Tenet Healthcare Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Tenet operated 65 hospitals and more than 540 other healthcare facilities, alongside its Ambulatory Care and Conifer businesses. Unless noted, amounts are in millions of dollars.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net operating revenue | $4,781 | $4,520 | +5.8% |
| Operating income | $520 | $327 | +59.0% |
| Operating margin | 10.9% | 7.2% | +3.7 percentage points |
| Adjusted EBITDA (non-GAAP) | $777 | $585 | +32.8% |
| Adjusted EBITDA margin (non-GAAP) | 16.3% | 12.9% | +3.4 percentage points |
| Net income | $222 | $159 | +39.6% |
| Net income attributable to Tenet common shareholders | $97 | $93 | +4.3% |
| Diluted EPS | $0.90 | $0.88 | +$0.02 |
| Cash provided by operating activities | $534 | $129 | +$405 |
Revenue growth reflected higher acuity, a more favorable payer mix and USPI’s acquisition of the SurgCenter Development centers, partly offset by lower hospital volumes. Results included $31 million of grant income and $42 million of equity earnings from unconsolidated affiliates. Net income attributable to common shareholders was substantially below consolidated net income because $125 million was allocated to noncontrolling interests.
Cash, debt and liquidity
- Cash and cash equivalents were $2.141 billion at March 31, 2021, down from $2.446 billion at year-end 2020. Cash used in investing was $145 million; cash used in financing was $694 million.
- Total long-term debt, including current maturities, was $15.235 billion. Tenet repaid approximately $478 million principal of 7.0% notes due 2025 for about $495 million in cash, recording a $23 million early-extinguishment loss. Management said the repayment reduces annual cash interest by approximately $33 million.
- No cash was drawn on the $1.9 billion revolving credit facility at quarter-end; the full amount was reported available. Tenet reported compliance with credit and letter-of-credit facility covenants.
- Net debt to last-twelve-month Adjusted EBITDA was 3.92x; management said the ratio was temporarily affected by Medicare advances. The company’s stated long-term objective is to reduce debt and leverage.
- Medicare accelerated-payment advances were recorded as $857 million current and $639 million long-term contract liabilities. Recoupment began in April 2021, generally through payment offsets, with interest on unpaid balances after the 29-month period.
- Quarterly capital expenditures were $121 million. Management anticipated full-year 2021 continuing-operations capital expenditures of approximately $700 million to $750 million.
Changes versus the prior-year quarter
- Hospital volumes remained pressured: admissions fell 10.9%, adjusted admissions 13.7%, total emergency-department visits 26.2%, and surgeries 5.7%. Patient volumes continued to reflect COVID-19 impacts; revenue rose despite lower volumes, primarily due to acuity and payer mix.
- Hospital Operations revenue before intersegment eliminations rose 2.9%. Ambulatory Care revenue increased 31.8%, including $118 million from acquisitions; consolidated cases rose 10.5%. Conifer revenue fell 6.6%, with client attrition and revised intercompany contract terms contributing.
- Operating expenses increased 2.9% overall. Hospital malpractice expense rose; higher temporary labor, medical-supply costs, rent, and other costs were noted. Restructuring and acquisition-related charges declined to $20 million from $55 million, while litigation and investigation costs increased to $13 million from $2 million.
- Operating cash flow improved substantially, but the comparison included timing and working-capital effects, lower malpractice claim payments, higher California and Texas supplemental Medicaid inflows, and grant receipts.
Outlook, commentary and risks
- Tenet provided no specific company-wide earnings or revenue guidance in the filing. Management expected patient demand to rebound further but said the timing of recovery, particularly for lower-acuity services, remained uncertain.
- Management estimated proposed FY2022 Medicare inpatient payment changes would increase its annual Medicare fee-for-service IPPS payments by about 1.6%, or approximately $32 million, subject to final rules and other uncertainties. The extension of the 2% Medicare sequestration suspension was expected to add about $80 million of revenue in 2021.
- COVID-19 continued to affect patient volumes, labor availability and costs, PPE prices, supply chains, payer and service mix, and patient collections. Winter Storm Uri also affected operations in February.
- Tenet completed the sale of most MedPost and CareSpot urgent-care centers on April 30, 2021, for approximately $80 million net cash proceeds; it expected to recognize a gain in Q2. A new multi-year UnitedHealthcare contract was signed in April. The company continued exploring a tax-free Conifer spin-off, but stated there was no assurance it would be completed or on what timetable.
- Material uncertainties include an ongoing DOJ/U.S. Attorney investigation of Detroit Medical Center with potential exposure not determinable; healthcare litigation and regulatory inquiries; possible liability related to the Philadelphia pension fund; and professional-liability exposure. Professional and general liability reserves totaled $1.026 billion. Management warned adverse legal outcomes could materially affect a reporting period.
- Other sensitivities include payer reimbursement and Medicaid supplemental programs, receivable collectability, managed-care estimates, and possible impairment or further restructuring if operating projections are not achieved. The company disclosed no material changes to its annual-report risk factors.
Important facts for investors to verify
- Whether hospital volumes, acuity, payer mix and operating margins remain resilient as pandemic-related comparisons and support programs change.
- The cash-flow and liquidity effects of Medicare advance recoupments beginning in April 2021, alongside debt service, distributions and planned capital spending.
- Progress in reducing leverage, and the realized savings and costs from the 2025-note retirement and April 2021 credit-facility amendment.
- Final Medicare payment rules, the continuation and compliance requirements of grant programs, and the durability of supplemental Medicaid funding.
- Developments in the DMC investigation and other legal matters, including any change in estimated exposure or reserves.
- Execution and financial impact of the urgent-care sale, the UnitedHealthcare agreement, and any decision or conditions related to a Conifer separation.