Tenet Healthcare Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Dollar amounts are in millions unless stated otherwise. Tenet operated hospitals, ambulatory facilities and Conifer healthcare business-process services. Its continuing operations comprised Hospital Operations and other, Ambulatory Care, and Conifer.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net operating revenues | $4,699 | $4,813 |
| Operating income | $517 | $267 |
| Income from continuing operations | $190 | $37 |
| Net income attributable to Tenet common shareholders | $99 | Loss of $53 |
| Diluted earnings (loss) per share | $0.96 | Loss of $0.53 |
| Adjusted EBITDA (non-GAAP) | $665 | $527 |
| Adjusted EBITDA margin | 14.2% | 11.1% |
| Net cash provided by operating activities | $113 | $186 |
Operating margin was 11.0%, compared with 5.5% a year earlier. The improvement in operating income included $110 million of gains on facility sales and other transactions, principally the $98 million MacNeal Hospital sale gain and $13 million from sales of minority interests in four North Texas hospitals. Results also included $47 million of impairment, restructuring and acquisition-related costs.
Revenue declined 2.4%, primarily reflecting facility divestitures and closures. Comparability is also affected by adoption of the new revenue-recognition standard: in Q1 2018, $347 million of estimated uncollectible patient amounts was presented as a reduction of revenue rather than as doubtful-account provision. Reported 2017 revenue included a $383 million provision for doubtful accounts. Tenet reported $64 million of California provider-fee revenue in Q1 2018 versus none in Q1 2017.
Hospital Operations and other same-hospital revenue increased 5.5%; same-hospital admissions increased 0.3%, while total reported continuing-operations admissions fell 7.4%, in part due to divestitures and closures. Ambulatory Care revenue rose 9.5%, supported by same-facility growth and acquisitions. Conifer revenue increased 0.5%; its Q1 included a $10 million customer contract termination payment.
Cash and cash equivalents were $974 million at March 31, 2018, up from $611 million at year-end. Investing activities provided $373 million, primarily reflecting facility-sale proceeds; operating activities provided $113 million, down from $186 million. Capital expenditures were $143 million. Current assets were $5,634 million and current liabilities $4,561 million.
Total debt, including current maturities, was $14,889 million, versus $14,937 million at December 31, 2017; $666 million was classified as current. Tenet reported no cash borrowings on its $1 billion revolving credit facility and approximately $998 million available. Its net-debt-to-Adjusted-EBITDA ratio was 5.53x under the company’s stated calculation. All outstanding long-term debt carried fixed interest rates.
Material changes, outlook and risks
- Tenet completed the MacNeal and Philadelphia-area hospital sales and sold minority interests in four North Texas hospitals, receiving approximately $378 million in net pre-tax proceeds from the latter transactions and MacNeal sale combined. The Philadelphia transaction generated an additional secured promissory note.
- In April 2018, after quarter-end, Tenet paid approximately $630 million to acquire WCAS’s remaining 15% interest in USPI and settle purchase-price adjustments. This subsequent transaction is not reflected in March 31 cash and debt balances. Baylor retains a separate 5% interest.
- Management targeted $250 million of annual operating-cost savings, with the full annualized run rate expected by year-end 2018. Tenet recorded $17 million of employee-severance charges in Q1 and expected further restructuring charges during 2018.
- 2018 capital expenditures were forecast at approximately $625 million to $675 million. Management said existing cash, revolver availability and expected operating cash flow should meet current needs, while noting liquidity could be pressured by weaker results, acquisitions, partner put rights, legal costs or other commitments.
- Management’s strategy emphasized cost control, higher-acuity services, ambulatory growth, asset divestitures and reducing leverage. It continued to explore a potential Conifer sale; no sale was reported as completed.
- Tenet estimated proposed FY2019 Medicare inpatient payment changes could increase its annual Medicare fee-for-service inpatient payments by approximately $36 million, subject to final rules and other uncertainties. It estimated 2018 outpatient payment-rule changes could increase hospital outpatient revenue by approximately $30 million.
- Key operating and regulatory risks include declining or shifting hospital volumes, payer pricing and utilization pressure, Medicaid funding and provider-fee program uncertainty, patient collection estimates, labor negotiations and possible strikes, and malpractice costs. Medicare and Medicaid cost-report settlements and managed-care receivables are subject to estimates and review.
- Tenet is subject to a non-prosecution agreement (NPA). On April 26, 2018, the DOJ notified the company that the remedy for a reporting-obligation breach would be a nine-month extension, to November 1, 2020. Tenet said it did not expect the extension to have a material effect; failure to comply with the NPA could have serious consequences. The filing also describes pending litigation and government investigations, with outcomes not predictable.
- Tenet adopted the new revenue standard effective January 1, 2018, changing the presentation of patient collection estimates. It also noted that adopting the lease standard in 2019 was expected to materially affect its balance sheet.
Important facts for investors to verify
- How much of the earnings and margin improvement reflects recurring operations versus sale gains and other unusual items.
- Whether the $250 million cost-savings target is achieved, and the related restructuring costs and effects on service levels and volumes.
- The cash, debt and leverage impact of the approximately $630 million USPI acquisition payment made after quarter-end.
- Whether operating cash flow and patient collections improve, including the effects of the new revenue presentation and provider-fee programs.
- Final Medicare payment rules, state Medicaid/provider-fee funding, and developments under the NPA, litigation and investigations.