Tenet Healthcare Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. Financial amounts are in millions except per-share data. Results cover continuing operations unless otherwise stated.
Business context and reporting period
Tenet operates hospitals and related healthcare businesses, ambulatory facilities through its USPI joint venture and Aspen, and healthcare business-process services through Conifer. At quarter-end, the company reported 79 hospitals, 20 short-stay surgical hospitals, approximately 470 outpatient centers, nine UK facilities and six health plans. Portfolio changes—including acquisitions and hospital divestitures—affect year-over-year comparisons.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net operating revenues, after doubtful-account provision | $4,849 | $4,692 | $14,761 | $13,608 |
| Operating income | $333 | $287 | $947 | $741 |
| Adjusted EBITDA | $570 | $566 | $1,800 | $1,663 |
| Adjusted EBITDA margin | 11.8% | 12.1% | 12.2% | 12.2% |
| Net income (loss) attributable to Tenet common shareholders | $(8) | $(29) | $(113) | $(43) |
| Diluted loss per share | $(0.08) | $(0.29) | $(1.14) | $(0.43) |
| Interest expense | $243 | $248 | $730 | $664 |
Consolidated net income was $80 million in Q3 and $153 million for the nine months, but noncontrolling interests received $88 million and $266 million, respectively, leaving losses attributable to Tenet common shareholders.
- Q3 revenue before the provision for doubtful accounts rose 3.0%; the provision was $367 million versus $371 million. Nine-month provision was $1,095 million versus $1,086 million.
- Nine-month operating cash flow was $851 million, compared with $835 million. Capital expenditures were $614 million; investing cash flow was $(150) million and financing cash flow was $(408) million. Cash increased to $649 million from $356 million at year-end 2015.
- At September 30, cash was $649 million, total debt was $14.507 billion, and borrowing availability under the revolving credit facility was approximately $998 million; there were no cash borrowings under that facility. Net debt to trailing-12-month Adjusted EBITDA was 5.74x.
- Current assets were $5.116 billion and current liabilities $4.547 billion. Accrued legal settlement costs were $527 million. Approximately $201 million of cash was intended for captive insurance and health-plan operations.
Material changes versus the prior comparable period
- Q3 net revenue increased about 3.3%, operating income increased about 16%, and Adjusted EBITDA was nearly flat. The company cited growth in USPI and Conifer, improved managed-care pricing, and higher-acuity services; the EBITDA margin edged down.
- For the nine months, net revenue rose about 8.5% and Adjusted EBITDA about 8.2%. Acquisitions, including USPI/Aspen and subsequent ambulatory acquisitions, contributed materially to growth; comparisons are also affected by divestitures.
- Same-hospital revenue increased 5.5% in Q3 and 6.0% for the nine months, while same-hospital admissions were up 0.4% in Q3 and down 0.2% year to date. Across reported continuing operations, admissions declined 3.7% in Q3, partly reflecting fewer hospitals in the portfolio.
- Ambulatory Care revenue increased 36.2% in Q3, mainly from acquisitions; Conifer revenue increased 14.7%. Hospital Operations same-hospital other operating expenses rose faster than revenue, including higher contracted-services and malpractice costs.
- Nine-month litigation and investigation costs increased to $291 million from $67 million. This was partly offset in operating income by $151 million of gains on sales and consolidation/deconsolidation, including a $113 million gain on the Georgia facilities sale.
- Interest expense increased $66 million for the nine months, which management attributed primarily to increased borrowings related to recent acquisitions. Total debt was broadly unchanged from December 2015.
Outlook, management commentary and risks
- Tenet forecast 2016 continuing-operations capital expenditures of approximately $850 million to $900 million. The filing does not provide a specific company-wide revenue or earnings forecast.
- Management emphasized growth in outpatient services, Conifer, physician alignment and managed-care contracting, along with cost control, cash generation and portfolio optimization. It noted that outpatient services historically generate higher margins than inpatient services.
- Tenet resolved the Clinica de la Mama matters for approximately $517 million in aggregate. The quarter-end reserve was approximately $517 million; subsidiaries paid approximately $146 million in forfeiture judgments on October 28, 2016, and the company said it would pay approximately $372 million on November 2. Funding was to come from general corporate liquidity, including cash and potential revolver borrowings. The NPA requires cooperation and an independent compliance monitor for a three-year term; violations could lead to prosecution, penalties or exclusion from federal healthcare programs.
- Two shareholder class-action complaints filed in October 2016 allege misleading statements concerning financial performance and compliance policies. Tenet said it believes the allegations are without merit and intends to defend itself.
- Tenet said it had filed to exit health-exchange markets in Arizona, Michigan and Texas and Medicare Advantage in Arizona, signed an agreement to sell its Michigan health plans, and expected to exit remaining Arizona and Texas health-plan businesses. Certain health-plan assets and liabilities were classified as held for sale.
- A national payer contract expired September 30, 2016, making Tenet facilities and employed physicians out of network. The contract represented approximately 2.9% of net operating revenues before doubtful-account provision after the Georgia sale. Tenet did not anticipate a long-term material adverse impact, but a replacement agreement was not assured.
- Key exposures include Medicaid funding levels and payment delays, payer mix and bad-debt collections, managed-care contract terms, labor negotiations and possible strikes, malpractice reserves, and the high debt burden. Management cautioned that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Actual payment and funding of the Clinica de la Mama settlement, compliance-monitor costs, and performance under the NPA.
- Progress on the Michigan health-plan sale and planned exits from other health-plan markets.
- Whether Tenet renewed or replaced the expired national payer contract and the resulting effects on volumes and revenue.
- Cash conversion, receivables collectability, Medicaid supplemental-program receipts, and whether capital spending remains within the stated $850–$900 million range.
- Debt service and leverage trends, including the effect of acquisitions and any required payments to USPI joint-venture partners under put/call arrangements.
Adjusted EBITDA is a non-GAAP measure; the filing cautions that it is not a measure of liquidity and may not be comparable with similarly titled measures at other companies.