Tenet Healthcare Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 24, 2020. The filing is an annual report, not a standalone quarterly filing; fourth-quarter figures are included below where provided. Unless indicated otherwise, financial amounts are in millions of dollars.
Business context
Tenet operates hospitals and other care facilities, ambulatory surgery and related businesses through USPI, and healthcare revenue-cycle and value-based-care services through Conifer. At year-end, it operated 65 hospitals and more than 500 other healthcare facilities. Tenet owned approximately 95% of USPI and 76.2% of Conifer.
Key financial results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net operating revenues | $18,479 | $18,313 |
| Operating income | $1,513 | $1,647 |
| Operating margin | 8.2% | 9.0% |
| Net income (loss) attributable to Tenet common shareholders | $(232) | $111 |
| Loss from continuing operations attributable to common shareholders | $(243) | Income of $108 |
| Adjusted EBITDA (non-GAAP) | $2,706 | $2,560 |
| Adjusted EBITDA margin (non-GAAP) | 14.6% | 14.0% |
| Net cash provided by operating activities | $1,233 | $1,049 |
| Capital expenditures | $670 | $617 |
Revenue increased 0.9%, while operating income declined 8.1%. The common-shareholder loss included a $227 million loss on early debt extinguishment and $141 million of litigation and investigation costs. Adjusted EBITDA is a company-defined non-GAAP measure and excludes, among other items, these costs.
Fourth-quarter net operating revenue was $4,806, up 4.0% from $4,619. Tenet reported $2 million of net income attributable to common shareholders, versus a $5 million loss in Q4 2018; diluted earnings per share were $0.02 versus $(0.04).
Segments and operating trends
- Hospital Operations and other: Segment revenue before intersegment eliminations was $15,522 versus $15,285. Same-hospital revenue rose 5.0%; same-hospital admissions increased 2.3%. Labor costs and other same-hospital expenses grew faster than revenue in aggregate, and salaries, wages and benefits increased to 49.1% of same-hospital revenue from 48.5%.
- Ambulatory Care: Revenue was $2,158 versus $2,085. Systemwide same-facility revenue grew 6.1% and cases rose 3.7%. USPI operated 346 facilities, including equity-method ventures; Tenet consolidated 238.
- Conifer: Revenue was $1,372 versus $1,533. Third-party customer revenue fell 15.3%, with customer contract terminations related in part to hospital divestitures. Tenet announced plans to pursue a tax-free spin-off.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $262 at year-end, down from $411; working capital was $876.
- Total debt was approximately $14.8 billion at carrying value. Net debt to trailing Adjusted EBITDA was 5.35x. Interest expense was $985, or 65% of operating income.
- The revolving credit facility had $1.499 billion available and no cash borrowings outstanding at year-end. Tenet reported compliance with its credit and letter-of-credit facility covenants.
- Operating cash flow was $1.233 billion; investing cash outflow was $619 million and financing cash outflow was $763 million. Investing outflow reflected capital spending and lower asset-sale proceeds than in 2018.
- Tenet refinanced $5.7 billion of notes during 2019, issuing secured debt to fund redemptions and repayment of earlier maturities. The transactions generated the $227 million early-extinguishment loss.
Guidance, outlook and material developments
- Management expected 2020 capital expenditures of approximately $700–$750 million and interest payments of approximately $935–$945 million.
- Tenet targeted completion of the proposed Conifer spin-off by the end of Q2 2021, subject to tax, contractual, regulatory, capital-structure and board-approval conditions. The filing cautions that completion and timing are uncertain; approximately 42% of Conifer revenue was attributable to Tenet and approximately 41% to CHI in 2019.
- Tenet agreed to sell its two Memphis-area hospitals and related operations. At year-end, the related assets and liabilities were classified as held for sale; the company recorded a $26 million impairment charge. The transaction was expected to close in 2020, subject to approvals and customary conditions.
- Management cited cost-reduction initiatives, including workforce reductions, supplier-contract renegotiations and an offshore support center. Tenet recorded $137 million of restructuring charges in 2019, including $57 million of severance, and expected further restructuring charges in 2020.
- For federal fiscal 2020, Tenet estimated a $45 million reduction in Medicaid DSH revenue if scheduled cuts proceeded, with a further incremental $45 million reduction in FFY2021. The filing also estimated that finalized 2020 Medicare inpatient and outpatient payment changes could increase annual payments by approximately $28 million and $10 million, respectively; these estimates were subject to uncertainty.
Risks, contingencies and unusual items
- Regulatory and legal exposure: The DOJ extended Tenet’s Non-Prosecution Agreement (NPA) to November 1, 2020 after finding breaches of certain reporting obligations. Further breach could lead to prosecution, penalties or exclusion from federal healthcare programs. Tenet recorded $141 million of litigation and investigation costs in 2019.
- Tenet recorded a $69 million reserve for an Oklahoma surgical-hospital qui tam matter after reaching an agreement in principle to resolve the matter for approximately $66 million, subject to government approval. It also disputed a $63 million pension withdrawal-liability assessment connected to the bankruptcy of the former purchaser of its Philadelphia operations.
- Significant operating risks include government reimbursement changes, payer concentration and contract terms, collection of patient balances, labor shortages and costs, competition, and the company’s substantial debt. Managed-care payers accounted for 66.2% of hospital and related outpatient net patient service revenue; the top ten payers generated 62% of managed-care revenue.
- The filing identified COVID-19 as a potential risk to patient volumes, staffing and medical-supply availability; it did not quantify a financial impact.
- Key estimates include patient-account collectability, contractual allowances, malpractice liabilities and asset valuations. Deloitte issued unqualified opinions on the financial statements and internal controls; management and the auditor concluded internal control over financial reporting was effective at year-end.
Most important facts for investors to verify
- Whether operating performance and cash generation can support debt service and reduce leverage from 5.35x net debt to Adjusted EBITDA.
- How the $227 million debt-extinguishment loss and $141 million litigation and investigation costs affect comparisons of GAAP earnings with adjusted results.
- Progress and final terms of the Conifer separation, including long-term service agreements, capital structure, tax-free status and the effect of losing Conifer earnings and cash flows.
- Completion and proceeds of the Memphis-area sale, and the ultimate resolution of the Oklahoma qui tam matter, pension assessment and ongoing Detroit investigation.
- Actual effects of Medicaid DSH reductions, Medicare payment changes, payer negotiations and patient receivable collections on revenue and liquidity.