Tenet Healthcare Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing, not a standalone fourth-quarter filing; selected Q4 results are included. The year-over-year comparison is materially affected by Tenet’s October 2013 acquisition of Vanguard, whose results were included for only three months in 2013 and for all of 2014.
Business context and financial performance
Tenet operated 80 hospitals, 210 outpatient centers, six health plans and Conifer Health Solutions. Its two reportable segments were Hospital Operations and other, and Conifer.
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net operating revenues, after doubtful-account provision | $16.615 billion | $11.102 billion |
| Revenue before doubtful-account provision | $17.920 billion | $12.074 billion |
| Provision for doubtful accounts | $1.305 billion; 7.3% of pre-provision revenue | $972 million; 8.1% |
| Operating income and margin | $925 million; 5.6% | $663 million; 6.0% |
| Adjusted EBITDA and margin | $1.952 billion; 11.7% | $1.342 billion; 12.1% |
| Net income attributable to Tenet common shareholders | $12 million; diluted EPS $0.12 | Net loss of $134 million; diluted EPS $(1.32) |
| Cash provided by operating activities | $687 million | $589 million |
| Capital expenditures | $933 million | $691 million |
FY2014 continuing-operations income attributable to common shareholders was $34 million, or diluted EPS of $0.34; the full-year common-shareholder result also includes a $22 million after-tax loss from discontinued operations. Interest expense rose to $754 million from $474 million. The filing reports $726 million of interest paid.
In Q4 2014, net operating revenue was $4.468 billion, versus $3.885 billion in Q4 2013. Common-shareholder net income was $61 million, versus a $24 million loss; diluted EPS was $0.61, versus $(0.24). On a same-hospital basis, Q4 net operating revenue increased 12.9%, admissions rose 4.0%, outpatient visits increased 9.6%, and charity and uninsured admissions fell 21.7%.
Liquidity, debt and material changes
- At year-end, cash was $193 million, working capital was $1.140 billion and total assets were $18.141 billion. Long-term debt, including the current portion, was $11.807 billion; the balance sheet reports $11.695 billion net of current maturities.
- Tenet reported net debt to Adjusted EBITDA of 5.95x. Revolving-credit availability was approximately $776 million, with $220 million drawn; the company said it was in compliance with its credit-agreement covenants.
- Operating cash flow increased by $98 million year over year, but investing activities used $1.322 billion, mainly reflecting $933 million of capital spending and $428 million for acquisitions. Financing activities provided $715 million.
- Headline revenue growth was 49.7%, substantially reflecting acquisitions. For hospitals operated throughout both periods, management attributed $1.012 billion of the revenue increase to those facilities, or 10.4% growth. FY2014 admissions rose 41.6% on the total-hospital basis, also affected by acquisitions.
- Debt increased alongside acquisition and financing activity. Tenet issued $1.6 billion of 5% and 5.5% notes due 2019, redeemed $474 million of 9.25% notes due 2015, and recorded a $24 million early-extinguishment loss.
Outlook, management commentary and risks
- Management expects FY2015 capital expenditures of approximately $900 million to $1 billion. It anticipated about $68 million of EHR incentive payments in 2015; these payments depend on meeting program requirements. No specific full-year earnings or revenue guidance is provided in the filing text.
- Management cited higher volumes, improved physician alignment, service-line expansion, ACA-related coverage gains and a strengthening economy as contributors to performance. It also highlighted growth in outpatient services and Conifer. Outpatient services represented about 37% of FY2014 net patient revenue; management said outpatient services historically generated higher margins than inpatient services.
- ACA coverage expansion reduced uninsured and charity care, but the net effect remains uncertain. Key exposures include state decisions on Medicaid expansion, government reimbursement reductions, DSH cuts, value-based payment penalties, payer negotiations and patients’ high deductibles. Commercial managed care generated 58.6% of FY2014 general-hospital net patient revenue; the top ten managed-care payers accounted for about 62% of managed-care revenue.
- Cash collection warrants attention: accounts-receivable days rose to 49.5 from 44.7, partly because of a temporary billing-system-related receivables buildup at acquired Vanguard hospitals. The self-pay collection rate at comparable hospitals declined to 27.5% from 28.7%.
- Unusual items included $153 million of impairment, restructuring and acquisition-related costs, including $95 million of acquisition-related costs and a $20 million impairment at a previously impaired hospital. Management warned that further impairment is possible if that hospital’s performance does not improve.
- Legal and regulatory matters include an aggregate $38 million reserve for specified government reviews, including ICD billing and Clinica de la Mama matters. A separately disclosed discontinued-operations class-action settlement had a maximum potential payment of $32.5 million; Tenet recorded an $11.5 million reserve. Outcomes and ultimate costs may differ from recorded reserves.
- After year-end, Tenet paid approximately $254 million on February 11, 2015 to acquire the remaining 49% interest in Valley Baptist, bringing ownership to 100%. Conifer also extended and expanded its CHI contract through 2032; CHI’s minority interest in Conifer increased to approximately 23.8%.
Important facts for investors to verify
- Separate acquisition-driven growth from organic performance, and compare same-hospital trends with total-hospital results.
- Track whether the Vanguard billing-system transition resolves the receivables buildup and whether collections improve, particularly for self-pay balances and patient deductibles.
- Assess leverage, interest burden, refinancing needs and covenant headroom against cash generation and planned capital spending.
- Review the sustainability and timing of California provider-fee and Texas waiver revenues, Medicaid expansion, and other supplemental payments; their timing affected reported results and cash flow.
- Follow the status and potential financial impact of pending legal and regulatory matters, hospital impairment risks, and the post-year-end Valley Baptist and CHI arrangements.
Adjusted EBITDA is a non-GAAP measure. The filing cautions that it excludes items included in GAAP results and may not be comparable across companies.