TENET HEALTHCARE CORP quarterly report, Q2 FY2013

Tenet Healthcare Corporation — Q2 2013 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2013. Unless otherwise stated, amounts are in millions of dollars. Tenet operated 49 hospitals with 13,180 licensed beds, 126 outpatient centers, and Conifer Health Solutions, which served more than 600 clients.

Financial performance and liquidity

Metric	Q2 2013	Q2 2012	Six months 2013	Six months 2012
Net operating revenues	$2,422	$2,265	$4,809	$4,567
Operating income	$202	$180	$348	$385
Operating margin	8.3%	7.9%	7.2%	8.4%
Adjusted EBITDA	$336	$288	$610	$598
Adjusted EBITDA margin	13.9%	12.7%	12.7%	13.1%
Net income (loss) attributable to Tenet common shareholders	$(50)	$(6)	$(138)	$52
Diluted EPS	$(0.49)	$(0.06)	$(1.33)	$0.49

Revenue growth reflected expanded Conifer business, outpatient volume growth, improved managed-care pricing, and higher state subsidy revenue. Q2 inpatient revenue declined 0.4%, while outpatient revenue increased 6.7%.
Q2 operating income improved, but first-half operating income fell year over year. First-half results included $34 of electronic health record incentives, recorded as an expense reduction.
Reported losses were substantially affected by $171 of Q2 and $348 of first-half losses on early debt extinguishment. Excluding the listed impairment/restructuring, litigation and debt-extinguishment items, management reported an after-tax impact of $(122) for Q2 and $(242) for the first half.
Operating cash flow was $128 for the first half, versus $201 a year earlier; capital expenditures were $256, implying cash flow after capital expenditures of approximately $(128), before acquisitions and financing. Cash declined to $90 from $364 at year-end 2012.
At June 30, total debt was $5,635, including $71 current; cash was $90. Management reported net debt to trailing-12-month Adjusted EBITDA of 4.6x. The revolving facility had $33 of borrowings, $152 of letters of credit, and approximately $615 of remaining borrowing availability.
Current assets were $2,574 and current liabilities $1,658. Net accounts receivable was $1,369; the doubtful-account provision was $207 in Q2, up 8.9%, and equaled 7.9% of revenue before provision. Self-pay collection rate was 28.7%.

Material changes and business developments

Hospital volumes remained pressured: Q2 admissions fell 3.5%, patient days fell 3.9%, and adjusted admissions fell 0.7%. Outpatient visits rose 2.5%; outpatient surgeries rose 23.8%, while inpatient surgeries declined 2.9%.
Tenet issued $850 of 4.5% secured notes due 2021 in February and $1,050 of 4.375% secured notes due 2021 in May, using proceeds in part to retire higher-coupon secured notes. The refinancing reduced coupon rates but generated $348 in combined early-extinguishment losses.
In May, John Muir Health invested approximately $98 for a 49% interest in Tenet’s San Ramon Regional Medical Center joint venture.
Tenet agreed to acquire Vanguard Health Systems for $21 per share, a transaction valued at $4.3 billion including assumption of $2.5 billion of Vanguard debt. The company expected closing before year-end 2013, subject to approvals and other conditions, and said financing was fully committed. Tenet also had a pending agreement to acquire Emanuel Medical Center.
Tenet repurchased $192 of common stock during the first half under its $500 share-repurchase authorization; $208 remained authorized at June 30.

Outlook, risks, and unusual items

Tenet forecast 2013 continuing-operations capital expenditures of approximately $550–$600. No full-year earnings or revenue guidance is provided in the filing.
Management anticipated possible benefits from expanded insurance coverage under the Affordable Care Act, while emphasizing uncertainty around Medicaid expansion, reimbursement reductions, implementation, and the net effect on bad debt and revenue. The employer-mandate penalties and reporting requirements were delayed to 2015.
Management cited weak economic conditions, competition, payer mix, lower inpatient volumes, higher patient deductibles and co-payments, and collection performance as operating challenges. It expected managed-care pricing increases to moderate.
Key regulatory exposure includes Medicare sequestration’s 2% payment reduction and changing federal and state reimbursement programs. CMS’s FY2014 inpatient payment rule was estimated by Tenet to increase its Medicare inpatient revenue by about $15; other payment-rule estimates were smaller and subject to uncertainty.
Material legal and regulatory matters include government reviews of kyphoplasty and cardiac-defibrillator billing, an investigation of provider arrangements in Georgia and South Carolina, and litigation related to the proposed Vanguard transaction. Tenet had $3 of reserves for three hospitals involved in specified government reviews and said potential outcomes could differ materially from reserves.
Other exposures include malpractice and general-liability claims, labor negotiations, possible impairment or restructuring charges, and acquisition approval, integration, and financing risks. The filing notes that actual results may differ from estimates and that interim results are not necessarily indicative of full-year results.

Important facts for investors to verify

Whether the Vanguard acquisition closed as expected, the final financing and debt burden, required regulatory remedies, and integration costs.
Whether inpatient volume declines and weaker first-half operating margin persist, and how much revenue growth depends on Conifer, outpatient services, and state subsidies.
Whether cash generation improves enough to fund capital spending and debt service, given first-half operating cash flow of $128, $90 cash on hand, and 4.6x reported net leverage.
Trends in doubtful-account provisions, self-pay collections, receivables, and the timing and collectability of DSH and other state-program payments.
Final outcomes of billing investigations, the HMM-related proceedings, Vanguard-related lawsuits, and other legal contingencies, including any reserve changes.