TENET HEALTHCARE CORP quarterly report, Q2 FY2019

Tenet Healthcare Corporation — Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2019. Unless noted otherwise, amounts are in millions of dollars. Tenet operates hospitals and related services, ambulatory care facilities, and Conifer healthcare business-process services.

Financial performance and position

Metric	Q2 2019	Q2 2018	Six months 2019	Six months 2018
Net operating revenues	$4,560	$4,506	$9,105	$9,205
Operating income	$388	$406	$759	$923
Income from continuing operations, after tax	$110	$106	$167	$296
Net income available to Tenet common shareholders	$17	$26	$(2)	$125
Diluted EPS	$0.16	$0.25	$(0.02)	$1.21
Adjusted EBITDA (non-GAAP)	$657	$634	$1,270	$1,299
Adjusted EBITDA margin (non-GAAP)	14.4%	14.1%	13.9%	14.1%

• Q2 revenue rose 1.2%, supported by improved payer mix, higher acuity and managed-care pricing. Same-hospital revenue increased 5.9%, with admissions up 3.3%; total surgeries across continuing operations declined 4.1%, partly reflecting divestitures.
• For the first half, revenue fell 1.1%. Hospital Operations and other revenue was nearly flat, Ambulatory Care revenue declined 2.4%, and Conifer revenue declined 10.9%. Conifer’s third-party revenue was pressured by contract terminations associated with client-hospital sales.
• Operating margin was 8.5% in Q2 versus 9.0% a year earlier, and 8.3% for the half versus 10.0%. Same-hospital other operating expense rose, notably from malpractice, medical fees, software, and legal and consulting costs.
• Net cash from operating activities was $294 for the first half, versus $461 in 2018. Capital expenditures were $336 versus $268. Cash and cash equivalents were $249 at June 30, down from $411 at year-end.
• Total debt was $14,976, including $664 current; long-term debt net of current portion was $14,312. Net debt to trailing-twelve-month Adjusted EBITDA was 5.82x. The company reported $808 of revolver borrowing availability and $190 drawn; it was in compliance with credit-facility covenants.
• Current assets were $4,704 and current liabilities $4,150. Accounts receivable was $2,734. Receivables days outstanding were 58.4, above the company’s target of less than 55 days.

Material changes and unusual items

• First-half 2019 common-shareholder results included a $47 loss on early debt extinguishment. First-half 2018 results included $118 in net gains on facility sales and other consolidation changes; these items affect the year-over-year comparison.
• In February 2019, Tenet issued $1.5 billion of 6.25% secured second-lien notes due 2027 and used proceeds, cash and revolver borrowings to refinance or repay notes due 2019, 2020 and 2022.
• Tenet adopted the new lease standard in January 2019, recording $822 of operating lease right-of-use assets at adoption. At June 30, operating lease liabilities were $968 and finance lease liabilities were $355.
• Malpractice expense for the first half was $205 versus $163 in 2018. Changes in discount-rate assumptions also caused unfavorable malpractice reserve adjustments in 2019.
• Cash conversion weakened: management cited higher receivables days, $16 less in California provider-fee cash receipts, $17 more in restructuring, acquisition and litigation payments, and working-capital timing.

Outlook, management commentary and risks

• Management estimated 2019 capital expenditures of approximately $650–$700. No comprehensive earnings or revenue guidance is provided in the filing.
• Tenet announced in July 2019 its intention to pursue a tax-free Conifer spin-off, targeting completion by the end of Q2 2021. Completion, timing, tax treatment, separation terms and final board approval are uncertain. Management cautioned that separation could reduce Tenet’s earnings and cash flows.
• Management emphasized cost reduction, operational efficiency, hospital-system growth, ambulatory expansion and leverage reduction. It expects additional restructuring charges in the remainder of 2019.
• Healthcare reimbursement and regulatory uncertainty, payer negotiations, patient volumes and mix, collection performance, state Medicaid funding and provider-fee programs could affect results. CMS finalized an estimated 1.4% increase in Tenet’s annual Medicare inpatient payments (about $28), and proposed outpatient changes estimated by Tenet to add about $15 annually; both estimates are subject to uncertainty.
• Legal and regulatory matters include an ongoing DOJ investigation involving Detroit Medical Center and a qui tam action concerning an Oklahoma surgical hospital. The company remains subject to a non-prosecution agreement; noncompliance could result in penalties or exclusion from federal healthcare programs.
• After the purchasers of the Philadelphia hospitals entered bankruptcy in July 2019, a pension fund assessed approximately $63 of withdrawal liability against Tenet. Tenet disputes and intends to contest the assessment.
• Other exposures include self-insured professional-liability reserves of $897, physician-related guarantees with a maximum potential payment of $138 (with $112 accrued), and possible outcomes of litigation and investigations. Management says actual results may differ materially from estimates.

Investor verification priorities

• Track collections, receivables aging and AR days against the less-than-55-day target, and monitor whether operating cash flow recovers.
• Assess leverage, upcoming debt maturities, refinancing costs and the company’s ability to reduce its 5.82x net leverage ratio.
• Separate underlying operating trends from divestitures, the prior-year facility-sale gains, the 2019 debt-extinguishment loss and restructuring charges.
• Monitor same-hospital expense growth—especially malpractice costs—and whether revenue growth translates into improved operating margins.
• Verify progress and final terms of the proposed Conifer spin-off, including client retention, separation costs, tax-free status and effects on Tenet’s cash flows.
• Follow the $63 pension withdrawal-liability dispute, DOJ matters, NPA compliance and potential Medicare/Medicaid reimbursement changes.