Business context and reporting period
Tenet Healthcare Corporation’s Form 10-K covers the fiscal year ended December 31, 2015. The filing also provides unaudited fourth-quarter data; it is an annual filing, not a standalone quarterly report. Tenet operates hospitals and outpatient facilities, owns health plans, and provides healthcare revenue-cycle and related services through Conifer.
During 2015, Tenet formed a majority-owned USPI ambulatory-care joint venture, acquired UK-based Aspen Healthcare, and established hospital joint ventures in Alabama and Arizona. The new Ambulatory Care segment includes USPI and Aspen; USPI results are consolidated for facilities Tenet controls and reflected as equity earnings for certain unconsolidated facilities.
Financial results and key metrics
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net operating revenues, after doubtful-account provision | $18.634 billion | $16.603 billion |
| Net operating revenues before doubtful-account provision | $20.111 billion | $17.908 billion |
| Operating income | $1.056 billion | $925 million |
| Interest expense | $912 million | $754 million |
| Income from continuing operations, before discontinued operations | $76 million | $98 million |
| Net income (loss) attributable to Tenet common shareholders | $(140) million | $12 million |
| Diluted EPS attributable to common shareholders | $(1.41) | $0.12 |
| Adjusted EBITDA (non-GAAP) | $2.276 billion | $1.952 billion |
| Adjusted EBITDA margin | 12.2% | 11.8% |
FY 2015 operating margin was 5.7%, compared with 5.6% in 2014. Consolidated net income was $78 million, but $218 million was attributable to noncontrolling interests, resulting in a loss attributable to Tenet shareholders. Adjusted EBITDA is a non-GAAP measure and excludes, among other items, litigation costs, interest, impairments and acquisition-related costs.
| Fourth-quarter metric | Q4 2015 | Q4 2014 |
|---|---|---|
| Net operating revenues | $5.026 billion | $4.465 billion |
| Net income (loss) attributable to Tenet common shareholders | $(97) million | $61 million |
| Diluted EPS attributable to common shareholders | $(0.98) | $0.61 |
For continuing operations in Q4, revenue before doubtful-account provision was $5.417 billion, up 12.4% year over year. The filing attributes growth primarily to acquisitions, increased outpatient volumes and improved managed-care pricing, partly offset by lower California provider-fee program revenue than in Q4 2014.
- Cash flow: FY operating cash flow was $1.026 billion, versus $687 million in 2014. Investing cash use was $1.317 billion; financing provided $454 million.
- Capital spending: FY capital expenditures were $842 million, compared with $933 million in 2014.
- Liquidity: Cash and cash equivalents were $356 million at year-end. Working capital was $863 million. Tenet reported approximately $995 million available under its revolving credit facility and no cash borrowings outstanding under that facility.
- Debt: Long-term debt, net of current portion, was $14.383 billion; total long-term debt including current portion was $14.510 billion. Interest paid was $859 million. Net debt to last-twelve-month Adjusted EBITDA was 5.86x.
- Receivables: Accounts-receivable days were 49.5, unchanged from year-end 2014 and within management’s target of below 55 days. The doubtful-account provision was $1.477 billion, up from $1.305 billion.
Material changes versus the prior comparable period
- Revenue before doubtful-account provision increased 12.3% for the year; operating income rose 14.2%. Comparability is affected by acquisitions and the formation of the USPI joint venture, whose results are included only from June 16, 2015.
- Same-hospital net operating revenue increased 5.4%. Same-hospital admissions rose 1.1%, outpatient visits rose 4.5%, and same-hospital net outpatient revenue increased 6.8%.
- Managed care represented 60.6% of Hospital Operations and other net patient revenue before doubtful accounts, versus 58.4% in 2014; Medicare and Medicaid shares declined. Management reported commercial managed-care inpatient revenue per admission was approximately 76% above its aggregate yield from government payers.
- Interest expense rose $158 million, primarily due to acquisition-related borrowings and the purchase of the remaining Valley Baptist noncontrolling interest.
- Litigation and investigation costs increased to $291 million from $25 million. Impairment, restructuring and acquisition-related costs rose to $318 million from $153 million. These were partly offset by $186 million of gains on sales, consolidation and deconsolidation of facilities.
- Tenet’s share price ranged from $26.60 to $39.75 in Q4 2015, compared with $46.01 to $59.65 in Q4 2014. The filing reports a five-year total return index value of 113.23 for Tenet at year-end 2015, versus 189.35 at year-end 2014.
Outlook, risks, contingencies and unusual items
- Management expects 2016 capital expenditures of approximately $850 million to $900 million. The filing does not provide specific earnings or revenue guidance.
- Management’s strategy emphasizes outpatient growth, physician alignment, quality and cost initiatives, and expansion of Conifer. Tenet expects continued industry movement toward outpatient care and value-based reimbursement, but notes that payer rates and government policy remain uncertain.
- Management estimated annual Medicare payment reductions of approximately $35 million from the FY 2016 inpatient payment rule and approximately $8 million from the 2016 outpatient rule. These are estimates and depend on volumes, case mix and policy changes.
- The most significant disclosed legal contingency is the Clinica de la Mama qui tam action and related criminal investigation. Tenet increased its reserve to $238 million from $20 million in Q4 after making a settlement offer; negotiations were ongoing, and the ultimate loss could materially exceed the reserve. Potential terms could include a corporate integrity agreement, monitoring, or other operating and reputational consequences.
- Tenet recorded $168 million of impairment charges in 2015, including $147 million related to the sale of Saint Louis University Hospital and $19 million for assets at two hospitals. The filing says those hospitals may face further impairment if projected cash flows do not improve.
- Tenet reported approximately $14.4 billion of debt and highlighted debt-service, covenant, refinancing and variable-rate risks. The $900 million floating-rate secured notes bear interest at LIBOR plus 3.5%. USPI put/call arrangements may require substantial future cash payments or share issuance; Welsh Carson delivered a 2016 put notice with an estimated $127 million repurchase cost.
- In January 2016, Tenet completed the sale of two North Carolina hospitals and transferred four North Texas hospitals into joint ventures with Baylor Scott & White. The Atlanta-area hospital sale remained subject to approvals and closing conditions. These transactions affect the portfolio and future comparability.
- Management and the auditor concluded internal control over financial reporting was effective as of year-end, but USPI and Aspen—representing approximately 22% of total assets and 5% of revenue—were excluded from the assessment and were expected to be evaluated after integration during 2016.
Important facts for investors to verify
- Track the outcome, final cost and non-monetary terms of the Clinica de la Mama matter against the $238 million reserve.
- Review debt maturities, interest costs, covenant headroom, leverage and the cash or dilution impact of USPI put/call obligations.
- Assess whether operating cash flow and outpatient/Conifer growth can support planned capital spending and debt service, while monitoring receivables and bad-debt trends.
- Verify realized proceeds, gains and continuing obligations from divestitures and joint ventures, and compare post-transaction performance on a consistent basis.
- Monitor Medicare, Medicaid, provider-fee and value-based payment changes, as well as impairment indicators at underperforming hospitals.
- Confirm completion of USPI and Aspen control integration and review the effect of acquisitions, noncontrolling interests and segment accounting on reported earnings.