems, Inc. common stockholders of $38 million, or $0.40 per share (diluted), for the same period in 2013. The results for the three months ended December 31, 2014, include $0.01 per share (diluted) related to acquisition and integration expenses from the acquisition of HMA; $0.15 per share (diluted) of expenses related to government legal settlements and related costs (other than HMA legal proceedings underlying the contingent value rights, or “CVR,” agreement); and $0.09 per share (diluted) of expenses related to the impairment of long-lived assets at certain hospitals, with these expenses partially offset by $0.14 per share (diluted) of income from fair value adjustments, net of legal expenses, related to HMA legal proceedings underlying the CVR agreement. Excluding these expenses, income from continuing operations was $1.23 per share (diluted). Net income attributable to Community Health Systems, Inc. common stockholders was $0.87 per share (diluted) for the three months ended December 31, 2014, compared with net income of $0.30 per share (diluted) for the same period in 2013. Discontinued operations for the three months ended December 31, 2014, consisted of $0.01 per share (diluted) of losses from operations of entities sold or held for sale, and $0.24 per share (diluted) of expenses related to the impairment of long-lived assets held for sale for a total after-tax loss of approximately $29 million, or $0.25 per share (diluted). Weighted-average shares outstanding (diluted) were 115 million for the three months ended December 31, 2014, and 95 million for the three months ended December 31, 2013.

Adjusted EBITDA for the three months ended December 31, 2014, was $785 million compared with $459 million for the same period in 2013, representing a 71.0 percent increase.

The consolidated operating results for the three months ended December 31, 2014, reflect a 56.4 percent increase in total admissions, and a 58.2 percent increase in total adjusted admissions compared with the same period in 2013. On a same-store basis, admissions decreased 0.2 percent while adjusted admissions increased 2.7 percent compared with the same period in 2013. On a same-store basis, net operating revenues increased 4.7 percent compared with the same period in 2013.

Net operating revenues for the year ended December 31, 2014, totaled $18.639 billion, a 45.4 percent increase compared with $12.819 billion for the same period in 2013. Income from continuing operations attributable to Community Health Systems, Inc. common stockholders decreased to $149 million, or $1.32 per share (diluted), for the year ended December 31, 2014, compared with income from continuing operations attributable to Community Health Systems, Inc. common stockholders of $166 million, or $1.77 per share (diluted), for the same period in 2013. The results for the year ended December 31, 2014, include $0.38 per share (diluted) related to acquisition and integration expenses from the acquisition of HMA; $0.57 per share (diluted) of expenses related to government legal settlements and related costs (other than HMA legal proceedings underlying the CVR agreement); $0.40 per share (diluted) of expenses related to the loss from early extinguishment of debt; $0.22 per share (diluted) of expenses related to the impairment of long-lived assets; and $0.42 per share (diluted) of expenses related to accelerating amortization on software to be abandoned, with these expenses partially offset by $0.03 per share (diluted) of income from fair value adjustments, net of legal expenses, related to HMA legal proceedings underlying the CVR agreement. Excluding these expenses, income from continuing operations was $3.29 per share (diluted). Net income attributable to Community Health Systems, Inc. common stockholders was $0.82 per share (diluted) for the year ended December 31, 2014, compared with net income of $1.51 per share (diluted) for the same period in 2013. Discontinued operations for the year ended December 31, 2014, consisted of 0.07 per share (diluted) of losses from operations of entities sold or held for sale and approximately $0.44 per share (diluted) of expenses related to the impairment of long-lived assets held for sale, for a total after-tax loss of approximately $57 million, or $0.51 per share (diluted). Weighted-average shares outstanding (diluted) were 113 million for the year ended December 31, 2014, and 94 million for the year ended December 31, 2013.

Adjusted EBITDA for the year ended December 31, 2014, was $2.777 billion compared with $1.860 billion for the same period in 2013, representing a 49.3 percent increase.

The consolidated operating results for the year ended December 31, 2014, reflect a 43.7 percent increase in total admissions and a 47.3 percent increase in total adjusted admissions compared with the same period in 2013. On a same-store basis, admissions decreased 4.2 percent while adjusted admissions decreased 0.9 percent compared with the same period in 2013. On a same-store basis, net operating revenues increased 1.2 percent compared with the same period in 2013.

Adjusted EBITDA is EBITDA adjusted to exclude discontinued operations, loss from early extinguishment of debt, impairment of long-lived assets, net income attributable to noncontrolling interests, acquisition and integration expenses from the acquisition of HMA, expenses related to government legal settlements and related costs (other than HMA legal proceedings underlying the CVR agreement), and income from fair value adjustments, net of legal expenses, related to the HMA legal proceedings underlying the CVR agreement. Adjusted EBITDA as set forth herein is calculated in the same manner for the applicable 2014 and 2013 periods as ADJUSTED EBITDA in the Company’s preliminary release issued on January 20, 2015. For information regarding why the Company believes Adjusted EBITDA presents useful information to investors, and for a reconciliation of Adjusted EBITDA to net cash provided by operating activities, see footnote (f) to the Financial Highlights, Financial Statements and Selected Operating Data below.

Commenting on the results, Wayne T. Smith, chairman and chief executive officer of Community Health Systems, Inc., said, “We are pleased with our overall operating performance, capping off an exceptional year for the Company following the acquisition of HMA at the beginning of 2014. Since that time, we have worked hard to assimilate these additional hospitals, and we have made considerable progress in achieving our targeted operating synergies. We are pleased with the incremental improvement in operating revenues across our hospital network. We are also encouraged by more favorable volume trends, partly driven by a more severe flu season during the fourth quarter, and we will continue to focus on initiatives to improve our overall admissions.

“Overall, we delivered a solid performance for 2014, reflecting consistent execution of our proven operating strategy in our expanded hospital network. Community Health Systems has continued to demonstrate success in a dynamic and challenging healthcare environment. The Affordable Care Act has been a watershed event for healthcare providers with greater access to essential health services, and we expect to realize additional benefits from proposed policy initiatives to cover the uninsured in more of our hospital markets. We continue to execute on the fundamental aspects of our business strategy, recruiting qualified physicians, managing our costs, investing in technology, and, above all, focusing on the safety and quality of care in our hospitals. As we look ahead to 2015, we will pursue this same strategy to deliver value to both our shareholders and the communities we serve,” Smith concluded.

Included on pages 15, 16, 17 and 18 of this press release are tables setting forth the Company’s 2015 annual earnings guidance. The 2015 guidance is based on the Company’s historical operating performance, current trends and other assumptions that the Company believes are reasonable at this time.

Community Health Systems, Inc. is one of the largest publicly-traded hospital companies in the United States and a leading operator of general acute care hospitals in communities across the country. Through its subsidiaries, the Company currently owns, leases or operates 205 affiliated hospitals in 29 states with an aggregate of approximately 31,000 licensed beds. The Company’s headquarters are located in Franklin, Tennessee, a suburb south of Nashville. Shares in Community Health Systems, Inc. are traded on the New York Stock Exchange under the symbol “CYH.” More information about the Company can be found on its website at www.chs.net.

Community Health Systems, Inc. will hold a conference call on Friday, February 20, 2015, at 10:00 a.m. Central, 11:00 a.m. Eastern, to review financial and operating results for the three months and year ended December 31, 2014. Investors will have the opportunity to listen to a live internet broadcast of the conference call by clicking on the Investor Relations link of the Company’s website at www.chs.net. To listen to the live call, please go to the website at least fifteen minutes early to register, download and install any necessary audio software. For those who cannot listen to the live broadcast, a replay will be available shortly after the call and will continue to be available through March 20, 2015. Copies of the Company’s Current Report on Form 8-K (including this press release) and conference call slide show will be available on the Company’s website at www.chs.net.

Regulation FD Disclosure

The following tables set forth selected information concerning the Company’s projected consolidated operating results for the year ending December 31, 2015. These projections are based on the Company’s historical operating performance, current trends and other assumptions that the Company believes are reasonable at this time. The 2015 guidance should be considered in conjunction with the assumptions included herein. See pages 17 and 18 for a list of factors that could affect the future results of the Company or the healthcare industry generally.

The following is provided as guidance to analysts and investors:

The following assumptions were used in developing the 2015 guidance provided above:

• The Company’s projection excludes the following:
  • Payments related to the CVRs issued in connection with the HMA acquisition, and changes in the valuation of liabilities underlying the CVR;
  • Future losses on the early extinguishment of debt;
  • Impairment of long-lived assets;
  • Resolution of government investigations or other significant legal settlements; and
  • Other significant gains or losses that neither relate to the ordinary course of business nor reflect the Company’s underlying business performance.
• Excluded from these projections is one hospital required to be divested as part of receiving regulatory approval from the Federal Trade Commission for the HMA acquisition, which is expected to close in the first quarter of 2015. The Company has classified several other small hospitals as held for sale, and the operating results of these hospitals have been moved to discontinued operations, and have also been excluded from these projections.
• The 2015 projections include the acquisition of MetroHealth Hospital in Grand Rapids, Michigan, which is currently targeted to close during the middle of 2015, and assume the completion of one additional targeted hospital acquisition during 2015.

Other assumptions used in the above guidance:

• Benefits to Adjusted EBITDA from Healthcare Reform in 2015 of an additional $100 million to $175 million of net operating revenues before government deductions.
• Achievement of additional acquisition synergies related to the HMA acquisition of approximately $125 million to $150 million during 2015.
• Health Information Technology (HITECH) electronic health records incentive reimbursement of approximately 0.7% to 0.8% of net operating revenues for the year ended December 31, 2015, with operating expenses related to achieving meaningful use of 0.25% to 0.35% of net operating revenues.
• Continuation and approval of the California hospital provider fee program for 2015.
• For comparison purposes, 2014 earnings per share of $3.29, included a benefit from the reversal of a tax liability of approximately $0.08 per share (diluted) and the benefit of reduced amortization from the abandonment of software of $0.09 per share (diluted) which the Company does not anticipate recurring in 2015.
• Settlement of certain claims related to the BP oil spill, for which the Company now expects to recognize up to approximately $28 million in the second half of 2015.
• Same-store hospital annual adjusted admissions growth, of 0.0% to 2.0% for the entire year, which does not take into account service closures and weather-related or other unusual events.
• Expressed as a percentage of net operating revenues, depreciation and amortization of approximately 6.0% to 6.2% for 2015. Additionally, this is a fixed cost and the percentages may change as revenue varies. Such amounts exclude the possible impact of any future hospital fixed asset impairments and acceleration of amortization of software to be abandoned.
• Interest expense, expressed as a percentage of net operating revenues, of approximately 5.1% to 5.2%; however, interest expense is a fixed cost and percentages may vary as revenue varies. Total fixed rate debt, including swaps, is expected to average approximately 60% to 70% of total debt during 2015.
• Expressed as a percentage of net operating revenues, equity in earnings of unconsolidated affiliates of approximately 0.2% to 0.3% for 2015.
• Expressed as a percentage of net operating revenues, net income attributable to noncontrolling interests of approximately 0.6% to 0.7% for 2015.
• Expressed as a percentage of income from continuing operations before income taxes, provision for income tax of approximately 31.5% to 33% for 2015.
• Capital expenditures are projected as follows (in millions):

• Net cash provided by operating activities, excluding cash flows related to the CVR and settlement of legal contingencies, is projected as follows (in millions):

Cash provided by operating activities in 2015 will be negatively impacted by approximately $300 million, primarily from a reduction in tax refunds, and the timing of payroll payments, compared to the adjusted cash flows from operations of $1.822 billion in 2014.

• Weighted average shares outstanding are projected to be approximately 115 million to 116 million for the year ended 2015 have been adjusted to include the estimated dilutive impact from “in-the-money” stock options and restricted shares.

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995 that involve risk and uncertainties. All statements in this press release other than statements of historical fact, including statements regarding projections, expected operating results, and other events that depend upon or refer to future events or conditions or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “thinks,” and similar expressions, are forward-looking statements. Although the Company believes that these forward-looking statements are based on reasonable assumptions, these assumptions are inherently subject to significant economic and competitive uncertainties and contingencies, which are difficult or impossible to predict accurately and may be beyond the control of the Company. Accordingly, the Company cannot give any assurance that its expectations will in fact occur and cautions that actual results may differ materially from those in the forward-looking statements. A number of factors could affect the future results of the Company or the healthcare industry generally and could cause the Company’s expected results to differ materially from those expressed in this press release.

These factors include, among other things:

• general economic and business conditions, both nationally and in the regions in which we operate;
• implementation, effect of, and changes to adopted and potential federal and state healthcare reform legislation and other federal, state or local laws or regulations affecting the healthcare industry;
• the extent to which states support increases, decreases or changes in Medicaid programs, implement healthcare exchanges or alter the provision of healthcare to state residents through regulation or otherwise;
• risks associated with our substantial indebtedness, leverage, and debt service obligations;
• demographic changes;
• changes in, or the failure to comply with, governmental regulations;
• potential adverse impact of known and unknown government investigations, audits, and Federal and State False Claims Act litigation and other legal proceedings;
• our ability, where appropriate, to enter into and maintain managed care provider arrangements and the terms of these arrangements;
• changes in, or the failure to comply with, managed care provider contracts, which could result in, among other things, disputes and changes in reimbursements, both prospectively and retroactively;
• changes in inpatient or outpatient Medicare and Medicaid payment levels;
• the effects related to the continued implementation of the sequestration spending reductions and the potential for future deficit reduction legislation;
• increases in the amount and risk of collectability of patient accounts receivable;
• the efforts of insurers, healthcare providers and others to contain healthcare costs;
• our ongoing ability to demonstrate meaningful use of certified electronic health record technology and recognize income for the related Medicare or Medicaid incentive payments;
• increases in wages as a result of inflation or competition for highly technical positions and rising supply costs due to market pressure from pharmaceutical companies and new product releases;
• liabilities and other claims asserted against us, including self-insured malpractice claims;
• competition;
• our ability to attract and retain, at reasonable employment costs, qualified personnel, key management, physicians, nurses and other healthcare workers;
• trends toward treatment of patients in less acute or specialty healthcare settings, including ambulatory surgery centers or specialty hospitals;
• changes in medical or other technology;
• changes in U.S. generally accepted accounting principles;
• the availability and terms of capital to fund additional acquisitions or replacement facilities or other capital expenditures;
• our ability to successfully make acquisitions or complete divestitures;
• our ability to successfully integrate any acquired hospitals, including those of HMA, or to recognize expected synergies from acquisitions;
• the impact of the acquisition of HMA on third-party relationships;
• the impact of seasonal severe weather conditions;
• our ability to obtain adequate levels of general and professional liability insurance;
• timeliness of reimbursement payments received under government programs;
• effects related to outbreaks of infectious diseases, including Ebola;
• the impact of the external, criminal cyber-attack suffered by us in the second quarter of 2014, including potential reputational damage, the outcome of our investigation and any potential governmental inquiries, the outcome of litigation filed against us in connection with this cyber-attack, the extent of remediation costs and additional operating or other expenses that we may continue to incur, and the impact of future cyber-attacks or security breaches; and
• the other risk factors set forth in our other public filings with the Securities and Exchange Commission.

The consolidated operating results for the three months and year ended December 31, 2014, are not necessarily indicative of the results that may be experienced for any such future period. The Company cautions that the projections for calendar year 2015 set forth in this press release are given as of the date hereof based on currently available information. The Company undertakes no obligation to revise or update any forward-looking statements, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.