Tenet Healthcare Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts are in millions, except per-share data. Tenet operated 65 hospitals and approximately 520 other healthcare facilities, alongside its USPI ambulatory-care and Conifer services businesses.
Financial performance and liquidity
- Q3 revenue: Net operating revenues were $4,557, down 0.2% from $4,568. Grant income was negative $66, reflecting reversals under revised federal guidance; it was $445 for the nine months, versus none in 2019.
- Profitability: Q3 operating income was $271, versus $302; operating margin was 5.9%, versus 6.6%. Adjusted EBITDA, a non-GAAP measure, was $551, versus $639, and its margin was 12.1%, versus 14.0%. Tenet-attributable net loss narrowed to $196 from $226, but included a $312 loss on early debt extinguishment. For the nine months, revenue was $12,725 (down 6.9%), operating income $1,069, and Tenet-attributable net loss $15, compared with $212 in 2019.
- Cash flow: Nine-month operating cash flow was $2,961, versus $713. The increase was substantially supported by $1,380 of Medicare advances, $848 of federal and state grant receipts, a $178 payroll-tax deferral, and working-capital timing; it should not be viewed as solely recurring operating cash generation. Investing cash outflow was $406; capital expenditures were $374.
- Debt and liquidity: Debt carrying value was $15,716, including current debt, and cash and equivalents were $3,300 at quarter-end. The revolving facility had no cash borrowings and $1,777 available. The company reported compliance with its credit and letter-of-credit covenants. Net debt to trailing Adjusted EBITDA was 4.66x, temporarily affected by Medicare advances. The $3.3 billion cash balance includes amounts held for captive insurance operations.
- Balance sheet: Current liabilities included $1,500 of contract liabilities, primarily Medicare advance payments. Tenet also deferred $403 of grant payments in other current liabilities. The filing states that more than $1 billion of Medicare advances would be reclassified to long-term liabilities after the October 2020 repayment-term extension.
Material changes and management commentary
- COVID-19 reduced patient volumes and revenue, with suspended elective procedures, fewer emergency-department visits, lower outpatient activity, and increased supply costs. In Q3, hospital admissions fell 11.4%, hospital outpatient visits 16.2%, and total emergency-department visits 23.0% year over year. Ambulatory Care cases increased 4.2%.
- Lower volumes pressured hospital cost ratios: same-hospital salaries and benefits were 49.7% of revenue in Q3, versus 49.5%; supplies were 17.9%, versus 17.6%; and other operating expenses were 24.5%, versus 23.8%. Management cited higher patient acuity, improved payer mix and managed-care terms as partial offsets.
- Tenet issued $2.5 billion of 6.125% senior notes due 2028 and used proceeds, with cash, to redeem its 8.125% notes due 2022. It reported that the refinancing eliminated significant maturities until June 2023 and reduced future annual cash interest payments by approximately $50. It also issued $700 million of 7.5% secured notes due 2025 and $600 million of 4.625% secured notes due 2028.
- Management reduced planned 2020 capital spending by approximately 30%; it expected continuing-operations capital expenditures of $500–$550 for the year. It also cited workforce reductions, deferred discretionary expenses, and variable-cost controls. No full-year earnings guidance is provided in the filing.
- HHS’s October 2020 Provider Relief Fund guidance was estimated to add approximately $100 of grant income in Q4, based on revised lost-revenue estimates through September. Management cautioned that further guidance changes and estimates make future grant income uncertain.
- Management targeted a tax-free Conifer spin-off by the end of Q2 2021, subject to tax, contractual, regulatory and board conditions; completion and timing are not assured. It also described a long-term goal to reduce leverage.
Risks, contingencies and unusual items
- Approximately $1.5 billion of Medicare advances are repayable. Legislation enacted October 1, 2020 delayed recoupment for a year, limited subsequent payment offsets, and reduced interest on remaining balances to 4% after the 29-month period.
- Provider Relief Fund grants are conditional on compliance and reporting. HHS guidance changed during 2020; failure to meet conditions could affect Tenet’s ability to retain funding. The company had received $890 of grant cash through September.
- COVID-19 surges, renewed restrictions, staffing pressures, higher-cost temporary labor, medical-supply shortages and price increases, and patient affordability or collection deterioration could further affect results and liquidity. Tenet also identified cybersecurity and potential COVID-related litigation risks.
- Tenet is self-insured for much of its professional and general liability exposure; reserves totaled $951. It changed to undiscounted liability accounting in 2020 and retrospectively recast prior periods.
- The DOJ investigation of Detroit Medical Center remained ongoing, with potential exposure not determinable. A previously disclosed Oklahoma qui tam matter was settled and related claims dismissed; USPI paid the settlement, with certain fees and costs still subject to court approval. The company’s non-prosecution agreement was scheduled to expire November 1, 2020.
- Restructuring and acquisition-related charges were $166 for the first nine months, including $155 of restructuring costs. Tenet recorded $13 of litigation and investigation costs in that period, versus $115 in 2019.
Investor facts to verify
- Whether patient volumes and hospital margins recover, and how further COVID-related disruptions affect operations.
- Final grant eligibility, reporting compliance and the timing and amount of Provider Relief Fund income and Medicare advance repayment.
- Cash-flow quality excluding temporary advances, grants, payroll-tax deferrals and working-capital effects; also confirm cash availability and ongoing leverage.
- Progress and conditions for the proposed Conifer spin-off, including the services agreement and tax-free treatment.
- Developments in the DMC investigation, professional-liability exposure, and other legal or regulatory matters.