Tenet Healthcare Corporation — Q3 2019 Form 10-Q
Quarter ended September 30, 2019; filed November 4, 2019. Financial figures are in millions of dollars except per-share data. Tenet operated 65 hospitals and approximately 500 other healthcare facilities, including ambulatory surgery, urgent care and imaging sites. Its three segments are Hospital Operations and other, Ambulatory Care (USPI) and Conifer.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net operating revenues | $4,568 | $4,489 | $13,673 | $13,694 |
| Operating income | $294 | $320 | $1,053 | $1,243 |
| Operating margin | 6.4% | 7.1% | 7.7% | 9.1% |
| Adjusted EBITDA | $631 | $577 | $1,901 | $1,876 |
| Adjusted EBITDA margin | 13.8% | 12.9% | 13.9% | 13.7% |
| Net income (loss) attributable to Tenet common shareholders | $(232) | $(9) | $(234) | $116 |
| Basic loss/earnings per share | $(2.24) | $(0.09) | $(2.26) | $1.14 |
Q3 revenue grew 1.8%, primarily from improved volumes, acuity and managed-care pricing. Same-hospital revenue increased 5.3%; same-hospital admissions rose 3.6%. Ambulatory Care cases increased 6.3%. Conifer revenue declined 9.4%, including lower third-party business after client hospital sales and contract terminations. For the nine months, revenue edged down 0.2%; operating income fell 15.3%, while Adjusted EBITDA rose 1.3%.
Q3 operating income was affected by $84 million of litigation and investigation costs and $46 million of impairment, restructuring and acquisition-related charges. The quarter also included a $180 million loss on early debt extinguishment. Nine-month debt-extinguishment losses totaled $227 million. These unusual items contributed to the reported common-shareholder loss; Adjusted EBITDA is a company-defined non-GAAP measure and excludes specified costs.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $713 million, versus $799 million a year earlier. Capital expenditures were $492 million, versus $404 million; investing activities used $426 million, compared with $120 million provided in 2018.
- Cash and cash equivalents were $314 million at September 30, down from $411 million at year-end 2018. Accounts receivable was $2.768 billion. Accounts-receivable days were 59.6, above management’s target of less than 55 days.
- Total debt was approximately $15.0 billion, including current debt; net of cash, the company reported leverage of 5.69x trailing-12-month Adjusted EBITDA. Interest expense was $742 million for the first nine months.
- Tenet refinanced several nearer-term notes with secured notes due 2024, 2026 and 2027, and issued $1.5 billion of second-lien notes due 2027 earlier in 2019. The revolver was expanded to $1.5 billion and extended to September 2024. At quarter-end, $275 million was drawn and $1.2 billion was available; Tenet reported compliance with facility covenants.
- The balance sheet includes $1.014 billion of operating lease liabilities and $340 million of finance lease liabilities following adoption of the new lease standard. Shareholders’ deficit was $341 million.
Outlook, management commentary and risks
- Management targets a tax-free Conifer spin-off by the end of Q2 2021, subject to tax, contractual, regulatory, SEC-filing and board-approval conditions; completion and timing are not assured. Tenet cautions that separation could adversely affect its earnings and cash flows.
- Management expects 2019 capital expenditures of approximately $650–$700 million and expects additional restructuring charges during the remainder of 2019. No full-year earnings guidance is provided in the supplied filing text.
- Absent further legislative action, Tenet expected Medicaid DSH revenue to decline by about $11 million in each quarter beginning Q4 2019. Management estimated annual Medicare inpatient payment changes could increase its payments by about $28 million and outpatient changes by about $10 million, subject to uncertainty.
- Tenet reached an agreement in principle with the DOJ in October 2019 to resolve an Oklahoma qui tam matter and related investigations for approximately $66 million, subject to approvals and final documentation. It recorded a $68 million reserve in Q3 and anticipated payment as early as Q1 2020.
- Tenet disputes a $63 million pension withdrawal-liability assessment following the purchasers of two Philadelphia hospitals entering bankruptcy. The DMC government investigation remains ongoing, with exposure not determinable. The company is also subject to a non-prosecution agreement; noncompliance could lead to penalties, prosecution or exclusion from federal healthcare programs.
- Key operating risks include healthcare regulatory and reimbursement changes, state Medicaid funding and payment delays, managed-care pricing and collections, competition and patient-volume shifts, malpractice claims, litigation, and execution of divestitures and the proposed spin-off. Management cited higher labor and supply costs; a one-day nurses’ strike at 12 hospitals increased Q3 contract-labor costs.
Most important facts for investors to verify
- Progress, final terms and conditions of the proposed Conifer spin-off, including any changes to Tenet’s earnings, cash flows, capital structure or client relationships.
- Whether receivables and collections improve: AR days were above target, and operating cash flow declined year over year.
- Debt maturities, refinancing costs, covenant headroom and the sustainability of leverage at 5.69x Adjusted EBITDA.
- Final settlement approval and payment for the DOJ matter, resolution of the disputed pension assessment, and developments in the DMC investigation and NPA compliance.
- Actual effects of Medicaid DSH reductions and Medicare payment changes, alongside ongoing same-hospital labor, supply and malpractice-cost trends.