Tenet Healthcare Corporation — Q3 2018 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and nine months ended September 30, 2018. Tenet operated 68 hospitals, 21 surgical hospitals and approximately 475 outpatient centers in the United States, alongside its Conifer healthcare-services business. Its reportable segments are Hospital Operations and other, Ambulatory Care, and Conifer. Unless stated otherwise, amounts below are in millions.
Financial and operating highlights
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net operating revenues | $4,489 | $4,586 | $13,694 | $14,201 |
| Operating income | $320 | $51 | $1,243 | $628 |
| Net income (loss) | $65 | $(289) | $364 | $(221) |
| Net income available (loss attributable) to Tenet common shareholders | $(9) | $(367) | $116 | $(475) |
| Diluted earnings (loss) per share | $(0.09) | $(3.64) | $1.12 | $(4.73) |
| Adjusted EBITDA, a non-GAAP measure | $577 | $507 | $1,876 | $1,604 |
| Adjusted EBITDA margin | 12.9% | 11.1% | 13.7% | 11.4% |
Revenue comparisons require care: Tenet adopted ASC 606 on January 1, 2018. Estimated uncollectible patient balances that were generally presented as doubtful-account expense in 2017 are generally reflected as reductions to revenue in 2018. Tenet reported $1.052 billion of implicit price concessions for the first nine months of 2018.
- Cash flow and liquidity: Operating cash flow was $799 million for the first nine months, compared with $709 million a year earlier. Investing activities provided $120 million and financing activities used $1.030 billion. Cash was $500 million at quarter-end, down from $611 million at December 31, 2017. Current assets were $4.492 billion and current liabilities $4.224 billion.
- Debt: Long-term debt, including current maturities, was $14.850 billion; $672 million was classified as current. No cash borrowings were outstanding under the revolving credit facility, with approximately $998 million available. The company reported net debt to last-twelve-month Adjusted EBITDA of 5.70x, using its stated calculation that excludes specified California provider-fee revenue.
- Capital spending: Nine-month capital expenditures were $404 million. Management estimated full-year 2018 continuing-operations capital expenditures of approximately $625–$675 million.
- Segment and volume trends: Ambulatory Care revenue increased 7.3% in Q3 and same-facility cases rose 5.0% on a systemwide basis. Hospital same-facility revenue increased 7.3%, while admissions decreased 2.1%. Consolidated hospital volumes also reflect facility closures and divestitures. Conifer revenue fell 7.5% in Q3, with third-party revenue affected by contract terminations and customer hospitals choosing to bring revenue-cycle services in-house.
Material changes, outlook and risks
- Operating income improved substantially year over year, while Q3 revenue declined 2.1%. The comparison benefited from lower impairment and restructuring charges than in 2017; Q3 2017 included substantial impairment charges. Q3 2018 operating results also included a $7 million net loss on facility sales and related transactions.
- For the first nine months, operating income included $111 million of net gains on facility sales, including the $88 million MacNeal gain. Tenet completed multiple hospital and business divestitures, including Aspen in August 2018, and had Chicago-area hospitals classified as held for sale at quarter-end.
- Management targeted $250 million of annualized cost savings from enterprise-wide initiatives, with the full run-rate expected by year-end 2018; it expected additional restructuring charges in the remainder of the year. It continued to pursue outpatient growth and lower leverage. Tenet was also exploring a potential sale or other strategic alternatives for Conifer, with no assurance a transaction would occur.
- Management estimated that 2019 Medicare payment changes could increase annual Medicare inpatient fee-for-service payments by about $40 million and outpatient hospital revenue by about $7 million; these were estimates subject to volume, case-mix, legislative and other uncertainties.
- Key risks include elevated leverage and debt maturities, changes in Medicare and state Medicaid/provider-fee funding, patient-volume and payer-mix pressures, collections and contractual-allowance estimates, malpractice costs, labor negotiations, and regulatory investigations and litigation. Tenet’s non-prosecution agreement was extended to November 1, 2020; the company warned that failure to comply could lead to criminal prosecution, substantial penalties or exclusion from federal healthcare programs.
- Tenet stated that it was in compliance with its credit and letter-of-credit facility covenants at September 30, 2018, and that disclosure controls were effective. It also noted that adoption of the new lease standard in 2019 was expected to materially affect the balance sheet.
Important facts for investors to verify
- How much of the reported earnings and EBITDA improvement reflects durable operating performance versus divestitures, provider-fee revenues, sale gains, and lower prior-year impairment charges.
- Whether hospital admissions, same-facility volumes, payer mix, and collection metrics improve; hospital same-facility admissions declined while outpatient surgery-center cases grew.
- Whether the $250 million cost-savings target was achieved and what further restructuring costs were incurred.
- Current debt maturities, refinancing plans, leverage trajectory, and liquidity after distributions, acquisitions, and remaining joint-venture ownership arrangements.
- Developments in the Conifer strategic review, Chicago-area facility sale, NPA compliance, and significant litigation or government inquiries.