Business context and reporting period
Tenet Healthcare Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the first quarter of 2021. The diversified healthcare company operates Hospital Operations, Ambulatory Care (USPI) and Conifer. At quarter-end, it owned approximately 95% of USPI and 76% of Conifer.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 or prior period |
|---|---|---|
| Net operating revenues | $4.745 billion | $4.781 billion |
| Operating income | $648 million; 13.7% margin | $520 million; 10.9% margin |
| Adjusted EBITDA (non-GAAP) | $888 million; 18.7% margin | $777 million; 16.3% margin |
| Net income attributable to Tenet common shareholders | $140 million; diluted EPS $1.28 | $97 million; diluted EPS $0.90 |
| Net cash from operating activities | $228 million | $534 million |
| Cash and cash equivalents | $1.405 billion | $2.364 billion at December 31, 2021 |
| Total long-term debt, including current portion | $14.851 billion | $15.646 billion at December 31, 2021 |
Adjusted EBITDA is a company-defined non-GAAP measure; the filing cautions that it is not a substitute for GAAP results and may not be comparable with similarly titled measures at other companies. Interest expense was $227 million, down from $240 million. Capital expenditures were $155 million. At March 31, net debt to trailing-12-month Adjusted EBITDA was 3.74x, or 3.93x including outstanding Medicare advance obligations.
Material changes versus the prior comparable period
- Consolidated revenue declined 0.8%. Hospital Operations revenue fell, primarily reflecting the August 2021 Miami Hospitals sale and lower volumes; high acuity and commercial rate increases partly offset the decline.
- Ambulatory Care revenue grew 14.2%, supported by acquisitions, higher same-facility surgical volumes and rate increases. Conifer revenue rose 4.5%; third-party client revenue increased 11.2%.
- Overall hospital admissions fell 13.5%; on a same-hospital basis they declined 4.7%, mainly due to Omicron in January and February. Same-hospital net patient service revenue rose 2.5%, and same-hospital revenue per adjusted admission increased 4.0%.
- Operating income and Adjusted EBITDA increased despite lower revenue, with lower reported operating expenses and a $69 million gain on medical-office-building sales contributing to the improvement.
- Operating cash flow decreased by $306 million. The company cited $194 million of Medicare advance recoupments, lower grant receipts and other working-capital timing. Financing cash outflow included $879 million of debt repayments.
Outlook, commentary, risks and unusual items
- Management expects 2022 capital expenditures of approximately $725 million to $775 million. It estimates the March 2022 debt redemptions and repurchases will reduce future annual cash interest payments by about $60 million.
- Tenet estimated that proposed fiscal 2023 Medicare inpatient payment changes could increase annual Medicare fee-for-service IPPS payments by about 2.3%, or approximately $45 million; the proposal was not final. The Medicare sequestration changes were estimated to add about $30 million of revenue for 2022.
- Management identified COVID-19 impacts, nurse and other staff shortages, elevated contract labor and wage costs, supply-price increases and supply-chain disruption as continuing pressures. The duration and effects of the pandemic remain uncertain.
- Accounts receivable days were 58.9, above the company’s target of less than 55. Tenet attributed the increase in part to $57 million of Texas Medicaid supplemental-program revenue recognized after approval at quarter-end that had not yet been collected.
- Unusual items included $43 million of losses on early debt extinguishments, a $32 million tax expense from increasing the valuation allowance for interest-expense carryforwards, and the $69 million building-sale gain. Grant income declined to $6 million from $31 million.
- The company reported an ongoing DOJ investigation of Detroit Medical Center concerning alleged Stark Law, anti-kickback and False Claims Act issues; potential exposure could not be determined. It also described ordinary-course litigation and other regulatory risks.
- Subsequent event: Tenet disclosed an April 2022 cybersecurity incident involving temporary disruption to a subset of acute-care operations and exfiltration of certain confidential company and patient information. The investigation and restoration were ongoing; potential operational, legal, financial and reputational effects were uncertain.
- Tenet had $1.405 billion of cash and $1.5 billion available under its revolving credit facility at quarter-end, with no cash borrowings under that facility, and reported compliance with its credit-facility covenants. It also had $686 million of Medicare advances remaining in contract liabilities.
Important facts for investors to verify
- Whether hospital volumes, staffing availability and labor costs recover or continue to pressure operating performance.
- Collection of the Texas Medicaid supplemental revenue, AR-days trends and the effects of Medicare advance recoupments on cash flow.
- Actual cash generation, debt reduction and leverage, including the cost and timing of the planned Baylor USPI interest purchases; management expected those purchases to cost at least $250 million in aggregate.
- The effects and final terms of Medicare payment rules, provider-fee programs and the 340B litigation on revenue and cash flows.
- The scope and consequences of the April cybersecurity incident and the outcome or potential costs of the DMC investigation and other legal matters.