Business context and reporting period
Tenet Healthcare Corporation filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. Tenet operates hospitals and other care sites, ambulatory surgery centers and surgical hospitals through USPI, and healthcare revenue-cycle and value-based care services through Conifer. At quarter-end, it operated 60 hospitals and had interests in 342 ambulatory facilities; it owned approximately 95% of USPI and 76% of Conifer.
Financial performance and liquidity
Dollar amounts are in millions except per-share data. Comparisons are with the corresponding 2020 period.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net operating revenues | $4,894 | $4,557 | $14,629 | $12,725 |
| Operating income | $1,014 | $271 | $2,120 | $1,069 |
| Net income (loss) attributable to Tenet common shareholders | $449 | $(196) | $665 | $(15) |
| Diluted EPS | $4.13 | $(1.86) | $6.13 | $(0.14) |
| Adjusted EBITDA | $855 | $551 | $2,466 | $1,868 |
| Adjusted EBITDA margin | 17.5% | 12.1% | 16.9% | 14.7% |
- Q3 revenue increased 7.4%; nine-month revenue increased 15.0%. Same-hospital activity, patient acuity, payer mix and commercial rate increases supported growth. Ambulatory Care also benefited from acquisitions, including the SCD Centers.
- Q3 GAAP operating margin was 20.7% versus 5.9%; the 2021 result included a $409 million pretax gain on the sale of five Miami-area hospitals. Nine-month operating margin was 14.5% versus 8.4%, also lifted by facility-sale gains. Adjusted EBITDA excludes such gains and other specified items.
- Q3 same-hospital admissions rose 2.6% and adjusted admissions rose 4.4%; outpatient visits increased 15.3%. For the quarter, consolidated ambulatory cases fell 45.8%, primarily reflecting urgent-care divestitures and imaging-center transfers; same-facility Ambulatory Care revenue rose 4.2% systemwide.
- Segment revenue trends were mixed: Q3 Hospital Operations revenue before intersegment eliminations rose 6.0%, Ambulatory Care rose 17.9%, and Conifer fell 3.4%. Conifer’s decline reflected revised terms in its agreement with Tenet.
- Operating cash flow was $1.211 billion for nine months, down from $2.961 billion. Investing cash flow was $802 million, including $1.235 billion of proceeds from facility and asset sales; financing cash flow was $(2.167) billion. Capital expenditures were $354 million.
- Cash and cash equivalents were $2.292 billion at September 30, 2021, versus $2.446 billion at year-end 2020. Long-term debt, including current maturities, was $14.134 billion. The $1.9 billion revolving facility had no cash borrowings and $1.802 billion available; Tenet reported compliance with its covenants.
- Net debt to last-twelve-month Adjusted EBITDA was 3.16x, or 3.47x including outstanding Medicare advance obligations. The filing reports $1.144 billion of Medicare advances in current contract liabilities at quarter-end. Tenet retired approximately $2.988 billion of note principal during the first nine months and stated the transactions reduced future annual cash interest by about $96 million.
Material changes, outlook and risks
- Portfolio and financing: Tenet sold five Miami-area hospitals in August and most of its urgent care centers in April. It issued $1.4 billion of 4.250% secured notes due 2029 and redeemed or retired other notes, recording $74 million of early-extinguishment losses for the nine-month period. Q3’s $20 million debt-extinguishment loss related to the 2024 notes redemption.
- COVID-19 and operating pressures: Delta-variant cases peaked in late August, and the pandemic continued to affect patient volumes, mix and costs. Management cited shortages of qualified personnel, higher contract labor and premium pay, supply-chain disruption and elevated PPE costs; it expected disruption to continue into 2022 and potentially for the duration of the pandemic.
- Government support: Nine-month grant income was $53 million, compared with $445 million in 2020. Tenet received $65 million in grant cash during the 2021 period and recognized $53 million in grant income, including amounts recorded through unconsolidated affiliates. Medicare advance-payment recoupments were underway; repayment timing and cash-flow effects remain relevant.
- Outlook: Tenet forecast 2021 continuing-operations capital expenditures of approximately $675 million to $725 million. It estimated the FY2022 Medicare inpatient rule would increase annual Medicare FFS IPPS payments by about $27 million; proposed outpatient rules could add about $14 million, while the proposed physician-fee schedule could reduce revenue by about $7 million. These are estimates subject to rule changes and other uncertainties. The filing provides no specific earnings or revenue guidance.
- Other risks and contingencies: Tenet is pursuing a proposed tax-free Conifer spin-off, but timing and completion are uncertain and depend on multiple conditions, including a comprehensive services agreement. The DOJ investigation of Detroit Medical Center continued; Tenet said it could not determine potential exposure. The filing also discusses litigation risks, including 340B reimbursement litigation, and possible ERISA pension withdrawal liability relating to the bankruptcy of purchasers of Philadelphia hospital operations. Professional and general liability reserves totaled $1.030 billion; maximum potential physician-related guarantee payments were $156 million, against a recorded $108 million liability.
- Tenet stated there were no material changes to the risk factors in its 2020 Form 10-K. It cautioned that results depend on patient volumes and acuity, payer mix and reimbursement, labor and supply costs, collections, government policy, litigation, and execution of portfolio and cost initiatives.
Important facts for investors to verify
- How much of reported earnings and operating cash generation reflects the Miami and other asset-sale gains, government grants, and temporary COVID-era payment support?
- Whether same-hospital revenue and volume trends can offset persistent labor, supply, malpractice and other cost inflation.
- Cash flow and liquidity as Medicare advance recoupments continue, including the effect on current contract liabilities and leverage.
- Debt reduction, refinancing and interest savings, and the distinction between reported leverage with and without Medicare advance obligations.
- Progress and conditions for the proposed Conifer spin-off, and exposure from the DMC investigation, 340B litigation and other legal or pension contingencies.