Tenet Healthcare Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Dollar amounts are in millions unless stated otherwise. Tenet operated hospitals, ambulatory facilities and Conifer healthcare-services businesses. Results are unaudited.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net operating revenues, after doubtful-account provision | $4,802 | $4,868 | $9,615 | $9,912 |
| Operating income | $310 | $274 | $577 | $628 |
| Net income from continuing operations | $31 | $41 | $68 | $79 |
| Net loss attributable to Tenet common shareholders | $(55) | $(46) | $(108) | $(105) |
| Adjusted EBITDA | $570 | $629 | $1,097 | $1,246 |
| Adjusted EBITDA margin | 11.9% | 13.3% | 11.5% | 12.9% |
| Net cash provided by operating activities | Not separately stated for the quarter | $401 | $582 |
- Q2 revenues after provision for doubtful accounts fell 1.4%; operating income rose 13.1%, but common-shareholder loss widened to $55 million. Six-month revenue declined 3.0%, operating income declined 8.1%, and common-shareholder loss widened to $108 million.
- Q2 interest expense was $260 million, up from $244 million; first-half expense was $518 million, up from $487 million. Q2 included a $26 million debt-extinguishment loss.
- Cash and cash equivalents were $475 million at June 30, down from $716 million at year-end 2016. Total debt, including current maturities, was $15.155 billion. Reported net debt/last-twelve-month Adjusted EBITDA was 6.3x.
- First-half investing cash outflow was $308 million, including $348 million of capital expenditures; financing cash outflow was $334 million. First-half operating cash flow was $401 million.
Business trends and changes versus prior periods
- Hospital activity weakened: Q2 total admissions declined 1.8%, surgeries 5.2%, and patient days 2.5%. Same-hospital Q2 net operating revenue declined 3.1%; six-month same-hospital revenue also declined 3.1%.
- Management attributed hospital revenue pressure to lower volumes, including the effect of being out of network with a national payer for most of the period, and the absence of California provider-fee-program revenue pending CMS approval. The payer agreement was reached in April, and facilities rejoined the network June 1.
- Pricing partly offset volume weakness: same-hospital Q2 inpatient revenue per admission rose 1.4%, while outpatient revenue per visit rose 6.8%. The doubtful-account provision rose to 7.2% of pre-provision revenue from 6.7%; same-hospital rates were 8.4% versus 7.5%.
- Ambulatory Care revenue grew 6.8% in Q2 and 6.4% in the first half, primarily from acquisitions; segment Adjusted EBITDA was $164 million for Q2 versus $139 million. Conifer revenue grew 3.6% in Q2 and 4.0% in the first half, while its Adjusted EBITDA was $60 million versus $63 million in Q2.
- First-half results included $74 million of impairment, restructuring and acquisition costs, compared with $50 million in 2016. Litigation and investigation costs were $6 million versus $287 million; the earlier period included reserves for a regulatory investigation settled in October 2016. Gains on sales and facility changes were $38 million versus $148 million, including the prior-year Georgia hospital sale gain.
Outlook, transactions and principal risks
- No company-wide earnings guidance is provided in the supplied filing text. Management forecast 2017 continuing-operations capital expenditures of approximately $700 million to $750 million.
- Management estimated the final Medicare inpatient payment rule would increase annual Medicare fee-for-service inpatient payments by about 0.1%, or approximately $2 million. A proposed outpatient rule was estimated to increase hospital outpatient revenue by approximately $13 million; both estimates were subject to uncertainty.
- Tenet reported that it paid $716 million on July 3, 2017 to acquire an additional 23.7% of USPI, bringing its ownership to 80%. Based on forecasts, it expected to pay approximately $550 million to $650 million through July 2019 to reach 95% ownership; Baylor University Medical Center holds the remaining 5%.
- On July 31, 2017, Tenet completed the sale of Houston-area hospital and related operations for approximately $750 million in net pretax cash proceeds, subject to purchase-price adjustments. The sale followed the June classification of $705 million of assets and $51 million of liabilities as held for sale.
- Debt refinancing transactions completed after quarter-end replaced specified 2018–2020 notes with new secured and unsecured notes due 2024–2025. Tenet expected to record an additional approximately $132 million debt-extinguishment loss in Q3 2017. At June 30, the revolving facility had no cash borrowings and approximately $998 million available.
- Key risks include high leverage and substantial interest costs; cash-flow and collection sensitivity to payer mix, bad debt and working capital; delayed or reduced Medicaid and supplemental-program funding, including California approval uncertainty; regulatory and legislative changes; declining hospital volumes and labor-cost pressure; and litigation, investigations, malpractice exposure, and compliance obligations under a non-prosecution agreement. Tenet disclosed securities and derivative shareholder litigation and other legal matters; outcomes and potential losses were not clear from the filing text.
- Management said existing cash, revolver availability and expected operating cash flow should meet current needs, but noted liquidity could be pressured by weaker operations, legal costs, acquisitions, capital commitments or partner put rights. Management also cited ongoing uncertainty around ACA-related policy changes and the healthcare regulatory environment.
Important facts for investors to verify
- Whether hospital volumes and same-hospital revenue stabilize, and whether the restored national-payer network relationship supports admissions and collections.
- CMS approval and timing of California provider-fee revenues, along with the actual impact of Medicare payment changes and broader Medicaid funding decisions.
- Cash conversion, doubtful-account provisions and receivable aging; the filing reported $475 million cash and $401 million first-half operating cash flow.
- Debt service, refinancing costs and leverage following the post-quarter transactions, including the expected $132 million Q3 extinguishment loss.
- Completion and final proceeds from the Houston sale, and future USPI purchase payments, ownership changes and related funding needs.
- Developments in securities litigation, government investigations, the non-prosecution agreement and malpractice reserves; these could affect costs, cash flow or operations.