Tenet Healthcare Corporation — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed February 27, 2012. The filing reports full-year results, with separate fourth-quarter operating information. Dollar amounts are in U.S. dollars.
Business context
Tenet is an investor-owned healthcare services company. At year-end it operated 50 hospitals with 13,453 licensed beds, plus 98 imaging, ambulatory surgery and urgent-care centers. Its strategy emphasized outpatient growth, quality and cost initiatives, physician alignment, and expansion of Conifer Health Solutions, which served more than 300 Tenet and non-Tenet organizations.
Financial and operating results
| Metric | 2011 | 2010 |
|---|---|---|
| Net operating revenues, after doubtful-account provision | $8.854 billion | $8.467 billion |
| Revenue before doubtful-account provision | $9.584 billion | $9.205 billion |
| Provision for doubtful accounts | $730 million | $738 million |
| Operating income | $650 million; 7.3% margin | $634 million; 7.5% margin |
| Income from continuing operations | $100 million | $1.135 billion |
| Net income attributable to common shareholders | $58 million | $1.119 billion |
| Diluted EPS from continuing operations | $0.13 | $2.01 |
| Adjusted EBITDA, a non-GAAP measure | $1.145 billion; 12.9% margin | $1.050 billion; 12.4% margin |
| Cash from operating activities | $497 million | $472 million |
| Capital expenditures | $475 million | $476 million |
Year-over-year revenue growth reflected mainly improved pricing, including managed-care contract gains and higher state supplemental payments; admissions and outpatient visits contributed more modestly. Total admissions rose 0.5%, outpatient visits 3.1%, and outpatient surgeries 4.9%; patient days fell 0.8%. Managed care generated 57.0% of net patient revenues before doubtful-account provision, Medicare 23.2%, and Medicaid 9.0%. The self-pay collection rate declined to 27.8% from 28.3%.
Fourth-quarter net operating revenues were $2.226 billion, up 5.4% from $2.111 billion. Common-shareholder net loss was $76 million, versus income of $74 million in fourth-quarter 2010; the 2011 quarter included a $117 million loss on early debt extinguishment.
Liquidity, debt and capital allocation
- Year-end cash was $113 million, down from $405 million. Working capital was $542 million, versus $586 million.
- Total debt was approximately $4.3 billion. The company reported $80 million drawn on its $800 million asset-backed revolving facility, $164 million of standby letters of credit, and $527 million of borrowing availability at year-end. It reported compliance with credit-agreement covenants.
- In November 2011, Tenet issued $900 million of 6.25% secured notes due 2018 and used part of the proceeds to repurchase about $713 million principal amount of 9% secured notes due 2015 for approximately $776 million. The transaction generated a $117 million accounting loss. Net debt to trailing Adjusted EBITDA was 3.7x.
- Tenet repurchased 81.1 million shares for approximately $400 million under its buyback program, completed in January 2012. It paid no common dividends and said it did not expect to do so in the foreseeable future. Its 7% mandatory convertible preferred stock carries a $1,000-per-share liquidation preference and was scheduled to convert in October 2012.
Material changes, outlook and risks
- Net income comparisons are heavily affected by the 2010 release of approximately $1.1 billion of deferred-tax valuation allowance, which produced a large tax benefit. The 2011 effective tax result therefore does not indicate a comparable deterioration in operating income.
- Operating expenses rose: salaries, wages and benefits increased 4.7%, while other operating expenses increased 8.2%. Malpractice expense was $110 million, compared with $57 million in 2010; management cited unfavorable case-reserve adjustments and a lower discount rate.
- Tenet recorded $27 million of impairment and restructuring charges and $55 million of continuing-operations litigation and investigation costs. It also recognized $55 million of Medicaid electronic-health-record incentives as a reduction of expenses.
- Management expected 2012 capital expenditures of approximately $500 million to $550 million. It anticipated possible benefits from broader insurance coverage under the Affordable Care Act beginning in 2014, but cautioned that coverage gains could be offset by Medicare and Medicaid payment reductions. No specific consolidated earnings or revenue guidance is provided.
- Management identified pressure from uninsured and underinsured care, weaker elective volumes, payer delays, rising labor and malpractice costs, competition, and concentration of beds in Florida, Texas and California. Government reimbursement rules and the Affordable Care Act remained uncertain. The company also faced potential Medicare sequestration reductions beginning in 2013 and dependence on regulatory approval for future supplemental Medicaid programs.
- Material legal matters include multiple government reviews of billing and medical procedures; reserves of approximately $50 million for the disclosed governmental proceedings; and an appealed $65 million punitive-damages verdict concerning a divested hospital, for which Tenet recorded a $6 million reserve based on its estimated probable-loss range. A separate Hurricane Katrina class-action settlement was agreed in principle at approximately $12 million and was expected to be covered by excess insurance.
- Tenet estimated approximately $1.7 billion of future information-technology contract-service obligations, including a contract extension and commitments associated with its electronic-health-record program. The company expected more than $600 million of HIT investment through 2014; incentive payments were not expected to cover all such investment.
Important facts for investors to verify
- Reconcile the $58 million 2011 common-shareholder income with the $1.119 billion reported for 2010, especially the prior-year tax-valuation-allowance benefit and 2011 debt-extinguishment charge.
- Review the quality and timing of cash conversion: operating cash flow increased, but cash fell, receivables grew, and government-payer delays reduced year-over-year cash flows.
- Assess leverage, refinancing needs and covenant headroom, including the revolving facility’s conditional maturity provisions and significant future debt maturities.
- Track self-pay collections, bad-debt provision, malpractice reserves, and outcomes of governmental reviews and litigation.
- Monitor CMS approval and realized cash proceeds from supplemental Medicaid programs, along with execution costs and incentive receipts for the HIT program.
- Distinguish management’s stated expectations from firm guidance: the filing provides 2012 capital-spending estimates but no clear earnings outlook.