TENET HEALTHCARE CORP quarterly report, Q2 FY2012

Business context and reporting period

Tenet Healthcare Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. It operated 49 hospitals in continuing operations, with 13,176 licensed beds, as well as outpatient facilities and Conifer, its revenue-cycle and healthcare-services business. The filing reports Conifer as a separate segment for the first time.

Financial performance and liquidity

Q2 included a $100 million impairment charge in discontinued operations related to the planned sale of Creighton University Medical Center (CUMC); discontinued operations reported a $68 million after-tax loss. Six-month operating cash flow was $201 million, versus $176 million a year earlier. Investing activities used $248 million, including $252 million of capital expenditures; financing activities provided $16 million. Cash declined to $82 million from $113 million at year-end 2011.

At June 30, total debt was $4.748 billion and cash was $82 million; management reported net-debt-to-LTM-Adjusted-EBITDA leverage of 4.3x. The revolving facility had $200 million drawn, $155 million of standby letters of credit and approximately $445 million available. The company reported compliance with its credit-agreement covenants. Current assets were $2.564 billion and current liabilities $1.872 billion.

Changes versus comparable periods

• Q2 net revenue grew 6.2%; six-month revenue grew 4.2%. Management attributed growth mainly to improved managed-care pricing and outpatient activity, supplemented by government and state-program payments.
• Volume trends were mixed: six-month adjusted admissions rose 2.1%, while total admissions fell 0.3% and patient days fell 1.9%. Six-month outpatient visits rose 4.7%; outpatient surgeries rose 10.2%.
• The provision for doubtful accounts increased 9.2% for the first half to $379 million, equal to 7.7% of revenue before that provision, up from 7.3%. Uninsured revenue and the prior-year benefit from aged managed-care settlements contributed.
• Six-month operating income and Adjusted EBITDA declined despite revenue growth. Adjusted EBITDA fell $48 million, with Hospital Operations and other down $84 million and Conifer up $36 million as reported. Management cautioned that the new intersegment pricing basis affects comparison; on a supplemental comparable basis, first-half EBITDA was $580 million for Hospital Operations and $18 million for Conifer.
• First-half common-shareholder earnings fell to $52 million from $128 million. Interest expense was lower year over year, partly because 2011 included mark-to-market losses on a now-terminated interest-rate swap; 2012 also had higher salaries and other operating costs.

Outlook, commentary, risks and unusual items

• Management estimated 2012 continuing-operations capital expenditures of approximately $500 million to $550 million. It expected Medicare inpatient rule changes to increase annual hospital revenue by about $34 million and proposed outpatient-payment changes by about $10 million; these were estimates, not guaranteed outcomes.
• Tenet received approximately $81 million of net cash proceeds in continuing operations from a Medicare rural-floor budget-neutrality settlement. The related favorable adjustment was recorded in Q1 2012 and materially supported first-half cash flow.
• In July, Tenet agreed to sell its interest in CUMC for an expected transaction price of approximately $63 million, including working capital. Closing was scheduled for August 31, 2012, subject to customary conditions and regulatory approvals. The $100 million impairment was recognized in Q2.
• Conifer entered a 10-year agreement with Catholic Health Initiatives to provide revenue-cycle services to 56 hospitals; CHI received a minority ownership interest in Conifer. Integration was expected to take up to 24 months.
• Management cited weak economic conditions, constrained inpatient and elective volume, payer-mix pressure, rising uninsured activity and bad debt, labor and operating-cost growth, and government reimbursement changes as risks. The Affordable Care Act’s effects remained uncertain, including potential coverage gains, payment reductions and state-by-state Medicaid decisions.
• Potential cash and earnings exposures include an estimated approximately $55 million Medicare cost-report outflow tied to disputed SSI calculations; ongoing DOJ reviews of kyphoplasty and ICD claims; and other litigation. A verbal settlement of approximately $0.9 million was reached for one kyphoplasty hospital, but the company could not estimate potential losses for other hospitals under review.
• The revolving facility’s scheduled 2016 maturity depends on repayment or refinancing by December 3, 2014 of approximately $238 million of the 9.25% notes due 2015; absent that, facility borrowings become due in 2014. Management said current liquidity sources should meet expected needs, while noting long-term debt service depends on operating cash flow and financing or refinancing access.

Investor facts to verify

• Whether CUMC’s sale closed on the stated terms and whether further impairment or transaction costs followed.
• How much of revenue growth and cash generation depended on the Medicare settlement and time-sensitive state provider-fee or DSH programs.
• Whether bad-debt trends, self-pay collections and payer mix improved or deteriorated after June 30.
• Progress on the estimated $55 million Medicare SSI-related settlement outflow and resolution of DOJ reviews and other legal matters.
• Actual 2012 capital spending, available revolver capacity, leverage, and the refinancing plan for the 2014 debt and credit-facility maturity condition.