Tenet Healthcare Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited results; amounts are in millions of dollars except per-share data. Tenet operates hospitals and other healthcare facilities, ambulatory-care businesses including USPI and Aspen, and Conifer healthcare-services operations.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net operating revenues | $4,868 | $4,492 | $9,912 | $8,916 |
| Operating income | $267 | $164 | $614 | $454 |
| Adjusted EBITDA (non-GAAP) | $617 | $568 | $1,230 | $1,097 |
| Adjusted EBITDA margin | 12.7% | 12.6% | 12.4% | 12.3% |
| Net loss attributable to Tenet common shareholders | $(46) | $(61) | $(105) | $(14) |
| Loss per share | $(0.46) | $(0.61) | $(1.06) | $(0.14) |
| Net cash provided by operating activities | Not separately presented for Q2 | $582 | $353 |
- Revenue growth reflected acquisitions, including USPI and Aspen, higher outpatient activity and improved managed-care pricing; hospital divestitures partly offset growth. Before doubtful-account provisions, revenue rose 7.8% in Q2 and 10.5% for the half year.
- Q2 operating margin was 5.5%, versus 3.7% a year earlier; first-half operating margin was 6.2%, versus 5.1%. Adjusted EBITDA is a company-defined non-GAAP measure and excludes, among other items, litigation costs and interest.
- Interest expense increased to $244 in Q2 from $217 and to $487 for the first half from $416, primarily reflecting acquisition-related borrowings. Total debt was $14,501 at June 30, including $181 current; cash was $656. Management reported net-debt-to-adjusted-EBITDA leverage of 5.75x.
- First-half capital expenditures were $413, and management estimated full-year 2016 capital expenditures of $850–$900. Cash and cash equivalents were $656; approximately $996 was available under the revolving credit facility, with no cash borrowings outstanding. The company reported compliance with credit-facility covenants.
- Current assets were $4,993 and current liabilities $4,430 at June 30. Accounts receivable, net, was $2,734; the doubtful-account allowance was $946, or 26.5% of patient accounts receivable. Receivable days outstanding were 51.1, up from 49.5 at year-end.
Material changes versus the prior comparable period
- Common-shareholder losses narrowed in Q2 but widened for the first half. Consolidated net income was $39 in Q2 and $73 for the first half, but substantial income attributable to noncontrolling interests contributed to Tenet’s common-shareholder losses.
- First-half operating cash flow increased by $229 to $582. Management cited improved underlying earnings and collections, about $110 of additional net cash from California and Texas supplemental Medicaid programs, and lower cash use from receivables; higher interest payments partly offset these benefits.
- Hospital Operations and other adjusted EBITDA fell to $415 in Q2 from $459; Ambulatory Care increased to $139 from $49, largely reflecting the acquired and expanded business; Conifer rose to $63 from $60.
- Same-hospital Q2 revenue increased 5.9%, despite admissions declining 1.1%; higher revenue per admission and outpatient growth supported the result. Across continuing operations, Q2 admissions declined 4.0%, while ambulatory-care cases increased 146.5%, substantially reflecting the acquisition comparison.
- Litigation and investigation costs rose to $114 in Q2 and $287 for the first half, versus $14 and $17, respectively, in 2015. First-half results also included a $148 gain, primarily from the Georgia facility sale and changes in USPI ownership; the Georgia sale generated a $113 gain.
Outlook, risks and unusual items
- Clinica de la Mama matters: Tenet said it had an agreement in principle for approximately $514 in civil and criminal payments. It increased its reserve to $516 for payments and related costs. Definitive agreements and court approval remained outstanding; payment was expected after sentencing, which management anticipated in Q3 2016. The proposed resolution included a three-year corporate monitor and a corporate integrity agreement. Tenet expected to fund the payment with cash and revolving-credit availability, but cautioned that a failed or materially different resolution could have a significant adverse effect.
- Other legal and contingency exposure: The company operates in a highly regulated and litigious sector. Professional and general liability reserves totaled approximately $792. Guarantees to certain physicians and physician groups had a maximum potential payment of $83, with $72 recorded as a liability. Tenet also disclosed pending litigation and other ordinary-course claims.
- Operating and reimbursement risks: Management identified payer mix, self-pay collections, high patient deductibles, managed-care negotiations, Medicaid funding and timing of supplemental payments, regulation, patient volumes, labor costs and malpractice trends as factors that could affect results. Union contract negotiations were ongoing at certain facilities; outcomes and any labor disruption were uncertain.
- Medicare proposals: Management estimated the proposed FY2017 inpatient payment and policy changes could reduce annual IPPS payments by about $2; proposed outpatient changes could increase annual Medicare outpatient revenue by about $11. These were estimates based on proposed rules, not firm guidance.
- Management said existing cash, revolver availability and anticipated operating cash flows should meet current needs, while noting liquidity could be affected by weaker operations, acquisitions, joint-venture put rights, legal costs and financing conditions. No full-year earnings guidance is provided in the supplied filing text.
Important facts for investors to verify
- Whether the Clinica de la Mama agreement was finalized and court-approved, the timing and funding of the approximately $514 payment, and whether the $516 reserve proved sufficient.
- Whether operating cash flow and collections remain strong after the period’s supplemental Medicaid cash receipts; monitor receivable days, doubtful-account allowance and payer mix.
- Whether the apparent revenue and EBITDA growth persists after separating acquisitions, divestitures, noncontrolling interests and other unusual items; compare segment trends, especially the decline in Hospital Operations EBITDA.
- Debt service, leverage and available liquidity after legal payments, capital spending and any further USPI partner put exercises; verify the basis and ongoing comparability of the reported 5.75x leverage ratio.
- Final Medicare and Medicaid reimbursement changes, managed-care pricing and volume trends, and any material changes in litigation, malpractice reserves or labor negotiations.