Tenet Healthcare Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Tenet operated hospitals, ambulatory facilities and Conifer healthcare-services operations. Financial amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net operating revenue, after doubtful-account provision | $4,586 | $4,849 | $14,201 | $14,761 |
| Operating income | $51 | $339 | $628 | $967 |
| Net loss attributable to Tenet common shareholders | $(367) | $(8) | $(475) | $(113) |
| Loss per diluted share | $(3.64) | $(0.08) | $(4.73) | $(1.14) |
| Adjusted EBITDA | $507 | $582 | $1,604 | $1,828 |
| Adjusted EBITDA margin | 11.1% | 12.3% | 11.4% | 12.7% |
Q3 net operating revenue before doubtful-account provision declined 5.3% to $4,941. After the $355 provision, net operating revenue fell 5.4%. For the nine months, revenue before provision declined 3.4% to $15,310. The filing attributes the deterioration chiefly to lower hospital volumes, the Houston-area divestiture, and the absence of California provider-fee revenue pending CMS approval. Q3 operating income included substantial impairment charges and was partly supported by the Houston sale gain.
For the nine months, operating cash flow was $709, down from $851. Investing activities provided $227, versus $150 used in the prior year, including $826 of proceeds from facility and asset sales; capital expenditures were $492. Financing activities used $1,223, including $722 for purchases of noncontrolling interests. Cash and equivalents were $429 at quarter-end, compared with $716 at December 31, 2016. Current assets were $5,309 and current liabilities $4,139.
Total debt was approximately $14,881, including $140 current; cash-adjusted debt was approximately $14,452. Tenet reported a 6.4x ratio of net debt to last-twelve-month Adjusted EBITDA. It had no cash borrowings on its $1 billion revolving facility and $998 of borrowing availability; the company reported compliance with its credit and letter-of-credit facility covenants. All long-term debt was fixed-rate. The company stated that cash, revolver availability and expected operating cash flow should meet current needs, while noting liquidity depends on operating performance and continued access to financing.
Material changes and unusual items
- Same-hospital admissions fell 2.6% in Q3 and 2.7% for the nine months; same-hospital surgeries fell 5.1% and 5.3%, respectively. Management cited lower volumes, Hurricane Irma, the Houston divestiture, and the prior-year leap day and payer-network disruption. Ambulatory Care cases increased 2.0% in Q3, while Conifer revenue from third parties grew.
- Impairment, restructuring and acquisition-related charges were $329 in Q3 and $403 for the nine months, versus $31 and $81. The nine-month total included $235 to write down Philadelphia-area assets and $59 for Aspen UK facilities classified as held for sale, plus investment impairment and restructuring costs.
- Tenet recorded a $138 Q3 loss on early debt extinguishment ($164 for nine months) as it refinanced and redeemed notes. Interest expense was $257 in Q3 and $775 for nine months, versus $243 and $730 in 2016.
- The Houston-area sale closed August 1 for approximately $750 net proceeds and produced a $111 gain. Philadelphia-area assets were under definitive sale agreement, with closing expected in Q1 2018, subject to conditions and approvals. MacNeal Hospital sale was announced after quarter-end and was also expected to close in Q1 2018, subject to conditions and approvals.
- Tenet paid approximately $716 to acquire an additional 23.7% of USPI, increasing its ownership to 80%. The remaining 15% held by its partner is subject to put/call options in 2018 and 2019.
Outlook, commentary and risks
Management announced an enterprise-wide cost-reduction initiative intended to lower annual operating expenses by $150, with full annualized savings expected by year-end 2018. It expected approximately $40 of restructuring charges in Q4 2017, substantially for severance. Tenet projected 2017 continuing-operations capital expenditures of $675–$725. The filing does not provide clear earnings or revenue guidance.
Management’s strategy emphasizes cost control, improved hospital performance, growth in ambulatory care and Conifer, divestiture of nonstrategic operations, and reducing leverage. Key risks include continued hospital-volume pressure; payer mix, reimbursement and collection uncertainty; state Medicaid funding and CMS approval of supplemental programs; healthcare-law and regulatory changes; labor negotiations and potential strikes; and litigation and investigations. Tenet disclosed pending securities and derivative litigation and a non-prosecution agreement; failure to comply with the latter could expose it to criminal prosecution, penalties or exclusion from federal healthcare programs. A shareholder-rights plan intended to protect tax-loss carryforwards could also discourage transactions and affect share liquidity.
The company adopted a rights plan in August 2017. It also disclosed that adoption of the new revenue-recognition standard in 2018 would materially affect revenue presentation and disclosures, though management did not expect a material effect on financial position, results or cash flows. Lease-standard adoption in 2019 was expected to materially affect the balance sheet.
Important facts for investors to verify
- Whether hospital volumes, payer mix and cash collections improve, and whether the California provider-fee program receives CMS approval.
- Execution and timing of the $150 annual cost-savings program, including Q4 restructuring charges and realized savings.
- Completion terms and proceeds for the Philadelphia and MacNeal divestitures, and the disposition of Aspen.
- Debt-service capacity, leverage trajectory, refinancing costs and future USPI partner put/call payments.
- Developments in litigation, government investigations and the non-prosecution agreement, as well as the potential effects of healthcare-policy changes.