Tenet Healthcare Corporation — Q3 2012 Form 10-Q
Business and period: Tenet operated 49 hospitals and 112 outpatient centers at September 30, 2012, alongside its Conifer healthcare services business. This unaudited filing covers the quarter and nine months ended September 30, 2012; amounts are in millions unless stated otherwise. Comparisons are with the corresponding 2011 periods.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net operating revenues | $2,221 | $2,100 | $6,788 | $6,482 |
| Operating income | $153 | $79 | $538 | $498 |
| Operating margin | 6.9% | 3.8% | 7.9% | 7.7% |
| Net income attributable to common shareholders | $40 | $6 | $92 | $134 |
| Diluted EPS | $0.37 | $0.05 | $0.86 | $1.08 |
| Adjusted EBITDA (non-GAAP) | $269 | $192 | $867 | $838 |
| Adjusted EBITDA margin (non-GAAP) | 12.1% | 9.1% | 12.8% | 12.9% |
Q3 net revenues rose 5.8%. Management attributed growth principally to improved managed-care pricing and outpatient volume; Q3 net outpatient revenue increased 7.5%, while inpatient revenue rose 3.9%. Q3 adjusted patient admissions increased 1.4%, but total admissions declined 0.5% and patient days fell 1.9%. The provision for doubtful accounts increased 9.0% to $206, or 8.5% of revenue before that provision, versus 8.3% a year earlier.
Q3 operating improvement reflected higher revenue and lower comparative litigation and malpractice costs, among other factors. Interest expense increased to $103 from $59; management cited the absence of the favorable interest-rate-swap impact recorded in 2011. For the nine months, common-shareholder earnings fell despite higher operating income, primarily reflecting $100 of discontinued-operations impairment charges associated with Creighton University Medical Center (CUMC), which was sold in August 2012. Continuing-operations income attributable to common shareholders was $129 versus $128 for the nine-month comparison.
- Cash flow: Nine-month operating cash flow was $337, compared with $324 in 2011. Capital expenditures were $360, so operating cash flow less capital expenditures was negative $23. Cash declined $30 to $83.
- Debt and liquidity: Total debt was $4,751 at September 30, versus $4,360 at year-end 2011; cash was $83. The company reported $175 drawn on its revolving facility, approximately $154 of standby letters of credit, and about $430 of borrowing availability. Net debt to trailing-12-month Adjusted EBITDA was 4.0x. The company said it was in compliance with credit-agreement covenants.
- Balance sheet: Total assets were $8,470 and total liabilities were $7,185. Current assets were $2,484 and current liabilities $1,829. Net accounts receivable was $1,338, including a $402 allowance for doubtful accounts.
Material changes and significant items
- Q3 revenue included $56 of Medicaid disproportionate-share and other state-funded subsidy revenue, up from $40; the 2012 amount included $13 from California’s provider-fee program. Nine-month operating cash flow also benefited from $81 in proceeds associated with a Medicare rural-floor budget-neutrality settlement.
- For the first nine months, net operating revenue grew 4.7%, while provision for doubtful accounts rose 9.1%. Uninsured admissions increased 6.9%; self-pay collection rates improved to 28.8% from 27.7%, but bad-debt expense remained a significant pressure.
- Tenet repurchased and retired $292 of mandatory convertible preferred stock in April, financed in part through additional debt issuance. The remaining preferred stock automatically converted into common shares on October 1. The one-for-four reverse stock split took effect in October; historical per-share amounts in the filing are retrospectively adjusted.
- After quarter-end, Tenet issued $800 of notes due 2020, tendered for $161 of 2013 notes, and authorized a new common-stock repurchase program of up to $500. The company also announced plans to spend approximately $400 in the near term on acquisitions.
Outlook, risks and contingencies
- Management expected 2012 continuing-operations capital expenditures of approximately $500–$550 and approximately $21 of additional EHR incentives for 2012. These are expectations, not guarantees.
- Tenet cited gradual adjusted-admission growth, outpatient expansion, managed-care contracting, physician alignment and Conifer growth as strategic priorities. It also noted pressure from economic conditions, competition, payer mix, lower elective volumes, utilization controls and rising patient deductibles.
- Management estimated that the 2013 Medicare inpatient rule could increase annual inpatient revenue by about $40 and the outpatient rule by about $11. The 2013 physician-fee schedule could reduce annual revenue by approximately $17 absent congressional action. Estimates are subject to volume, case-mix and policy uncertainty.
- Risks include Medicare and Medicaid payment changes, state funding and provider-fee program approvals, bad-debt and receivables collectability, and prepayment claim reviews that could delay or reduce Medicare payments. Management expected approximately $57 of Medicare cash outflow related to delayed DSH cost-report settlements, subject to appeals and policy developments.
- Pending matters include government reviews of kyphoplasty and cardiac-defibrillator billing; Tenet said it could not estimate potential losses for several hospitals under review. Other legal matters include Hurricane Katrina-related cases, a disputed hospital-related tort judgment under appeal, and a Louisiana patient-records class action for which loss could not be estimated. Recorded reserves and insurance coverage may not eliminate exposure.
- Tenet’s liquidity assessment depends on operating cash flow, revolver availability and refinancing access; management cautioned that acquisitions, repurchases, weaker operating performance or other uncertainties could increase financing needs. The filing states results for the interim period are not necessarily indicative of full-year results.
Key facts for investors to verify
- Whether revenue and operating improvement persist after considering subsidy revenues, the Medicare settlement and other timing or one-time items.
- Whether bad-debt expense, uninsured volumes, collection rates and receivables days improve; reported AR days were 54.7 at September 30, 2012.
- Debt refinancing, interest expense, use of the new note proceeds, leverage and actual revolver availability after subsequent transactions.
- Realized capital spending, acquisition commitments and returns, including the announced near-term acquisition plan and Conifer expansion.
- Final Medicaid provider-fee approvals and payments, DSH settlements and appeals, and the effect of federal and state reimbursement changes.
- Developments in governmental billing reviews and litigation, including any change in reserves, potential exposure or insurance recoveries.