Tenet Healthcare Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Dollar amounts are in millions unless noted. Tenet operates hospitals, outpatient facilities, health plans and Conifer healthcare services. Results include Vanguard, acquired October 1, 2013, so reported year-over-year growth reflects a substantially larger company; same-hospital comparisons provide a more comparable view.
Financial performance and position
- Revenue: Q3 net operating revenue was $4,179, up from $2,408; nine-month revenue was $12,147, up from $7,217. On a same-hospital basis, Q3 revenue rose 11.5% and nine-month revenue rose 7.7%.
- Profit and margins: Q3 operating income was $211 versus $148, while operating margin fell to 5.0% from 6.1%. Adjusted EBITDA, a non-GAAP measure, was $459 versus $288; margin was 11.0% versus 12.0%. Nine-month operating income was $588 versus $496, with margin of 4.8% versus 6.9%; Adjusted EBITDA was $1,306 versus $898, with margin of 10.8% versus 12.4%.
- Net income: Income attributable to common shareholders was $9 in Q3 versus $28; diluted EPS was $0.09 versus $0.27. For the nine months, the company reported a common-shareholder loss of $49 versus a loss of $110; diluted loss per share was $0.50 versus $1.07.
- Cash flow and investment: Nine-month operating cash flow was $468 versus $334. Investing cash outflow was $914, including $734 of capital expenditures and $185 for acquisitions. Cash was $200 at September 30, 2014, versus $113 at December 31, 2013. Operating cash flow less capital expenditures was negative $266.
- Debt and liquidity: Long-term debt, including current maturities, was $11,553 versus $10,849 at year-end 2013; cash borrowings under the revolving facility were zero, with $994 available. Net debt to last-twelve-month Adjusted EBITDA was 6.5x. Current assets were $4,201 and current liabilities $3,145.
- Receivables: Accounts receivable, net, increased to $2,238 from $1,890. The doubtful-account allowance was 25.9% of patient receivables, up from 24.0%; AR days were 49.3, compared with 44.7 at year-end.
Material changes versus the prior period
- Vanguard’s acquisition added 28 hospitals and materially increased reported scale. Total Q3 admissions rose 64.4%, but same-hospital admissions increased a more modest 4.6%.
- Same-hospital Q3 outpatient visits rose 7.9%, outpatient surgeries 20.2%, and net operating revenue 11.5%. Management cited volume growth, improved managed-care pricing, ACA-related coverage and Conifer third-party services.
- Q3 doubtful-account provision declined to $249 from $210? The filing reports $249 for 2014 and $210 for 2013 on a total-company basis; on a same-hospital basis it declined 22.4%, to $163 from $210. The same-hospital provision rate fell to 5.7% from 8.0%, although self-pay collection rates weakened to 27.5% from 28.8%.
- Interest expense rose to $186 from $91 in Q3 and to $558 from $292 for nine months, primarily reflecting acquisition-related borrowing. Tenet issued $1.6 billion of 2019 senior notes during 2014 and redeemed $474 of 2015 notes, recording a $24 early-extinguishment loss in 2014. The prior-year nine-month period included a larger $348 debt-extinguishment loss.
- Nine-month impairment, restructuring and acquisition-related costs increased to $90 from $45; litigation and investigation costs increased to $19 from $3.
Outlook, commentary and risks
- Tenet forecast 2014 continuing-operations capital expenditures of approximately $900–$1,000. No full-year earnings or revenue guidance is provided in the supplied filing text.
- Management expects growth from outpatient expansion, acquisitions, Conifer services and broader insurance coverage, but cautions that operating results are affected by payer mix, reimbursement and regulation, patient volumes, collections, integration, costs and litigation. Interim results are not necessarily indicative of full-year performance.
- Management identified higher operating costs per adjusted patient admission, including labor, pharmaceuticals, contracted services, physician fees and malpractice expense. Same-hospital operating expenses per adjusted patient admission rose 4.3% in Q3.
- Government reimbursement remains uncertain. The company estimated the FFY 2015 inpatient Medicare rule could reduce annual inpatient revenue by about $13; projected outpatient changes could add about $13. California provider-fee program revenue was not recognized in Q3 because CMS approval was pending.
- Pending matters include government investigations into kyphoplasty, cardiac defibrillator procedures and the Clinica de la Mama arrangements; reserves for these matters totaled approximately $38. A previously disclosed class action settlement has a maximum potential payment of $32.5, with a $17 reserve recorded in discontinued operations. Conifer is also cooperating with a CFPB investigation; the company could not estimate a loss range.
- After quarter-end, Conifer acquired SPi Healthcare for a base purchase price of $235. The filing describes the purchase-price allocation as unfinished.
Important facts for investors to verify
- How much reported revenue and EBITDA growth reflects Vanguard and other acquisitions versus sustainable same-hospital performance, and whether integration delivers expected efficiencies.
- Whether margins recover as operating costs rise, and how much of Adjusted EBITDA converts into operating cash after interest, capital spending and working-capital needs.
- Self-pay collection trends, receivables aging, allowance adequacy and the effects of payer mix and ACA coverage changes.
- Debt maturities, refinancing needs and the sustainability of 6.5x net leverage, including the effect of further acquisitions and interest costs.
- Final outcomes and potential additional costs from government reviews, the CFPB investigation, the class action settlement and changing Medicare, Medicaid and state funding rules.