Tenet Healthcare Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Dollars are in millions unless stated otherwise. Tenet operates Hospital Operations, Ambulatory Care (USPI) and Conifer.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net operating revenues | $5,066 | $4,801 | $15,169 | $14,184 |
| Operating income | $568 | $596 | $1,775 | $1,797 |
| Net income attributable to Tenet common shareholders | $101 | $131 | $367 | $309 |
| Diluted EPS | $0.94 | $1.16 | $3.41 | $2.82 |
| Adjusted EBITDA | $854 | $841 | $2,529 | $2,572 |
| Adjusted EBITDA margin | 16.9% | 17.5% | 16.7% | 18.1% |
Q3 revenue rose 5.5%, but operating income declined 4.7% and common-shareholder net income declined 22.9%. Higher operating costs and lower grant income weighed on margins. Nine-month common-shareholder income and EPS increased despite slightly lower Adjusted EBITDA; the prior-year period included a larger debt-extinguishment loss. Adjusted EBITDA is a non-GAAP measure and is not a substitute for GAAP results.
Segment trends: Q3 Hospital Operations revenue before eliminations increased 3.7%; Ambulatory Care revenue increased 16.7%, supported by acquisitions, case growth and higher revenue per case; Conifer revenue decreased 5.4%, reflecting contract changes and client divestitures. Q3 total consolidated cases at Ambulatory Care facilities increased 17.1%. Hospital Operations’ Q3 same-hospital adjusted admissions rose 0.4%, while same-hospital other operating expenses increased 7.7%.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $1,550, versus $662 in 2022. The comparison was substantially affected by $880 of Medicare advance payments repaid or recouped in 2022 and none in 2023; working-capital timing also contributed.
- Capital expenditures were $543 for the nine months. Investing cash use was $636; financing cash use was $718. Cash and equivalents ended the period at $1,054, up from $858 at year-end 2022.
- Debt carrying value was $15,042, including $141 current; aggregate principal of senior notes was $14,762. Net debt, using carrying debt less reported cash, was approximately $13,988. Management reported net-debt-to-LTM-Adjusted-EBITDA leverage of 4.08x.
- Tenet had no revolving-credit borrowings and reported $1,500 available under its revolving facility. It was in compliance with facility covenants. It also had $111 of letters of credit outstanding under its separate LC facility.
- In May 2023, Tenet issued $1,350 of 6.75% first-lien notes due 2031 and used proceeds plus cash to redeem $1,345 principal of 4.625% notes due 2024, recording an $11 early-extinguishment loss. Notes carry fixed rates; stated maturities are staggered from 2026 through 2031.
Outlook, risks and unusual items
- Management expects 2023 continuing-operations capital expenditures of approximately $675–$725, including $196 accrued at year-end 2022. The filing provides no clear full-year earnings or revenue guidance.
- Tenet expects its San Ramon Regional Medical Center sale to close by early 2024, subject to regulatory review and customary conditions. The facility’s assets and liabilities, $140 and $17 respectively, were classified as held for sale.
- Management’s longer-term priorities include expanding USPI, improving hospital efficiency, growing higher-demand services and reducing leverage. A new San Antonio medical campus is scheduled for completion in mid-2024, with expected project cost of approximately $230.
- Key operating pressures include inflation in wages and supplies, limited availability of qualified staff, possible California minimum-wage increases beginning in 2024, supply-chain delays, payer negotiations and collection risks. Management noted that contract-labor expense declined year over year but remained above historical levels.
- COVID-19 grant income fell to $3 in Q3 from $54 and to $14 for nine months from $154. The public health emergency ended in May 2023; Tenet does not expect significant future assistance under these programs.
- Tenet reported $41 of insurance recoveries related to its 2022 cybersecurity incident in the first nine months of 2023, including $34 recorded as net operating revenue. It also reported higher malpractice expense: $271 for nine months versus $197 in 2022.
- Legal and regulatory outcomes remain uncertain. Tenet says existing ordinary-course claims are not expected to materially affect business or financial condition, but an adverse outcome in one or more matters could materially affect a particular period. Professional and general liability reserves totaled $1,051.
- Regulatory estimates include an approximate $64 annual increase in Medicare inpatient payments under the final FY2024 IPPS rule. Proposed outpatient payment changes were estimated to increase Medicare FFS outpatient revenue by about $23 for acute-care hospitals and $17 for USPI; these estimates are subject to rule changes and other uncertainties.
Most important facts for investors to verify
- Whether the sharp increase in reported operating cash flow is repeatable, given the prior-year Medicare advance recoupments and working-capital effects.
- Whether Ambulatory Care acquisition-driven growth translates into sustained margins and cash generation as labor, supplies and other expenses rise.
- Whether Hospital Operations can improve operating margins despite higher malpractice and other operating costs, and whether patient volumes and payer mix remain favorable.
- Progress on leverage reduction, debt refinancing costs and liquidity; confirm covenant compliance and available revolving capacity in subsequent filings.
- Closing and financial impact of the San Ramon sale, and completion, cost and timing of the San Antonio campus project.
- Developments in malpractice claims, government inquiries, cybersecurity-related matters and reimbursement rules, including the proposed outpatient and 340B payment remedies.