Tenet Reports 50% Increase in Adjusted EBITDA for Third Quarter

 

EBITDA, a non-GAAP term defined below, of $240 million for the third quarter ended Sept. 30, 2009, an increase of $80 million, or 50 percent, as compared to $160 million for the third quarter of 2008. On a samehospital basis, Adjusted EBITDA was $236 million for the third quarter of 2009, an increase of $74 million, or 45.7 percent, as compared to $162 million in the third quarter of 2008. The net loss attributable to common shareholders for the third quarter of 2009 was $3 million, or $0.01 per share, compared to net income attributable to common shareholders of $104 million, or $0.22 per share, for the third quarter of 2008. Net income attributable to common shareholders in the third quarter of 2008 included pre-tax gains on sales of investments of $140 million.

 

 

"Our strategies drove a significant enhancement in earnings through the first three quarters of 2009, making this the second consecutive quarter in which we've generated year-over-year Adjusted EBITDA growth of 50 percent or better," said Trevor Fetter, president and chief executive officer. "Adjusted free cash flow from continuing operations was also solid at $142 million. Strong revenue growth, excellent cost control, and robust growth in our outpatient business were more than sufficient to offset an adverse shift in payer mix. While the economy has had some effect year-to-date, it remains less than we would have expected in the context of rising unemployment levels in many of our markets. Given our strong year-to-date performance, we are raising our range for 2009 Adjusted EBITDA to $925 million to $975 million. Additionally, it is important to recognize the strong reception Tenet received from the capital markets this year as it successfully extended more than $2.3 billion of near-term debt maturities and raised fresh capital by accessing the preferred equity market. These actions reduced our leverage and created a much stronger and liquid balance sheet."

 

Net loss attributable to common shareholders was $3 million in the third quarter of 2009, or $0.01 per share, including the following items with an aggregate, net unfavorable impact of $18 million after-tax, or $0.04 per share:

1. Loss from discontinued operations, net of tax, of $5 million, or $0.01 per share;

2. Favorable income tax adjustments of $3 million, or zero cents per share, primarily related to a decrease in

the Company's valuation allowance for deferred tax assets and other tax adjustments;

3. Loss from early extinguishment of debt of $16 million pre-tax, $10 million after-tax before the deferred tax

valuation allowance, or $0.02 per share;

4. Litigation and investigation costs of $3 million pre-tax, $2 million after-tax before the deferred tax

valuation allowance, or zero cents per share; and

5. Impairment of long lived-assets and goodwill, and restructuring charges of $7 million pre-tax, $4 million

after-tax before the tax valuation allowance, or $0.01 per share.

 

Adjusted EBITDA, a non-GAAP term defined below, was $240 million, or a margin of 10.6 percent of net operating revenues, in the third quarter of 2009. This represents an increase of $80 million, or 50 percent, from Adjusted EBITDA of $160 million in the third quarter of 2008, and a margin increase of 310 basis points as compared to an Adjusted EBITDA margin of 7.5 percent in the third quarter of 2008.

Same-hospital Adjusted EBITDA was $236 million in the third quarter of 2009, an increase of $74 million, or 45.7 percent, from the $162 million in the third quarter of 2008. The same-hospital Adjusted EBITDA margin increased by 290 basis points to 10.5 percent in the third quarter of 2009 compared to 7.6 percent in the third quarter of 2008. Same-hospital financial data excludes the results from one of the Company's hospitals as discussed below.

Adjusted EBITDA is a non-GAAP term defined by the Company as net income (loss) attributable to common shareholders of Tenet Healthcare Corporation before: (1) the cumulative effect of changes in accounting principle, net of tax; (2) net income attributable to noncontrolling interests; (3) preferred stock dividends, (4) income (loss) from discontinued operations, net of tax; (5) income tax (expense) benefit; (6) net gains (losses) on sales of investments; (7) investment earnings (loss); (8) gain (loss) from early extinguishment of debt; (9) interest expense; (10) litigation and investigation (costs) benefit, net of insurance recoveries; (11) hurricane insurance recoveries, net of costs; (12) impairment of long-lived assets and goodwill and restructuring charges, net of insurance recoveries; (13) amortization; and (14) depreciation. A reconciliation of Adjusted EBITDA to net income (loss) attributable to Tenet Healthcare Corporation common shareholders is provided in Table #1 at the end of this release.

 

Same-hospital continuing operations data excludes Sierra Providence East Medical Center, in El Paso, which opened on May 21, 2008. Same-hospital continuing operations data is the primary form of tabular data presentation in the narrative sections of this document. There are currently 48 hospitals in same-hospital continuing operations. Sierra Providence East Medical Center will be added to our same-hospital reporting beginning in the first quarter of 2010.

Total admissions were relatively flat in the third quarter with an increase of 0.1 percent as compared to the third quarter of 2008. In the third quarter of 2008, total admissions had increased by 1.9 percent as compared to the third quarter of 2007, providing a strong prior-year comparative. Commercial managed care admissions declined by 4.5 percent, which compared favorably to the 5.7 percent decline in the second quarter of 2009.

The Company's California Region and its Philadelphia Market each reported positive total admissions growth in the quarter. Tenet's other regions reported admissions declines in the third quarter. Total surgery growth remained strong growing by 2.2 percent with outpatient surgeries growing by 4.4 percent but inpatient surgeries declining by 0.7 percent.

Flu related admissions were not a major factor in the quarter, adding 339 admissions to the third quarter of 2009 as compared to 17 flu related admissions in the third quarter of 2008, an increase of 322 admissions.

Total same-hospital outpatient volume grew by 45,091 visits, or 4.8 percent, in the third quarter of 2009 compared to the third quarter of 2008. Tenet has now reported year-over-year growth in outpatient visits in six of the last seven quarters.

Changes in outpatient payer mix included growth in paying patients which rose to 89.4 percent of total outpatient visits, an increase of 40 basis points as compared to 89.0 percent in the third quarter of 2008, and a smaller contribution from commercial outpatient visits, which declined to 35.8 percent of total outpatient visits, a decline of 170 basis points as compared to 37.5 percent in the third quarter of 2008.

Newly opened or acquired facilities contributed 1,814 visits, net of the loss of visits from centers which were closed in the period following September 30, 2008. Excluding this net incremental volume from new facilities, organic growth in outpatient visits would have been an increase of 43,277 visits, or growth of 4.6 percent.

Outpatient surgeries also reported a strong quarter increasing by 4.4 percent. Outpatient surgeries grew by 3.5 percent in the second quarter of 2009. Outpatient imaging also continued its growth trend, increasing by 2.7 percent relative to the third quarter of 2008. Emergency Department outpatient visits increased by 30,353 visits, or 9.3 percent, in the third quarter of 2009 as compared to the third quarter of 2008. This increase in Emergency Department outpatient visits contributed 67 percent of the increase in total outpatient visits in the quarter.

Charity plus uninsured outpatient visits increased by 0.7 percent as compared to a decline rate of 3.4 percent in the second quarter of 2009. Flu-related outpatient visits were 5,271 in the third quarter of 2009 as compared to 214 in the third quarter of 2008. This increase of 5,057 visits accounted for 11 percent of the total increase in outpatient visits of 45,091.

All of the Company's regions exhibited growth in outpatient visits in the third quarter with the strongest growth coming from the Central and Florida Regions and the Philadelphia Market, each of which saw outpatient visit growth in excess of 8 percent. The Company's California and Southern States Regions grew outpatient visits by more than one percent.

Revenue growth remained robust in the third quarter of 2009 with an increase of $111 million, or 5.2 percent, on a same-hospital basis. Favorable prior-year cost report adjustments contributed $11 million to net operating revenues in the third quarter of 2009 as compared to a contribution of $10 million in the third quarter of 2008. Excluding prior year cost report adjustments from both quarters, same-hospital revenues would have shown the same increase of 5.2 percent. Net operating revenues in the third quarter of 2009 include $6 million of revenue recognized by the Company's Philadelphia Market related to calendar year 2008 that was approved for distribution to Tenet in the third quarter of 2009 by a Philadelphia HMO in which Tenet holds a minority interest.

Commercial managed care revenues grew by 4.2 percent on a same-hospital basis, a rate of growth significantly stronger than the 4.5 percent decline in commercial managed care admissions and the flat commercial managed care outpatient visits as compared to the third quarter of 2008.

Pricing improvement was evident across all key metrics, primarily reflecting the improved terms of our commercial managed care contracts. The growth in net inpatient revenue per admission of 3.7 percent was adversely impacted by a mix shift, including a decline in commercial managed care admissions as a percent of total admissions to 25.8 percent in the third quarter of 2009 as compared to 27.0 percent of total admissions in the third quarter of 2008.

In a similar fashion, the 2.7 percent growth in outpatient revenue per visit was constrained by the decline of commercial outpatient visits as a percent of total outpatient visits to 35.8 percent in the third quarter of 2009 as compared to 37.5 percent of total outpatient visits in the third quarter of 2008.

Salaries, wages and benefits per adjusted patient day decreased by 0.3 percent in the third quarter of 2009 compared to the third quarter of 2008. This decrease is primarily due to a decline in full-time employee headcount, reduced contract labor expense, lower 401(k) match expense, and lower overtime costs. These cost efficiencies were partially offset by higher health benefits costs, and increased accruals for annual incentive compensation. Contract labor expense, which is included in salaries, wages and benefits, was $16 million in the third quarter of 2009, a decrease of $18 million, or 53 percent, compared to the third quarter of 2008. The third quarter of 2009 also included a $3 million favorable pension expense adjustment related to the termination of a fully funded and frozen retirement plan of a previously acquired company.

Supplies expense per adjusted patient day increased by 2.0 percent compared to the third quarter of 2008. The increase in supplies expense is primarily due to the increase in the number of surgeries which grew by 2.2 percent, and the increased utilization of high cost implants. A portion of the increase in supplies expense was offset by revenue growth related to payments we receive from certain payers.

Other operating expenses per adjusted patient day decreased by 3.2 percent compared to the third quarter of 2008. Contributing to this decrease was a $4 million, or 12.9 percent, decline in total hospital malpractice expense to $27 million, compared to $31 million in the third quarter of 2008. This decrease is primarily attributable to improved claims experience. Declines in consulting costs, utility costs and information systems implementation costs also had a favorable impact on other operating expenses. The favorable impact of these items was partially offset by increases in costs of contracted services and a reduction in information systems and business office costs allocable to discontinued operations. Total controllable operating expenses, which is defined as salaries, wages & benefits, supplies, and other operating expenses, declined by 0.6 percent on a per adjusted patient day basis compared to the third quarter of 2008.

Bad debt expense increased by $28 million, or 17.3 percent, compared to the third quarter of 2008. The increase in bad debt expense was related to higher pricing, and decreased collection rates from self-pay accounts, partially offset by a decline in uninsured volumes and improved managed care accounts receivable aging categories.

The Company's self-pay collection rate, which is the aggregate collection rate for uninsured and balanceafter insurance accounts receivable, declined to approximately 30.3 percent in the third quarter of 2009 compared to 33.3 percent in the third quarter of 2008, and 30.8 percent in the second quarter of 2009. The estimated direct and allocated costs (based on selected operating expenses, which include salaries, wages and benefits, supplies and other operating expenses) of caring for uninsured patients were $100 million and $93 million, respectively, for the third quarters of 2009 and 2008.

 

Accounts Receivable

 

Consolidated accounts receivable were approximately $1.195 billion at September 30, 2009 and $1.225 billion at June 30, 2009. Accounts receivable days outstanding from continuing operations were 47 days at September 30, 2009 compared to 48 days at June 30, 2009 and 50 days at December 31, 2008. This amount is calculated as accounts receivable from continuing operations divided by net revenue from continuing operations divided by the number of days in the quarter.

 

Cash Flow

 

Cash and cash equivalents were $731 million at September 30, 2009, a decrease of $27 million from $758 million at June 30, 2009.

Significant cash flow items in the three months ended September 30, 2009 included:

  • Payments of $383 million to purchase $376 million aggregate principal amount of our senior notes due in 2011, 2012, 2014, 2015 and 2031;
  • Net proceeds of $334 million from the issuance of 345,000 shares of 7.0% mandatory convertible preferred stock;
  • Interest payments of $100 million, including $4 million of payments that were accelerated and paid in the three months ended September 30, 2009 as a result of our repurchase of $308 million aggregate principal amount of our senior notes due in 2015 and $20 million of interest payments under an interest rate swap agreement that has the effect of converting our 7% senior notes due 2013 from a fixed interest rate paid semi-annually to a variable interest rate paid monthly based on the onemonth LIBOR plus a floating rate spread of approximately 5.46%;
  • $18 million received under the interest rate swap agreement discussed above;
  • Cash distributions of $3 million received related to the Company's investment in the Reserve Yield Plus Fund, which are classified as investing activity cash flows;
  • Capital expenditures of $91 million;
  • $23 million in principal payments classified as operating cash outflows from continuing operations related to our 2006 civil settlement with the federal government;
  • $81 million in payments classified as operating cash outflows from continuing operations related to our 2009 settlement of wage and hour actions; and;
  • Income tax payments of $7 million.

 

Outlook for 2009

 

The Company is raising its 2009 outlook range for Adjusted EBITDA by $25 million to a new 2009 outlook range of $925 million to $975 million. The outlook for net income attributable to common shareholders for 2009 is in a range from $66 million to $130 million. A reconciliation of the Company's outlook for 2009 Adjusted EBITDA to the outlook for net income attributable to common shareholders of Tenet Healthcare Corporation for the year ending Dec. 31, 2009 is provided in Table #3 below.

This favorable refinement to the 2009 outlook range reflects the Company's stronger than anticipated results of operations in the third quarter.

 

Management's Webcast Discussion of Third Quarter Results

 

Tenet management will discuss third quarter 2009 results on a webcast scheduled for 10:00 AM (ET) on Nov. 3, 2009. This webcast may be accessed through Tenet's website at www.tenethealth.com/investors. A set of slides, which the Company will refer to on the call, will be posted to the Company's website at approximately 7:30 AM (ET).

Tenet Healthcare Corporation is a health care services company whose subsidiaries and affiliates own and operate acute care hospitals, ambulatory surgery centers and diagnostic imaging centers. Tenet's hospitals and related healthcare facilities are committed to providing high quality care to patients in the communities they serve.

For more information, please visit www.tenethealth.com.

# # #

Same-Hospital Data

Adjusted EBITDA

Continuing Operations

DALLAS - November 3, 2009 - Tenet Healthcare Corporation (NYSE:THC) today reported Adjusted

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