Tenet Healthcare Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Dollar amounts are in millions unless stated otherwise. Tenet operates hospitals and other healthcare facilities, ambulatory-care businesses including USPI and Aspen, and Conifer healthcare business-process services.
Key financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net operating revenues | $5,044 | $4,424 |
| Operating income | $347 | $290 |
| Adjusted EBITDA | $613 | $529 |
| Adjusted EBITDA margin | 12.2% | 12.0% |
| Net income (loss) attributable to Tenet common shareholders | $(59) | $47 |
| Diluted earnings (loss) per share | $(0.60) | $0.47 |
| Operating cash flow | $147 | $(57) |
- Revenue before doubtful-account provision was $5,420, up 13.2%. Net revenue growth reflected acquisitions, higher outpatient volumes and improved managed-care pricing. The provision for doubtful accounts was $376; net revenue after provision was $5,044.
- Operating income included $147 of gains on facility sales and consolidation/deconsolidation, and $173 of litigation and investigation costs. Interest expense rose to $243 from $199. Income tax expense was $67 on $105 of pretax continuing-operations income.
- Consolidated net income was $34, but $93 was attributable to noncontrolling interests, resulting in a $59 loss attributable to Tenet common shareholders. Ambulatory Care accounted for $75 of noncontrolling-interest income, including gains associated with USPI ownership changes.
- Cash from investing activities was $320, including $573 of proceeds from facility and other asset sales; capital expenditures were $208. Financing activities used $95. Cash and cash equivalents ended the quarter at $728, versus $356 at year-end 2015.
- Total long-term debt was $14,522, including its current portion. Net debt to trailing-12-month Adjusted EBITDA was 5.68x. Tenet reported no cash borrowings under its revolving credit agreement and $996 of borrowing availability; $139 of standby letters of credit were outstanding under a separate LC facility.
- At March 31, current assets were $5,129 and current liabilities $4,268. Accounts receivable, net, was $2,807; AR days were 50.6, within the company’s target of fewer than 55 days.
Material changes and business developments
- Compared with Q1 2015, reported revenue rose 14.0% and Adjusted EBITDA rose 15.9%. Results include acquisitions and changes in the portfolio, so reported growth is not wholly comparable organically.
- Same-hospital net operating revenue increased 6.5%; adjusted admissions rose 2.2%, outpatient visits 5.2%, and same-hospital outpatient revenue 8.6%. Management cited higher-acuity volumes, outpatient growth, improved managed-care contract terms and physician alignment.
- Ambulatory Care revenue was $429 versus $91, primarily reflecting the USPI and Aspen acquisitions completed in June 2015. Conifer revenue was $385 versus $342, with growth attributed in part to new clients. Hospital Operations and other revenue was $4,397 versus $4,151.
- Tenet completed the sale of its Atlanta-area hospitals and 26 physician clinics on March 31, recognizing a pretax gain of approximately $113. It also formed North Texas hospital joint ventures with Baylor Scott & White, which holds majority ownership.
- After quarter-end, Tenet paid approximately $127 to acquire additional USPI shares under a partner put notice, increasing its ownership to approximately 56.3%.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Tenet estimated 2016 continuing-operations capital expenditures of approximately $850–$900. Management described strategies focused on outpatient growth, cost control, Conifer expansion, physician alignment and portfolio optimization.
- Management cautioned that quarterly results may not indicate full-year performance. Key uncertainties include patient volumes and payer mix, reimbursement and Medicaid supplemental funding, collection experience, managed-care contracting, labor costs, malpractice claims, acquisitions and divestitures, and regulatory changes. Managed-care pricing improvement had moderated, and management said moderation could continue.
- Material legal contingency: Tenet increased its accrual for the Clinica de la Mama qui tam action and related DOJ criminal investigation from $238 to $407. Its April 25 settlement offer was not accepted; discussions continued. Tenet said a resolution could require significant additional payments, compliance oversight or other consequences, and that reasonably possible losses above the accrual could not be estimated. An adverse outcome could materially affect results, cash flow or participation in federal healthcare programs.
- Other notable items include $28 of impairment, restructuring and acquisition-related costs; an unfavorable malpractice-reserve adjustment associated with a lower discount rate; and the Georgia sale gain. The company reported compliance with credit-facility covenants and no material change to its previously disclosed risk factors.
Important facts for investors to verify
- Developments in the Clinica de la Mama matter, the adequacy of the $407 accrual, and any potential additional monetary or nonmonetary consequences.
- How much reported growth and EBITDA reflects acquisitions, portfolio changes, facility-sale gains and consolidation accounting versus ongoing operating performance.
- Whether operating cash flow, receivables collections and Medicaid supplemental-program receipts are sustainable, and how the $850–$900 capital-spending estimate is funded.
- Debt, 5.68x net leverage, financing availability and cash needs related to USPI partner put rights and other acquisitions.
- Future reimbursement levels, managed-care pricing, Medicaid funding, labor negotiations and changes in malpractice reserves.