Tenet Healthcare Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Dollar amounts are in millions unless otherwise noted. Tenet operated 80 hospitals, 215 outpatient centers, six health plans and Conifer. Results include acquired or opened facilities that were not in the prior-year comparison.
Financial performance
- Revenue: Net operating revenue was $4,428, up 12.8% from $3,926. Revenue before doubtful-account provision rose 11.3% to $4,791; the provision declined to $363 from $380, or 7.6% of pre-provision revenue versus 8.8%.
- Profit: Operating income increased to $290 from $170; operating margin rose to 6.5% from 4.3%. Adjusted EBITDA, a non-GAAP measure, was $529 versus $387, with margin of 11.9% versus 9.9%. Consolidated net income was $76 versus a $16 loss; income attributable to Tenet common shareholders was $47 versus a $32 loss. Diluted EPS was $0.47, including $0.46 from continuing operations, versus a $0.33 loss.
- Cash flow and investment: Operating cash flow was negative $57 versus negative $19. Investing cash outflow was $187 versus $291, including $184 of capital expenditures. Cash declined by $8 during the quarter to $185. Interest paid was $117.
- Debt and liquidity: Balance-sheet short-term borrowings were $400; long-term debt, including its current portion, was $11,934. Cash was $185, and revolving-credit availability was approximately $646, with $350 drawn under that facility. Management reported net long-term-debt-to-adjusted-EBITDA leverage of 5.80x. A new $400 secured interim loan matures March 23, 2016; its stated interest rate was 4.50% through July 22, 2015, with a subsequent step-up if unpaid.
- Other balance-sheet indicators: Accounts receivable, net, was $2,468, while the doubtful-account allowance was $902, or 27.4% of patient receivables. Total liabilities were $17,245 and total equity was $972.
Changes versus Q1 2014
- Same-hospital admissions increased 4.9%, adjusted admissions 5.9%, outpatient visits 7.6% and total surgeries 7.1%. Same-hospital net operating revenue grew 11.0%.
- Revenue benefited from higher volumes, improved managed-care pricing, $46 of California provider-fee revenue and $23 of Texas Medicaid DSH revenue related to prior periods. DSH and other supplemental revenue totaled $247 versus $154.
- Insurance coverage shifts reduced charity and uninsured admissions and bad-debt provision, but increased patient co-pays and deductibles remained a collection challenge. Same-hospital self-pay collection rate was 27.8%, down from 28.1% a year earlier.
- Operating expenses increased, although several expense categories declined as a percentage of revenue. Malpractice expense rose to $89 from $49; management cited higher volumes, case settlements and discount-rate adjustments. Interest expense increased to $199 from $182, partly reflecting borrowings and the Valley Baptist interest purchase.
- Tenet paid $254 to acquire the remaining 49% interest in Valley Baptist, bringing its ownership to 100%. Redeemable noncontrolling interests also changed following Conifer’s expanded agreement with Catholic Health Initiatives.
Outlook, developments and risks
- Management expected 2015 continuing-operations capital expenditures of approximately $900–$1,000. The filing provides no full-year earnings guidance and cautions that quarterly results are not necessarily indicative of the full year.
- Definitive agreements were announced for a USPI surgery/imaging-center joint venture, in which Tenet expected initially to own 50.1%, and for acquisition of Aspen Healthcare’s UK operations. Both were subject to closing conditions and regulatory approvals. A separate Baylor Scott & White joint venture involving five North Texas hospitals was also pending; Baylor Scott & White would hold the majority interest.
- CMS proposed FY2016 inpatient payment changes; Tenet estimated a potential annual $30 reduction in its Medicare IPPS payments, primarily from lower uncompensated-care DSH reimbursement. These were proposed changes, not final rates. Management also estimated approximately $1 of potential annual revenue increases each for proposed psychiatric and rehabilitation payment updates.
- Key uncertainties include reimbursement and Medicaid funding changes, ACA implementation and legal challenges, payer negotiations, patient volumes and case mix, self-pay collections, labor negotiations, malpractice costs, and the company’s high leverage and refinancing needs. Management noted that Q1 operating cash flow is typically affected by annual incentive and 401(k) payments.
- Legal exposure includes the Clinica de la Mama investigations and qui tam action; four hospital subsidiaries were designated targets of the criminal investigation in April 2015. DOJ discussions regarding ICD billing at 56 hospitals continued, as did CFPB discussions concerning Conifer debt-collection practices. Recorded reserves for these matters totaled approximately $34. Outcomes and ultimate payments could differ materially from reserves.
Important facts for investors to verify
- Whether revenue and operating improvement persist after excluding provider-fee/DSH items, acquisitions and other nonrecurring effects.
- Cash conversion, receivables aging and self-pay collection trends, especially given negative quarterly operating cash flow.
- Debt maturities, borrowing availability, refinancing terms and leverage; verify the interim loan repayment plan and covenant compliance.
- Closing, regulatory and financing terms for the USPI and Baylor Scott & White transactions, and the expected cash or dilution implications of USPI put/call rights.
- Developments in governmental investigations, potential settlements and malpractice reserves, along with final Medicare and Medicaid payment decisions.