Tenet Healthcare Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. Tenet operates Hospital Operations, Ambulatory Care (USPI) and Conifer. At quarter-end, it operated 60 hospitals and USPI had interests in 410 ambulatory surgery centers and 24 surgical hospitals.
Financial results and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net operating revenues | $4.638B | $4.954B | $9.383B | $9.735B |
| Operating income | $553M | $586M | $1.201B | $1.106B |
| Net income attributable to Tenet common shareholders | $38M | $119M | $178M | $216M |
| Diluted EPS | $0.35 | $1.10 | $1.64 | $1.99 |
| Adjusted EBITDA (non-GAAP) | $843M | $834M | $1.731B | $1.611B |
| Adjusted EBITDA margin (non-GAAP) | 18.2% | 16.8% | 18.4% | 16.5% |
Q2 operating margin was 11.9%, compared with 11.8% a year earlier. Operating income increased for the first half despite lower revenue, while common-shareholder earnings and EPS declined. Net income attributable to all shareholders was $179M in Q2 and $459M for the first half.
Cash flow: First-half operating cash flow was $347M, versus $779M in 2021; investing activities used $200M and financing activities used $1.160B. Capital expenditures were $307M. Cash and cash equivalents were $1.351B at June 30, down from $2.364B at December 31, 2021.
Debt and liquidity: Long-term debt was $15.072B, including current maturities, versus $15.646B at year-end. Tenet reported net debt to trailing Adjusted EBITDA of 3.81x, or 3.92x including remaining COVID-era Medicare advances. It had no cash borrowings on its revolving facility and $1.5B available; $127M of standby letters of credit were outstanding under a separate facility. Current assets were $6.064B and current liabilities $4.368B.
Material changes and drivers
- Consolidated Q2 revenue declined 6.4%. Hospital Operations revenue before intersegment eliminations fell 11.0%, primarily reflecting the cybersecurity incident and the 2021 sale of the Miami-area hospitals. Ambulatory Care revenue grew 16.1%, largely from acquisitions and rate increases; Conifer revenue grew 4.4%.
- Same-hospital adjusted patient admissions fell 5.3% in Q2; same-hospital admissions fell 8.1%. Management attributed lower volumes in part to the April cybersecurity incident. Total Q2 surgeries across the reported hospital and related facilities were down 13.5% year over year, including portfolio effects.
- Tenet estimated the cybersecurity incident reduced Q2 pre-tax results by approximately $100M, including remediation, interruption-related lost revenue and other costs. It recorded $5M of related insurance recoveries and filed a claim; the timing and amount of further recovery were uncertain.
- Q2 grant income was $94M, versus $19M a year earlier; first-half grant income was $100M, versus $50M. These amounts are separate from net operating revenues. First-half operating cash flow also reflected $475M of Medicare advance recoupments, versus $152M in 2021.
- Hospital Operations faced lower volumes and higher costs per adjusted admission; staffing shortages, premium pay, inflation and supply costs remained pressures. Supplies as a percentage of same-hospital revenue improved, but Q2 salaries and other operating costs as a share of revenue increased.
Outlook, transactions and risks
- No full-year earnings or revenue guidance was provided in the supplied filing text. Tenet estimated 2022 continuing-operations capital expenditures of approximately $725M–$775M.
- Management said existing cash, revolving-credit availability and anticipated operating cash flow should meet current needs, while noting liquidity depends on operating performance, collections and access to financing. It targets reducing leverage over time.
- In June, Tenet acquired Baylor’s remaining 5% voting interest in USPI for $406M, increasing its voting ownership to 100%. The agreement provided for $11M paid at signing and 35 monthly payments of approximately $11M beginning August 2022; $377M was recorded as a liability at present value.
- After quarter-end, USPI completed a joint venture with United Urology Group on July 15, 2022, acquiring interests in 22 ASCs for $105M.
- Tenet issued $2.0B of 6.125% secured first-lien notes due 2030 and used proceeds and cash to retire its 2023 unsecured notes and 2025 secured notes. First-half early debt extinguishment losses totaled $109M. The refinancing extended maturities but added secured debt.
- First-half tax expense included a $77M increase to the valuation allowance for interest-expense carryforwards. Restructuring, impairment and acquisition-related charges totaled $73M; litigation and investigation costs were $38M.
- Key uncertainties include COVID-19 and future patient volumes, labor availability and inflation, cybersecurity and data exposure, payer collection and reimbursement, Medicaid supplemental-payment programs, regulatory changes, and litigation. A DOJ investigation concerning Detroit Medical Center remains ongoing; the filing states outcomes of legal matters may be material and are uncertain.
- CMS proposals described in the filing could affect future reimbursement; estimates were preliminary and subject to rule changes. Management estimated proposed annual increases of about $45M for inpatient Medicare payments and $21M for outpatient payments under the then-current 340B assumptions, but noted the 340B ruling and potential remedies remained uncertain.
Most important facts for investors to verify
- Whether hospital volumes and revenue recover from the cybersecurity disruption, and the ultimate incident costs and insurance proceeds.
- How much reported performance depended on COVID-related grants and whether comparable support continues; separately monitor Medicare advance recoupments.
- Cash conversion, receivable collection and days outstanding: AR Days rose to 59.8 from 57.0 at year-end, above Tenet’s stated target of less than 55 days.
- Debt, interest expense, leverage and the cash commitments for the Baylor purchase, acquisitions and planned capital spending.
- Whether labor, inflation, reimbursement changes, legal matters and regulatory developments affect margins, cash flow or liquidity.
- Interpret Adjusted EBITDA alongside GAAP results: it is a company-defined non-GAAP measure and excludes expenses including interest, litigation and restructuring.