Business context and reporting period
Tenet Healthcare Corporation filed this unaudited Form 10-Q for the quarter ended June 30, 2011. It operated 49 acute-care hospitals and one critical-access hospital, with 13,420 licensed beds across 11 states. Unless noted, amounts are in millions of dollars and relate to continuing operations.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net operating revenues | $2,374; up 3.1% from $2,303 | $4,880; up 5.1% from $4,642 |
| Operating income and margin | $163 and 6.9%, versus $171 and 7.4% | $422 and 8.6%, versus $372 and 8.0% |
| Net income attributable to common shareholders | $55, or diluted EPS of $0.11, versus $25 and $0.05 | $128, or diluted EPS of $0.25, versus $113 and $0.22 |
| Adjusted EBITDA and margin | $277 and 11.7%, versus $268 and 11.6% | $656 and 13.4%, versus $566 and 12.2% |
| Net cash provided by operating activities | Quarterly cash flow was $178, versus $191 | $176, versus $169 |
| Capital expenditures | $82, versus $70 | $198, versus $148 |
| Adjusted free cash flow | $116, versus $138 | $18, versus $55 |
Quarterly common-shareholder earnings included $15 of income from discontinued operations, compared with a $10 loss in the prior-year quarter. Continuing-operations income attributable to common shareholders was $40, versus $35. The quarter also included an $18 discontinued-operations income-tax benefit.
At June 30, cash and cash equivalents were $264, down from $405 at December 31, 2010. Current assets were $2,314 and current liabilities $1,662. Long-term debt totaled $4,117, including $128 current; cash borrowings on the revolving facility were zero. The company reported $581 of revolver availability, with $174 of standby letters of credit outstanding. Net debt to trailing-12-month Adjusted EBITDA was 3.4x. The company reported compliance with its credit agreement covenants.
Material changes versus the prior comparable period
- First-half revenue growth reflected higher patient revenue, acquisitions and government-program receipts. Net patient revenues increased 3.9%; reported operating revenues also included $50 of Medicaid health-information-technology (HIT) incentive revenue, expected to be collected later in 2011.
- Quarterly total admissions were nearly flat, down 0.2%, while patient days declined 1.5%. Outpatient visits grew 2.7% in the quarter and 4.4% for the first half; inpatient surgeries declined 2.2% in the quarter, while outpatient surgeries increased 3.3%.
- Operating income fell in the quarter despite revenue growth, as operating expenses increased. Selected operating expenses per adjusted patient day rose 3.7% in the quarter and 4.1% for the first half, with higher labor, physician, malpractice and HIT-related costs. First-half operating income improved year over year.
- Provision for doubtful accounts declined to 7.2% of revenue from 7.5% in the quarter and 7.8% for the first half a year earlier. However, the self-pay collection rate declined to 27.9% from 29.5% a year earlier.
- First-half cash from operations improved modestly, but capital spending rose $50 year over year and adjusted free cash flow fell to $18 from $55. Receivables increased to $1,258 from $1,143 at year-end.
Outlook, management commentary, risks and unusual items
- Management described patient volumes as gradually improving, but said weak economic conditions, competition and managed-care utilization pressures continued to constrain elective procedures. It expects to pursue outpatient growth, cost control, physician alignment and revenue-cycle improvements. No full-year earnings guidance is provided in the filing text.
- Management estimated 2011 continuing-operations capital expenditures of $475 to $525. It estimated the Medicare inpatient payment changes in the 2012 final rule could increase annual inpatient revenue by about $16; these estimates are subject to volume, case-mix and other uncertainties.
- Medicaid HIT incentive revenue recognized in the first half was $50, offsetting $41 of related 2011 operating expenses. Payment amounts remain subject to state validation and audit. A California hospital-fee program contributed $63 of first-half net revenue; final approval of a separate six-month program was still pending at June 30.
- The company recorded an estimated $10 liability for Missouri Medicaid disproportionate-share payment recoupments and is challenging the recoupment. It also disclosed approximately $27 of reserves for government reviews; final outcomes and amounts could differ materially.
- Two Hurricane Katrina-related class actions were settled for $25, with expected reinsurance recoveries of approximately $10. The settlement was preliminarily approved in July 2011 and remained subject to a fairness hearing and final court review. Six individual opt-out cases and other Katrina-related matters remained pending.
- Other risks include continued high bad debt, Medicaid funding changes, payer contract and reimbursement pressure, malpractice costs, labor negotiations and possible strikes, regulatory reviews, and litigation. The filing warns that interim results are not necessarily indicative of full-year results.
- A $600 interest-rate swap converts $600 of 10% senior secured notes due 2018 to a floating rate; the rate was approximately 7.0% at June 30. This lowers current cash interest but exposes the company to rate changes.
- The company repurchased 11.5 million shares for $72 during the quarter under a $400 share-repurchase authorization. It also acquired outpatient and physician-related businesses for $42 in the first half.
Most important facts for investors to verify
- Whether the $50 of Medicaid HIT incentives and pending state-program receipts are collected as expected, and whether related payments or approvals change.
- Trends in self-pay collections, accounts-receivable aging and days sales outstanding; receivables were $1,258 and receivable days were 48 at quarter-end.
- Whether operating-cost growth, especially malpractice, labor and other operating expenses, moderates relative to revenue and volume growth.
- Available liquidity and debt-refinancing needs, particularly the approximately $1.19 billion of notes due in 2015 and the revolver’s potential early-termination condition.
- Developments in government reviews, the Missouri recoupment challenge, the Katrina settlement and remaining lawsuits, including whether recorded reserves are adequate.
- The impact of share repurchases, capital spending and acquisitions on cash balances, leverage and free cash flow.