Tenet Healthcare Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Dollars are in millions unless noted. Tenet operated 80 hospitals, 18 short-stay surgical hospitals, more than 400 outpatient centers and nine UK facilities. In June, it formed the USPI joint venture, owning 50.1%, and acquired Aspen; Ambulatory Care became a separate reporting segment.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net operating revenues | $4,492 | $4,038 | $8,916 | $7,963 |
| Operating income | $164 | $207 | $454 | $377 |
| Adjusted EBITDA | $568 | $460 | $1,097 | $847 |
| Adjusted EBITDA margin | 12.6% | 11.4% | 12.3% | 10.6% |
| Net loss attributable to Tenet common shareholders | $(61) | $(26) | $(14) | $(58) |
| Net loss per diluted share | $(0.61) | $(0.27) | $(0.14) | $(0.60) |
- Q2 operating margin was 3.7%, versus 5.1% a year earlier; the six-month margin was 5.1%, versus 4.7%. Q2 operating income included $193 million of impairment, restructuring and acquisition-related charges, including a $147 million write-down tied to the planned sale of Saint Louis University Hospital (SLUH).
- Revenue growth reflected acquisitions, higher inpatient and outpatient volumes, improved managed-care pricing and California provider-fee program revenue. Same-hospital revenue increased 6.8% in Q2; same-hospital admissions rose 1.7% and outpatient visits 4.6%.
- Adjusted EBITDA is a non-GAAP measure. The company reported Q2 interest expense of $217 million, up from $190 million; six-month interest expense was $416 million, up from $372 million.
- Six-month operating cash flow was $353 million, versus $247 million. Investing cash outflow was $985 million, including $636 million for acquisitions; capital expenditures were $359 million, versus $523 million. Cash at quarter-end was $299 million.
- Long-term debt was $14.754 billion, including current maturities. Revolver borrowings were $100 million and reported borrowing availability was $896 million. Net debt to trailing Adjusted EBITDA, including USPI and Aspen for the full trailing period, was 5.7x. Management stated existing cash, revolver availability and expected operating cash flow should meet current needs, while noting long-term debt service depends on operating cash flow and access to financing.
- Accounts receivable, net, was $2.505 billion. AR days were 50.7, within the company’s target of fewer than 55 days. The doubtful-account provision was 7.3% of revenue before that provision in both Q2 periods.
Material changes and unusual items
- Tenet combined its contributed surgery and imaging-center interests with USPI assets in a joint venture holding interests in 249 ambulatory surgery centers, 18 short-stay surgical hospitals and 20 imaging centers. Tenet paid approximately $424 million to align contributed-asset valuations and refinanced approximately $1.5 billion of USPI debt. Aspen, a UK provider with nine hospitals and clinics, was acquired for approximately $226 million.
- USPI’s minority partners have annual put rights beginning in 2016, generally covering at least 12.5% and up to 25% of their initial interest; Tenet has specified call rights, including a path to acquire all voting common stock by 2020. Exercise and settlement could require cash, shares or additional borrowing. Redeemable noncontrolling interests rose to $1.591 billion, substantially reflecting the joint venture.
- Net operating revenue before doubtful accounts rose 11.2% in Q2, while the doubtful-account provision increased 10.0%. Same-hospital payer mix shifted toward managed care; the company cited insurance coverage gains and Medicaid expansion as factors in lower charity and uninsured volumes.
- Q2 included offsetting Medicaid supplemental-revenue adjustments: a $35 million unfavorable adjustment for Valley Baptist hospitals and a $33 million favorable adjustment for Detroit hospitals. California’s provider-fee program contributed $45 million of revenue in Q2; management estimated approximately $575 million of net revenues over the program’s 36-month term.
Outlook, risks and contingencies
- Management estimated 2015 continuing-operations capital expenditures of $900 million to $1 billion. The filing does not provide a specific full-year earnings or revenue forecast and cautions that interim results are not necessarily indicative of full-year results.
- Management’s strategy emphasizes outpatient growth, acquisitions and partnerships, physician alignment, cost initiatives and Conifer’s revenue-cycle services. It noted that outpatient services historically produce higher margins, but cautioned that acquisitions and joint ventures may not achieve expected returns or synergies.
- CMS’s final FY2016 inpatient prospective payment rule, issued July 31, 2015, was estimated by Tenet to reduce annual IPPS payments by 1.2%, or approximately $30 million, largely due to lower uncompensated-care DSH reimbursement. This is a management estimate subject to volume, case-mix and other uncertainties.
- Key operating risks include high leverage and interest burden; payer negotiations and reimbursement changes; Medicaid funding and provider-fee program uncertainty; patient collections, bad debt and high deductibles; integration and performance of recent acquisitions and joint ventures; and labor, malpractice and regulatory exposure.
- The DOJ’s Clinica de la Mama matter includes civil and criminal investigations; four hospital subsidiaries were designated targets of the criminal investigation. Tenet had a $20 million reserve for the civil matter, while stating the ultimate amount could materially exceed it. The DMC nurse wage-fixing class action was set for trial in September 2015.
- Other disclosed matters include a $12.1 million DOJ settlement of the ICD investigation, fully reserved at quarter-end and paid in August 2015; a CFPB consent order involving Conifer’s debt-collection subsidiary, including $5.6 million and consumer-redress obligations; and $750 million of professional and general liability reserves.
Important facts for investors to verify
- Whether operating cash flow and earnings growth can offset the company’s debt burden, interest costs and 5.7x reported net leverage.
- Whether volume, managed-care pricing and outpatient growth persist after separating organic performance from acquisitions and one-time program revenue.
- Whether the $147 million SLUH impairment and the pending hospital dispositions and joint ventures close on expected terms and timing.
- The potential cash or dilution impact of USPI put/call rights beginning in 2016, and whether the joint venture achieves expected returns.
- Developments in the DOJ investigations, the DMC nurse litigation and other legal matters, including whether existing reserves remain adequate.
- The final effect of Medicare and Medicaid reimbursement changes, California provider-fee funding and patient-collection trends on revenue and cash flow.