Tenet Healthcare Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also provides unaudited fourth-quarter results; this is an annual report, not a standalone quarterly filing. Unless indicated otherwise, financial amounts are in millions of dollars.
Business context
Tenet operated 49 hospitals with 13,216 licensed beds, 117 outpatient centers, and Conifer Health Solutions, which served more than 600 healthcare clients. Its reportable segments are Hospital Operations and other, and Conifer. Tenet’s strategy emphasizes outpatient growth, physician alignment, managed-care pricing, quality and cost improvement, acquisitions, and expansion of Conifer.
Key financial metrics
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net operating revenues before doubtful-account provision | $9,904 | $9,371 |
| Provision for doubtful accounts | $785 | $717 |
| Net operating revenues | $9,119 | $8,654 |
| Operating income | $749 | $653 |
| Income from continuing operations | $209 | $103 |
| Net income attributable to Tenet common shareholders | $141 | $58 |
| Diluted EPS from continuing operations | $1.70 | $0.56 |
| Cash from operating activities | $593 | $497 |
| Capital expenditures | $508 | $475 |
| Adjusted EBITDA (non-GAAP) | $1,203 | $1,126 |
| Adjusted EBITDA margin | 13.2% | 13.0% |
Operating margin increased to 8.2% from 7.5%. FY2012 net income included a $76 million loss from discontinued operations, including a $100 million impairment charge related to the planned sale of Creighton University Medical Center (sold in August 2012). FY2011 included a $117 million debt-extinguishment loss; FY2012 included $4 million.
At December 31, 2012, cash and cash equivalents were $364 million; working capital was $918 million; total assets were $9,044 million; total equity was $1,218 million; and long-term debt, net of current portion, was $5,158 million. Total long-term debt was approximately $5.3 billion. No revolving-credit borrowings were outstanding; $154 million of letters of credit left $646 million of borrowing availability. Net debt to Adjusted EBITDA was 4.1x, as defined by the company.
Fourth-quarter performance and changes
Fourth-quarter 2012 net operating revenues were $2,331 million, up 7.3% from $2,172 million. Common-shareholder net income was $49 million, or diluted EPS of $0.45, versus a $76 million loss, or diluted loss per share of $0.70, in fourth-quarter 2011. Adjusted patient admissions increased 2.9%, while total admissions were essentially flat. Outpatient visits rose 7.3% and outpatient surgeries rose 13.9%; inpatient surgeries fell 2.6%.
For the full year, revenues rose 5.4% and net patient revenues increased 4.6%, driven mainly by improved pricing, with reported volume contributing 0.6%. Total admissions declined 0.3%, patient days fell 1.8%, and outpatient visits increased 5.4%. The doubtful-account provision rose 9.5% to $785 million, or 7.9% of revenues before the provision, from 7.7%; management cited higher uninsured volumes, partly offset by improved self-pay collections.
Operating cash flow increased $96 million year over year, including $81 million of proceeds related to a Medicare rural-floor settlement. Investing cash outflow was $662 million and financing cash inflow was $320 million. The company spent $211 million on acquisitions and $126 million repurchasing common stock during the year. FY2012 results also included $40 million of EHR incentives, compared with $55 million in FY2011.
Outlook, commentary and risks
- Management forecast 2013 continuing-operations capital expenditures of approximately $550–$600 million. It also stated an intention to spend approximately $400 million in the near term on acute-care hospitals, outpatient facilities and business-process services companies; this is an investment plan, not earnings guidance.
- Tenet expects potential benefit from expanded insurance coverage beginning in 2014, but emphasized that the net effect of the Affordable Care Act is uncertain. Medicare and Medicaid payment reductions, DSH cuts, state decisions on Medicaid expansion, and payer negotiations could offset coverage-related benefits.
- In February 2013, Tenet issued $850 million of 4.5% senior secured notes due 2021 and used part of the proceeds to tender for approximately $645 million and call approximately $69 million of 10% senior secured notes due 2018. The company expected an approximately $179 million early-extinguishment loss. It also signed an agreement to acquire Emanuel Medical Center, expected to close in Q2 2013, and announced a John Muir Health joint venture involving an approximately $100 million investment for a 49% interest in San Ramon Regional Medical Center.
- Major operating risks include high uninsured and underinsured volumes, bad debt, dependence on managed-care payers, government reimbursement and regulatory changes, competition, physician and nurse recruitment, labor costs and union activity, geographic concentration in Florida, Texas and California, and Conifer’s ability to retain customers and grow profitably.
- Material uncertainties include pending government billing reviews, including cardiac-defibrillator and other procedure billing matters, and litigation. Tenet had approximately $3 million of reserves for three hospitals in certain governmental reviews at year-end; ultimate resolution could differ materially. The filing also identifies exposure from professional-liability claims and potential future asset impairments.
Most important facts to verify
- Reconcile the reported improvement in earnings with the discontinued-operations impairment, debt-extinguishment charges, and the large year-over-year tax and litigation-cost changes.
- Assess whether revenue growth and margin gains are sustainable given flat annual admissions, falling patient days, payer-mix pressure, and rising doubtful-account provisions.
- Review debt maturities, covenant terms, borrowing availability, leverage, and the actual costs and proceeds of the February 2013 refinancing.
- Confirm the timing, state approvals, and realized economics of Medicaid/DSH programs, the Medicare settlement and pending cost-report appeals.
- Track 2013 capital spending, acquisition commitments, Conifer’s external-client growth, and the projected savings or costs from EHR implementation.
- Review subsequent outcomes of significant legal and regulatory matters, including the amounts ultimately paid versus recorded reserves.