Tenet Healthcare Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Dollar amounts are in millions unless stated otherwise. Tenet operated 65 hospitals and approximately 510 other healthcare facilities, alongside its USPI ambulatory-care business and Conifer services business. COVID-19 began materially affecting volumes and revenue in March; management said performance had been ahead of expectations through February.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net operating revenues | $4,520 | $4,545 |
| Operating income | $327 | $381 |
| Operating margin | 7.2% | 8.4% |
| Adjusted EBITDA | $585 | $623 |
| Adjusted EBITDA margin | 12.9% | 13.7% |
| Net income attributable to Tenet common shareholders | $93 | Loss of $12 |
| Diluted EPS | $0.88 | Loss of $0.11 |
| Cash from operating activities | $129 | $10 |
| Capital expenditures | $182 | $192 |
- Revenue declined 0.6% year over year. Operating income fell 14%; Adjusted EBITDA fell 6%. The EBITDA measure is non-GAAP and should be considered alongside GAAP results.
- Net income improved despite lower operating income, substantially reflecting a $75 income-tax benefit versus $20 of tax expense in Q1 2019. The benefit included a $91 benefit from reducing the valuation allowance on interest-expense carryforwards under the CARES Act.
- Operating cash flow was $129, while investing activities used $204, including $182 of capital spending and $55 for business or joint-venture acquisitions. Financing activities provided $426, including $500 of net revolving-credit borrowings. Cash increased to $613 from $262 at year-end.
- At March 31, total debt was $15,247, including $500 outstanding on the revolving facility; cash was $613. Reported net debt to last-twelve-month Adjusted EBITDA was 5.44x. Long-term debt, net of current portion, was $15,082. Shareholders’ deficit was $358, although total equity was $503 including noncontrolling interests.
- Current assets were $5,388 and current liabilities $4,095. Accounts-receivable days outstanding rose to 60.7 from 58.4 at year-end, above the company’s target of less than 55 days.
Material changes and operating trends
- Hospital Operations revenue before intersegment eliminations fell 0.7%; Conifer revenue fell 4.9%; Ambulatory Care revenue rose 2.1%. Conifer third-party revenue declined 3.4%, partly due to contract wind-downs and client terminations.
- Hospital admissions decreased 5.1%, adjusted admissions 5.6%, surgeries 7.4%, and emergency-department visits 2.5%. Ambulatory Care cases increased 0.9% for the quarter, though elective-focused centers were closed or operating reduced hours beginning in late March.
- Same-hospital net revenue increased 0.3%, supported by higher acuity and improved managed-care contract terms, but same-hospital admissions fell 4.5%. Salaries and supplies per adjusted admission rose 7.9% and 7.6%, respectively, amid lower volume, higher acuity, and increased supply costs. Malpractice expense declined $40 year over year.
- Restructuring, impairment and acquisition-related charges were $55, versus $19 a year earlier. The 2020 total included $23 related to termination of the USPI management equity plan and $15 for the Philippines Global Business Center.
Outlook, liquidity actions and risks
- Management expects service demand to rebound but said the duration and extent of the pandemic’s effects are unknown. It reduced planned 2020 capital spending by approximately 40%, forecasting $400–$450, furloughed some employees, deferred certain expenses and reduced variable costs. No earnings or revenue guidance is provided.
- After quarter-end, Tenet issued $700 of 7.5% senior secured first-lien notes due 2025; part of the proceeds repaid the $500 revolving-credit balance outstanding at March 31. On April 24, it increased revolving commitments from $1.5 billion to $1.9 billion, subject to borrowing availability. At March 31, reported availability was $999 and the company was in covenant compliance.
- Facilities received approximately $1.5 billion of Medicare accelerated payments in April. These are advances subject to later recoupment/repayment, unlike Provider Relief Fund payments. Tenet received approximately $225 of Provider Relief Fund payments and estimated another $145, for an estimated $370 in the general distribution, subject to program conditions. Management also estimated 2020 revenue increases of approximately $67 from suspension of Medicare sequestration and $60 from delaying Medicaid DSH reductions; these estimates are uncertain.
- COVID-19 risks include lost elective procedures and other visits, supply shortages and price increases, staffing constraints, worsening payer mix and collections, and potential COVID-related litigation. Management cautioned that prolonged economic disruption could affect liquidity and debt repayment.
- Other material matters include an Oklahoma qui tam resolution in principle for approximately $66, still subject to approvals and final documentation; an ongoing Detroit Medical Center investigation with exposure not estimable; and continuing obligations under a non-prosecution agreement. The previously reported $63 Philadelphia pension withdrawal assessment was withdrawn, but secondary liability may arise if the purchasers fail to pay.
- Two Memphis-area hospitals and related operations, with $394 of assets and $49 of liabilities classified as held for sale, were subject to a planned divestiture. Tenet continued to target a tax-free Conifer spin-off by the end of Q2 2021, subject to conditions and with no assurance it will occur.
- Tenet changed its accounting for professional and general liability reserves from discounted to undiscounted presentation, retrospectively recasting prior periods. It also adopted the credit-loss standard and recorded a $14 cumulative-effect increase to accumulated deficit.
Key facts investors should verify
- Subsequent-quarter patient volumes, elective procedure recovery, supply costs and the resulting effects on operating margins and cash collections.
- Actual receipt, permitted use and any recoupment obligations for government advances and relief funds, compared with management’s estimates.
- Liquidity and borrowing availability after the April financing transactions, together with debt maturities, interest costs and leverage.
- Final terms and timing of the Memphis divestiture and proposed Conifer separation.
- Resolution and financial exposure, if any, from the Oklahoma settlement, Detroit investigation, non-prosecution agreement and other litigation.
- Underlying earnings excluding the unusual tax benefit and restructuring costs, and reconciliation of non-GAAP Adjusted EBITDA to GAAP results.