Tenet Healthcare Corporation — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010; comparative periods ended June 30, 2009. Unaudited. Dollar amounts are in millions except per-share data. Tenet operated 49 general hospitals and one critical access hospital, with 13,420 licensed beds in 11 states.
Financial performance and liquidity
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net operating revenues | $2,303 | $2,229 | $4,642 | $4,491 |
| Operating income | $171 | $138 | $372 | $314 |
| Operating margin | 7.4% | 6.2% | 8.0% | 7.0% |
| Net income (loss) attributable to common shareholders | $25 | $(15) | $113 | $163 |
| Diluted EPS, including discontinued operations | $0.05 | $(0.03) | $0.22 | $0.34 |
| Adjusted EBITDA, non-GAAP | $268 | $246 | $566 | $524 |
| Adjusted EBITDA margin, non-GAAP | 11.6% | 11.0% | 12.2% | 11.7% |
- Six-month operating cash flow was $169, versus $164 a year earlier. Capital expenditures were $160, including $148 for continuing operations and $12 for hospital construction. Adjusted free cash flow, a non-GAAP measure, was $21 versus $(2).
- Cash and cash equivalents were $711 at June 30, compared with $690 at year-end 2009. Total debt was $4,274, essentially unchanged from year-end; long-term debt net of current maturities was $4,272. Net debt to last-twelve-month Adjusted EBITDA was 3.5x.
- The $800 revolving credit facility had no cash borrowings outstanding; $491 was available after letters of credit and borrowing-base limits. The facility matures in November 2011. Tenet reported compliance with its covenants.
- Current assets were $2,435 and current liabilities $1,558. Accounts receivable, net, was $1,160. These figures include cash held for captive insurance operations and should not be read alone as a measure of immediately available liquidity.
Material changes and operating trends
- Q2 revenue increased 3.3% and six-month revenue increased 3.4%. Management attributed growth mainly to improved commercial managed-care pricing, higher acuity and payer-mix effects; net inpatient revenue rose 2.6% in Q2 and outpatient revenue rose 4.4%.
- Volumes remained weak: Q2 admissions fell 2.0%, patient days 2.4%, and outpatient visits 0.8%. Commercial managed-care admissions declined 7.2%; total admissions were down 2.0% for the six-month period as well. Management cited competition, economic weakness, fewer elective procedures, strategic service-line reductions, and flu- and weather-related impacts.
- Q2 salaries, wages and benefits rose 2.1%, supplies were flat, and other operating expenses rose 5.5%. Selected costs per adjusted patient day increased 3.8%. The six-month provision for doubtful accounts rose 12.1% to $362 and reached 7.8% of revenue, versus 7.2%; the self-pay collection rate declined to 29.5% from 30.8%.
- Q2 common-shareholder income improved from a loss to profit, but six-month income declined from $163 to $113. The 2009 comparison included a $113 gain from early debt extinguishment and a $15 investment-sale gain. Preferred dividends of $12 were recorded in the first half of 2010; no preferred dividends were recorded in the first half of 2009.
- Interest expense declined to $216 for the first half from $230. Professional and general liability reserves declined to $531 from $572 at year-end. Tenet sold certain NorthShore Regional Medical Center assets in April for approximately $16 cash proceeds and terminated its operating lease.
Outlook, risks and unusual items
- Tenet forecast 2010 capital expenditures of approximately $475–$525. Management expected liquidity from cash, operating cash flow, available revolver capacity and investments to cover current needs, while noting long-term debt service depends on cash-flow improvement and potential refinancing or asset sales. It planned to negotiate a replacement credit facility in Q3 2010.
- Management expected health-care reform to broaden coverage over time, potentially reducing uninsured-care costs, but also noted reimbursement reductions, including Medicare and Medicaid payment changes. It anticipated HIT-related operating costs could begin to be offset by incentive payments in 2012. No full-year earnings guidance is provided in the supplied filing text.
- CMS-related Medicare disproportionate-share adjustments reduced Q2 revenue by approximately $20, including $14 attributable to prior years; a separate $8 unfavorable adjustment concerned Medicare reimbursement of bad debts. Tenet was pursuing appeals of CMS policy and expected to submit required Part C “no-pay” claims by August 31, 2010.
- Tenet recorded a $55 income-tax benefit in continuing operations from reducing its deferred-tax valuation allowance and other tax adjustments, yet retained a $1.1 billion valuation allowance at June 30. Management said further operating improvement could affect the allowance; any future release is uncertain.
- Governmental reviews included rehabilitation billing, kyphoplasty, partial hospitalization billing and a DOJ inquiry into implantable defibrillator claims. Tenet had recorded approximately $26 in reserves for specified reviews. It also faced class-action litigation related to Hurricane Katrina and other claims; outcomes and potential losses may be material, and some matters are not estimable.
- Other uncertainties include self-pay collectability, state Medicaid funding and provider-tax proposals, labor contract negotiations, malpractice and other litigation exposure, and the implementation and financial impact of health-care reform. Tenet noted that actual results may differ materially from estimates and that interim results are not necessarily indicative of full-year performance.
Important facts for investors to verify
- Whether admissions and patient volumes stabilize, particularly commercial managed-care volumes, and whether pricing gains continue to offset volume declines.
- Subsequent self-pay collection rates, doubtful-account provisions and accounts-receivable aging; self-pay collection was 29.5% and provision expense was rising faster than revenue for the first half.
- Execution of the planned replacement credit facility, refinancing terms, debt maturities, leverage and the availability of asset-sale proceeds.
- Final Medicare DSH/SSI determinations and appeals, Medicaid funding and provider-tax approvals, and the actual effects of federal payment changes.
- Changes to the deferred-tax valuation allowance and the sustainability of reported earnings excluding tax adjustments and prior-year or other unusual items.
- Developments in government investigations, legal proceedings, liability reserves and related cash payments; also confirm the scope and timing of required capital and seismic improvements.