Tenet Healthcare Corporation — Q2 2018 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2018. Tenet operated 68 hospitals, 21 surgical hospitals and approximately 470 outpatient centers in the U.S., plus nine U.K. facilities classified as held for sale. Its segments are Hospital Operations and other, Ambulatory Care (including USPI), and Conifer.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net operating revenues | $4.506 billion | $4.802 billion | $9.205 billion | $9.615 billion |
| Operating income | $406 million | $310 million | $923 million | $577 million |
| Operating margin | 9.0% | 6.5% | 10.0% | 6.0% |
| Net income attributable to Tenet common shareholders | $26 million | $(55) million | $125 million | $(108) million |
| Diluted EPS | $0.25 | $(0.55) | $1.21 | $(1.08) |
| Adjusted EBITDA (non-GAAP) | $634 million | $570 million | $1.299 billion | $1.097 billion |
| Adjusted EBITDA margin (non-GAAP) | 14.1% | 11.9% | 14.1% | 11.5% |
Cash flow and liquidity. Six-month operating cash flow was $461 million, versus $401 million a year earlier. Capital expenditures were $268 million, implying cash flow after capex of approximately $193 million. Investing activities provided $225 million, principally reflecting facility-sale proceeds; financing activities used $894 million, including $642 million for noncontrolling-interest purchases, primarily the USPI transaction. Cash and equivalents were $403 million at June 30, down from $611 million at year-end. The company reported $998 million available under its $1 billion revolving credit facility, with no cash borrowings outstanding.
Debt. Long-term debt was $14.867 billion, including $663 million current; cash-adjusted debt was approximately $14.464 billion. Management reported net debt to trailing Adjusted EBITDA of 5.76x, using its stated calculation that excludes certain California provider-fee revenue. All outstanding long-term debt carried fixed interest rates. Six-month interest expense was $509 million, and cash interest paid was $501 million.
Material changes versus prior period
- Reported revenue fell 6.2% in Q2 and 4.3% for the half year. The comparison reflects facility sales and closures, lower health-plan revenue and the 2018 adoption of ASC 606, which moved estimated uncollectible patient amounts largely from a separate doubtful-accounts provision to reductions of revenue. Tenet recorded $713 million of implicit price concessions as revenue reductions in the first half; reported revenue comparisons therefore are not directly like-for-like.
- Hospital Operations same-hospital revenue increased 3.1% in Q2 and 4.3% year to date, supported by managed-care pricing and California provider-fee revenue. Same-hospital admissions declined 2.3% in Q2 and 1.0% for the half year; Q2 adjusted admissions were nearly flat.
- Ambulatory Care revenue grew 12.5% in Q2 and 11.0% for the half year, reflecting same-facility growth and acquisitions. Conifer revenue declined 3.5% in Q2 and 1.5% year to date, while lower costs lifted its Adjusted EBITDA.
- Operating income included $118 million of net gains on facility sales and consolidations in the first half, including a $95 million MacNeal sale gain. Q2 included $8 million of net gains. These items materially contributed to reported operating-income improvement.
- In April, Tenet paid approximately $630 million to acquire an additional 15% of USPI and settle purchase-price adjustments, increasing its ownership to 95%.
Outlook, commentary, risks and unusual items
- Management targeted $250 million of annualized cost savings from enterprise-wide initiatives, with the full run rate anticipated by year-end 2018. It incurred $47 million of restructuring charges in the first half and expected further charges in the remainder of 2018.
- 2018 continuing-operations capital expenditures were forecast at approximately $625 million to $675 million. No consolidated earnings or revenue guidance was provided in the supplied filing text.
- Tenet was exploring a potential sale of Conifer. On July 18, 2018, it announced a definitive agreement to sell its three remaining Chicago-area hospitals and affiliated operations, subject to customary conditions and regulatory approvals; completion was expected in Q4 2018.
- CMS’s final FY2019 inpatient payment rule was estimated by Tenet to increase annual Medicare fee-for-service inpatient payments by about $40 million. Proposed 2019 outpatient rules were estimated to increase hospital outpatient revenue by about $3 million; both estimates were subject to uncertainty and rule changes.
- Risks include high leverage and substantial interest costs; payer collection and reimbursement uncertainty; dependence on Medicaid supplemental/provider-fee programs and state funding; healthcare regulation and volume pressures; labor negotiations, potential strikes and cost inflation; malpractice reserves; and ongoing litigation and government investigations. The DOJ extended Tenet’s Non-Prosecution Agreement by nine months, to November 1, 2020, following a reporting-obligation breach; Tenet stated it did not expect the extension to have a material effect. The filing warns that noncompliance with the agreement could lead to prosecution, penalties or exclusion from federal healthcare programs.
- Other notable items include $77 million of first-half impairment, restructuring and acquisition-related costs, and $19 million of litigation and investigation costs. The company expected adoption of the new lease standard in 2019 to materially affect its balance sheet.
Important facts for investors to verify
- Reconcile the revenue and bad-debt presentation across periods after ASC 606 adoption, including the scale and estimation of implicit price concessions.
- Assess whether same-hospital revenue growth and cost savings can persist amid declining admissions and outpatient visits, and separate recurring operating performance from sale gains and supplemental payments.
- Confirm completion, proceeds and final accounting for the Chicago-area sale and other divestitures; track the status of any Conifer sale process.
- Review leverage, refinancing needs, interest burden, liquidity and the cash impact of future USPI partner purchases, distributions and capital spending.
- Monitor Medicaid/provider-fee program approvals and collections, payer disputes and receivable aging, labor-contract negotiations, malpractice reserves, and legal or DOJ developments.