Tenet Healthcare Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Tenet operates hospitals and other healthcare facilities, an ambulatory-care business (including USPI), and Conifer healthcare business-process services. Financial amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue before provision for doubtful accounts | $5,196 | $5,420 | (4.1%) |
| Net operating revenue, after doubtful accounts provision | $4,813 | $5,044 | (4.6%) |
| Provision for doubtful accounts | $383 | $376 | +$7 |
| Operating income | $267 | $354 | (24.6%) |
| Net income from continuing operations | $37 | $38 | Nearly flat |
| Net income attributable to Tenet common shareholders | $(53) | $(59) | Loss narrowed |
| Diluted loss per share | $(0.53) | $(0.60) | Improved |
| Adjusted EBITDA (non-GAAP) | $527 | $617 | (14.6%) |
| Adjusted EBITDA margin | 11.1% | 12.5% | (1.4) percentage points |
| Cash from operating activities | $186 | $147 | +$39 |
| Capital expenditures | $198 | $208 | $(10) |
Consolidated net income was $36, while $89 was attributable to noncontrolling interests, resulting in the $53 common-shareholder loss. Interest expense was $258, up from $243. A $33 income-tax benefit on $4 of pretax continuing-operations income compares with $67 of tax expense on $105 of pretax income in Q1 2016.
Liquidity, debt and capital
- Cash and cash equivalents were $572 at March 31, down from $716 at December 31, 2016. Operating cash flow was partly offset by $189 of investing outflows and $141 of financing outflows; cash declined $144 during the quarter.
- Total long-term debt, including current maturities and capital leases, was $15,218; long-term debt net of current portion was $15,071. The company reported net debt to trailing 12-month Adjusted EBITDA of 6.1x.
- No cash borrowings were outstanding under the $1 billion revolving credit facility; approximately $998 was available. The company reported compliance with credit and letter-of-credit facility covenants.
- Capital spending outlook for 2017 was approximately $700–$750. Interest paid in Q1 was $130.
Material changes and operating trends
- Hospital Operations and other revenue before doubtful accounts fell 5.8% to $4,332. Same-hospital revenue decreased 3.0%; same-hospital admissions fell 3.3%, surgeries 5.3%, and emergency-department visits 4.2%.
- Management cited lower volumes, a leap-year comparison effect, and out-of-network status with a national payer. Improved managed-care pricing partly offset volume pressure. The 2016 comparison included $57 of California provider-fee revenue whose extension had not yet received CMS approval for Q1 2017.
- The doubtful-accounts provision rose to 7.4% of revenue before provision from 6.9%; management attributed the increase mainly to higher uninsured revenue. Accounts-receivable days were 56.1, above the company’s target of less than 55.
- Ambulatory Care revenue increased 6.1% to $455, primarily reflecting acquisitions; cases increased 2.6%. Conifer revenue increased 4.4% to $402, with third-party growth primarily attributed to new clients.
- Adjusted EBITDA decreased to $527 from $617. Hospital Operations and other segment Adjusted EBITDA was $309 versus $418; Ambulatory Care was $153 versus $136; Conifer was $65 versus $63.
- Comparability is affected by unusual items: litigation and investigation costs were $5 versus $173 in Q1 2016, while gains on sales and facility consolidation were $15 versus $147. The 2016 period included a $113 gain on the sale of Georgia facilities.
Outlook, developments and risks
- No full-year earnings guidance is provided in the supplied filing text. Tenet said Q1 results are not necessarily indicative of full-year results and highlighted sensitivity to volumes, payer mix and collections, reimbursement, litigation, interest rates, and other factors.
- In April, Tenet amended its USPI put/call agreement, expecting to pay approximately $711 to acquire 23.7% of USPI and increase ownership from approximately 56.3% to 80% by July 3, 2017. Funding was expected from cash, asset-sale proceeds and credit-facility borrowings. Further put/call transactions could raise ownership to 95% as early as 2019.
- After quarter-end, Tenet sold its Arizona health plan and most home-health and hospice businesses for approximately $13 and $20, respectively. It also agreed to sell three Houston-area hospitals and related operations for approximately $725, subject to customary conditions and regulatory approvals; completion was expected in Q3 2017.
- CMS’s proposed FY2018 inpatient payment rule was estimated by Tenet to increase annual fee-for-service IPPS payments by about 1.1%, or $24; the proposal was not final. The company also cited uncertainty surrounding potential ACA changes, Medicaid funding and provider-fee programs.
- Material risks include shareholder securities and derivative litigation related to the Clinica de la Mama matters, other investigations and claims, and a non-prosecution agreement. Failure to comply with that agreement could lead to criminal prosecution, penalties or exclusion from federal healthcare programs. Outcomes and financial effects of legal matters may be uncertain.
- Other disclosed exposures include $815 of professional and general liability reserves, physician-related guarantees with a maximum potential payment of $109 (with $94 recorded), and labor negotiations that could increase costs or disrupt operations.
Most important facts for investors to verify
- Whether hospital volumes and collections recover, particularly admissions, surgeries, payer mix, doubtful-account provisions and accounts-receivable days.
- Completion, final price and funding of the approximately $711 USPI purchase, and the resulting impact on liquidity, debt and cash taxes.
- Closing and proceeds from the Houston hospital sale and other divestitures, and how proceeds are applied.
- Final CMS reimbursement decisions, including the California provider-fee program and FY2018 IPPS rule, plus changes to Medicaid funding.
- Underlying earnings trend after separating recurring performance from prior-year litigation costs and facility-sale gains; Adjusted EBITDA is a non-GAAP measure and is not a liquidity measure.
- Developments in legal proceedings and compliance with the non-prosecution agreement, as well as liability-reserve adequacy.