Tenet Healthcare Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; the filing also reports fourth-quarter results. This is an annual filing, not a standalone Q4 report. Dollars are in U.S. dollars; financial amounts below are in millions unless stated otherwise.
Business context
Tenet operates hospitals and outpatient facilities, a majority-owned ambulatory care joint venture (USPI), and Conifer, a healthcare revenue-cycle and business-services provider. At year-end, Tenet reported 79 hospitals, 20 short-stay surgical hospitals, more than 470 outpatient centers, and nine U.K. facilities. It also employed approximately 131,600 people.
Financial and operating highlights
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net operating revenues before doubtful-account provision | $21,070 | $20,111 |
| Provision for doubtful accounts | $1,449 | $1,477 |
| Net operating revenues | $19,621 | $18,634 |
| Operating income | $1,219 | $1,056 |
| Operating margin | 6.2% | 5.7% |
| Interest expense | $979 | $912 |
| Net income from continuing operations | $181 | $76 |
| Net loss attributable to Tenet common shareholders | $(192) | $(140) |
| Adjusted EBITDA, non-GAAP | $2,413 | $2,276 |
| Adjusted EBITDA margin | 12.3% | 12.2% |
| Cash from operating activities | $558 | $1,026 |
| Capital expenditures | $875 | $842 |
FY2016 net loss per share attributable to common shareholders was $1.93, including discontinued operations; loss from continuing operations was $1.88 per share. Adjusted EBITDA is a company-defined non-GAAP measure and excludes significant costs; it should not be treated as a substitute for GAAP results or cash flow.
Q4 2016: Net operating revenues were $4,860, versus $5,026 in Q4 2015. Net loss attributable to common shareholders was $79, versus $97; loss per share was $0.79, versus $0.98. Quarterly results were affected by changing facility scope and other factors.
Liquidity and debt: Cash and cash equivalents were $716 at December 31, 2016, compared with $356 a year earlier. Working capital was $1,223, up from $863. Long-term debt, including current portion, was approximately $15,255; total long-term debt obligations shown in the contractual-obligations table were $19,163 including interest through maturity. The company reported $998 of borrowing availability under its revolving facility and no cash borrowings outstanding on that facility. Net debt to trailing Adjusted EBITDA was 6.03x. Approximately 94% of long-term debt carried fixed interest rates.
Material changes versus the prior year
- Revenue increased 5.3% to $19.6 billion, driven in part by growth in ambulatory care and Conifer, while general-hospital revenue declined slightly. Same-hospital net operating revenue rose 5.2%; same-hospital admissions were nearly flat, down 0.2%.
- Operating income rose 15.4%, and operating margin expanded 0.5 percentage points. Adjusted EBITDA increased 6.0%, with margin up 0.1 percentage points.
- Despite improved operating income, the common-shareholder net loss widened to $192 from $140, reflecting, among other items, higher interest expense and the allocation of $368 of net income to noncontrolling interests.
- Operating cash flow fell $468 to $558, principally reflecting $491 more cash paid for restructuring, acquisition-related and litigation costs and settlements, including payments connected with the Clinica de la Mama resolution.
- Tenet sold its Georgia facilities in 2016 for approximately $575, recognizing a $113 gain, and completed other portfolio changes. The sale generated $573 of proceeds from facilities and other assets during the year.
- Ambulatory Care revenue increased to $1,797 from $959, largely because USPI was consolidated for a full year in 2016 versus a partial year in 2015. Conifer revenue was $1,571 before intercompany eliminations, up from $1,413.
Outlook, risks and unusual items
- Management priorities: Grow outpatient and ambulatory services, expand Conifer, improve operating leverage, optimize the hospital portfolio, and reduce debt-to-Adjusted EBITDA. No company-wide earnings or revenue guidance is provided in the supplied filing text.
- Spending and financing outlook: Tenet projected 2017 continuing-operations capital expenditures of approximately $700–$750 and expected annual interest expense to rise by $50–$55 from 2016, primarily due to its December 2016 issuance of $750 of 7.5% second-lien secured notes. It stated that liquidity sources were expected to meet current needs, while noting dependence on operating cash flow, refinancing access and facility availability.
- USPI obligations: Welsh Carson delivered a 2017 put notice for a 6.25% interest in USPI. Tenet estimated an initial payment of $159–$170 million, subject to final true-up. Future put/call exercises could require significant cash, additional borrowing or share issuance.
- Legal and compliance: In September 2016, Tenet and certain subsidiaries resolved the Clinica de la Mama investigation and civil qui tam matter; the company reported approximately $517 million of monetary forfeitures and settlement payments, including interest. Two subsidiaries pleaded guilty. A DOJ non-prosecution agreement requires cooperation and an independent compliance monitor; the agreement is scheduled to expire in February 2020, subject to extension or early termination. Securities class-action and derivative lawsuits were also pending.
- Regulatory uncertainty: Management highlighted potential ACA modification or repeal, government reimbursement cuts, Medicaid supplemental-payment uncertainty, and value-based payment models. Medicaid DSH and other supplemental revenues were $906 in 2016. The California provider-fee program had expired at year-end; CMS approval and timing for a successor program were uncertain. The Texas 1115 waiver was scheduled to expire December 31, 2017, with extension uncertain.
- Other material risks: Managed-care concentration and contract bargaining; bad debt and patient deductibles; high leverage and debt covenants; competition and shifting inpatient volumes; staffing shortages, wage pressures and labor negotiations; medical-liability reserves; cybersecurity and privacy; and possible further impairments. Tenet recorded $202 of impairment, restructuring and acquisition-related costs, $293 of litigation and investigation costs, and $151 of gains on sales/consolidation in 2016.
- Controls and audit: Management and Deloitte reported effective internal control over financial reporting at December 31, 2016; Deloitte issued an unqualified opinion on the consolidated financial statements.
Most important facts for investors to verify
- Whether operating cash flow recovers after the unusually large legal and restructuring-related cash payments, and how much cash remains available after capital spending, interest and required joint-venture purchases.
- Debt maturities, covenant headroom, refinancing terms and the company’s progress against its 6.03x net-debt/Adjusted-EBITDA ratio.
- Actual cost, settlement form and timing of USPI put/call transactions, including the 2017 payment estimate and later purchase obligations.
- Final outcomes and any further costs or restrictions associated with the Clinica de la Mama matter, NPA monitoring and shareholder litigation.
- CMS and state decisions on ACA-related policy, California provider-fee funding, the Texas waiver and other Medicaid supplemental payments.
- Trends in same-hospital volumes, payer mix, doubtful-account provisions and collection days, especially given the Q4 revenue decline and lower full-year operating cash flow.