TENET HEALTHCARE CORP quarterly report, Q1 FY2019

Tenet Healthcare Corporation — Q1 2019 Form 10-Q

Reporting period: Three months ended March 31, 2019; unaudited. Dollar amounts are in millions unless stated otherwise. Tenet operated 65 hospitals, 23 surgical hospitals and approximately 470 outpatient centers, and provided healthcare business-process services through Conifer.

Financial performance and liquidity

Metric	Q1 2019	Q1 2018 / prior period
Net operating revenues	$4,545	$4,699; down 3.3%
Operating income	$371; 8.2% margin	$517; 11.0% margin
Adjusted EBITDA (non-GAAP)	$613; 13.5% margin	$665; 14.2% margin
Net income attributable to Tenet common shareholders	Loss of $19; diluted EPS loss of $0.18	Income of $99; diluted EPS of $0.96
Continuing-operations income before tax	$74	$260
Cash from operating activities	$10	$113
Capital expenditures	$192	$143
Cash and cash equivalents	$252 at March 31	$411 at December 31, 2018
Total long-term debt, including current portion	$14,972 at March 31	$14,826 at December 31, 2018

Interest expense was $251, versus $255 a year earlier. Cash declined by $159 during the quarter. Management reported $808 of borrowing availability under its revolving credit facility; $190 was drawn at quarter-end. Net debt to last-twelve-month Adjusted EBITDA was 5.87x. The company said it was in compliance with credit-facility and letter-of-credit covenants.

Changes versus the prior-year quarter

• Revenue fell primarily because of facility divestitures; same-hospital revenue increased 2.5%, aided by improved managed-care contract pricing. Adjusted patient admissions at the same 65 hospitals rose 0.6%, while same-hospital total admissions were approximately flat.
• Across continuing operations, admissions fell 4.2%, surgeries 6.5% and emergency-department visits 5.7%; reported volumes were affected by divestitures. Ambulatory Care cases increased 0.3%.
• Hospital Operations same-hospital other operating expenses increased 13.8%; malpractice expense and medical fees were significant contributors. Company-wide malpractice expense was $121 versus $83.
• Q1 2018 included $110 of net gains on facility sales and consolidation, including a $98 gain from the MacNeal sale. Q1 2019 instead recorded a $47 loss on early debt extinguishment. These items materially affect year-over-year comparisons.
• Conifer revenue decreased 13.6%; third-party customer revenue fell 20.1%, reflecting contract terminations associated with customer-hospital sales and a $10 contract-termination payment in Q1 2018.
• Operating cash flow decreased to $10, with management citing California provider-fee payment timing and other working-capital movements. Receivables days were 58.6, above the company’s target of less than 55 days.

Debt, unusual items and accounting changes

• In February, Tenet issued $1.5 billion of 6.25% senior secured second-lien notes due 2027. Proceeds, cash and revolver borrowings funded redemptions or repayment of $300 of 2020 notes, $750 of 2022 notes and $468 of 2019 notes. The refinancing generated a $47 early-extinguishment loss.
• Adoption of the new lease standard on January 1 added $822 of operating right-of-use assets, net of deferred rent, and $862 of lease liabilities at adoption. At March 31, operating and finance lease liabilities totaled $1,225. This accounting change affects balance-sheet comparability.
• Restructuring, impairment and acquisition-related costs were $19, including $16 of restructuring charges. Management expected additional restructuring charges during the remainder of 2019.
• The company recorded $13 of litigation and investigation costs, versus $6 a year earlier. Professional and general liability reserves totaled $914, up from $882 at year-end.

Outlook, management commentary and risks

• No full-year earnings or revenue guidance was provided. Management estimated 2019 continuing-operations capital expenditures of approximately $650–$700.
• Management’s strategy emphasizes cost reduction, operational effectiveness, higher-acuity services, outpatient growth, improved patient experience and lower leverage. Tenet was exploring a potential sale of Conifer and other strategic alternatives, including a merger or tax-efficient spin-off; no transaction was assured.
• Management estimated proposed FY2020 Medicare inpatient payment changes could increase annual Medicare fee-for-service IPPS payments by approximately $22; it estimated finalized 2019 outpatient-payment changes could add approximately $7. These estimates are subject to regulatory and operating uncertainty.
• Key risks include healthcare regulatory and reimbursement changes, state Medicaid funding and provider-fee programs, managed-care pricing and payment delays, patient volumes and collection trends, malpractice costs, and legal proceedings. The filing describes ongoing government investigations, including the Detroit Medical Center investigation and the Oklahoma Surgical Hospital qui tam action; potential exposure was not clear or determinable for these matters. Tenet also remains subject to a non-prosecution agreement, and failure to comply could lead to significant penalties or exclusion from federal healthcare programs.
• Tenet reported that disclosure controls were effective and that there were no material changes to its risk factors from the 2018 Form 10-K.

Investor verification priorities

• Track cash conversion, receivables days and collections, including the effect of California provider-fee timing and working capital.
• Reconcile GAAP results with Adjusted EBITDA and account for prior-year facility-sale gains and the current-period debt-extinguishment loss.
• Monitor hospital volumes, same-hospital cost growth, malpractice expense and reserve assumptions.
• Review debt maturities, refinancing costs, leverage, revolver availability and covenant compliance.
• Follow Conifer’s third-party customer trends and any outcome of the strategic-alternatives review.
• Assess developments in government investigations, the non-prosecution agreement, Medicaid reimbursement and Medicare payment rules.