September 30, 2016 Fiscal Year Financial Report (Audited Statements)

Bond Long Term Rating Standard and Poor’s AA/Stable FITCH Investors Service AA/Stable September 30, 2016 Fiscal Year Financial Report (Audited Statem...
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Bond Long Term Rating Standard and Poor’s AA/Stable FITCH Investors Service AA/Stable

September 30, 2016 Fiscal Year Financial Report (Audited Statements) Cone Health is an integrated health care delivery system based in Greensboro, NC serving Greensboro and the surrounding counties through a system of hospitals, ambulatory care centers, physician offices and other related health care facilities. The primary and secondary service areas have almost one million residents for which Cone maintains a dominant market presence.

OPERATIONS 6 Hospitals - 1,254 licensed beds 3 Ambulatory Surgery Centers 2 Nursing Homes – 221 beds 1 Continuing Care Retirement Community 3 Ambulatory Care campuses 149+ Outpatient facilities 1,400+ Medical Staff, 500 employed Over 12,000 employees Triad Healthcare Network – clinically integrated with over 875 affiliated physicians 40,000 member Medicare ACO

For the fiscal year ended September 30, 2016 the Health System’s consolidated operating income was $33.3M and a margin of 2.0% compared to operating income of $55.8M and a margin of 3.6% for fiscal year 2015. Excess of revenues over expenses were $59.8M and an excess margin of 3.5% compared to $46.0M and 2.9% for fiscal year 2015. Fiscal year 2016 continued the trend of higher outpatient volumes from fiscal year 2015, as net patient revenue increased 5.0% to $1,560.6M. Compared to fiscal year 2015, inpatient volume decreased slightly by 0.9% to 60,303 for the year while acute length of stay decreased by 0.06 to 4.12 days driven by decreased in case mix from 1.62 to 1.58. Salaries and wages increased in line with patient volume, but benefits increased by 14.42% representing a higher cost of employee health and other employee benefits. Depreciation expense increased 13.4% to $107.2M reflecting continued investment in facilities and information technology. Supplies expense increased 11.4% principally driven by supplies for intensive inpatient surgeries, surgical implants and drug expenses for high cost cancer treatments, employee and specialty pharmacies and industrywide inflation. Non-operating income (other income) improved by $37.9 million to positive $26.7 million reflecting improved realized gains on investments.

6,000 member Medicare Advantage Plan

Summary Statement of Operations ($000) Fiscal Year 2016 YTD Operating income $33,288 Operating Margin % 2.0% Operating EBIDA $151,667 Operating EBIDA Margin % 9.0% Excess of revenue over expenses $59,847 Excess Margin % 3.5% Change in Net Assets $62,562

Prior YTD $55,792 3.6% $161,611 10.5% $45,951 2.9% $-21,555

Surgical procedures increased slightly to 41,927 fiscal year to date, an increase of 317 procedures over last fiscal year. Emergency department visits were up 2.9% attributable to seasonal flu and respiratory cases. Physician services were up sharply, driven by a number of factors including increased volume at the Cancer Center, as well as an increased number of affiliated physicians. Operating Statistics Current Year 41,927 7,550 366,086 719,037

Surgical Procedures Deliveries ED Visits Outpatient Visits Physician Services Office Visits Physician Hospital Visits Procedures

Fiscal Year 2016 Prior year 41,610 7,401 355,753 702,606

700,799 210,658 453,516

663,653 199,677 432,808

% Variance 0.8% 2.0% 2.9% 2.3% 5.6% 5.5% 4.8%

Inpatient activity, measured by discharges, census and length of stay, was marginally below prior year, partially offset by increased acuity.

Hospital Statistics

Beds in Service Number of Inpatients (Discharges) Average Length of Stay Average Daily Acute Census Extended Care Census Long Term Care Census

Fiscal Year 2016 Actual 1,075 60,303 4.20 693 287 84.9

Prior year 1,154 60,848 4.28 713 275 84.9

% Variance -6.8% -0.9% 1.9% -2.9% 4.4% 0.0%

Balance Sheet liquidity ratios softened in the last quarter of the year driven by a small decline in long term investments, and investments in capital projects. Unrestricted cash and investments were essentially flat for the fiscal year. The fiscal year-to-date return on the system investment portfolio was a 4.8% gain as the portfolio value orientation and low equity exposure impacted performance. The small decline in day’s cash on hand was principally driven by strong growth in top line revenue and expenses.

Balance Sheet Summary of Key Metrics and Ratios as of September 30, 2016

Cash and long-term investment ($000) Days cash on hand Days in A/R Cash to debt Debt to capitalization Annual debt service coverage ratio

FY2016

Prior Qtr.

Change

FY2015

$902,933 215 54 186% 24.4% 7.08

$894,259 213 48 185% 24.8% 6.69

$8,674 1 6 1% 0% 0.41

$899,401 235 49 186% 25.2% 6.15

Debt Summary As of September 30, 2016 The following table shows debt under the Cone Master Trust Indenture, and excludes smaller direct loans and leases. Cone’s debt is rated AA/Stable by both Standard & Poor’s and FITCH Investors Service.

2001A 2001B

Outstanding Debt Series as of September 30, 2016 Principal($) Current Original Outstanding Rate Maturity(FY) 42,600,000 42,600,000 0.83% 2019 42,600,000 42,600,000 0.77% 2019

2004A 2011A

47,500,000 60,170,000

47,500,000 42,185,000

0.83% 4.42%

2017 2023

47,980,000 100,000,000 130,185,000 471,035,000

47,885,000 96,875,000 119,250,000 438,895,000

1.19% 1.04% 2.82%

2036 2021 2024

2011B 2011C & D 2013A, B & C

Interest Mode Weekly VRDB Daily VRDB

Weekly VRDB Fixed Rate Windows Mode Direct Placement Direct Placement

Rates include all related fees including remarketing, credit support and trustee. VRDB maturities are the renewal date of credit support. Direct placement maturities are the renewal date of rate agreements. The 2001 A&B bonds are swapped to maturity at a rate of 3.43%. The 2011B bonds are swapped to maturity at a rate of 2.097%.

The 2004A and 2011B bonds are supported with Cone Health’s liquidity that totaled $782 million at September 30, 2016, not including funds of the Cone Foundation and Impact Alamance Foundation. Two lines of credit totaling $97.5 million are also available to support outstanding indebtedness. The availability of Cone’s liquidity is shown in the following table. On October 6, 2016, Cone entered into a forward dated fixed rate swap to hedge interest on an expected debt issuance in 2018. The notional amount is $100 million, fixed rate of 1.336 versus 70% of 1 month LIBOR. On December 29, 2016, Cone executed a 30 year $50 million fixed rate loan at 4.33% with the proceeds being used to partially fund the shortfall in a closed defined benefit plan.

Cone Health Liquidity As of September 30, 2016 available to support debt payments and self-supported bond exposure (excluding Foundation assets) Funds Availability Type Deposits at Banks Bond Funds Equity Funds Other Funds Total Liquid Assets

Market Value (Millions) $24.4 $183.4 $246.9 $320.6 $775.3

Bank Lines of Credit Total Liquidity

$97.5 $872.8

1-Day $24.4 $63.0

Under 1-Week

Over 1-Week

$32.5 $119.8

$120.4 $62.6 $12.3 $195.3

$0 $184.3 $275.8 $460.2

$97.5 $217.3

$195.3

$460.2

$47.5 million in bank lines of credit are only available to support a failed remarketing of the 2004A bonds. The remaining $50 million line is available for general working capital purposes. In October 2015, Cone entered into an additional line of credit in the amount of $50 million to provide liquidity in the event that the adoption of ICD-10 coding on October 1st resulted in a temporary slowdown in receivables collection and decrease in available cash. This line was terminated in September 2016. The values of investments in the above chart are market values for Cone Health assets, not including foundation assets. The market values are higher than financial statement values because certain investments in the financial statements are carried at cost, not market value.

Contact Information John Miller CIO and Treasurer [email protected]

Andy Barrow VP Finance [email protected]

Ratio Methodology Long Term Debt Service Coverage Ratio Excess of Revenues + Depreciation+ Interest / Interest + Principal For interim periods, Excess of Revenues and Depreciation are annualized, Interest and Principal are estimated for the full year. Interest Expense includes remarketing, credit support, trustee fees and other related expenses. Days Cash on Hand Unrestricted Cash and Investments / Operating Expense less Depreciation For interim periods, the calculation is based on actual number of days in the period. Debt to Capital Ratio Short and Long Term Debt + Leases / Total Capitalization Total Capitalization is Short and Long Term Debt + Leases + Unrestricted Net Assets Max Annual Debt Service Coverage Ratio Same as the Long Term Debt Service Coverage Ratio, except the interest and principal is the largest scheduled debt service amount estimated for each future year. Variable rate debt is estimated using the 10 year average of SIFMA plus related expenses. Cash to Debt Ratio

Unrestricted Cash and Investments / Short and Long Term Debt + Leases

Cone Health Consolidated Balance Sheets

Assets Current Assets Cash Short-term investments Patient Receivables (net) (Note 1) Other Receivables Inventories Prepaid Expenses Other Current Assets Total Current Assets

Audited September 30, 2016

$

Plant and Property(net) Land and Land Improvements Building and Fixed Equipment Moveable Equipment Real Estate

Construction/Equipment In Progress Total Plant and Property (Note 2)

Other Non Current Assets Marketable Securities (Note 3) Joint Ventures (Note 4) Investment in Unrelated Parties Trustee held bond funds Subtotal Investments

Deferred Costs Other Assets Goodwill Total Other Non-Current Assets TOTAL ASSETS

$

Audited September 30, 2015

Liabilities and Net Assets

Audited September 30, 2016

Audited September 30, 2015

$

$

27,152,128 39,501,735 205,578,977 21,610,735 27,639,854 15,456,292 6,446,312 343,386,033

Current Liabilities Accrued Payroll Accounts Payable PAL & Retirement Medical Claims IBNR Bonds Payable (Note 5) Short Term Debt, Line of Credit (Note 5) Other Current Liabilities Total Current Liabilities

71,117,979 726,893,720 199,159,669 11,566,825 1,008,738,193

99,843,954 668,063,886 188,161,715 11,773,428 967,842,983

Debt and Other Liabilities Bonds Payable (Note 5) Long Term Debt (Note 5) Capital Lease Obligation Other Non-Current Liabilities

247,990,000 41,892,253 1,140,639 167,763,627

258,310,000 31,001,312 2,012,057 153,595,150

43,864,697 1,052,602,890

66,943,611 1,034,786,594

Total Liabilities

915,538,245

872,845,743

873,340,430 52,231,924 588,024 6,259,848 932,420,226

837,013,218 51,099,203 588,024 8,343,685 897,044,130

1,498,397,466 2,806,425 1,501,203,891

1,442,445,101 7,827,080 1,450,272,181

2,942,993 69,009,614 9,729,338 81,681,945

3,028,945 47,506,036 9,729,338 60,264,319

11,115,911 11,115,911

12,363,152 12,363,152

1,512,319,802

1,462,635,333

20,336,741 17,825,555 229,609,563 40,649,516 28,873,047 16,201,229 7,657,335 361,152,986

2,427,858,047

$

$

2,335,481,076

Net Assets Unrestricted Noncontrolling Interest Total Unrestricted Net Assets

Temporarily Restricted Total Restricted Net Assets Total Net Assets

TOTAL LIAB. AND NET ASSETS

$

73,340,792 65,004,630 33,184,629 4,652,201 12,100,000 181,438,191 87,031,283 456,751,726

2,427,858,047

$

75,548,269 57,151,214 31,472,387 12,459,931 181,014,193 70,281,230 427,927,224

2,335,481,076

Cone Health Consolidated Statements of Operations Audited YEAR-TO-DATE ACTUAL ACTUAL 9/30/16 9/30/15 REVENUE Patient Service Revenue (net of contractual allowances and discounts) Provision for bad debts (Note 1) Net Patient Service Revenue (Note 2)

$

1,696,542,593 135,932,650 1,560,609,943

$

Act./Act. % VAR

1,608,735,405 122,020,320 1,486,715,085

5.46% 11.40% 4.97%

Other Operating Revenue Premium Revenue (Note 5) TOTAL OPERATING REVENUES

75,977,406 41,706,094 1,678,293,443

59,099,006 1,545,814,091

28.56% 0.00% 8.57%

EXPENSE Salaries and Wages Fringe Benefits Purchased Personnel Medical Claims Expense (Note 5) Supplies Other Operating Expense Interest Expense Depreciation/Amortization TOTAL OPERATING EXPENSE

635,797,619 235,159,831 18,769,917 37,359,971 318,493,984 281,044,906 11,206,098 107,173,340 1,645,005,666

589,068,960 205,529,524 13,350,062 285,831,356 290,422,703 11,294,792 94,524,608 1,490,022,005

-7.93% -14.42% -40.60% -100.00% -11.43% 3.23% 0.79% -13.38% -10.40%

33,287,777

55,792,086

-40.34%

46,622,628 4,540,840 (24,465,708) 26,697,760

15,706,315 5,894,088 (32,830,741) (11,230,338)

196.84% -22.96% 25.48% -337.73%

59,985,537

44,561,748

INCOME FROM OPERATIONS (Note 6) OTHER INCOME Investment Income (Note 3) Joint Venture Income(Note 4) Other Expenses, Net (Note 4) Total Other Income (Note 6) EXCESS OF REVENUES OVER EXPENSE BEFORE MINORITY INTEREST (Note 6) Minority Interest Expense (Income)

138,926

EXCESS OF REVENUES OVER EXPENSE (Note 6) Change In Net Unrealized Gains and Losses on Investments (Note 3) Change In AOCI

INCREASE IN UNRESTRICTED NET ASSETS

$

(1,389,749)

34.61% -110.00%

59,846,611

45,951,497

30.2%

18,721,929 (16,006,923)

(57,845,868) (9,660,933)

132.37% -65.69%

62,561,617

(21,555,304)

-390.24%

Cone Health Consolidated Statement of Changes in Net Assets Audited September 30, 2016 UNRESTRICTED NET ASSETS: Excess of revenues over expenses from consolidated operations Change in net unrealized gains and losses on investments Change in the fair value of the floating-to-fixed swap agreement

$

Other changes in net assets

59,985,536 24,715,191 (5,993,262)

Audited September 30, 2015 $

44,561,749 (50,676,708) (7,169,160)

(27,775,755)

(15,214,314)

Increase in unrestricted net assets

50,931,710

(28,498,433)

TEMPORARILY RESTRICTED NET ASSETS: Other changes in net assets

(1,247,241)

1,442,946

Increase in temporarily restricted net assets

(1,247,241)

1,442,946

INCREASE IN NET ASSETS

$

49,684,469

$

(27,055,487)

Cone Health Consolidated Statements of Cash Flows Audited September 30, 2016 September 30, 2015 CASH FLOWS FROM OPERATING AND NON OPERATING ACTIVITIES CASH PROVIDED BY OPERATING ACTIVITIES Increase (Decrease) in net assets Adjustments to reconcile revenue and gains in excess of expenses and losses to net cash provided by operating activities: Change in net unrealized gains and losses on investments Change in fair value of the floating-to-fixed swap agreement Net realized (gains) on sale of investments Depreciation and amortization Provision for uncollectible accounts Accumulated or Other Comprehensive Income (FAS 158) Funding in excess of net periodic pension cost Loss on disposal of property and equipment Equity in earnings of unconsolidated entities Distributions from unconsolidated affiliates (Increase) Decrease in patient accounts receivable (Increase) Decrease in prepaids and other receivables (Increase) Decrease in inventory Increase (Decrease) in accounts payable and accrued expenses Purchase of Non-controlling interest Change in other operating assets and liabilities, net Net cash provided by operating activities and gains and losses

$

49,684,468

$

(24,715,191) 5,993,262 (31,340,034) 107,173,340 135,932,650 16,006,923 (4,322,387) 1,300,575 (4,540,840) 2,344,883 (159,963,237) (21,454,182) (1,233,193) 19,598,842 8,270,354 (21,167,585) $

CASH FLOWS FROM INVESTING ACTIVITY (Additions) to Property, Plant and Equipment Proceeds from sale of property and equipment Liquidation of trusted funds for capital expenditures Purchase of investments Proceeds from sale of investments Restriction of funds in Care-n-Care Inc Acquisition of physician practice Investments in unconsolidated affiliated entities

77,568,648

(27,055,487)

50,676,708 7,169,160 (2,347,044) 94,524,608 122,020,320 9,660,933 (4,582,492) 816,592 (5,894,089) 1,284,826 (138,592,279) 27,536,254 (965,026) 6,354,944 18,350,681 $

158,958,609

(121,960,437) (11,523) (199,847,584) 248,498,247 (4,703,190) 1,063,236

(108,630,944) 196,312 8,757,091 (397,599,324) 335,089,691 (829,186) (452,912)

(76,961,250)

(163,469,272)

27,927,704 (25,835,745) (8,270,354) (1,244,391)

(12,558,149) (1,596,197)

(7,422,786)

(14,154,346)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

(6,815,388)

(18,665,009)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

27,152,128

45,817,137

Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITY Proceeds from debt issuances Repayments of debt Purchase of Non-controlling interest Payments on capital lease obligations Net cash used in financing activities

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

20,336,740

$

27,152,128

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