Tenet Healthcare Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Dollar amounts are in millions unless otherwise stated. Tenet operated 77 hospitals, 189 outpatient centers, six health plans and Conifer Health Solutions. Results include Vanguard, acquired October 1, 2013; the prior-year quarter does not include Vanguard.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net operating revenues | $3,926 | $2,387 |
| Provision for doubtful accounts | $380 | $207 |
| Operating income | $170 | $146 |
| Adjusted EBITDA (non-GAAP) | $387 | $274 |
| Adjusted EBITDA margin | 9.9% | 11.5% |
| Net loss attributable to Tenet shareholders | $32 | $88 |
| Basic and diluted loss per share | $0.33 | $0.85 |
| Net cash used in operating activities | $19 | $32 |
| Capital expenditures | $281 | $133 |
Interest expense was $182, up from $103, primarily reflecting acquisition-related borrowing and 2013 share repurchases. Q1 2013 included a $177 loss on early debt extinguishment; Q1 2014 did not. Cash from operations was pressured by a $557 increase in accounts receivable, among other working-capital movements. Cash and cash equivalents were $141 at quarter-end, versus $113 at December 31, 2013.
Total debt was $11,234 at March 31, 2014, including $622 classified as current. Net debt to last-twelve-month Adjusted EBITDA, including Vanguard, was 6.4x. Tenet reported $825 of borrowing availability under its revolving credit facility, in addition to cash on hand.
Material changes and operating trends
- Reported revenue rose substantially, principally because the quarter includes Vanguard. On a same-hospital basis, net operating revenues increased 5.3% to $2,513; same-hospital admissions declined 1.2%, while outpatient visits increased 2.5% and outpatient surgeries rose 19.1%.
- Same-hospital net patient revenue increased 3.4%; improved managed-care pricing and outpatient growth were partly offset by lower inpatient volumes. Same-hospital operating expenses per adjusted patient admission rose 4.5%.
- The doubtful-account provision increased 10.6% on a same-hospital basis. The self-pay collection rate fell to 28.1% from 28.8%; management cited higher uninsured revenues, patient cost-sharing and temporary payer payment delays. The allowance was 24.0% of patient accounts receivable, up from 23.2% at year-end.
- Adjusted EBITDA increased in dollars but its margin declined to 9.9% from 11.5%. Operating income margin also declined, to 4.3% from 6.1%.
- Medicaid DSH and other state-funded subsidy revenues were $154, compared with $67, including acquired operations. Same-hospital subsidy revenue was $53 versus $67; no California provider-fee-program revenue was recognized in Q1 2014 pending CMS approval.
Outlook, financing, risks and unusual items
- Management forecast 2014 continuing-operations capital expenditures of approximately $900–$1,000. It provided no specific earnings or revenue guidance and cautioned that quarterly results are not necessarily indicative of full-year results.
- In March, Tenet issued $600 of 5% senior notes due 2019, using proceeds for general corporate purposes, including repayment of revolver borrowings. The company had $170 outstanding on its revolving facility and approximately $180 of letters of credit outstanding under a new letter-of-credit facility.
- Approximately $238 of the $474 outstanding 9.25% senior notes due 2015 must be repaid or refinanced by November 3, 2014 under the revolver terms; otherwise, revolver borrowings become due on that date. Tenet said it was in compliance with credit-agreement covenants.
- Management expected the proposed FY2015 Medicare inpatient payment changes to reduce annual Medicare inpatient revenue by approximately $20, largely due to lower uncompensated-care DSH reimbursement; this estimate was uncertain. Management also noted a potentially favorable DSH appeal outcome, but timing and financial impact were unclear.
- Management anticipated that ACA coverage expansion could benefit patient volumes and collections over time, but said the net effect was uncertain. Medicaid expansion, reimbursement reductions, state funding and implementation timing remain risks.
- Pending government matters include reviews of kyphoplasty and ICD billing and the Clinica de la Mama investigations and litigation. Tenet had recorded aggregate reserves of approximately $28 for specified potential liabilities; outcomes and ultimate payments could differ materially. The Louisiana patient-record class action had no estimable loss or range, and trial was scheduled to begin June 16, 2014.
- Other notable items include $21 of impairment, restructuring and acquisition-related costs; $3 of litigation and investigation costs; and $9 of EHR incentives recognized as an offset to operating expenses. The quarter also included $10 of acquisition-related costs and $6 of employee severance costs.
Important facts for investors to verify
- How much reported growth reflects Vanguard versus underlying same-hospital performance, and whether the integration delivers expected operating benefits.
- Whether receivables, self-pay collections and bad-debt expense improve, particularly given payer delays and a higher allowance.
- How Tenet will refinance or repay the specified 2015 notes by November 3, 2014, and how leverage and interest costs affect cash generation.
- Whether the $900–$1,000 capital-spending plan can be funded while operating cash flow remains weak.
- Developments in CMS approval and reimbursement programs, DSH appeals, and the identified government investigations and litigation.