Tenet Posts Mixed Bag in 1Q - Analyst Blog

By Zacks Equity Research,

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Tenet Healthcare Corp. ( THC ) reported first-quarter 2012 income from continuing operations of 13 cents per share, surpassing the Zacks Consensus Estimate of 9 cents, but it fell a penny short of the prior-year quarter earnings of 14 cents. Operating income for the quarter declined to $58 million from $73 million in the year-ago quarter.

Growth in revenues arising from higher admissions, outpatient visits and surgeries were offset by the rise in operating expenses, leading to the year-over-year decline.

Operational Update

Net operating revenues stood at $2.35 billion, up 2.2% from $2.30 billion in the prior-year quarter. However, reported revenues lagged the Zacks Consensus Estimate of $2.45 billion.

During the reported quarter, Tenet's net patient revenues per adjusted admission increased 1.6% on a year-over-year basis to $2.518, primarily due to improved terms of commercial managed care contracts, partially offset by an adverse shift in payer mix and growth in obstetrics deliveries.

Admissions edged down 0.1% during the quarter, while adjusted admissions climbed 2.8% year over year. Surgeries increased 6.6% and emergency department visits improved 5.2%.

Bad debt expense increased 6.0% to $193 million from $182 million in the first quarter of 2011.

Tenet posted adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $314 million in the reported quarter, down 17% from $379 million in the prior-year quarter. Adjusted EBITDA margin was 13.4% compared with 16.5% in the year-ago quarter.

Adjusted EBITDA for both the reported quarter and the year-ago quarter include state provider fees, Health Information Technology incentives, payer settlements and gains. Adjusted EBITDA also includes $77 million from an industry-wide Medicare inpatient prospective payment settlement in the reported quarter and $75 million in incremental revenue from the California and Pennsylvania Provider Fee programs in the year-ago quarter.

Financial Position

Tenet exited the quarter with cash and cash equivalents of $104 million, down from $113 million as of 2011 year end. The decrease in cash was the result of $26 million spent on buying back 5.3 million shares. It was negatively impacted by annual cash payments related to some compensation and benefit expenses and seasonal repayment of debt obligations.

Tenet's capital expenditures increased to $136 million in the quarter, compared with $116 million in the prior-year quarter.

Net cash used in operating activities in the quarter was $42 million, soaring up from $2 million used in the year-ago quarter. As of March 31, 2012, total assets of Tenet were $8.455 billion and shareholders' equity was $1.46 billion.

Update on Buyback of Mandatory Convertible Preferred Stock

The company bought back mandatory convertible preference shares worth $299 million, which would have been converted into about 51 million equity shares on October 1, 2012, had the preference shares not been repurchased.

The buyback was financed by the issue of $150 million worth of 8% senior notes due August 1, 2020 and $141.2 million of 6.25% senior secured notes due November 1, 2018.

This buyback coupled with 81 million shares bought back exhausting the $400 million authorization, lowered the share count by 132 million.


Tenet, for the second time raised Adjusted EBITDA guidance. The guidance was raised by $25 million to $1.250 - $1.375 billion.

The company expects two major items - net revenues of $120 million from the California Provider Fee 30-Month Program and $35 million from Health Information Technology incentive payments - to be realized in the fourth quarter. Therefore, expectedly earnings would be higher in the second half of 2012.

As such, the company guided second quarter adjusted EBITDA in the band of $225-250 million.

Revenue and adjusted EBITDA guidance include $190 million and $10 million, respectively, from Tenet's holding in Creighton University Medical Center (CUMC). However, the company is planning to sell its stake in the CUMC to Alegent Health and has signed a non-binding agreement for the same.

Tenet expects to realize $63 million from the sale, including working capital. The transaction is expected to culminate in the second quarter of 2012, subject to agreement finalization as well as customary closing conditions. The company expects a non-cash impairment pre-tax charge of $100 million, or $50 million post-tax, due to the sale.

Peer Take

Universal Health Services Inc. ( UHS ), a rival of Tenet, declared its first-quarter earnings of $1.13 per share, lower than the Zacks Consensus Estimate of $1.16  and also lagging the year-ago earnings of $1.15.

Another competitor, HCA Holdings Inc. ( HCA ) reported adjusted income of 96 cents per share in the first quarter of 2012, lagging the Zacks Consensus estimate of 98 cents, but beating the year-ago earnings of 84 cents.

Zacks Rank

Tenet carries a Zacks #3 Rank, implying a short-term Hold rating, with no clear directional pressure in the near term. Considering the fundamentals, we maintain our long-term Neutral recommendation on the shares.

HCA HOLDINGS (HCA): Free Stock Analysis Report
TENET HEALTH (THC): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: HCA , THC , UHS

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