Tenet Healthcare Corporation — Q1 2013 Form 10-Q
Business context and period. This unaudited filing covers the three months ended March 31, 2013, compared with the same period in 2012. Tenet operated 49 hospitals, 122 outpatient centers and Conifer Health Solutions, serving more than 600 clients. Dollar amounts below are in millions except per-share data.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net operating revenues | $2,387 | $2,302 |
| Provision for doubtful accounts | $207 | $189 |
| Operating income | $146 | $205 |
| Operating margin | 6.1% | 8.9% |
| Adjusted EBITDA | $274 | $310 |
| Adjusted EBITDA margin | 11.5% | 13.5% |
| Net loss attributable to common shareholders | $(88) | Net income $58 |
| Diluted EPS | $(0.85) | $0.53 |
| Net cash used in operating activities | $(32) | $(42) |
- Revenue before doubtful-account provision increased 4.1%. Growth reflected outpatient activity, improved managed-care pricing and Conifer expansion; the provision for doubtful accounts rose 9.5%.
- Operating results included a $177 loss on early debt extinguishment and $14 of impairment, restructuring and acquisition-related costs. The tax benefit was $53. The debt-extinguishment charge accounted for most of the reported common-shareholder loss.
- Cash was $95 at quarter-end, down from $364 at December 31, 2012. Investing activities used $104, including $133 of capital expenditures; financing activities used $133. Cash interest paid was $125.
- Total debt was $5,427, including $52 current; long-term debt net of current portion was $5,375. Net debt to trailing-12-month Adjusted EBITDA was 4.6x. The revolving facility had $20 drawn, $152 of letters of credit outstanding and $628 of reported borrowing availability. Tenet said it was in compliance with credit-agreement covenants.
- Current assets were $2,443 and current liabilities $1,549. Accounts receivable, net, was $1,383; reported AR Days were 52, within management’s target of fewer than 55 days.
Material changes and operating trends
- Total admissions fell 4.0%, adjusted patient admissions fell 2.5%, and patient days fell 2.3%. Management cited the calendar comparison, service-line closures, economic weakness and competition; outpatient visits rose 2.2% and outpatient surgeries rose 19.7%.
- Net inpatient revenue declined 4.4%, while net outpatient revenue increased 6.1%. The comparison was affected by an $81 favorable Medicare cost-report settlement recorded in Q1 2012; excluding that settlement, management said inpatient revenue would have increased 0.7%.
- Conifer revenue increased substantially, reflecting acquisitions, new clients and expanded services, including the CHI partnership. Consolidated Conifer revenue was $211 versus $107, with intercompany amounts eliminated.
- Operating income and Adjusted EBITDA declined despite higher revenue. Salaries, wages and benefits rose to 48.6% of revenue from 46.1%; operating costs also reflected Conifer growth and health-information-technology implementation. Supplies expense decreased.
- Medicaid DSH and other state-funded subsidy revenues were $67 versus $45. Medicare represented a smaller share of hospital revenue, while managed care’s share increased.
- In February 2013, Tenet issued $850 of 4.5% secured notes due 2021 and used proceeds partly to retire approximately $714 principal amount of 10% secured notes due 2018. The refinancing generated the $177 extinguishment loss. The credit facility’s 2016 maturity is subject to repayment or refinancing of approximately $238 of 2015 notes by December 2014; otherwise facility borrowings become due then.
Outlook, risks and unusual items
- Management projected 2013 continuing-operations capital expenditures of approximately $550–$600, including spending for disability-access improvements. The filing does not provide earnings guidance.
- Tenet said existing cash, revolver availability and expected operating cash flows should meet current needs, while noting long-term debt service depends on improved operating cash flow and potentially future financing. First-quarter operating cash flow is typically lower because of working-capital timing and annual compensation-related payments.
- Management expected potential benefit from expanded insurance coverage under the Affordable Care Act, but highlighted uncertainty over state Medicaid expansion, implementation and reimbursement reductions. Medicare sequestration’s 2% payment reduction took effect April 1, 2013. The filing also describes proposed FY2014 Medicare payment changes; Tenet estimated an approximately $8 impact on annual inpatient revenue, subject to uncertainty.
- Tenet had signed a definitive agreement to acquire Emanuel Medical Center, pending regulatory approval, and planned a John Muir Health joint venture in which John Muir would invest approximately $100 for a 49% interest in San Ramon Regional Medical Center.
- Risks include payer-mix shifts, bad debt, patient-volume pressure, state Medicaid funding and payment delays, labor negotiations, reimbursement changes, and potential additional impairments or restructuring charges. Self-pay collection rate was 28.8%; doubtful-account provision was 8.0% of revenue before that provision.
- Pending matters include federal reviews of kyphoplasty, cardiac defibrillator billing and arrangements with a service provider. Tenet recorded approximately $3 of reserves for three hospitals in the government proceedings; outcomes and exposure at other hospitals were uncertain. Other litigation includes an appealed hospital-related tort matter and a Louisiana privacy class action for which the company said loss could not be reasonably estimated.
- Tenet repurchased $100 of common stock in Q1 under its $500 authorization; $300 remained available at March 31. Management also cited approximately $35 of expected 2013 payments related to a Supplemental Security Income matter.
Key facts for investors to verify
- Whether outpatient and Conifer growth can offset declining inpatient volumes and lower operating margins.
- Whether cash generation, receivables collections and the 4.6x net leverage level support debt service, planned capital spending and acquisitions.
- Debt refinancing requirements, facility availability and compliance with covenants, especially the December 2014 refinancing condition.
- Actual effects of Medicare sequestration, Medicaid decisions and other reimbursement changes on revenue and uncompensated care.
- Developments in the disclosed government investigations, litigation, labor negotiations and the pending Emanuel acquisition and John Muir transaction.