Tenet Healthcare Corporation (THC) reported its first-quarter income from continuing operations of $82 million or 16 cents per share, ahead of the Zacks Consensus Estimate of 14 cents per share. Net operating income in the prior-year quarter was $83 million or 16 cents per share.
The improved results were due to strong results in all lines of the business, especially the robust performance in outpatient volumes, has contributed to the growth. The increase in both paying admissions and total admissions also turned positive in the quarter.
Tenet’s net income was $73.0 million or 14 cents per share in the reported quarter, as opposed to $88.0 million or 17 cents in the prior-year quarter. The results include loss from discontinuing operations of $9.0 million or 2 cents in the reported quarter and income from discontinuing operations of $5.0 million or 1 cent in the prior-year quarter.
Behind the Headlines
Net operating revenues improved in the reported quarter with $2.51 billion, as against the $2.34 billion reported in the prior-year quarter. It also surpassed the Zacks Consensus Estimate of $2.47 billion.
Net operating revenues in the quarter included $63 million from the 2009-2010 California Provider Fee Program and $13 million from the 2010 portion of the Pennsylvania Provider Fee Program, which received final CMS approval in the reported quarter.
Tenet’s operating revenues in the reported quarter also included Medicaid health information technology incentives of $25 million.
However, these were partially offset by an unfavorable reduction in contributions from prior year cost report settlements which added $15 million to net operating revenues in the first quarter of 2010, but added only $1 million in the first quarter of 2011.
During the quarter, Tenet’s net patient revenues per adjusted patient day increased by 5.5% on a year-over-year basis.
Likewise, admissions surged during the quarter by 0.6%, which compared very favorably to the respective declines of 3.5% and 2.0% in the third and fourth quarters of 2010. Outpatient visits increased by 6.1% in the reported quarter, again showing a strong improving sequential trend compared to the increase of 2.9% in the fourth quarter of 2010 and the decline of 2.0% for the third quarter of 2010.
Additionally, adjusted admissions increased by 2.3% in the first quarter of 2011.
However, Tenet witnessed a year-over-year increase of 5.0% in total controllable operating expenses in the reported quarter, consistent with the management’s guidance. This increase includes the impact of the annual salary increases of the Tenet’s employees.
In addition, health information technology implementation and other related expenses increased $12 million in the first quarter of 2011 as compared to the first quarter of 2010.
Bad debt expense plummeted 3.7% year-over-year in the reported quarter, while the ratio of bad debt expense to net operating revenues fell to 7.3% from 8.1% in the prior year quarter.
Tenet posted adjusted EBITDA of $379 million in the quarter, up 27.2% year-over-year from $298 million in the prior-year quarter. Adjusted EBITDA margin was 15.1%, a 240-basis point increase during the quarter.
Tenet exited the quarter with cash and cash equivalents of $267 million at the end of March 31, 2011, down $138 million from $405 million at December 31, 2010.
Net cash used in operating activities was $2 million in the first quarter of 2011, as compared to a cash use of $22 million in the first quarter of 2010, primarily as a result of higher adjusted EBITDA, partially offset by net income tax payments of $24 million in the first quarter of 2011 on prior year tax settlements, compared to $17 million in net income tax refunds in the first quarter of 2010, an adverse change of $41 million.
In addition, the decrease in cash includes the use of $18 million to purchase three outpatient centers and the receipt of $3 million from the sale of a medical office building. Also, Tenet’s capital expenditures were $116 million in the quarter, compared to $83 million in the prior-year quarter.
As of March 31, 2011, total assets of Tenet were $8.52 billion and shareholders equity was $1.84 billion.
Acquisition Update
Tenet has received a revised proposal from Community Health Systems, Inc. (CYH) on May 2, to acquire all of the outstanding shares of Tenet for $7.25 per share in cash. Tenet’s Board has decided to review the proposal after consulting its independent financial and legal advisors.
Tenet noted that it had earlier received a proposal on November 12, 2010from Community Health to acquire all the outstanding shares of Tenet for $6.00 per share, including $5 a share in cash and $1 per share of its common stock.
However, the deal did not appear favorable of Tenet, as it undervalued the company.
Tenet has been working hard to thwart the hostile takeover bid from Community Health, but the latter is determined to buy Tenet.
Tenet even adopted a poison pill strategy against the takeover, but Community Health was determined to buy Tenet. To pressurize Tenet, Community Health nominated a full slate of 10 independent directors on January, 2011 to Tenet’s board, which is up for re-election at the 2011 annual meeting, which has been delayed until November 3, 2011.
Recently, Tenet also filed a lawsuit against Community Health for overbilling its Medicare. The action was undertaken by Tenet to fend off the hostile takeover.
According to the lawsuit by Tenet, Community Health has been artificially enhancing its performance over the years by showing more payments from Medicare. Further, Tenet accused that Community Health has increased its inpatient admissions by admitting thousands of patients into hospitals that should only be kept for outpatient observation, which is less expensive.
Tenet estimates improper Medicare billings of between $280 million and $377 million over three years, beginning in 2006, for as many as 82,000 patients.
Though Community Health is rejecting all the accusations, the lawsuits states that if found guilty, Community Health is likely liable to pay well over $1 billion for its practices during the 2006-2009 period.
Outlook
Tenet has raised its guidance for 2011, on the back of improved patient volume trends and growth from provider fees and government healthcare information technology incentives recorded in the quarter.
Accordingly, Tenet has raised its expectations for adjusted EBITDA for 2011 by $25 million to a new range of $1.175 billion to $1.275 billion. Adjusted margin is expected to lie in the range of 12.1%-12.9%.
Additionally, Tenet expects its 2011 net operating income to be in the range of $193.0 million-$265 million for 2011. Operating earnings per share is expected in the range of 38 cents to 51 cents for the fiscal 2011.
Tenet’s net operating revenues are expected to fall in the range of $9.70 billion to $9.90 billion for 2011.
Our Recommendation
We believe that volume growth can significantly help achieve future profitability, including growth through the acquisition of hospitals and other health care facilities. We also expect appropriate reimbursement levels and cost control across the portfolio of hospitals to facilitate better cost management and business operations.
Though Tenet has been focusing on cost efficiencies, controlling labor costs in a fluctuating patient volumes environment is a tough challenge for Tenet, as inflation and technology improvements drive supply costs higher, and the efforts to control supply costs through product standardization, bulk purchases and improved utilization become difficult.
Overall, we strongly believe that volume growth can significantly help boost the earnings outlook of Tenet and its labor cost management in future.
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