Tenet Healthcare Corporation — FY2020 Form 10-K
Reporting period: Year ended December 31, 2020. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 results are noted separately below. Dollar amounts are in U.S. dollars.
Business context and reporting period
Tenet is a diversified healthcare services company operating three segments: Hospital Operations, Ambulatory Care (USPI) and Conifer. At year-end, it operated 65 hospitals and more than 550 other healthcare facilities. Tenet owned approximately 95% of USPI and 76.2% of Conifer. COVID-19 materially affected all three segments, particularly patient volumes and elective procedures.
Financial and operating performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net operating revenues | $17.640 billion | $18.479 billion |
| COVID-related grant income | $882 million | None reported |
| Operating income | $1.989 billion | $1.537 billion |
| Interest expense | $1.003 billion | $985 million |
| Net income available to Tenet common shareholders | $399 million | Net loss of $215 million |
| Diluted earnings (loss) per share | $3.75 | $(2.08) |
| Adjusted EBITDA (non-GAAP) | $3.146 billion | $2.730 billion |
| Adjusted EBITDA margin (non-GAAP) | 17.9% | 14.8% |
| Net cash from operating activities | $3.407 billion | $1.233 billion |
| Capital expenditures | $540 million | $670 million |
| Cash and cash equivalents at year-end | $2.446 billion | $262 million |
Operating cash flow benefited substantially from approximately $1.4 billion of Medicare advances, $900 million of cash grants and a $260 million payroll-tax deferral. The Medicare advances are repayable; grants are subject to program requirements. Year-end total long-term debt was approximately $15.7 billion. The company reported $1.9 billion available under its revolving credit facility, with no cash borrowings outstanding. Its reported net-debt-to-Adjusted-EBITDA ratio was 4.22x and was temporarily affected by Medicare advance cash.
Selected Q4: Net operating revenues were $4.915 billion versus $4.806 billion in Q4 2019. Net income was $546 million and income available to common shareholders was $414 million, compared with $124 million and a $3 million loss, respectively, in Q4 2019. Q4 2020 included substantial grant income.
Material changes versus the prior comparable period
- Annual net operating revenues fell 4.5%, mainly due to pandemic-related volume declines. Hospital Operations same-hospital admissions declined 11.6%, outpatient visits declined 19.4%, and total surgeries declined 14.6%.
- Operating income rose to $1.989 billion, with $882 million of recognized grant income contributing materially. Adjusted EBITDA and margin also increased; these non-GAAP measures should be considered alongside GAAP results.
- Hospital Operations same-hospital net operating revenues declined 4.5%. Higher acuity, a more favorable payer mix and improved managed-care contract terms partly offset lower volumes.
- Ambulatory Care revenue declined 4.0%; same-facility revenue and cases were down 5.6% and 10.0%, respectively. Acquisitions partly offset the decline. Conifer revenue declined 4.8%, affected by client volume declines and hospital divestitures.
- Operating cash flow increased sharply, but the comparison reflects temporary pandemic-related advances, grants and tax deferrals. Capital spending was reduced from 2019.
- Tenet issued new debt and redeemed or repurchased 2022 notes, recording a $316 million loss on early extinguishment of debt in 2020. Management said these transactions removed significant maturities until June 2023 and reduced expected annual cash interest by about $50 million.
Outlook, management commentary, risks and unusual items
- Management reported gradual volume improvement from May 2020 but said pandemic effects continued and their duration and extent remained uncertain. The filing provides no numerical earnings or revenue guidance.
- Management expected 2021 capital expenditures of approximately $700–$750 million and interest payments of approximately $920–$930 million.
- In December 2020, Tenet agreed to sell 87 urgent care centers, subject to approvals and closing conditions, and expected completion in Q1 2021. It also acquired controlling interests in 45 ASCs for approximately $1.115 billion.
- Tenet continued to pursue a tax-free Conifer spin-off, conditional on tax, contractual, financing, SEC filing and board-approval requirements; timing and completion were uncertain. Conifer revenue was substantially dependent on Tenet and CHI relationships.
- COVID-related risks included reduced patient volumes, higher temporary labor and supply costs, staffing shortages, supply disruptions, potential deterioration in collections, and uncertainty over further relief. HHS grant reporting rules could affect the amount of grant income Tenet may retain.
- Other material exposures include approximately $15.7 billion of debt, significant interest expense, managed-care payer concentration, reimbursement and regulatory changes, cybersecurity threats, self-insured liability claims and ongoing litigation or investigations. A DOJ investigation concerning Detroit Medical Center remained unresolved; the Oklahoma qui tam settlement was paid and resolved in 2020.
- Tenet recorded $290 million of impairment, restructuring and acquisition-related charges, including $92 million of impairments and $184 million of restructuring charges. It also recorded a $97 million income tax benefit, including effects from changes in valuation allowances and tax treatment of interest expense.
- The financial-statement and internal-control audit opinions were unqualified. Management and the auditor excluded the newly acquired 45 SCD Centers from the year-end internal-control assessment; those centers represented about 6% of assets and less than 1% of annual revenue.
Most important facts for investors to verify
- How much of earnings and cash flow reflects recurring operations versus grants, Medicare advances and payroll-tax deferrals—and the timing and source of repayments.
- Whether patient volumes, case mix, labor costs and supply costs normalize, and whether 2020 grant-supported margins are sustainable.
- Debt maturities, refinancing costs, covenant headroom and progress toward reducing leverage; confirm the status and terms of the announced 2021 note redemption.
- Completion, proceeds and financial effects of the urgent-care sale and the integration and returns of the ASC acquisitions.
- Whether the Conifer spin-off proceeds, and how separation terms, client concentration and cash flows would affect Tenet.
- Developments in the DMC investigation, HHS grant compliance, payer disputes and other legal or regulatory matters.