Tenet Healthcare Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; comparative periods ended September 30, 2010. Dollar amounts are in millions unless noted. Tenet operated 49 acute care hospitals and one critical access hospital, with 13,453 licensed beds across 11 states.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net operating revenues | $2,342 | $2,262 | $7,222 | $6,904 |
| Operating income | $79 | $97 | $501 | $469 |
| Operating margin | 3.4% | 4.3% | 6.9% | 6.8% |
| Adjusted EBITDA (non-GAAP) | $195 | $203 | $851 | $769 |
| Adjusted EBITDA margin | 8.3% | 9.0% | 11.8% | 11.1% |
| Net income attributable to common shareholders | $6 | $932 | $134 | $1,045 |
| Diluted EPS | $0.02 | $1.68 | $0.26 | $1.90 |
Q3 revenue rose 3.5%, while operating income declined 18.6% and Adjusted EBITDA fell 3.9%. For nine months, revenue rose 4.6%, operating income rose 6.8%, and Adjusted EBITDA rose 10.7%. 2010 net income and EPS comparisons are heavily distorted by a roughly $1.0 billion income tax benefit, primarily from releasing substantially all of the deferred-tax-asset valuation allowance; they are not a straightforward measure of recurring performance.
- Revenue and volume: Q3 admissions increased 1.5%, outpatient visits 3.4%, and total surgeries 3.2%. Nine-month admissions increased 0.6% and outpatient visits 4.1%. Net patient revenue increased 2.9% in Q3 and 3.5% year to date. Managed-care pricing and state subsidy payments supported revenue; inpatient volume growth remained constrained.
- Costs and margins: Q3 selected operating expenses rose 4.4%, faster than revenue. Other operating expense per adjusted patient day increased 6.9%, reflecting higher physician and medical fees, contracted services, malpractice expense, and HIT implementation costs. Nine-month impairment and restructuring charges were $18 versus $1 in 2010; litigation and investigation costs were $24 versus $6.
- Cash flow: Nine-month operating cash flow was $324, compared with $297 in 2010. Investing cash use was $324, including $298 of capital expenditures and $56 for acquisitions. Financing cash use was $220, including $196 of share repurchases and $18 of preferred dividends. Cash declined $220 during the period, from $405 to $185.
- Liquidity and debt: At September 30, cash was $185; current assets were $2,176 and current liabilities $1,679. Total debt was $4,095, including $129 current and $3,966 long-term. No revolving-credit borrowings were outstanding; approximately $540 was available, subject to borrowing-base limits, and $169 of letters of credit were outstanding. Management reported compliance with credit-facility covenants. Net debt to trailing-12-month Adjusted EBITDA was 3.5x.
Changes, outlook and material matters
- Cash and cash equivalents decreased from $405 at year-end 2010 to $185 at September 30, 2011. Accounts receivable rose to $1,221 from $1,143; the filing cites government-payer delays and temporary adjudication delays during revenue-cycle changes, contributing to $91 of lower comparative net cash flows from receivables.
- Self-pay collection rate was 27.7%, down from 29.1% a year earlier; managed-care collection rate was 98.4%. AR days were 48, versus 46 at year-end. Provision for doubtful accounts was 8.2% of revenue in Q3 versus 8.3%, and 7.6% year to date versus 8.0%.
- Tenet recognized approximately $50 of Medicaid health-information-technology incentive revenue in the first nine months, offsetting part of the approximately $66 of HIT implementation expenses. Management expected most Medicaid incentive receipts by year-end and anticipated potential Medicare and additional Medicaid incentives in Q4; amounts remained subject to eligibility, state processing and validation.
- Management estimated 2011 continuing-operations capital expenditures of $475–$525. It cited outpatient growth, Conifer service expansion, quality initiatives and cost control as priorities. Management also said weak economic conditions, competition, payer utilization controls and higher patient cost sharing constrained volumes; it expected some moderation in managed-care pricing increases.
- Potential reimbursement developments include an estimated $16 annual increase in Medicare inpatient revenue from the FFY 2012 IPPS rule, subject to volume and case-mix uncertainty. A proposed 29.5% Medicare physician-fee reduction could reduce annual net revenue by approximately $10 if not forestalled by Congress. Management could not predict the impact of federal deficit-reduction actions or future state Medicaid funding changes.
- California supplemental-payment programs remained subject to CMS approval; the proposed 30-month program was estimated to yield approximately $210 of net revenue for Tenet hospitals if approved. Tenet recorded a $12 liability for estimated Missouri Medicaid DSH recoupments and was challenging the matter. The filing also notes a potential approximately $50 Medicare payment related to an unresolved SSI issue.
- Legal and operating exposures include ongoing government billing reviews, unresolved Hurricane Katrina-related suits beyond the approved $25 class settlement, labor-contract negotiations and possible strikes, malpractice reserves, and a previously impaired hospital at risk of further impairment. Recorded reserves for specified government reviews were approximately $27; outcomes and additional exposure could differ materially.
Investor verification priorities
- Assess underlying earnings excluding the unusually large 2010 tax benefit, and reconcile GAAP results with the company’s non-GAAP Adjusted EBITDA.
- Track receivables, payer delays, self-pay collections and cash conversion, including whether revenue-cycle changes improve collections.
- Verify receipt and final eligibility of HIT incentives and CMS approval, timing and economics of state provider-fee and supplemental-payment programs.
- Review liquidity against debt maturities, capital spending, the remaining share-repurchase authorization and the company’s leverage objective.
- Monitor government investigations, the Missouri recoupment dispute, SSI exposure, malpractice and Katrina-related litigation, labor negotiations, and the impaired hospital’s performance.