Tenet Healthcare Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. Tenet operated 50 hospitals and 101 outpatient facilities at quarter-end. Unless noted, amounts are in millions.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net operating revenue | $2,350 | $2,299 |
| Operating income / margin | $205 / 8.7% | $259 / 11.3% |
| Adjusted EBITDA / margin | $314 / 13.4% | $379 / 16.5% |
| Net income attributable to common shareholders | $58 | $73 |
| Diluted EPS | $0.13 | $0.16 |
| Cash used in operating activities | $42 | $2 |
- Revenue before doubtful-account provision was $2,543, up 2.5%; the provision rose 6% to $193, or 7.6% of pre-provision revenue versus 7.3%.
- Operating cash flow was negative; capital expenditures were $136 and cash interest paid was $102. Cash declined $9 to $104.
- Total debt was $4,583, including $283 drawn on the revolving facility. Available revolver capacity was $355; net debt to trailing 12-month Adjusted EBITDA was 4.1x. The company reported compliance with credit agreement covenants.
- Current assets were $2,482 versus current liabilities of $1,840. The filing notes that Q1 operating cash flow is typically lower because of working-capital timing and annual employee-related payments.
Changes versus the prior comparable period
- Revenue increased modestly, but operating income fell about 21% and Adjusted EBITDA about 17%; margins contracted. Salaries, wages and benefits rose 4.2%, and other operating expenses rose 9.3%.
- Net outpatient revenue rose 6.5% and outpatient visits 4.1%; outpatient surgeries increased 10.9%. Net inpatient revenue declined 0.8%; total admissions were nearly flat, patient days fell 2.8%, and average length of stay declined 2.7%.
- Q1 2012 revenue included $81 of favorable prior-year cost-report adjustments, substantially related to a Medicare settlement, versus $1 in Q1 2011. State DSH and other subsidy revenue fell to $46 from $130, mainly reflecting timing and program differences.
- Interest expense declined to $98 from $118, partly because Q1 2011 included $19 of swap and hedged-debt mark-to-market losses. The 2011 period also included $25 of electronic health record incentives versus $1 in 2012, reducing the year-over-year comparison benefit.
- Common shares repurchased in Q1 totaled approximately 5.3 million for $26. The $400 million repurchase program was completed in January 2012.
Outlook, developments and risks
- Medicare settlement: An April 2012 government settlement generated a recorded Q1 gain of approximately $77 in continuing operations and $7 in discontinued operations; approximately $84 of cash proceeds were expected around June 30, 2012.
- Capital spending: Management expected 2012 continuing-operations capital expenditures of approximately $500–$550.
- Proposed hospital sale: Tenet signed a non-binding letter of intent to sell its interest in Creighton University Medical Center for approximately $63, subject to definitive agreements and closing conditions. If completed, the company anticipated a non-cash pre-tax impairment of approximately $100.
- Debt and financing: In April, Tenet repurchased and retired 298,700 mandatory convertible preferred shares, financed with $141 of 6.25% secured notes due 2018 and $150 of 8% notes due 2020. The revolving facility’s stated maturity could accelerate to December 2014 if specified 2015-note refinancing or repayment is not completed.
- Government reimbursement: Management expected approximately $55 of cash outflow from pending Medicare DSH cost-report settlements, with timing likely beginning in 2012; $49 had previously been reserved. California’s supplemental Medicaid fee program remained subject to CMS approval, and timing of state programs affected reported revenue and cash receipts.
- Legal and regulatory matters: A $42.75 Medicare rehabilitation settlement was entered into in April and paid; it had been fully reserved at year-end. Government reviews and other litigation remain, and outcomes or reserves could change. After quarter-end, a judge reduced a $65 punitive-damages verdict in the Rosenberg matter to $5, subject to the plaintiff’s acceptance or a new trial.
- Management cited weak economic conditions, payer mix, uninsured and underinsured care, bad-debt collections, labor negotiations, competition, managed-care utilization pressure, and changing Medicare/Medicaid rules and funding as risks. It expected outpatient growth and Conifer expansion to support longer-term performance, but provided no specific earnings guidance. The filing cautions that quarterly results may not indicate full-year results.
Important facts for investors to verify
- How much of reported revenue and earnings reflects the Medicare settlement and other prior-period cost-report adjustments, and when the related cash is collected.
- Whether operating cash flow, collections and bad-debt trends improve, especially given higher receivables and a 27.9% self-pay collection rate.
- Progress on the expected $55 Medicare DSH outflow, California Medicaid program approval, and other state subsidy funding.
- Debt refinancing requirements, revolver availability, leverage and the cash-flow impact of capital spending and preferred-share retirement.
- Whether the Creighton sale closes and whether the anticipated impairment is recorded; monitor remaining legal and government-review exposures.