Tenet Healthcare Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Figures are in millions of dollars except per-share amounts and operating statistics. Tenet operated 49 hospitals, 134 outpatient centers, and Conifer Health Solutions, which served more than 700 clients.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net operating revenue | $2,408 (+8.4%) | $2,221 | $7,217 (+6.3%) | $6,788 |
| Operating income | $148 | $153 | $496 | $538 |
| Operating margin | 6.1% | 6.9% | 6.9% | 7.9% |
| Adjusted EBITDA | $288 | $269 | $898 | $867 |
| Adjusted EBITDA margin | 12.0% | 12.1% | 12.4% | 12.8% |
| Net income (loss) attributable to common shareholders | $28 | $40 | ($110) | $92 |
| Diluted EPS | $0.27 | $0.37 | ($1.07) | $0.86 |
Q3 diluted EPS from continuing operations was $0.32 versus $0.28 a year earlier. Nine-month results included a $348 million pretax loss on early extinguishment of debt, associated with refinancing higher-coupon notes; the company reported a $255 million after-tax impact from identified unusual items for the period.
- Revenue mix and volumes: Q3 net outpatient revenue rose 7.1%, while net inpatient revenue was essentially flat. Total admissions fell 2.6%, but outpatient visits increased 3.5% and outpatient surgeries rose 28.7%. Improved managed-care pricing, outpatient growth, state subsidy revenue, and Conifer growth supported revenue; weaker inpatient volumes partly offset them.
- Costs and doubtful accounts: Q3 provision for doubtful accounts was $210 million, or 8.0% of revenue before the provision, versus $206 million and 8.5% a year earlier. Salaries, wages and benefits increased 11.6% in Q3, including substantial Conifer growth; hospital operating costs per adjusted patient admission increased 4.3%.
- Cash flow: Nine-month operating cash flow was $334 million versus $337 million. Investing used $509 million, including $398 million of capital expenditures and $142 million for acquisitions; financing used $107 million. Cash declined to $82 million from $364 million at year-end 2012.
- Debt and liquidity: September 30 total debt was $5.823 billion, including $133 million current; cash was $82 million. The revolving facility had $210 million drawn, $152 million of letters of credit, and approximately $415 million available. Net debt to trailing-twelve-month Adjusted EBITDA was 4.7x. Management reported compliance with credit-facility covenants.
Changes, transactions and outlook
- During 2013, Tenet issued $850 million of 4.5% secured notes and $1.05 billion of 4.375% secured notes, using proceeds in part to retire 10% and 8.875% notes. The transactions lowered stated coupons but generated the $348 million extinguishment loss.
- On October 1, 2013, after the quarter-end, Tenet acquired Vanguard for approximately $4.3 billion and repaid approximately $2.5 billion of Vanguard net debt. Vanguard operated 28 hospitals, had another under development, 39 outpatient centers, and five health plans with about 150,000 members. The acquisition was financed with $2.8 billion of 8.125% notes and $1.8 billion of 6% secured notes. Tenet also assumed about $600 million of capital and construction commitments. Its revolving credit facility limit was increased to $1 billion on October 15, subject to availability.
- Management estimated 2013 continuing-operations capital expenditures of $550–$600 million. It gave no specific earnings guidance in the filing. Management expected insurance-coverage expansion under the Affordable Care Act to benefit providers over time, while emphasizing uncertainty around Medicaid expansion, implementation, reimbursement reductions, and payer behavior.
- California’s provider-fee program was extended by state legislation after quarter-end. Based on the California Hospital Association’s estimates, the extension could provide Tenet hospitals approximately $475 million in additional net revenue over the three years through 2016; this is an estimate, not guaranteed revenue.
Risks, contingencies and unusual items
- Pending government reviews include hospital billing for kyphoplasty and cardiac defibrillator procedures, and investigations into arrangements with a local service provider. Tenet had approximately $3 million in reserves for specified billing reviews but could not estimate potential exposure for several matters. The company reported that the Georgia Attorney General had intervened in the HMM-related case and said it intended to defend the matters.
- Tenet disclosed ongoing ordinary-course litigation and claims, including a Louisiana patient-records class action for which it could not estimate a reasonably possible loss. A separate hospital-related claim was settled for $8 million in August 2013.
- Management cited weak economic conditions, competition, high-deductible plans, lower inpatient volumes, self-pay collection challenges, and potential changes to Medicare and Medicaid payments as risks. Self-pay collection rates were about 28.8%; the allowance for doubtful accounts was $440 million.
- Vanguard integration, realization of expected benefits, additional borrowing and increased leverage are material risks. Tenet cautioned that integration costs, delays, operational disruption, or unidentified liabilities could prevent or delay anticipated synergies.
- Other disclosed exposure includes physician and hospital-based group guarantees with a maximum potential payment of $104 million and a recorded liability of $76 million. Management warned that impairments or restructuring charges could arise if hospital projections are not achieved.
Important facts for investors to verify
- Vanguard’s post-close operating results, integration costs, assumed commitments, financing costs, and effect on leverage and cash flow.
- Whether outpatient growth and Conifer expansion can offset declining admissions and pressure on operating margins.
- Cash collection trends, receivable aging, self-pay bad debt, and the timing and collectability of Medicaid DSH and other state subsidy receivables.
- Developments in government investigations and litigation, including any change in reserves or newly estimable exposures.
- Actual capital spending versus the $550–$600 million estimate and the availability of revolver borrowing under its borrowing-base limits.