Tenet Healthcare Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Tenet operates Hospital Operations, Ambulatory Care (USPI) and Conifer. Comparisons with 2020 are affected by the pandemic-driven decline in patient volumes during the 2020 comparison period and by much higher government relief funding then.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net operating revenues | $4.954 billion | $3.648 billion | $9.735 billion | $8.168 billion |
| Operating income | $586 million | $471 million | $1.106 billion | $798 million |
| Net income attributable to Tenet common shareholders | $119 million | $88 million | $216 million | $181 million |
| Diluted EPS | $1.10 | $0.83 | $1.99 | $1.71 |
| Adjusted EBITDA (non-GAAP) | $834 million | $732 million | $1.611 billion | $1.317 billion |
| Adjusted EBITDA margin | 16.8% | 20.1% | 16.5% | 16.1% |
Q2 revenue increased 35.8%; first-half revenue rose 19.2%. Growth reflected recovering patient volumes, higher acuity, commercial rate increases and USPI acquisitions. Q2 grant income was $19 million versus $511 million a year earlier; first-half grant income was $50 million versus $511 million. The Q2 Adjusted EBITDA margin fell despite higher EBITDA, as pandemic-era grant support and other comparison-period effects differed materially.
Consolidated net income was $257 million in Q2 and $479 million in the first half, but $138 million and $263 million, respectively, were attributable to noncontrolling interests. Thus, common-shareholder earnings were substantially lower than consolidated net income.
Cash flow, debt and liquidity
- First-half operating cash flow was $779 million, versus $2.368 billion in 2020. The filing attributes much of the decline to the prior-year receipt of Medicare advances and grants, 2021 Medicare advance recoupments, and working-capital timing; 2021 operating results before specified items improved.
- First-half investing cash outflow was $195 million; capital expenditures were $243 million. Financing cash outflow was $836 million, including debt retirement payments and $212 million of distributions to noncontrolling interests. Cash declined by $252 million to $2.194 billion from year-end 2020.
- Long-term debt was $15.218 billion gross, including current maturities; cash was $2.194 billion. Management reported net-debt-to-Adjusted-EBITDA leverage of 3.79x, or 4.17x including obligations related to COVID-era Medicare advances.
- No cash borrowings were outstanding under the $1.9 billion revolving facility, and the full $1.9 billion was available at quarter-end. Tenet reported compliance with credit and letter-of-credit facility covenants. Current assets were $7.417 billion and current liabilities $5.071 billion.
- In June, Tenet issued $1.4 billion of 4.25% first-lien notes due 2029 and redeemed $1.410 billion of 5.125% second-lien notes due 2025. It also retired approximately $478 million of 7.0% unsecured notes in March. These transactions reduced expected annual cash interest by approximately $46 million, but generated $54 million of first-half early-extinguishment losses.
Material changes and operating developments
- Hospital Operations same-hospital admissions increased 13.7% and surgeries 37.0% in Q2 year over year; same-hospital outpatient visits rose 70.6%. First-half same-hospital admissions were nearly flat (+0.1%), while surgeries rose 13.0%.
- Ambulatory Care revenue increased 80.4% in Q2 and 52.7% in the first half, reflecting higher volumes and acuity, acquisitions—including the SCD Centers acquired in December 2020—and rate increases. USPI operated 341 facilities, including consolidated and equity-method facilities.
- Conifer revenue increased 4.6% in Q2 but declined 1.3% in the first half. The first-half decrease reflected amended Tenet contract terms and expected client attrition, partly offset by new business and improving client volumes.
- Tenet completed the sale of most MedPost and CareSpot urgent care centers in April and recognized a $14 million gain. In June it agreed to sell five Miami-area hospitals and related operations; closing was expected in Q3 2021, subject to customary conditions. The assets were classified as held for sale, with $683 million of net assets.
Outlook, commentary and risks
- The filing provides no company-wide earnings guidance. Tenet estimated 2021 continuing-operations capital expenditures of approximately $700 million to $750 million. It estimated that the 2021 extension of the Medicare sequestration suspension would add approximately $80 million of revenue.
- Management said patient volumes were recovering, but the pandemic continued to affect volumes, payer and service mix, labor costs and supply availability. Temporary staffing, premium pay, PPE price increases and supply-chain disruptions pressured costs. Management expects demand to rebound but said the timing and extent remain uncertain.
- COVID-related Medicare advance recoupment began in April 2021. At June 30, $997 million of advances were included in current contract liabilities and $335 million in long-term contract liabilities for Hospital Operations; repayment occurs through offsets to Medicare claims.
- Key exposures include regulatory and reimbursement changes, managed-care pricing and collection disputes, self-pay collectability, malpractice and litigation costs, and the possibility of further impairments or restructuring. Professional and general liability reserves totaled $1.016 billion.
- The DOJ investigation of Detroit Medical Center concerning alleged Stark Law, anti-kickback and False Claims Act issues remained ongoing; Tenet said it could not determine potential exposure. The Supreme Court agreed to review the 340B payment case; a reversal of the current policy could affect revenue and cash flow. The filing also notes possible ERISA pension withdrawal or secondary liability related to the bankruptcy of former Philadelphia hospital operators.
- Tenet continued to pursue a possible tax-free Conifer spin-off, but identified multiple outstanding conditions and gave no assurance that or when it would occur. Management’s cost-reduction program included workforce changes and offshore support; additional restructuring charges were expected during 2021.
Important facts for investors to verify
- Whether post-pandemic patient volumes, acuity and commercial pricing sustain revenue and earnings once 2020 relief-funding comparisons normalize.
- Whether higher labor, supply and malpractice costs continue to pressure margins, particularly at USPI and Hospital Operations.
- Cash generation as Medicare advance recoupments proceed, and the company’s ability to reduce leverage while funding capital expenditures and distributions.
- Completion and proceeds of the planned Miami-area hospital sale, and the financial effects of the urgent-care divestitures and other portfolio changes.
- Developments in the DMC investigation, 340B litigation and other legal or reimbursement matters, including any material change in estimated exposure.
- Progress and conditions for a Conifer spin-off, including the required comprehensive agreement and final approvals.