Business context and reporting period
Tenet Healthcare Corporation’s Form 10-K covers the fiscal year ended December 31, 2021, with comparisons primarily to 2020. Tenet operates hospital and related healthcare services, ambulatory surgery centers and surgical hospitals through USPI, and revenue-cycle and value-based care services through Conifer. At year-end, it operated 60 hospitals and 535 other healthcare facilities. Tenet owned approximately 95% of USPI and 76% of Conifer.
Financial and operating highlights
| Metric | 2021 | 2020 |
|---|---|---|
| Net operating revenues | $19.485 billion | $17.640 billion |
| Operating income | $2.871 billion | $1.989 billion |
| Net income available to Tenet common shareholders | $914 million | $399 million |
| Diluted earnings per share | $8.42 | $3.75 |
| Adjusted EBITDA (non-GAAP) | $3.483 billion | $3.146 billion |
| Operating cash flow | $1.568 billion | $3.407 billion |
| Capital expenditures | $658 million | $540 million |
- Operating margin increased to 14.7% from 11.3%; Adjusted EBITDA margin was 17.9% in both years. Adjusted EBITDA is a company-defined non-GAAP measure.
- Interest expense was $923 million, down from $1.003 billion. Income tax expense was $411 million, compared with a $97 million tax benefit in 2020.
- Cash and cash equivalents were $2.364 billion at year-end. Long-term debt totaled $15.646 billion. The company reported net debt to Adjusted EBITDA of 3.81x, or 4.07x including Medicare advance obligations.
- The revolving credit facility had no cash borrowings and $1.797 billion of stated borrowing availability at year-end. Tenet reported compliance with its credit-facility covenants.
Material changes versus the prior comparable period
- Revenue rose 10.5%, reflecting higher patient volumes and acuity, a more favorable payer mix and improved managed-care contract terms, along with substantial growth from ambulatory acquisitions. Tenet also sold five Miami-area hospitals in August 2021 and divested most urgent care centers.
- Hospital Operations same-hospital adjusted admissions rose 2.4%; outpatient visits increased 15.7% and total surgeries increased 6.1%. Ambulatory Care revenue grew 31.2%, including acquisition-related growth. Conifer revenue declined 3.0%, partly due to revised terms of its agreement with Tenet.
- Operating income included $445 million of net gains on facility sales and consolidation, principally a $406 million gain on the Miami hospital sale. Grant income fell to $191 million from $882 million, principally reflecting lower pandemic relief funding.
- Operating cash flow fell by $1.839 billion. The filing cites lower grant receipts, repayment and recoupment of Medicare advances, repayment of deferred payroll taxes, higher income-tax payments and working-capital timing among the drivers, notwithstanding improved operating income before specified items.
- Tenet issued $2.850 billion of senior secured first-lien notes and retired or redeemed $2.988 billion of notes during 2021. Early debt extinguishment losses were $74 million, versus $316 million in 2020.
Outlook, risks and unusual items
- Management did not provide earnings or revenue guidance in the supplied filing text. It expects 2022 capital expenditures of approximately $725–$775 million and interest payments of approximately $850–$860 million.
- Tenet expects $880 million of Medicare accelerated-payment advances to be recouped through reduced Medicare claim payments during 2022. The company stated that existing cash, revolver availability and anticipated operating cash flow should meet current needs, while noting liquidity remains exposed to operating performance and other uncertainties.
- Management’s strategy emphasizes ambulatory-care expansion, higher-demand and higher-acuity services, operating efficiency, portfolio optimization and reducing leverage. The December 2021 SCD transaction added interests in 86 ASCs; additional physician-interest purchases may require up to approximately $250 million. A development agreement targets at least 50 new ASCs over five years.
- A proposed tax-free Conifer spin-off remains conditional, including on tax treatment, a comprehensive long-term services agreement and board approval; completion and timing are uncertain. Conifer’s Tenet and CHI relationships represented approximately 38% and 45% of its 2021 net operating revenue, respectively.
- COVID-19 continued to affect volumes, staffing and supply costs. Management highlighted reliance on higher-cost contract labor, nurse shortages, supply-chain disruption and inflation. Other material risks include payer reimbursement and collection pressures, healthcare regulation and litigation, cybersecurity, competition, and substantial debt and refinancing requirements.
- Significant items include the $406 million Miami sale gain, $116 million of litigation and investigation costs, and $1.045 billion of professional and general liability reserves. A DOJ investigation of Detroit Medical Center concerning physician arrangements remains ongoing; Tenet said potential exposure could not be determined. The company also recorded a $23 million reserve related to the bankruptcy of buyers of previously sold Philadelphia hospitals.
- After year-end, Tenet called for redemption of $700 million of 7.500% notes due 2025, expected to use cash on hand and reduce annual cash interest by approximately $53 million. This is a subsequent event, not a 2021 year-end debt repayment.
Important facts for investors to verify
- Reconcile the improvement in reported earnings with the Miami divestiture gain, lower pandemic grant income, and other nonrecurring or excluded items; review the Adjusted EBITDA reconciliation against GAAP results.
- Assess the sustainability of operating cash flow and liquidity after Medicare-advance recoupments, payroll-tax payments, capital spending and planned acquisitions.
- Review debt maturities, covenant headroom, the planned $700 million note redemption, and the stated leverage calculations, including treatment of Medicare advances.
- Monitor staffing and supply costs, same-hospital volumes and payer mix, managed-care collections, and the performance and integration of acquired ASCs.
- Track the Conifer spin-off prerequisites and customer retention, the Baylor USPI put/call negotiations, and the status and potential exposure of significant litigation and investigations.
- The auditor issued an unqualified opinion on the financial statements and internal controls; critical audit matters included net revenue and accounts-receivable estimates and professional and general liability reserves.