Tenet Healthcare Corporation — Q2 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2014. Tenet operated 79 hospitals, 189 outpatient centers, six health plans and Conifer Health Solutions. The October 2013 Vanguard acquisition materially expanded the business; reported year-over-year growth therefore includes acquired operations and is not directly comparable. Same-hospital figures provide a more comparable view.
Financial results and key metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net operating revenues, after doubtful-account provision | $4.042 billion | $2.422 billion | $7.968 billion | $4.809 billion |
| Operating income | $207 million | $202 million | $377 million | $348 million |
| Operating margin | 5.1% | 8.3% | 4.7% | 7.2% |
| Adjusted EBITDA (non-GAAP) | $460 million | $336 million | $847 million | $610 million |
| Adjusted EBITDA margin | 11.4% | 13.9% | 10.6% | 12.7% |
| Net loss attributable to Tenet common shareholders | $26 million | $50 million | $58 million | $138 million |
| Basic and diluted loss per share | $0.27 | $0.49 | $0.60 | $1.33 |
Cash flow and liquidity. First-half operating cash flow was $247 million, versus $128 million a year earlier. Investing activities used $576 million, including $523 million of capital expenditures; operating cash flow less capital expenditures was negative $276 million. Cash increased $293 million to $406 million. At June 30, current assets were $4.208 billion and current liabilities $3.384 billion. The company reported $994 million available under its revolving credit facility and no cash borrowings outstanding on that facility.
Debt. Total long-term debt was $11.564 billion, including $622 million classified as current; cash-adjusted leverage was reported at 6.6x using trailing-twelve-month Adjusted EBITDA including Vanguard. Interest expense was $190 million in Q2 and $372 million in the first half, compared with $98 million and $201 million, respectively, in 2013.
Material changes versus the prior comparable period
- Consolidated revenue grew substantially, principally reflecting Vanguard and other acquired or newly opened operations. On a same-hospital basis, Q2 net operating revenue increased 6.4%; first-half revenue increased 5.9%.
- Same-hospital Q2 admissions rose 3.3%, outpatient visits 6.3%, and outpatient surgery 20.8%. Same-hospital net outpatient revenue grew 9.8%, while inpatient revenue was essentially flat.
- Despite higher operating income dollars, margins declined as operating expenses—particularly other operating expenses—increased faster. Same-hospital selected operating expenses per adjusted patient admission rose 3.9% in Q2; same-hospital other operating expenses per adjusted admission rose 8.3%.
- The doubtful-account provision was $320 million in Q2 and $700 million in the first half. The allowance was 25.5% of patient accounts receivable at June 30, up from 23.2% at year-end; management cited weaker self-pay collections and higher patient co-pays and deductibles.
- Q2 2013 included a $171 million debt-extinguishment loss, and first-half 2013 included $348 million of such losses. Their absence helped improve reported net loss comparisons, while 2014 interest costs were higher.
Outlook, management commentary, risks and unusual items
- No full-year earnings guidance is provided. Management expected 2014 continuing-operations capital expenditures of approximately $900 million to $1 billion; $523 million had been spent in the first half.
- Management cited improved physician alignment, service-line expansion, ACA-related insurance coverage and a strengthening economy as volume supports. It also identified high-deductible plans, competition, utilization controls and shifts of procedures to outpatient settings as constraints.
- The California provider-fee program had not received CMS approval for the current program, so Tenet recognized no related Q2 2014 revenue; Q2 2013 included $66 million. Management said the timing and approval of Medicaid supplemental programs can make results variable.
- Management estimated proposed FY2015 Medicare inpatient rule changes could reduce annual Medicare inpatient revenue by about $21 million, while proposed outpatient changes could add about $14 million. These are estimates subject to regulatory and operating uncertainties, not company earnings guidance.
- In July 2014, Tenet used proceeds from its 5% notes due 2019 to redeem approximately $474 million of 9.25% notes due 2015. It expected to record an approximately $24 million debt-extinguishment loss.
- Material legal matters include pending federal and state investigations relating to kyphoplasty, cardiac defibrillator procedures and Clinica de la Mama; recorded reserves for these matters totaled approximately $38 million. A separate previously divested-hospital class-action settlement had a maximum potential payment of $32.5 million; Tenet recorded a $17 million reserve in discontinued operations, subject to final agreement and court approval.
- Other risks include malpractice and self-insurance estimates, state Medicaid funding and payment delays, ACA implementation and reimbursement changes, payer contract negotiations, labor negotiations, acquisition integration and possible additional impairments or restructuring costs. Tenet disclosed a CFPB investigation into Conifer’s debt-collection activities and said its outcome was uncertain.
- After quarter-end, Tenet completed its acquisition of Emanuel Medical Center on August 1, 2014. The newly built Resolute Health Hospital opened June 24, 2014, and Tenet acquired a majority interest in Texas Regional Medical Center in June.
Most important facts for investors to verify
- Whether same-hospital volume and revenue growth can continue while operating costs and margins are under pressure.
- Self-pay collection trends, the doubtful-account allowance and accounts-receivable aging, including the impact of higher co-pays and deductibles.
- Cash generation relative to the $900 million–$1 billion capital-spending plan, debt maturities, interest burden and reported 6.6x leverage.
- CMS approval and timing for California provider-fee and other Medicaid supplemental-payment programs, and actual Medicare reimbursement changes.
- Developments in the cited government investigations, class-action settlement and CFPB inquiry, including any changes to reserves or potential payments.