Business context and reporting period
Tenet Healthcare Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2020. Tenet operated 65 hospitals and approximately 510 other healthcare facilities; its reportable segments are Hospital Operations, Ambulatory Care (USPI) and Conifer. Results were materially affected by the COVID-19 pandemic, including suspended elective procedures, reduced patient volumes and government relief.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net operating revenues | $3.648B | $4.560B | $8.168B | $9.105B |
| Grant income | $511M | — | $511M | — |
| Operating income | $471M | $400M | $798M | $781M |
| Net income | $169M | $121M | $328M | $193M |
| Net income attributable to Tenet common shareholders | $88M | $26M | $181M | $14M |
| Diluted EPS | $0.83 | $0.25 | $1.71 | $0.14 |
| Adjusted EBITDA (non-GAAP) | $732M | $669M | $1.317B | $1.292B |
- Q2 revenue fell 20.0% year over year; six-month revenue declined 10.3%. Reported Q2 operating margin was 12.9% versus 8.8%, and Adjusted EBITDA margin was 20.1% versus 14.7%. Both 2020 measures include substantial government grant income; they should not be read as underlying operating improvement without considering that support.
- Q2 same-hospital admissions fell 20.3%, surgeries 30.2%, emergency department visits 39.1% and outpatient visits 41.9%. Hospital Operations and Ambulatory Care were particularly affected by elective-procedure suspensions. Higher acuity and improved managed-care contract terms partly offset volume declines.
- Operating cash flow was $2.368B for the first half, compared with $294M a year earlier. The increase included $1.378B of Medicare advances, $674M of grant cash and an $89M payroll-tax deferral, as well as working-capital timing. Medicare advances are repayable; the filing says repayment is expected within a year.
- Cash and equivalents were $3.514B at June 30, up from $262M at year-end 2019. The balance sheet included $1.496B of current contract liabilities, primarily Medicare advances. Revolver availability was $1.757B, with no cash borrowings outstanding.
- Long-term debt, including current portion, was $15.888B, versus $14.751B at year-end. Net debt was approximately $12.4B based on reported cash. The company issued $700M of 7.5% first-lien notes due 2025 and $600M of 4.625% first-lien notes due 2028, and repurchased $135M principal of 2022 notes for $142M. Reported net-debt-to-Adjusted-EBITDA leverage was 4.49x, temporarily affected by Medicare advances.
- Current assets were $7.947B and current liabilities $5.585B. Shareholders’ deficit was $257M, while total equity including noncontrolling interests was $633M. Capital expenditures were $288M for the first half.
Material changes, outlook and risks
- COVID-19 reduced volumes and revenues and caused supply disruptions and higher prices, particularly for personal protective equipment. Tenet furloughed or reduced headcount, cut variable costs and reduced planned 2020 capital spending by about 40%.
- Management estimated 2020 continuing-operations capital expenditures of $400M–$450M. No specific earnings or revenue guidance is provided. Tenet said demand was expected to rebound, but the duration and extent of disruption were unknown.
- Tenet received $712M in federal and state grant cash in Q2, recognized $511M as grant income and deferred $163M of grant payments pending recognition. Relief funding is nonrepayable but subject to use, reporting and compliance conditions; estimates and eligibility may change.
- Management is targeting a tax-free Conifer spin-off by the end of Q2 2021, subject to tax, contractual, regulatory and board conditions; completion is not assured. Two Memphis-area hospitals and related operations remained classified as held for sale.
- Restructuring and acquisition-related charges were $109M for the first half, including $103M of restructuring charges. A $88M tax benefit from CARES Act changes to interest-deduction rules contributed to the first-half tax benefit; the company used the discrete tax method because annual income estimates were uncertain.
- Material uncertainties include further COVID-19 surges or restrictions, staffing and supply constraints, patient affordability and receivable collection, reliance on government programs, state Medicaid funding, and high leverage. Tenet also disclosed ongoing government investigations and litigation; the DMC investigation exposure could not be estimated. USPI paid the approximately $66M Oklahoma qui tam settlement in July 2020. The company is subject to a non-prosecution agreement and warns noncompliance could result in penalties or exclusion from federal healthcare programs.
- After quarter-end, on July 29, 2020, Tenet amended its letter-of-credit facility covenant, temporarily increasing the maximum secured-debt ratio and then providing for step-downs through December 2021.
Important facts for investors to verify
- How patient volumes, elective procedures and operating margins recover, and how results compare after removing temporary grant support.
- The timing and repayment mechanics for approximately $1.5B of Medicare advances, and compliance with grant conditions and audits.
- Cash conversion and receivable performance: AR days rose to 68.4 from 58.4 at year-end, above Tenet’s target of less than 55 days.
- Debt maturities, interest costs, covenant headroom and leverage after relief-related cash and EBITDA effects normalize.
- Whether the Memphis divestiture and proposed Conifer spin-off proceed on expected terms and timing, and the resolution of significant investigations and litigation.