Tenet Healthcare Corporation — 2018 Form 10-K
Business context and reporting period. Fiscal year ended December 31, 2018; fourth-quarter figures are for the three months ended December 31. Tenet operates hospital, ambulatory-care and Conifer healthcare-services businesses. At year-end it reported 68 hospitals, 23 surgical hospitals and approximately 475 outpatient centers. It divested eight U.S. hospitals and its U.K. operations during 2018; the sale of three Chicago-area hospitals closed in January 2019.
Financial and operating performance
| Metric | 2018 | 2017 |
|---|---|---|
| Net operating revenue | $18.313 billion | $19.179 billion |
| Operating income | $1.647 billion; 9.0% margin | $1.113 billion; 5.8% margin |
| Net income (loss) attributable to Tenet common shareholders | $111 million | $(704) million |
| Diluted EPS, continuing operations | $1.04 | $(7.00) |
| Adjusted EBITDA (non-GAAP) | $2.560 billion; 14.0% margin | $2.444 billion; 12.8% margin |
| Cash from operating activities | $1.049 billion | $1.200 billion |
| Capital expenditures | $617 million | $707 million |
| Cash and cash equivalents at year-end | $411 million | $611 million |
| Long-term debt, net of current portion | $14.644 billion | $14.791 billion |
Operating income improved substantially as impairment, restructuring and acquisition-related charges fell to $209 million from $541 million. Results also included $127 million of net gains on facility sales and $38 million of litigation and investigation costs. Interest expense was $1.004 billion, equal to 61% of operating income. Net cash used in investing activities was $115 million and net cash used in financing activities was $1.134 billion. Working capital was $779 million, down from $1.241 billion. Management reported net debt to Adjusted EBITDA of 5.63x at year-end.
Fourth quarter: Revenue was $4.619 billion, down 7.2% year over year. Net income was $102 million, but Tenet common shareholders had a $5 million loss, or diluted loss per share of $0.04. Compared with the prior-year quarter, total admissions fell 8.5%, adjusted admissions 7.4%, surgeries 8.7% and emergency-department visits 8.7%. The company attributed lower revenue primarily to facility sales and closures and lower California provider-fee program revenue ($64 million versus $267 million); improved managed-care pricing partly offset hospital volume declines.
Material changes versus prior period
- Full-year revenue decreased 4.5%, while operating income increased $534 million and Adjusted EBITDA rose to $2.560 billion from $2.444 billion.
- Hospital Operations revenue before inter-segment eliminations declined, reflecting divestitures and closures. On a same-hospital basis, however, revenue rose 3.6%, supported primarily by improved managed-care contract terms; admissions declined 1.7%.
- Ambulatory Care revenue increased 7.5%, reflecting same-facility growth and acquisitions, partly offset by the U.K. Aspen divestiture. Conifer revenue fell 4.0%; third-party revenue declined 3.7%.
- Cash from operations fell $151 million. The filing cites, among other factors, additional professional-liability claim payments, lower California provider-fee receipts and higher interest payments.
- Accounting adoption of ASC 606 changed revenue presentation: approximately $1.422 billion of 2018 implicit price concessions was deducted directly from revenue, whereas similar amounts were presented as doubtful-account provisions before adoption. This limits direct revenue comparability with 2017.
Outlook, risks and unusual items
- Management gave no specific earnings or revenue guidance in the provided filing text. It expects 2019 capital expenditures of approximately $650–$700 million and interest payments of approximately $980–$990 million.
- Management’s priorities include cost reduction, hospital operational improvement, growth in ambulatory care and lower leverage. Tenet said it achieved its targeted 2018 cost savings, but recorded $115 million of restructuring charges, including $68 million of severance, and expects further restructuring charges in 2019.
- Tenet was exploring strategic alternatives for Conifer, including a possible sale, merger or tax-efficient spin-off; no transaction was assured. Tenet owned 76.2% of Conifer, whose revenue was concentrated in relationships with Tenet and Catholic Health Initiatives.
- In February 2019, Tenet issued $1.5 billion of 6.25% secured second-lien notes due 2027 to refinance notes due 2020 and 2022 and repay $468 million of notes due March 2019. The company expected an approximately $47 million early-extinguishment loss in first-quarter 2019.
- Major risks include substantial debt and interest burden, payer concentration and reimbursement changes, declining hospital volumes, collection risk, labor costs and competition, and uncertainty around ACA policy and government funding. Management estimated 65% of hospital and related outpatient net patient service revenue came from managed-care payers in 2018; the top ten managed-care payers generated 65% of managed-care revenue.
- The DOJ extended Tenet’s Non-Prosecution Agreement to November 1, 2020 after determining the company breached certain reporting obligations. Tenet remains subject to an independent compliance monitor. The filing also describes an ongoing DOJ investigation involving Detroit Medical Center and a qui tam matter involving an Oklahoma surgical hospital; potential exposure was not clear or estimable in the filing.
- Professional and general liability reserves were $882 million, and malpractice expense rose to $388 million from $303 million. Tenet is largely self-insured for these risks; actual claims may differ materially from estimates.
- The auditor issued an unqualified opinion on the financial statements and internal controls. Management and the auditor reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- Whether hospital admissions, outpatient volumes and same-hospital revenue trends improve, and whether divestitures obscure underlying comparisons.
- Cash conversion, receivable days and collections, particularly given year-end cash of $411 million and working capital of $779 million.
- Debt reduction and refinancing progress, interest burden, leverage and compliance with debt covenants.
- Realization and sustainability of cost savings, alongside restructuring costs and rising malpractice expense.
- Any outcome of the Conifer strategic review and the effect of a potential separation on earnings, cash flow and client retention.
- Developments under the DOJ agreement, compliance monitoring and pending investigations or litigation, including any financial or program-participation consequences.
- Effects of Medicare, Medicaid and ACA changes, including state supplemental-payment programs and the California provider-fee program.