Business context and reporting period
Tenet Healthcare Corporation’s Form 10-K covers the fiscal year ended December 31, 2017; it was filed February 26, 2018. Tenet operates hospital and outpatient networks, ambulatory-care facilities through its USPI joint venture, and Conifer healthcare business-process services. At year-end it reported 76 hospitals, 20 surgical hospitals and more than 470 outpatient centers in the United States, plus nine UK facilities. Two hospitals were subsequently divested.
Unless noted otherwise, amounts below are in U.S. dollars. Annual comparisons are 2017 versus 2016; selected fourth-quarter figures are identified separately.
Financial performance and key metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Net operating revenues before doubtful-account provision | $20.613 billion | $21.070 billion |
| Net operating revenues | $19.179 billion | $19.621 billion |
| Operating income | $1.113 billion | $1.247 billion |
| Operating margin | 5.8% | 6.4% |
| Adjusted EBITDA (non-GAAP) | $2.444 billion | $2.478 billion |
| Adjusted EBITDA margin (non-GAAP) | 12.8% | 12.9% |
| Net loss attributable to Tenet common shareholders | $704 million | $192 million |
| Net cash provided by operating activities | $1.200 billion | $558 million |
Interest expense was $1.028 billion, up from $979 million, and consumed about 92% of operating income. Tenet recorded a $164 million loss on early debt extinguishment, compared with none in 2016. Income tax expense was $219 million despite a $101 million pretax loss, including an estimated $252 million charge to revalue deferred tax assets following the federal corporate tax-rate reduction.
Cash and cash equivalents were $611 million at year-end, versus $716 million a year earlier. Working capital was $1.241 billion; long-term debt, net of current portion, was $14.791 billion. The company reported $998 million of revolver availability, no cash borrowings under the revolver, and net debt to Adjusted EBITDA of 5.86x. Capital expenditures were $707 million. The filing reports a $1.200 billion operating cash inflow; the increase from 2016 was attributed principally to $566 million less in payments on restructuring, acquisition and litigation reserves and to working-capital timing.
For fourth-quarter 2017, net operating revenues were $4.978 billion versus $4.860 billion in the prior-year quarter. Net loss attributable to common shareholders was $229 million versus $79 million.
Material changes versus the prior comparable period
- Consolidated net operating revenue declined 2.3%, while operating income fell 10.7% and Adjusted EBITDA decreased 1.4%.
- Same-hospital net operating revenue fell 1.8%; same-hospital admissions declined 2.0%, total surgeries declined 4.7%, and outpatient visits declined 2.6%. Outpatient revenue nevertheless rose 3.2%, supported by improved managed-care contract terms and higher revenue per visit.
- Hospital Operations and other segment Adjusted EBITDA decreased to $1.462 billion from $1.586 billion. Ambulatory Care Adjusted EBITDA increased to $699 million from $615 million, and Conifer’s increased to $283 million from $277 million.
- Ambulatory Care revenue grew 8.0%, largely from acquisitions. Conifer revenue was $1.597 billion, with third-party revenue growth attributed primarily to new clients.
- Impairment, restructuring and acquisition-related charges rose to $541 million from $202 million. Litigation and investigation costs fell to $23 million from $293 million; the 2016 amount included substantial Clinica de la Mama matter accruals. Gains on facility sales and consolidation were $144 million, versus $151 million.
- Tenet sold its Houston-area hospitals and related operations in August 2017 for approximately $750 million in net proceeds and recorded a $111 million gain. The Philadelphia-area hospital sale closed January 11, 2018; Tenet had recorded a $232 million impairment in 2017.
Outlook, management commentary, risks and unusual items
- Management targeted $250 million of annualized cost savings, primarily through workforce reductions, supplier and vendor contract renegotiations, and streamlining management and support functions; it expected the full run-rate by the end of 2018. Tenet recorded $42 million of employee-severance restructuring charges in the fourth quarter and expected additional charges in 2018.
- Tenet forecast 2018 capital expenditures of approximately $625 million to $675 million and annual interest expense of approximately $1.000 billion to $1.010 billion. It provided no specific earnings guidance in the supplied filing text.
- Management’s stated longer-term priority was to reduce leverage through cost management, growth in Adjusted EBITDA, more efficient capital allocation and potential asset sales. Tenet was exploring a possible Conifer sale, with no assurance a transaction would occur. The company also announced divestitures involving multiple hospitals and related operations.
- A Welsh Carson put notice for 7.5% of USPI was delivered in January 2018. Tenet estimated a 2018 payment of $285 million to $295 million, before potential true-ups, and could choose cash or shares as settlement.
- In the fourth quarter, the DOJ notified Tenet that it believed the company had breached its Non-Prosecution Agreement by not promptly reporting allegations and a document request concerning potential Stark Law, Anti-Kickback Statute and False Claims Act issues at Detroit Medical Center. In early 2018, DOJ said it would await a retrospective review before deciding on a remedy, did not intend to prosecute the underlying conduct for purposes of enforcing the breach provision, and would consider remedies short of prosecution. Tenet expected the review and discussions to continue into the second quarter of 2018 and did not expect the remedy to have a material effect.
- Key operating risks include changes to the Affordable Care Act and insurance coverage, Medicare and Medicaid reimbursement and supplemental-payment programs, managed-care pricing and collection delays, competition and falling hospital volumes, labor costs and staffing shortages, and the company’s substantial debt and covenant requirements. Managed-care payers represented 61.7% of hospital net patient revenue before doubtful accounts; the top ten payers generated approximately 64% of managed-care revenue.
- Other significant exposures include the independent compliance monitor and NPA obligations, pending legal and regulatory matters, self-insured malpractice liabilities, and possible additional impairments. Tenet recorded $402 million of impairment charges in 2017, including charges related to Philadelphia, Chicago-area and Aspen assets. The company estimated $854 million of professional and general liability reserves at year-end.
Most important facts for investors to verify
- Whether the $250 million cost-savings target was achieved by the end of 2018, and the associated implementation and severance costs.
- Actual proceeds, closing dates and remaining obligations from announced hospital and Aspen divestitures, and whether Conifer was sold or retained.
- Cash funding or share settlement of the USPI put, final purchase price true-ups, and the impact on leverage and liquidity.
- Progress and outcome of the DOJ’s retrospective review and any remedy arising from the alleged NPA reporting breach.
- Hospital volume trends, payer mix, collection performance and the sustainability of state supplemental-payment revenue.
- Debt maturities, interest costs, covenant compliance and progress toward reducing the reported 5.86x net leverage ratio.