Tenet Reports Results for the Third Quarter Ended September 30, 2017

Tenet Healthcare Corporation (NYSE: THC) reported a net loss from continuing operations attributable to Tenet shareholders of $366 million in the third quarter of 2017 compared to a $9 million net loss from continuing operations in the third quarter of 2016. Adjusted EBITDA was $507 million in the third quarter of 2017 compared to $582 million in the third quarter of 2016.

“Consistent with the announcement that we made in late October, we delivered Adjusted EBITDA within our Outlook range for the quarter. Reflecting on the impact of Hurricanes Harvey and Irma and a softer volume environment, we are lowering our full year 2017 Adjusted EBITDA Outlook to $2.375 billion to $2.425 billion,” said Ronald A. Rittenmeyer, executive chairman and CEO. “We are partially offsetting the volume declines with tighter cost controls, but the one-time impacts are difficult to recover in a short period of time. We are challenging ourselves to improve accountability, agility and decision making, changing how we manage our business day-to-day, and reiterating our focus on quality and service.”

The $75 million year-over-year decline in Adjusted EBITDA was primarily attributable to the following items:

(i) a $55 million decline in California Provider Fee revenue, with no revenue being recorded under the program in the third quarter of 2017 since the 2017 program has not yet been approved by the Centers for Medicare and Medicaid Services (CMS); this compares to $55 million in the third quarter of 2016;

(ii) an estimated $30 million of lower revenues and higher expenses associated with Hurricanes Harvey and Irma, prior to any insurance recoveries the Company may receive in future periods. Approximately $20 million of the $30 million impacted the Hospital Operations and other segment and the remaining $10 million impacted the Ambulatory Care segment.

(iii) approximately $20 million due to the sale of the Company’s hospitals and related assets in Houston, effective August 1, 2017.

Hospital Operations and Other Segment

Net operating revenues in the Hospital Operations and other segment was $3.856 billion, down 4.6 percent from $4.040 billion in the third quarter of 2016; in order to improve comparability, these revenue figures exclude revenue generated by the Company’s health plans in both periods since the Company is exiting this business. The decline was primarily due to: (i) a decline in adjusted admissions, including the impact of Hurricane Irma; (ii) the Company not being able to record revenue under the California Provider Fee Program in the third quarter of 2017; and (iii) the sale of our former hospitals and related assets in Houston.

On a same-hospital basis, patient revenue was $3.777 billion, down 2.3 percent from $3.867 billion in the third quarter of 2016. The decline was primarily due to a 2.2 percent decline in adjusted admissions and a 0.2 percent decline in net patient revenue per adjusted admission. The Company’s same-hospital revenue per adjusted admission was lowered by approximately 150 basis points due to the lack of CMS approval of the California Provider Fee Program. The Company estimates that Hurricane Irma lowered same-hospital admissions and adjusted admissions by approximately 50 basis points. Excluding the impact of the hurricane as well as patients that were insured by Humana in both the third quarters of 2016 and 2017, same-hospital admissions declined 1.2 percent and adjusted admissions declined 0.8 percent.

Adjusted EBITDA in Tenet’s hospital segment was $269 million, representing a decline of $77 million or 22.3 percent as compared to $346 million in the third quarter of 2016. The $77 million decline in Adjusted EBITDA in the hospital segment was primarily driven by: (i) the $55 million decline in revenue from the California Provider Fee program; (ii) an estimated $20 million of lower revenues and higher expenses associated with Hurricane Irma; and (iii) approximately $20 million due to the sale of our former hospitals and related assets in Houston. In addition, a $33 million increase in same-hospital self-pay net revenues contributed to a $26 million increase in the provision for doubtful accounts on a same hospital basis, from $308 million in the third quarter of 2016 to $334 million in the third quarter of 2017, which placed pressure on the year-over-year EBITDA comparison.

Tenet’s health plan business generated losses of $6 million in the third quarter of 2017 versus a loss of $6 million on the EBITDA line in the third quarter of 2016. The revenue and expenses associated with the Company’s health plan operations are included in Tenet’s consolidated statements of operations; however, the results are excluded from Adjusted EBITDA in both periods.

Selected operating expenses in the segment, defined as the sum of salaries, wages and benefits, supplies and other operating expenses, increased 1.7 percent on a per adjusted admission basis in the third quarter of 2017.

Exchanges

Tenet’s same-hospital exchange admissions were 4,856 in the third quarter of 2017, down 6.8 percent from the third quarter of 2016. Same-hospital exchange outpatient visits were 49,089 in the third quarter of 2017, up 4.3 percent from the third quarter of 2016.

Uncompensated Care

Tenet’s provision for doubtful accounts was $355 million in the third quarter of 2017, representing a ratio of 7.2 percent of revenues before bad debt, as compared to $367 million in the third quarter of 2016, or 7.0 percent of revenues before bad debt. The increase in the bad debt ratio was primarily attributable to a $33 million increase in same-hospital self-pay revenues.

Tenet’s uncompensated care costs, defined as the sum of the provision for doubtful accounts, charity care write-offs and uninsured discounts, were $1.361 billion and $1.318 billion in the third quarters of 2017 and 2016, respectively, including $1.006 billion and $951 million, respectively, of charity care write-offs and uninsured discounts that were offered through Tenet’s Compact with Uninsured Patients. Uncompensated care in the third quarter of 2017 represented 22.9 percent of revenue before bad debts, uninsured discounts and charity care write-offs, up from 21.4 percent in the third quarter of 2016. Nearly all of Tenet’s uncompensated care is associated with the Hospital Operations and other segment.

Uninsured plus charity admissions decreased by 210 admissions, or 2.0 percent on a same-hospital basis in the third quarter of 2017 compared to the third quarter of 2016. Uninsured plus charity outpatient visits decreased by 15,694 visits, or 11.8 percent, on a same-hospital basis.

Ambulatory Care Segment

During the third quarter of 2017, the Ambulatory segment produced net operating revenues of $468 million, representing an increase of 4.5 percent as compared to $448 million in the third quarter of 2016. In addition, the Ambulatory segment generated Adjusted EBITDA of $159 million, up 1.3 percent from $157 million in the third quarter of 2016 and Adjusted EBITDA less facility-level noncontrolling interest was $104 million, up 1.0 percent from $103 million in the third quarter of 2016. Hurricanes Harvey and Irma lowered EBITDA and EBITDA less facility-level noncontrolling interest by approximately $10 million and $4 million, respectively, during the third quarter of 2017.

The results of many of the facilities in which the Ambulatory segment has an investment are not consolidated by Tenet. To help analyze the segment’s results of operations, management uses system-wide measures which include revenues and cases of both consolidated and unconsolidated facilities. On a same-facility system-wide basis, revenue in the Ambulatory segment increased 0.9 percent, with cases decreasing 2.4 percent and revenue per case increasing 3.4 percent. Hurricanes Harvey and Irma lowered same-facility system-wide case growth by approximately 210 basis points. Also, one less surgical day in the quarter lowered case growth 100 basis points. On a same-day basis and excluding the hurricanes, same-facility system-wide revenue increased 4.0 percent and cases were up 0.7 percent.

Conifer Segment

During the third quarter of 2017, Conifer’s revenue increased 0.8 percent to $401 million, up from $398 million in the third quarter of 2016. Revenue from third party customers increased 5.4 percent to $252 million. Conifer generated $79 million of Adjusted EBITDA in both the third quarters of 2017 and 2016.

Net Income and Earnings Per Share

Tenet reported a net loss from continuing operations attributable to Tenet shareholders of $366 million, or a loss of $3.63 per diluted share, in the third quarter of 2017 compared to a net loss of $9 million, or a loss of $0.09 per diluted share, in the third quarter of 2016.

As shown on Table #2, the net loss from continuing operations attributable to Tenet shareholders of approximately $366 million included: (i) a $329 million pre-tax impairment and restructuring charge, primarily related to the write-down of assets held for sale in Philadelphia and the United Kingdom to their estimated fair value; (ii) a $104 million pre-tax gain on sale, primarily related to the sale of the Company’s former hospitals and related assets in Houston; (iii) a $138 million pre-tax loss from the early extinguishment of debt related to the Company’s refinancing transactions and debt redemption in the quarter; and (iv) other items that lowered pre-tax income by $12 million. These items collectively lowered pre-tax income by approximately $375 million, lowered after-tax income by approximately $349 million and lowered diluted earnings per share by approximately $3.46. The net loss in the third quarter of 2017 does not include the pre-tax restructuring charge of approximately $40 million related to the $150 million cost reduction initiative that was announced on October 27, 2017; this charge will be recorded in the fourth quarter of 2017.

After adjusting for the items listed on Table #2, Tenet recorded an Adjusted net loss from continuing operations attributable to Tenet shareholders of $17 million, or a loss of $0.17 per diluted share, during the third quarter of 2017, as compared to Adjusted net income from continuing operations attributable to Tenet shareholders of $20 million, or $0.20 per diluted share, in the third quarter of 2016.

A reconciliation of GAAP net income (loss) attributable to Tenet shareholders to Adjusted net income (loss) from continuing operations and Adjusted diluted earnings (loss) per share from continuing operations attributable to Tenet shareholders is contained in Table #2 at the end of this release.

Cash Flow and Liquidity

Cash and cash equivalents were $429 million at September 30, 2017 compared to $475 million at June 30, 2017. The Company had no outstanding borrowings on its $1 billion credit line as of September 30, 2017. Accounts receivable days outstanding from continuing operations were 55.6 at September 30, 2017 compared to 56.5 at December 31, 2016. The calculation of accounts receivable days outstanding from continuing operations: (i) includes the accounts receivable of the Company’s two hospitals in Philadelphia, MacNeal Hospital in the Chicago-area and the Aspen facilities in the United Kingdom, which have been classified in assets held for sale on the Condensed Consolidated Balance Sheet at September 30, 2017; (ii) excludes revenue from our former hospitals and related assets in Houston, which were divested on August 1, 2017, from the 2016 and 2017 periods; (iii) excludes health plan revenues from the 2016 and 2017 periods; and (iv) excludes California Provider Fee revenues from the 2016 period.

Net cash provided by operating activities for the nine months ended September 30, 2017 was $709 million, representing a $142 million decrease compared to $851 million in the first nine months of 2016. After subtracting $492 million and $614 million of capital expenditures in the nine months ended September 30, 2017 and September 30, 2016, respectively, Free Cash Flow was $217 million in the nine months ended September 30, 2017, representing a $20 million decline compared to $237 million in the comparable period in 2016. Adjusted Free Cash Flow was $308 million in the nine months ended September 30, 2017, representing a $60 million decline from $368 million in the comparable period in 2016. The primary reasons for the decline in cash flow from operations, Free Cash Flow and Adjusted Free Cash Flow during the nine months ended September 30, 2017 versus the comparable period in 2016 include lower earnings in the 2017 period, lower cash flows from our health plan businesses in 2017 of approximately $100 million, and the timing of other working capital items, partially offset by lower capital expenditures of $122 million.

Net cash provided by investing activities was $227 million in the nine months ended September 30, 2017 compared to $150 million of net cash used in investing activities in the comparable period in 2016. The 2017 period included $826 million of proceeds from the sales of facilities and other assets, primarily from the sale of the Company’s Houston-area hospitals effective August 1, 2017 for net pre-tax proceeds of approximately $750 million; the 2016 period included $573 million of proceeds from the sale of the Company’s hospitals and related outpatient facilities in Georgia.

Net cash used in financing activities was $1.223 billion in the nine months ended September 30, 2017 compared to $408 million of net cash used in financing activities in the comparable period in 2016. The 2017 period included: (i) $722 million related to purchases of noncontrolling interests, primarily the Company’s purchase of an additional 23.7 percent of USPI, which increased Tenet’s ownership interest in the USPI joint venture to 80.0 percent; (ii) the refinancing activities that were completed in the second and third quarters of 2017; and (iii) the redemption of $250 million aggregate principal amount of Tenet’s 8.0 percent senior unsecured notes due 2020 on September 11, 2017, which will lower future annual cash interest payments by $20 million.

Reconciliations of net cash provided by operating activities to both Free Cash Flow and Adjusted Free Cash Flow are contained in Table #3 at the end of this release.

Outlook

The Company’s revised Outlook for 2017 includes:

• Revenue of $18.9 billion to $19.1 billion, excluding approximately $110 million of revenue from the Company’s health plans,
• Net loss from continuing operations attributable to Tenet common shareholders ranging from a loss of $372 million to a loss of $367 million,
• Adjusted EBITDA of $2.375 billion to $2.425 billion,
• Net cash provided by operating activities of $1.0 billion to $1.3 billion,
• Adjusted Free Cash Flow of $450 million to $650 million,
• Diluted loss per share from continuing operations attributable to Tenet shareholders ranging from a loss of $3.68 to a loss of $3.63, and
• Adjusted diluted earnings per share from continuing operations attributable to Tenet shareholders of $0.59 to $0.74.

The Company is lowering the midpoint of its 2017 Adjusted EBITDA Outlook range by $100 million to reflect: (i) approximately $60 million of lower revenues and higher expenses associated with Hurricanes Harvey and Irma, prior to any insurance recoveries the Company may receive in future periods, with approximately $30 million reflected in the Company’s results for the third quarter of 2017 and an additional $30 million included in the Company’s Outlook for the fourth quarter of 2017, primarily related to additional repair costs at facilities that were damaged by the hurricanes; (ii) approximately $15 million of lower-than-anticipated revenue from the Texas and Florida Medicaid programs, of which, $10 million was recognized in the third quarter of 2017; (iii) approximately $17 million of executive severance and related stock-based compensation expense to be recorded in the fourth quarter of 2017; and, (iv) approximately $8 million from other items, primarily lower volume growth, higher bad debt and the timing of Ambulatory acquisitions, partially offset by the Company’s cost reduction initiatives.

The Outlook for 2017 assumes equity in earnings of unconsolidated affiliates of $140 million to $150 million, electronic health record incentives of approximately $10 million, net income attributable to noncontrolling interests of $370 million to $380 million and an average diluted share count of 101 million. In addition, the Outlook assumes that CMS will approve the proposed California Provider Fee program for the 30-month period from January 2017 through June 2019 during the fourth quarter of 2017 and further assumes that the Company will record approximately $220 million to $230 million of revenue and Adjusted EBITDA during 2017 as a result of this program. In 2016, the Company recorded $232 million of revenue under the California Provider Fee program. The Company will not be able to recognize any revenue under the 2017 program until CMS approves the program. Finally, the Adjusted EBITDA Outlook excludes approximately $50 million of losses in 2017 that the Company expects to incur in its health plan business.

The Company’s Outlook for the fourth quarter of 2017 includes:

• Revenue of $4.8 billion to $5.0 billion, excluding approximately $10 million of revenue from the Company’s health plans,
• Net income from continuing operations attributable to Tenet shareholders ranging from $102 million to $107 million,
• Adjusted EBITDA of $771 million to $821 million,
• Earnings per diluted share from continuing operations attributable to Tenet shareholders ranging from $1.01 to $1.06, and
• Adjusted earnings per diluted share from continuing operations attributable to Tenet shareholders ranging from $1.20 to $1.35.

The Outlook for the fourth quarter assumes equity in earnings of unconsolidated affiliates of approximately $50 million, $2 million of electronic health record incentives, net income attributable to noncontrolling interests of $116 million to $126 million, a pre-tax restructuring charge of approximately $40 million related to the $150 million cost reduction initiative that was announced on October 27, 2017, and an average diluted share count of 101 million. The Outlook for the fourth quarter of 2017 includes $220 million to $230 million of revenue and Adjusted EBITDA associated with the California Provider Fee program, whereas the Company’s results in the fourth quarter of 2016 included $65 million of revenue and Adjusted EBITDA associated with the program.

Additional details on Tenet’s Outlook for both the fourth quarter and calendar year 2017 are available in Tables #4 and #5 at the end of this press release and in an accompanying slide presentation that is accessible through the Company’s website at www.tenethealth.com/investors.

Management’s Webcast Discussion of Third Quarter Results

Tenet management will discuss the Company’s third quarter 2017 results on a webcast scheduled for 10:00 a.m. Eastern Time (9:00 a.m. Central Time) on November 7, 2017. Investors can access the webcast through the Company’s website at www.tenethealth.com/investors. A set of slides, which will be referred to on the conference call, is available on the Quarterly Results section of the Company’s website.

Additional information regarding Tenet’s quarterly results of operations is contained in its Form 10-K report for the twelve months ended December 31, 2016 and Form 10-Q report for the period ended September 30, 2017, which will be filed with the Securities and Exchange Commission and posted on the Company’s website before the webcast.

This press release includes certain non-GAAP measures, such as Adjusted EBITDA, Adjusted net income (loss) from continuing operations attributable to Tenet shareholders, Adjusted diluted earnings (loss) per share from continuing operations attributable to Tenet shareholders, Free Cash Flow and Adjusted Free Cash Flow. Reconciliations of these measures to the most comparable GAAP measure are contained in the tables at the end of this release.

Tenet Healthcare Corporation is a diversified healthcare services company with nearly 130,000 employees united around a common mission: to help people live happier, healthier lives. Through its subsidiaries, partnerships and joint ventures, including United Surgical Partners International, the Company operates general acute care and specialty hospitals, ambulatory surgery centers, urgent care centers and other outpatient facilities in the United States and the United Kingdom. Tenet’s Conifer Health Solutions subsidiary provides technology-enabled performance improvement and health management solutions to hospitals, health systems, integrated delivery networks, physician groups, self-insured organizations and health plans. For more information, please visit www.tenethealth.com.

The terms "THC", "Tenet Healthcare Corporation", "the Company", "we", "us" or "our" refer to Tenet Healthcare Corporation or one or more of its subsidiaries or affiliates as applicable.

This release contains “forward-looking statements” – that is, statements that relate to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as “expect,” “assume,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” or “will.” Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include, but are not limited to, the factors disclosed under “Forward-Looking Statements” and “Risk Factors” in our Form 10-K for the year ended December 31, 2016, Form 10-Q for the quarterly period ended September 30, 2017 and other filings with the Securities and Exchange Commission.

Tenet uses its Company website to provide important information to investors about the Company including the posting of important announcements regarding financial performance and corporate developments.

*Had we generated income from continuing operations in the three months ended September 30, 2017 and 2016 the effect of employee stock options, restricted stock units and deferred compensation units on the diluted shares calculation would have been an increase of 711 thousand and 1,455 thousand shares, respectively.

*Had we generated income from continuing operations in the nine months ended September 30, 2017 and 2016, the effect of employee stock options, restricted stock units and deferred compensation units on the diluted shares calculation would have been an increase of 747 thousand and 1,470 thousand shares, respectively.

(1) Represents the consolidated results of Tenet’s acute care hospitals and related outpatient facilities included in the Hospital Operations and other segment.

(2) Excludes operating expenses from Tenet's health plans.
* This change is the difference between the 2017 and 2016 amounts shown.

(1) Information for our Hospital Operations and other segment is presented on a same-hospital basis, which includes the results of our same 72 hospitals operated throughout the nine months ended September 30, 2017 and 2016, and associated outpatient facilities but excludes the results of hospitals that Tenet began operating, as well as hospitals Tenet divested, since January 1, 2016.
* This change is the difference between the 2017 and 2016 amounts shown.

(1) Represents the consolidated results of Tenet’s acute care hospitals and related outpatient facilities included in the Hospital Operations and other segment.

(2) Excludes operating expenses from Tenet's health plans.

(1) Information for our Hospital Operations and other segment is presented on a same-hospital basis, which includes the results of our same 72 hospitals operated throughout the nine months ended September 30, 2017 and 2016, and associated outpatient facilities but excludes the results of hospitals that Tenet began operating, as well as hospitals Tenet divested, since January 1, 2016.