TENET HEALTHCARE CORP quarterly report, Q1 FY2011

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Tenet Healthcare Corporation — Q1 2011 Form 10-Q

Business context and reporting period

Unaudited results cover the three months ended March 31, 2011, compared with Q1 2010; balance-sheet amounts are compared with December 31, 2010. Tenet operated 49 acute-care hospitals and one critical-access hospital, with 13,457 licensed beds across 11 states.

Financial performance and liquidity

  • Revenue: Net operating revenue rose 7.1% to $2.506 billion. Net patient revenue increased 6.0%; inpatient revenue rose 7.1% and outpatient revenue 3.8%.
  • Profitability: Operating income increased to $259 million from $201 million; operating margin expanded to 10.3% from 8.6%. Continuing-operations income before tax was $142 million versus $93 million. Net income attributable to Tenet common shareholders was $73 million versus $88 million; diluted EPS was $0.14 versus $0.17. Continuing-operations diluted EPS was $0.16 in both periods.
  • Adjusted EBITDA: Company-reported non-GAAP Adjusted EBITDA was $379 million, or 15.1% of revenue, versus $298 million, or 12.7%. The measure excludes several costs and is not a substitute for GAAP results.
  • Cash flow: Operating cash use was $2 million, compared with $22 million used in Q1 2010. Capital expenditures were $116 million; investing cash use was $129 million and financing cash use was $7 million. Cash declined $138 million to $267 million. Adjusted Free Cash Flow, a company-defined non-GAAP measure, was negative $98 million.
  • Debt and liquidity: Total debt was $4.082 billion, including $68 million current; cash was $267 million. The $800 million revolving facility had no cash borrowings, $181 million of letters of credit outstanding, and about $590 million available. The company reported net debt to trailing-12-month Adjusted EBITDA of 3.4x and compliance with credit agreement covenants.
  • Balance sheet: Current assets were $2.393 billion and current liabilities $1.657 billion. Accounts receivable, net, rose to $1.237 billion from $1.143 billion; total professional and general liability reserves were $477 million.

Material changes versus Q1 2010

  • Revenue growth reflected improved managed-care pricing and acuity, higher outpatient volume, and substantial government-program revenue: $63 million net from California’s hospital fee program, $28 million of incremental Medicaid DSH and other state subsidies, and $25 million of Medicaid health-IT incentive revenue. These items affect comparability and include amounts expected to be collected later.
  • Admissions increased 0.6%, outpatient visits 6.1%, and total surgeries 0.9%; patient days fell 1.2%. Inpatient surgeries declined 1.8%, while outpatient surgeries increased 2.8%.
  • Provision for doubtful accounts fell to $182 million from $189 million and to 7.3% of revenue from 8.1%. However, the self-pay collection rate declined to 27.9% from 29.9% in Q1 2010.
  • Selected operating costs increased 5.0% to $1.945 billion. Malpractice expense rose to $27 million from $11 million, including unfavorable case-reserve adjustments. Litigation and investigation costs increased to $11 million from $2 million; impairment and restructuring charges were $8 million versus none.
  • Interest expense increased to $118 million from $109 million. Income-tax expense rose to $51 million from $3 million, primarily because the prior-year period’s tax expense was substantially offset by deferred-tax valuation-allowance changes.

Outlook, management commentary, risks and unusual items

  • Management cited gradual patient-volume improvement but said weak economic conditions, competition, utilization pressure, and lower elective-procedure demand constrained growth. It expects continued focus on outpatient services, physician alignment, cost control, revenue-cycle performance, and acquisitions.
  • Management estimated 2011 continuing-operations capital expenditures of $475 million to $525 million. The estimate includes seismic, health-IT, and disability-access spending; the filing provides no earnings guidance.
  • Tenet recognized $25 million of Medicaid health-IT incentives in Q1 and expected receipt later in 2011. Incentive eligibility and payment amounts depend on state processes and validation. A proposed California fee program was estimated to generate about $26 million in 2011, subject to CMS approval; Pennsylvania and Georgia programs also contributed revenue.
  • The company entered a $600 million interest-rate swap converting 10% fixed-rate notes due 2018 to a floating rate; the reported rate was about 7.08% at quarter-end. Mark-to-market losses increased Q1 interest expense.
  • Tenet agreed to a $25 million cash settlement of two Hurricane Katrina-related class actions, fully reserved at March 31, subject to court approval. It also recorded a $10 million discontinued-operations expense for the settlement, net of expected reinsurance recoveries; investors should verify how these amounts relate.
  • Government reviews of rehabilitation admissions, kyphoplasty billing, a Florida partial-hospitalization program, and implantable defibrillator claims remained ongoing. Tenet had recorded about $27 million of reserves for these matters, but stated outcomes and potential payments could differ materially.
  • Other risks include Medicaid funding reductions, managed-care pricing and payer mix, self-pay collection weakness, malpractice claims, labor negotiations and potential strikes, and a possible approximately $50 million Medicare repayment tied to an SSI calculation matter. The company stated that the first-quarter operating cash-flow pattern is typically affected by seasonal working-capital needs.
  • Community Health Systems’ unsolicited acquisition proposal had been revised to $7.25 per share in cash on May 2, 2011; Tenet’s board had rejected earlier proposals. Shareholder litigation and Tenet’s lawsuit against Community were pending.

Most important facts for investors to verify

  • How much of revenue and EBITDA growth is sustainable after excluding state subsidies, California fee-program revenue, and health-IT incentives.
  • Whether self-pay collections recover and whether receivables, payer mix, and operating cash flow improve.
  • Final outcomes and cash exposure from government reviews, the Katrina settlement and related claims, and the possible Medicare repayment.
  • Progress against the $475 million to $525 million capital-spending plan, debt maturities, and availability under the receivables-based revolver.
  • Final approval, timing, and net economics of state provider-fee programs and health-IT incentive payments, alongside changes in Medicare and Medicaid reimbursement.