Tenet Healthcare Corporation — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Unaudited results; dollars in millions except per-share data. Tenet operated 83 hospitals and reported three segments: Hospital Operations and other, Conifer, and newly established Ambulatory Care.
Financial results and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net operating revenues | $4,692 | $4,175 | $13,608 | $12,138 |
| Operating income | $287 | $211 | $741 | $588 |
| Operating margin | 6.1% | 5.1% | 5.4% | 4.8% |
| Adjusted EBITDA | $566 | $459 | $1,663 | $1,306 |
| Adjusted EBITDA margin | 12.1% | 11.0% | 12.2% | 10.8% |
| Net income (loss) attributable to Tenet common shareholders | $(29) | $9 | $(43) | $(49) |
| Basic diluted EPS | $(0.29) | $0.09 | $(0.43) | $(0.50) |
Revenue before doubtful-account provision was $5,063 in Q3, up 14.4%; the provision rose to $371 from $249. Consolidated net income was $28 in Q3 and $76 for the nine months, but noncontrolling interests received $57 and $119, respectively, leaving losses attributable to Tenet shareholders.
Operating cash flow was $835 for the nine months, compared with $468 a year earlier. Investing cash use was $1,272, including $720 for acquisitions and $566 of capital expenditures. Financing provided $694; cash increased $257 to $450. Long-term debt was $14,754, versus $11,807 at year-end 2014. Tenet reported $885 of availability under its revolving credit facility and a 5.6x net-debt-to-adjusted-EBITDA ratio using last-twelve-month EBITDA including USPI and Aspen. Current assets were $6,296 and current liabilities $4,093.
Changes and operating drivers
- Reported revenue growth reflected acquisitions and portfolio changes, higher outpatient volumes, improved managed-care pricing, and California provider-fee revenue. Same-hospital revenue rose 4.7% in Q3 and 7.0% year to date.
- Same-hospital Q3 admissions declined 0.6%, while outpatient visits increased 3.0%; inpatient revenue per admission rose 6.5% and outpatient revenue per visit rose 4.8%.
- Q3 doubtful-account provision increased 49.0%; it equaled 7.3% of revenue before provision, versus 5.6% a year earlier. Management cited higher patient co-pays and deductibles and the revenue increase.
- Adjusted EBITDA growth included new Ambulatory Care operations. Hospital Operations and other Q3 adjusted EBITDA was $383 versus $386; Conifer generated $61 versus $47 and Ambulatory Care $122 versus $26.
- Interest expense rose to $248 in Q3 from $186, and to $664 year to date from $558, primarily reflecting additional debt associated with acquisitions and the Valley Baptist minority-interest purchase.
Transactions, outlook, and risks
- In June, Tenet formed the USPI joint venture, retaining 50.1%, and acquired Aspen’s nine UK hospitals and clinics. It also formed the Carondelet joint venture in August, holding 60%. Tenet sold Saint Louis University Hospital on August 31 for approximately $32; the sale triggered a $147 impairment charge.
- October developments included a $500 share-repurchase authorization and a 60%-owned Birmingham-area hospital joint venture. Tenet also expected to complete a Baylor Scott & White joint venture involving five North Texas hospitals, subject to conditions.
- Management estimated 2015 continuing-operations capital expenditures of $850–$900. The filing provides no formal earnings or revenue guidance and cautions that interim results are not necessarily indicative of full-year performance.
- Management cited opportunities in outpatient growth, Conifer expansion, acquisitions, and improved collections, while noting pressure from bad debt, payer negotiations, labor and supply costs, regulation, and integration of acquired operations. It expected declining EHR incentives and described potential benefits and reimbursement reductions under the ACA.
- CMS payment changes were estimated to reduce annual Medicare inpatient prospective-payment revenue by about $30 and outpatient revenue by about $8; estimated psychiatric and rehabilitation payment increases were about $1 each. Estimates are uncertain.
- Material exposures include ongoing DOJ civil and criminal investigations and litigation concerning HMM arrangements at four Georgia hospitals, with potential repayment, penalties, treble damages, or exclusion from federal programs. Tenet had $67 of litigation and investigation costs year to date. A $42 Detroit nurses’ settlement was reserved; the San Antonio nurses’ case remained in discovery.
- Other notable items: professional and general liability reserves totaled $751; maximum physician-related guarantee payments were $100, with $80 recorded. The USPI minority owners’ put/call rights may require future cash or share settlements. Tenet said it was in compliance with credit-facility covenants.
Investor verification priorities
- Assess how much reported revenue and EBITDA growth is attributable to acquisitions, joint ventures, provider-fee programs, and other nonrecurring or timing-sensitive items.
- Track doubtful-account provision, self-pay collections, receivables aging, and payer mix; verify whether the Q3 increase persists.
- Review debt service, refinancing needs, floating-rate exposure, and the effect of joint-venture put/call rights on leverage and liquidity.
- Confirm the status, accounting allocations, and integration performance of USPI, Aspen, Carondelet, and announced transactions; purchase-price allocations remained preliminary.
- Monitor Medicaid and Medicare funding changes, the California provider-fee program, and the resolution or potential cost of significant legal and regulatory matters.