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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-Q

 

x

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the quarterly period ended June 30, 2014

 

OR

 

¨

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the transition period from               to               

 

Commission File Number 1-7293

 


 

TENET HEALTHCARE CORPORATION

 (Exact name of Registrant as specified in its charter)

 


 

Nevada

(State of Incorporation)

 

95-2557091

(IRS Employer Identification No.)

 

1445 Ross Avenue, Suite 1400

Dallas, TX 75202

(Address of principal executive offices, including zip code)

 

(469) 893-2200

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the
past 90 days.   Yes 
x No o

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.   Yes x No o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Exchange Act Rule 12b-2).

 

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2).  Yes o No x

 

As of July 31, 2014, there were 97,915,606 shares of the Registrant’s common stock, $0.05 par value, outstanding.

 

 

 




Table of Contents

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

TENET HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

Dollars in Millions

(Unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

406

 

$

113

 

Accounts receivable, less allowance for doubtful accounts ($753 at June 30, 2014 and $589 at December 31, 2013)

 

2,171

 

1,965

 

Inventories of supplies, at cost

 

264

 

262

 

Income tax receivable

 

34

 

0

 

Current portion of deferred income taxes

 

633

 

581

 

Other current assets

 

700

 

789

 

Total current assets

 

4,208

 

3,710

 

Investments and other assets

 

362

 

405

 

Deferred income taxes, net of current portion

 

125

 

90

 

Property and equipment, at cost, less accumulated depreciation and amortization ($4,178 at June 30, 2014 and $3,898 at December 31, 2013)

 

7,771

 

7,691

 

Goodwill

 

3,200

 

3,042

 

Other intangible assets, at cost, less accumulated amortization ($618 at June 30, 2014 and $523 at December 31, 2013)

 

1,241

 

1,192

 

Total assets

 

$

16,907

 

$

16,130

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

622

 

$

149

 

Accounts payable

 

1,015

 

1,075

 

Accrued compensation and benefits

 

669

 

631

 

Professional and general liability reserves

 

162

 

156

 

Accrued interest payable

 

207

 

198

 

Other current liabilities

 

709

 

719

 

Total current liabilities

 

3,384

 

2,928

 

Long-term debt, net of current portion

 

10,942

 

10,690

 

Professional and general liability reserves

 

567

 

543

 

Defined benefit plan obligations

 

380

 

398

 

Other long-term liabilities

 

484

 

446

 

Total liabilities

 

15,757

 

15,005

 

Commitments and contingencies

 

 

 

 

 

Redeemable noncontrolling interests in equity of consolidated subsidiaries

 

277

 

247

 

Equity:

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, $0.05 par value; authorized 262,500,000 shares; 145,010,828 shares issued at June 30, 2014 and 144,057,351 shares issued at December 31, 2013

 

7

 

7

 

Additional paid-in capital

 

4,594

 

4,572

 

Accumulated other comprehensive loss

 

(20

)

(24

)

Accumulated deficit

 

(1,480

)

(1,422

)

Common stock in treasury, at cost, 47,196,972 shares at June 30, 2014 and 47,197,722 shares at December 31, 2013

 

(2,378

)

(2,378

)

Total shareholders’ equity

 

723

 

755

 

Noncontrolling interests

 

150

 

123

 

Total equity

 

873

 

878

 

Total liabilities and equity

 

$

16,907

 

$

16,130

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 



Table of Contents

 

TENET HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Dollars in Millions, Except Per-Share Amounts

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net operating revenues:

 

 

 

 

 

 

 

 

 

Net operating revenues before provision for doubtful accounts

 

$

4,362

 

$

2,629

 

$

8,668

 

$

5,223

 

Less: Provision for doubtful accounts

 

320

 

207

 

700

 

414

 

Net operating revenues

 

4,042

 

2,422

 

7,968

 

4,809

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

1,956

 

1,166

 

3,877

 

2,327

 

Supplies

 

649

 

387

 

1,277

 

771

 

Other operating expenses, net

 

1,035

 

567

 

2,034

 

1,135

 

Electronic health record incentives

 

(58

)

(34

)

(67

)

(34

)

Depreciation and amortization

 

209

 

121

 

402

 

235

 

Impairment and restructuring charges, and acquisition-related costs

 

32

 

11

 

53

 

25

 

Litigation and investigation costs

 

12

 

2

 

15

 

2

 

Operating income

 

207

 

202

 

377

 

348

 

Interest expense

 

(190

)

(98

)

(372

)

(201

)

Loss from early extinguishment of debt

 

0

 

(171

)

0

 

(348

)

Investment earnings

 

0

 

1

 

0

 

1

 

Income (loss) from continuing operations, before income taxes

 

17

 

(66

)

5

 

(200

)

Income tax benefit (expense)

 

(8

)

20

 

(7

)

73

 

Income (loss) from continuing operations, before discontinued operations

 

9

 

(46

)

(2

)

(127

)

Discontinued operations:

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

(7

)

6

 

(15

)

3

 

Litigation and investigation costs

 

(18

)

0

 

(18

)

0

 

Income tax benefit (expense)

 

9

 

(3

)

12

 

(2

)

Income (loss) from discontinued operations

 

(16

)

3

 

(21

)

1

 

Net loss

 

(7

)

(43

)

(23

)

(126

)

Less: Net income attributable to noncontrolling interests

 

19

 

7

 

35

 

12

 

Net loss attributable to Tenet Healthcare Corporation common shareholders

 

$

(26

)

$

(50

)

$

(58

)

$

(138

)

Amounts attributable to Tenet Healthcare Corporation common shareholders

 

 

 

 

 

 

 

 

 

Loss from continuing operations, net of tax

 

$

(10

)

$

(53

)

$

(37

)

$

(139

)

Income (loss) from discontinued operations, net of tax

 

(16

)

3

 

(21

)

1

 

Net loss attributable to Tenet Healthcare Corporation common shareholders

 

$

(26

)

$

(50

)

$

(58

)

$

(138

)

Earnings (loss) per share attributable to Tenet Healthcare Corporation common shareholders:

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.11

)

$

(0.52

)

$

(0.38

)

$

(1.34

)

Discontinued operations

 

(0.16

)

0.03

 

(0.22

)

0.01

 

 

 

$

(0.27

)

$

(0.49

)

$

(0.60

)

$

(1.33

)

Diluted

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.11

)

$

(0.52

)

$

(0.38

)

$

(1.34

)

Discontinued operations

 

(0.16

)

0.03

 

(0.22

)

0.01

 

 

 

$

(0.27

)

$

(0.49

)

$

(0.60

)

$

(1.33

)

Weighted average shares and dilutive securities outstanding (in thousands):

 

 

 

 

 

 

 

 

 

Basic

 

97,677

 

103,010

 

97,419

 

103,557

 

Diluted

 

97,677

 

103,010

 

97,419

 

103,557

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

2



Table of Contents

 

TENET HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME

Dollars in Millions

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net loss

 

$

(7

)

$

(43

)

$

(23

)

$

(126

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Amortization of prior-year service costs included in net periodic benefit costs

 

2

 

0

 

3

 

0

 

Unrealized gains on securities held as available-for-sale

 

3

 

0

 

3

 

0

 

Other comprehensive income before income taxes

 

5

 

0

 

6

 

0

 

Income tax expense related to items of other comprehensive income

 

(2

)

0

 

(2

)

0

 

Total other comprehensive income, net of tax

 

3

 

0

 

4

 

0

 

Comprehensive net loss

 

(4

)

(43

)

(19

)

(126

)

Less: Comprehensive income attributable to noncontrolling interests

 

19

 

7

 

35

 

12

 

Comprehensive net loss attributable to Tenet Healthcare Corporation common shareholders

 

$

(23

)

$

(50

)

$

(54

)

$

(138

)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

TENET HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in Millions

(Unaudited)

 

 

 

Six Months Ended
 June 30,

 

 

 

2014

 

2013

 

Net loss

 

$

(23

)

$

(126

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

402

 

235

 

Provision for doubtful accounts

 

700

 

414

 

Deferred income tax benefit

 

(7

)

(76

)

Stock-based compensation expense

 

26

 

19

 

Impairment and restructuring charges, and acquisition-related costs

 

53

 

25

 

Litigation and investigation costs

 

15

 

2

 

Loss from early extinguishment of debt

 

0

 

348

 

Amortization of debt discount and debt issuance costs

 

14

 

9

 

Pre-tax (income) loss from discontinued operations

 

33

 

(3

)

Other items, net

 

(9

)

(18

)

Changes in cash from operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(937

)

(445

)

Inventories and other current assets

 

78

 

(166

)

Income taxes

 

(17

)

(4

)

Accounts payable, accrued expenses and other current liabilities

 

(32

)

(65

)

Other long-term liabilities

 

47

 

5

 

Payments for restructuring charges, acquisition-related costs, and litigation costs and settlements

 

(84

)

(19

)

Net cash used in operating activities from discontinued operations, excluding income taxes

 

(12

)

(7

)

Net cash provided by operating activities

 

247

 

128

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment — continuing operations

 

(523

)

(256

)

Purchases of businesses or joint venture interests, net of cash acquired

 

(42

)

(16

)

Proceeds from sales of marketable securities, long-term investments and other assets

 

3

 

3

 

Other long-term assets

 

(14

)

6

 

Other items, net

 

0

 

3

 

Net cash used in investing activities

 

(576

)

(260

)

Cash flows from financing activities:

 

 

 

 

 

Repayments of borrowings under credit facility

 

(1,300

)

(620

)

Proceeds from borrowings under credit facility

 

895

 

653

 

Repayments of other borrowings

 

(68

)

(1,967

)

Proceeds from other borrowings

 

1,108

 

1,907

 

Repurchases of common stock

 

0

 

(192

)

Deferred debt issuance costs

 

(19

)

(30

)

Distributions paid to noncontrolling interests

 

(20

)

(10

)

Contributions from noncontrolling interests

 

13

 

98

 

Proceeds from exercise of stock options

 

11

 

21

 

Other items, net

 

2

 

(2

)

Net cash provided by (used in) financing activities

 

622

 

(142

)

Net increase (decrease) in cash and cash equivalents

 

293

 

(274

)

Cash and cash equivalents at beginning of period

 

113

 

364

 

Cash and cash equivalents at end of period

 

$

406

 

$

90

 

Supplemental disclosures:

 

 

 

 

 

Interest paid, net of capitalized interest

 

$

(360

)

$

(226

)

Income tax payments, net

 

$

(19

)

$

(8

)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

TENET HEALTHCARE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1. BASIS OF PRESENTATION

 

Description of Business and Basis of Presentation

 

Tenet Healthcare Corporation (together with our subsidiaries, referred to herein as “Tenet,” “we” or “us”) is a national, diversified healthcare services company. As of June 30, 2014, we operated 79 hospitals, 189 outpatient centers, six health plans and Conifer Health Solutions, LLC (“Conifer”), which provides healthcare business process services in the areas of revenue cycle management, value-based care and patient communications.

 

Effective October 1, 2013, we acquired the common stock of Vanguard Health Systems, Inc. (“Vanguard”) for $21 per share in an all cash transaction. Vanguard owned and operated 28 hospitals (plus one more under construction, which was recently completed), 39 outpatient centers and five health plans with approximately 140,000 members, serving communities in Arizona, California, Illinois, Massachusetts, Michigan and Texas. We paid approximately $4.3 billion to acquire Vanguard, including the assumption of $2.5 billion of Vanguard’s net debt.

 

This quarterly report supplements our Annual Report on Form 10-K for the year ended December 31, 2013 (“Annual Report”). As permitted by the Securities and Exchange Commission for interim reporting, we have omitted certain notes and disclosures that substantially duplicate those in our Annual Report. For further information, refer to the audited Consolidated Financial Statements and notes included in our Annual Report. Unless otherwise indicated, all financial and statistical data included in these notes to our Condensed Consolidated Financial Statements relate to our continuing operations, with dollar amounts expressed in millions (except per-share amounts). Certain prior-year amounts have been adjusted to conform to the current-year presentation, including $73 million of Medicaid supplemental payments receivable that are now presented as other current assets rather than accounts receivable.

 

Although the Condensed Consolidated Financial Statements and related notes within this document are unaudited, we believe all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. In preparing our financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), we must use estimates and assumptions that affect the amounts reported in our Condensed Consolidated Financial Statements and these accompanying notes. We regularly evaluate the accounting policies and estimates we use. In general, we base the estimates on historical experience and on assumptions that we believe to be reasonable given the particular circumstances in which we operate. Actual results may vary from those estimates. Financial and statistical information we report to other regulatory agencies may be prepared on a basis other than GAAP or using different assumptions or reporting periods and, therefore, may vary from amounts presented herein. Although we make every effort to ensure that the information we report to those agencies is accurate, complete and consistent with applicable reporting guidelines, we cannot be responsible for the accuracy of the information they make available to the public.

 

Operating results for the three and six month periods ended June 30, 2014 are not necessarily indicative of the results that may be expected for the full year. Reasons for this include, but are not limited to: overall revenue and cost trends, particularly the timing and magnitude of price changes; fluctuations in contractual allowances and cost report settlements and valuation allowances; managed care contract negotiations, settlements or terminations and payer consolidations; changes in Medicare and Medicaid regulations; Medicaid and other supplemental funding levels set by the states in which we operate; the timing of approval by the Centers for Medicare and Medicaid Services of Medicaid provider fee revenue programs; trends in patient accounts receivable collectability and associated provisions for doubtful accounts; fluctuations in interest rates; levels of malpractice insurance expense and settlement trends; the number of covered lives managed by our health plans and the plans’ ability to effectively manage medical costs; the timing of when we meet the criteria to recognize electronic health record incentives; impairment of long-lived assets and goodwill; restructuring charges; losses, costs and insurance recoveries related to natural disasters; litigation and investigation costs; acquisitions and dispositions of facilities and other assets; income tax rates and deferred tax asset valuation allowance activity; changes in estimates of accruals for annual incentive compensation; the timing and amounts of stock option and restricted stock unit grants to employees and directors; gains or losses from early extinguishment of debt; and changes in occupancy levels and patient volumes. Factors that affect patient volumes and, thereby, the results of operations at our hospitals and related healthcare facilities include, but are not limited to: the business environment, economic conditions and demographics of local communities in which we operate; the number of uninsured and underinsured individuals in local communities treated at our hospitals; seasonal cycles of illness; climate and weather conditions; physician recruitment, retention and attrition; advances in technology and treatments that reduce length of stay; local healthcare competitors; managed care contract negotiations or terminations; any unfavorable publicity about us, which impacts our relationships with physicians and patients; changes in healthcare regulations and the participation of individual states in federal programs; and the timing of elective procedures. These considerations apply to year-to-year comparisons as well.

 

5



Table of Contents

 

Net Operating Revenues Before Provision for Doubtful Accounts

 

We recognize net operating revenues before provision for doubtful accounts in the period in which our services are performed. Net operating revenues before provision for doubtful accounts primarily consist of net patient service revenues that are recorded based on established billing rates (i.e., gross charges), less estimated discounts for contractual and other allowances, principally for patients covered by Medicare, Medicaid, managed care and other health plans, as well as certain uninsured patients under our Compact with Uninsured Patients (“Compact”) and other uninsured discount and charity programs.

 

The table below shows the sources of net operating revenues before provision for doubtful accounts:

 

 

 

Three Months Ended
 June 30,

 

Six Months Ended
 June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

General Hospitals:

 

 

 

 

 

 

 

 

 

Medicare

 

$

865

 

$

502

 

$

1,722

 

$

1,042

 

Medicaid

 

380

 

236

 

672

 

424

 

Managed care

 

2,228

 

1,387

 

4,418

 

2,748

 

Indemnity, self-pay and other

 

368

 

261

 

815

 

521

 

Acute care hospitals — other revenue

 

18

 

11

 

37

 

39

 

Other:

 

 

 

 

 

 

 

 

 

Other operations

 

503

 

232

 

1,004

 

449

 

Net operating revenues before provision for doubtful accounts

 

$

4,362

 

$

2,629

 

$

8,668

 

$

5,223

 

 

Cash and Cash Equivalents

 

We treat highly liquid investments with original maturities of three months or less as cash equivalents. Cash and cash equivalents were approximately $406 million and $113 million at June 30, 2014 and December 31, 2013, respectively. As of June 30, 2014 and December 31, 2013, our book overdrafts were approximately $144 million and $245 million, respectively, which were classified as accounts payable.

 

At June 30, 2014 and December 31, 2013, approximately $79 million and $62 million, respectively, of total cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheets were intended for the operations of our captive insurance subsidiaries.

 

Also at June 30, 2014 and December 31, 2013, we had $114 million and $193 million, respectively, of property and equipment purchases accrued for items received but not yet paid. Of these amounts, $64 million and $138 million, respectively, were included in accounts payable.

 

During the six months ended June 30, 2014 and 2013, we entered into non-cancellable capital leases of approximately $60 million and $79 million, respectively, primarily for buildings and equipment.

 

Other Intangible Assets

 

The following table provides information regarding other intangible assets, which are included in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013:

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net Book
Value

 

As of June 30, 2014:

 

 

 

 

 

 

 

Capitalized software costs

 

$

1,385

 

$

(546

)

$

839

 

Long-term debt issuance costs

 

247

 

(44

)

203

 

Trade names

 

81

 

0

 

81

 

Contracts

 

64

 

(6

)

58

 

Other

 

82

 

(22

)

60

 

Total

 

$

1,859

 

$

(618

)

$

1,241

 

 

6



Table of Contents

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net Book
Value

 

As of December 31, 2013:

 

 

 

 

 

 

 

Capitalized software costs

 

$

1,260

 

$

(475

)

$

785

 

Long-term debt issuance costs

 

230

 

(31

)

199

 

Trade names

 

81

 

0

 

81

 

Contracts

 

64

 

(2

)

62

 

Other

 

80

 

(15

)

65

 

Total

 

$

1,715

 

$

(523

)

$

1,192

 

 

Estimated future amortization of intangibles with finite useful lives as of June 30, 2014 is as follows:

 

 

 

 

 

Years Ending December 31,

 

Later

 

 

 

Total

 

2014

 

2015

 

2016

 

2017

 

2018

 

Years

 

Amortization of intangible assets

 

$

1,151

 

$

128

 

$

241

 

$

188

 

$

128

 

$

124

 

$

342

 

 

NOTE 2. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

The principal components of accounts receivable are shown in the table below:

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

Continuing operations:

 

 

 

 

 

Patient accounts receivable

 

$

2,949

 

$

2,537

 

Allowance for doubtful accounts

 

(753

)

(589

)

Estimated future recoveries from accounts assigned to our Conifer subsidiary

 

90

 

91

 

Net cost reports and settlements payable and valuation allowances

 

(118

)

(77

)

 

 

2,168

 

1,962

 

Discontinued operations

 

3

 

3

 

Accounts receivable, net

 

$

2,171

 

$

1,965

 

 

As of June 30, 2014 and December 31, 2013, our allowance for doubtful accounts was 25.5% and 23.2%, respectively, of our patient accounts receivable. The increase in the provision for doubtful accounts primarily related to a decrease in our self-pay collection rate, as well as higher patient co-pays and deductibles, partially offset by decreased uninsured patient revenues, in the six months ended June 30, 2014. Accounts that are pursued for collection through Conifer’s regional business offices are maintained on our hospitals’ books and reflected in patient accounts receivable with an allowance for doubtful accounts established to reduce the carrying value of such receivables to their estimated net realizable value. Generally, we estimate this allowance based on the aging of our accounts receivable by hospital, our historical collection experience by hospital and for each type of payer, and other relevant factors. As of June 30, 2014 and December 31, 2013, our allowance for doubtful accounts for self-pay was 76.5% and 75.9%, respectively, of our self-pay patient accounts receivable, including co-pays and deductibles owed by patients with insurance. As of June 30, 2014 and December 31, 2013, our allowance for doubtful accounts for managed care was 5.7% and 5.6%, respectively, of our managed care patient accounts receivable.

 

The estimated costs (based on selected operating expenses, which include salaries, wages and benefits, supplies and other operating expenses) of caring for our self-pay patients for the three months ended June 30, 2014 and 2013 were approximately $167 million and $122 million, respectively, and for the six months ended June 30, 2014 and 2013 were approximately $353 million and $226 million, respectively. Our estimated costs (based on the selected operating expenses described above) of caring for charity care patients for the three months ended June 30, 2014 and 2013 were approximately $55 million and $31 million, respectively, and for the six months ended June 30, 2014 and 2013 were approximately $95 million and $63 million, respectively. Most states include an estimate of the cost of charity care in the determination of a hospital’s eligibility for Medicaid disproportionate share hospital (“DSH”) payments. Revenues attributable to DSH payments and other state-funded subsidy payments for the three months ended June 30, 2014 and 2013 were approximately $157 million and $119 million, respectively, and for the six months ended June 30, 2014 and 2013 were approximately $311 million and $186 million, respectively. These payments are intended to mitigate our cost of uncompensated care, as well as reduced Medicaid funding levels.

 

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NOTE 3. DISCONTINUED OPERATIONS

 

Net operating revenues and income (loss) before income taxes reported in discontinued operations are as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net operating revenues

 

$

0

 

$

0

 

$

1

 

$

3

 

Income (loss) before income taxes

 

(25

)

6

 

(33

)

3

 

 

Included in loss before income taxes from discontinued operations in the three months ended June 30, 2014 is approximately $18 million of expense recorded in litigation and investigation costs allocable to one of our previously divested hospitals related to a class action lawsuit discussed in Note 10. In the three months ended June 30, 2013, we recognized a $7 million gain in discontinued operations related to the sale of land.

 

Should we dispose of additional hospitals or other assets in the future, we may incur asset impairment and restructuring charges in future periods.

 

NOTE 4. IMPAIRMENT AND RESTRUCTURING CHARGES, AND ACQUISITION-RELATED COSTS

 

During the six months ended June 30, 2014, we recorded impairment and restructuring charges and acquisition-related costs of $53 million, consisting $9 million of employee severance costs, $18 million of restructuring costs, and $26 million in acquisition-related costs, which include $4 million of transaction costs and $22 million of acquisition integration charges.

 

During the six months ended June 30, 2013, we recorded impairment and restructuring charges and acquisition-related costs of $25 million, consisting of $2 million relating to the impairment of property, $7 million of restructuring costs, $5 million of employee severance costs, $1 million of lease termination costs, and $10 million in acquisition-related costs.

 

Our impairment tests presume stable, improving or, in some cases, declining operating results in our hospitals, which are based on programs and initiatives being implemented that are designed to achieve the hospital’s most recent projections. If these projections are not met, or if in the future negative trends occur that impact our future outlook, impairments of long-lived assets and goodwill may occur, and we may incur additional restructuring charges, which could be material.

 

As of June 30, 2014, our continuing operations consisted of two operating segments, our hospital and other operations and our Conifer subsidiary. During the three months ended March 31, 2014, we combined our California region and our Phoenix market to form our Western region. Our hospital and other operations are currently structured as follows:

 

·                  Our Central region includes all of our hospitals and other operations in Missouri, New Mexico, Tennessee and Texas, except for those in the San Antonio and South Texas markets;

 

·                  Our Florida region includes all of our hospitals and other operations in Florida;

 

·                  Our Northeast region includes all of our hospitals and other operations in Illinois, Massachusetts and Pennsylvania;

 

·                  Our Southern region includes all of our hospitals and other operations in Alabama, Georgia, North Carolina and South Carolina;

 

·                  Our Western region includes all of our hospitals and other operations in Arizona and California;

 

·                  Our Detroit market includes all of our hospitals and other operations in the Detroit, Michigan area;

 

·                  Our San Antonio market includes all of our hospitals and other operations in the San Antonio, Texas area;

 

·                  Our South Texas market includes all of our hospitals and other operations in the Brownsville and Harlingen, Texas areas; and

 

·                  Our Resolute Health market includes our hospital and other operations in the New Braunfels, Texas area.

 

These regions and markets are reporting units used to perform our goodwill impairment analysis and are one level below our hospital operations reportable business segment level.

 

We periodically incur costs to implement restructuring efforts for specific operations, which are recorded in our statement of operations as they are incurred. Our restructuring plans focus on various aspects of operations, including aligning our operations in the most strategic and cost-effective structure. Certain restructuring and acquisition-related costs are based on estimates. Changes in estimates are recognized as they occur.

 

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NOTE 5. LONG-TERM DEBT AND LEASE OBLIGATIONS

 

The table below shows our long-term debt as of June 30, 2014 and December 31, 2013:

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

Senior notes:

 

 

 

 

 

97¤8%, due 2014

 

$

60

 

$

60

 

91¤4%, due 2015

 

474

 

474

 

5%, due 2019

 

1,100

 

0

 

63¤4%, due 2020

 

300

 

300

 

8%, due 2020

 

750

 

750

 

81/8%, due 2022

 

2,800

 

2,800

 

67¤8%, due 2031

 

430

 

430

 

Senior secured notes:

 

 

 

 

 

61¤4%, due 2018

 

1,041

 

1,041

 

43/4%, due 2020

 

500

 

500

 

6%, due 2020

 

1,800

 

1,800

 

41/2%, due 2021

 

850

 

850

 

43/8%, due 2021

 

1,050

 

1,050

 

Credit facility due 2016

 

0

 

405

 

Capital leases and mortgage notes

 

428

 

407

 

Unamortized note discounts and premium

 

(19

)

(28

)

Total long-term debt

 

11,564

 

10,839

 

Less current portion

 

622

 

149

 

Long-term debt, net of current portion

 

$

10,942

 

$

10,690

 

 

Credit Agreement

 

We have a senior secured revolving credit facility (as amended, “Credit Agreement”) that provides, subject to borrowing availability, for revolving loans in an aggregate principal amount of up to $1 billion, with a $300 million subfacility for standby letters of credit. The Credit Agreement, which has a scheduled maturity date of November 29, 2016, is collateralized by patient accounts receivable of all of our wholly owned acute care and specialty hospitals. In addition, borrowings under the Credit Agreement are guaranteed by our wholly owned hospital subsidiaries. Outstanding revolving loans accrue interest at a base rate plus a margin ranging from 1.00% to 1.50% or the London Interbank Offered Rate plus a margin ranging from 2.00% to 2.50% per annum based on available credit. An unused commitment fee payable on the undrawn portion of the revolving loans ranges from 0.375% to 0.500% per annum based on available credit. Our borrowing availability is based on a specified percentage of eligible accounts receivable, including self-pay accounts. At June 30, 2014, we had no cash borrowings outstanding under the revolving credit facility; however, we had approximately $6 million of standby letters of credit outstanding. Based on our eligible receivables, approximately $994 million was available for borrowing under the revolving credit facility at June 30, 2014.

 

Letter of Credit Facility

 

On March 7, 2014, we entered into a new letter of credit facility agreement (“LC Facility”) that provides for the issuance of standby and documentary letters of credit (including certain letters of credit issued under our existing Credit Agreement, which we transferred to the LC Facility (the “Existing Letters of Credit”)), from time to time, in an aggregate principal amount of up to $180 million (subject to increase to up to $200 million). The LC Facility has a scheduled maturity date of March 7, 2017, and obligations thereunder are guaranteed by and secured by a first priority pledge of the capital stock and other ownership interests of certain of our hospital subsidiaries on an equal ranking basis with our existing senior secured notes.

 

Drawings under any letter of credit issued under the LC Facility (including the Existing Letters of Credit) that we have not reimbursed within three business days after notice thereof will accrue interest at a base rate plus a margin equal to 0.875% per annum. An unused commitment fee is payable at an initial rate of 0.50% per annum with a step down to 0.375% per annum based on the secured debt to EBITDA ratio of 3.00 to 1.00. A per annum fee on the aggregate outstanding amount of issued but undrawn letters of credit (including Existing Letters of Credit) will accrue at a rate of 1.875% per annum. An issuance fee equal to 0.125% per annum of the aggregate face amount of each outstanding letter of credit is payable to the account of the issuer of the related letter of credit. At June 30, 2014, we had approximately $133 million of standby letters of credit outstanding under the LC Facility.

 

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Senior Notes

 

In June and March 2014, we sold $500 million and $600 million aggregate principal amount, respectively, of 5% senior notes, which will mature on March 1, 2019. We will pay interest on the notes semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2014. The net proceeds from the sale of the notes in June 2014 were used to redeem our 91/4% senior notes due 2015 in July 2014. The proceeds from the sale of the notes in March 2014 were used for general corporate purposes, including the repayment of borrowings under our Credit Agreement.

 

All of our senior notes are general unsecured senior debt obligations that rank equally in right of payment with all of our other unsecured senior indebtedness, but are effectively subordinated to our senior secured notes described in our Annual Report, the obligations of our subsidiaries, and any obligations under our Credit Agreement and the LC Facility to the extent of the collateral. Our Annual Report also describes the covenants and conditions, as well as other provisions, including our redemption rights, set forth in the indentures governing our senior notes.

 

NOTE 6. GUARANTEES

 

At June 30, 2014, the maximum potential amount of future payments under our income guarantees to certain physicians who agree to relocate and revenue collection guarantees to hospital-based physician groups providing certain services at our hospitals was $94 million. We had a liability of $69 million recorded for these guarantees included in other current liabilities at June 30, 2014.

 

We have also guaranteed minimum rent revenue to certain landlords who built medical office buildings on or near our hospital campuses. The maximum potential amount of future payments under these guarantees at June 30, 2014 was $4 million. We had a liability of less than $1 million recorded for these guarantees included in other current liabilities at June 30, 2014.

 

NOTE 7. EMPLOYEE BENEFIT PLANS

 

At June 30, 2014, approximately 6.0 million shares of common stock were available under our 2008 Stock Incentive Plan for future stock option grants and other incentive awards, including restricted stock units. Options have an exercise price equal to the fair market value of the shares on the date of grant and generally expire 10 years from the date of grant. A restricted stock unit is a contractual right to receive one share of our common stock or the equivalent value in cash in the future. Options and restricted stock units typically vest one-third on each of the first three anniversary dates of the grant; however, from time to time, we grant (i) options and restricted stock units with different time-based vesting terms, and (ii) performance-based options and restricted stock units that vest subject to the achievement of specified performance goals within a specified timeframe.

 

Our income from continuing operations for the six months ended June 30, 2014 and 2013 includes $26 million and $22 million, respectively, of pre-tax compensation costs related to our stock-based compensation arrangements.

 

Stock Options

 

The following table summarizes stock option activity during the six months ended June 30, 2014:

 

 

 

Options

 

Weighted Average
Exercise Price
Per Share

 

Aggregate
Intrinsic Value

 

Weighted Average
Remaining Life

 

 

 

 

 

 

 

(In Millions)

 

 

 

Outstanding as of December 31, 2013

 

3,308,111

 

$

30.79

 

 

 

 

 

Granted

 

0

 

 

 

 

 

 

 

Exercised

 

(336,789

)

34.08

 

 

 

 

 

Forfeited/Expired

 

(620,719

)

47.96

 

 

 

 

 

Outstanding as of June 30, 2014

 

2,350,603

 

$

25.78

 

$

50

 

3.8 years

 

Vested and expected to vest at June 30, 2014

 

2,340,428

 

$

25.73

 

$

50

 

3.8 years

 

Exercisable as of June 30, 2014

 

1,932,972

 

$

24.03

 

$

44

 

3.5 years

 

 

There were 336,789 stock options exercised during the six months ended June 30, 2014 with a $4 million aggregate intrinsic value, and 875,005 stock options exercised during the same period in 2013 with a $16 million aggregate intrinsic value.

 

As of June 30, 2014, there were $3 million of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 1.3 years.

 

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Table of Contents

 

There were no stock options granted in the six months ended June 30, 2014. In the six months ended June 30, 2013, we granted an aggregate of 295,639 stock options under our 2008 Stock Incentive Plan to certain of our senior officers. These stock options will all vest on the third anniversary of the grant date, subject to the terms of the Plan, and will expire on the fifth anniversary of the grant date.

 

The weighted average estimated fair value of stock options we granted in the six months ended June 30, 2013 was $14.46 per share. This fair value was calculated based on the grant date, using a binomial lattice model with the following assumptions:

 

 

 

Six Months Ended
June 30, 2013

 

Expected volatility

 

50%

 

Expected dividend yield

 

0%

 

Expected life

 

3.6 years

 

Expected forfeiture rate

 

6%

 

Risk-free interest rate

 

0.48%

 

Early exercise threshold

 

100% gain

 

Early exercise rate

 

50% per year

 

 

The expected volatility used in the binomial lattice model incorporated historical and implied share-price volatility and was based on an analysis of historical prices of our stock and open-market exchanged options. The expected volatility reflects the historical volatility for a duration consistent with the contractual life of the options, and the volatility implied by the trading of options to purchase our stock on open-market exchanges. The historical share-price volatility excludes the movements in our stock price on two dates (one in 2010 and one in 2011) with unusual volatility due to an unsolicited acquisition proposal. The expected life of options granted is derived from the output of the binomial lattice model and represents the period of time that the options are expected to be outstanding. This model incorporates an early exercise assumption in the event of a significant increase in stock price. The risk-free interest rates are based on zero-coupon United States Treasury yields in effect at the date of grant consistent with the expected exercise timeframes.

 

The following table summarizes information about our outstanding stock options at June 30, 2014:

 

 

 

Options Outstanding

 

Options Exercisable

 

Range of Exercise Prices 

 

Number of
Options

 

Weighted Average
Remaining
Contractual Life

 

Weighted Average
Exercise Price

 

Number of
Options

 

Weighted Average
Exercise Price

 

$0.00 to $4.569

 

279,719

 

4.6 years

 

$

4.56

 

279,719

 

$

4.56

 

$4.57 to $25.089

 

1,010,431

 

5.4 years

 

20.89

 

871,251

 

20.55

 

$25.09 to $32.569

 

453,862

 

2.1 years

 

29.38

 

453,862

 

29.38

 

$32.57 to $42.529

 

595,009

 

2.1 years

 

40.87

 

316,558

 

42.24

 

$42.53 to $55.129

 

11,582

 

0.7 years

 

49.17

 

11,582

 

49.17

 

 

 

2,350,603

 

3.8 years

 

$

25.78

 

1,932,972

 

$

24.03

 

 

Restricted Stock Units

 

The following table summarizes restricted stock unit activity during the six months ended June 30, 2014:

 

 

 

 

Restricted Stock
Units

 

Weighted Average Grant
Date Fair Value Per Unit

 

Unvested as of December 31, 2013

 

2,707,222

 

$

33.34

 

Granted

 

1,280,028

 

44.36

 

Vested

 

(884,431

)

30.18

 

Forfeited

 

(119,020

)

33.68

 

Unvested as of June 30, 2014

 

2,983,799

 

$

38.04

 

 

In the six months ended June 30, 2014, we granted 1,280,028 restricted stock units subject to time-vesting of which 944,590 will vest and be settled ratably over a three-year period from the date of the grant, 52,971 will vest 100% on the fifth anniversary of the grant date and 10,652 will vest 100% on the third anniversary of the grant date. In addition, we granted 271,815 performance-based restricted stock units to certain of our senior officers; the vesting of these restricted stock units is contingent on our achievement of a specified one-year performance goal for the year ending December 31, 2014. Provided the goal is achieved, the performance-based restricted stock units will vest ratably over a three-year period from the grant date. If the performance goal is not achieved, the restricted stock units will be forfeited. The actual number of performance-based restricted stock units that could vest will range from 0% to 200% of the 271,815 units granted, depending on our level of achievement with respect to the performance goal.

 

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In the six months ended June 30, 2013, we granted 804,062 restricted stock units subject to time-vesting, of which 723,929 will vest and be settled ratably over a three-year period from the grant date and 80,133 will vest 100% on the fifth anniversary of the grant date. In addition, we granted 206,058 performance-based restricted stock units to certain of our senior officers. Because the performance goal for the year ended December 31, 2013 was met at the target level, 100% of the performance-based restricted stock units will vest and be settled ratably over a three-year period from the grant date. We also awarded a grant of 212,180 restricted stock units to our chief executive officer, of which 106,090 are subject to time-vesting and 106,090 are performance-based. If target conditions are met, 50% of this grant will vest three years from the grant date and the remaining 50% will vest six years from the grant date. The award also allows for an additional 106,090 shares to be issued if higher performance criteria are met.

 

As of June 30, 2014, there were $94 million of total unrecognized compensation costs related to restricted stock units. These costs are expected to be recognized over a weighted average period of 2.6 years.

 

NOTE 8. EQUITY

 

Changes in Shareholders’ Equity

 

The following table shows the changes in consolidated equity during the six months ended June 30, 2014 and 2013 (dollars in millions, share amounts in thousands):

 

 

 

Tenet Healthcare Corporation Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Additional

 

Other

 

 

 

 

 

 

 

 

 

 

 

Shares
Outstanding

 

Issued Par
Amount

 

Paid-in
Capital

 

Comprehensive
Loss

 

Accumulated
Deficit

 

Treasury
Stock

 

Noncontrolling
Interests

 

Total Equity

 

Balances at December 31, 2013

 

96,860

 

$

7

 

$

4,572

 

$

(24

)

$

(1,422

)

$

(2,378

)

$

123

 

$

878

 

Net income (loss)

 

0

 

0

 

0

 

0

 

(58

)

0

 

13

 

(45

)

Distributions paid to noncontrolling interests

 

0

 

0

 

0

 

0

 

0

 

0

 

(18

)

(18

)

Contributions from noncontrolling interests

 

0

 

0

 

0

 

0

 

0

 

0

 

3

 

3

 

Other comprehensive income

 

0

 

0

 

0

 

4

 

0

 

0

 

0

 

4

 

Purchases of businesses or joint venture interests

 

0

 

0

 

0

 

0

 

0

 

0

 

29

 

29

 

Stock-based compensation expense and issuance of common stock

 

954

 

0

 

22

 

0

 

0

 

0

 

0

 

22

 

Balances at June 30, 2014

 

97,814

 

$

7

 

$

4,594

 

$

(20

)

$

(1,480

)

$

(2,378

)

$

150

 

$

873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2012

 

104,633

 

$

7

 

$

4,471

 

$

(68

)

$

(1,288

)

$

(1,979

)

$

75

 

$

1,218

 

Net income (loss)

 

0

 

0

 

0

 

0

 

(138

)

0

 

8

 

(130

)

Distributions paid to noncontrolling interests

 

0

 

0

 

0

 

0

 

0

 

0

 

(10

)

(10

)

Sale of joint venture interest

 

0

 

0

 

53

 

0

 

0

 

0

 

0

 

53

 

Purchases of businesses or joint venture interests

 

0

 

0

 

0

 

0

 

0

 

0

 

13

 

13

 

Repurchase of common stock

 

(4,453

)

0

 

0

 

0

 

0

 

(192

)

0

 

(192

)

Stock-based compensation expense and issuance of common stock

 

1,558

 

0

 

28

 

0

 

0

 

1

 

0

 

29

 

Balances at June 30, 2013

 

101,738

 

$

7

 

$

4,552

 

$

(68

)

$

(1,426

)

$

(2,170

)

$

86

 

$

981

 

 

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Table of Contents

 

Changes in Redeemable Noncontrolling Interests in Equity of Consolidated Subsidiaries

 

The following table shows the changes in redeemable noncontrolling interests in equity of consolidated subsidiaries during the six months ended June 30, 2014 and 2013:

 

 

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

Balances at beginning of period

 

$

247

 

$

16

 

Net income

 

22

 

4

 

Distributions paid to noncontrolling interests

 

(2

)

0

 

Contributions from noncontrolling interests

 

10

 

0

 

Sales of joint venture interests

 

0

 

50

 

Purchases of businesses

 

0

 

10

 

Balances at end of period

 

$

277

 

$

80

 

 

NOTE 9. PROPERTY AND PROFESSIONAL AND GENERAL LIABILITY INSURANCE

 

Property Insurance

 

We have property, business interruption and related insurance coverage to mitigate the financial impact of catastrophic events or perils that is subject to deductible provisions based on the terms of the policies. These policies are on an occurrence basis.

 

Professional and General Liability Reserves

 

At June 30, 2014 and December 31, 2013, the aggregate current and long-term professional and general liability reserves in our accompanying Condensed Consolidated Balance Sheets were approximately $729 million and $699 million, respectively. These reserves include the reserves recorded by our captive insurance subsidiaries and our self-insured retention reserves recorded based on actuarial estimates for the portion of our professional and general liability risks, including incurred but not reported claims, for which we do not have insurance coverage. We estimated the reserves for losses and related expenses using expected loss-reporting patterns discounted to their present value under a risk-free rate approach using a Federal Reserve seven-year maturity rate of 2.13% and 2.45% at June 30, 2014 and December 31, 2013, respectively.

 

If the aggregate limit of any of our professional and general liability policies is exhausted, in whole or in part, it could deplete or reduce the limits available to pay any other material claims applicable to that policy period.

 

Included in other operating expenses, net, in the accompanying Condensed Consolidated Statements of Operations is malpractice expense of $127 million and $52 million for the six months ended June 30, 2014 and 2013, respectively.

 

NOTE 10. CLAIMS AND LAWSUITS

 

We operate in a highly regulated and litigious industry. As a result, we commonly become involved in disputes, litigation and regulatory matters incidental to our operations, including governmental investigations, personal injury lawsuits, employment claims and other matters arising out of the normal conduct of our business.

 

We record accruals for estimated losses relating to claims and lawsuits when available information indicates that a loss is probable and we can reasonably estimate the amount of the loss or a range of loss. If a loss on a material matter is reasonably possible and estimable, we disclose an estimate of the loss or a range of loss. In cases where we have not disclosed an estimate, we have concluded that the loss is either not reasonably possible or the loss, or a range of loss, is not reasonably estimable, based on available information.

 

Governmental Reviews

 

Healthcare companies are subject to numerous investigations by various governmental agencies. Further, private parties have the right to bring qui tam or “whistleblower” lawsuits against companies that allegedly submit false claims for payments to, or improperly retain overpayments from, the government and, in some states, private payers. Certain of our individual facilities have received inquiries from government agencies, and our facilities may receive such inquiries in future periods. The following material governmental reviews, which have been previously reported, are currently pending.

 

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·                  Kyphoplasty—From March 2009 through July 2010, seven of our hospitals became the subject of a review by the U.S. Department of Justice (“DOJ”) and certain other federal agencies regarding the appropriateness of inpatient treatment for Medicare patients receiving kyphoplasty, which is a surgical procedure used to treat certain spinal conditions. We believe this review is part of a national investigation and is related to a qui tam settlement between the government and the manufacturer and distributor of Kyphon, the product used in performing kyphoplasty procedures. In January 2013, we paid $900,000 to settle claims against one of our hospitals subject to this review, and, in April 2014, we confirmed that another hospital is no longer the subject of investigation. We continue to engage in settlement discussions with the DOJ to resolve this matter with respect to the remaining five hospitals. Although it is impossible to predict the ultimate outcome of those discussions, we believe it is possible that a settlement could be reached in the year ending December 31, 2014. Furthermore, based on current discussions, we believe the amount of the reserve management has established for this matter, as described below, continues to reflect our current estimate of probable liability.

 

·                  Implantable Cardioverter Defibrillators (“ICDs”)At this time, 56 of our hospitals are part of a nationwide investigation to determine whether ICD procedures from 2002 to 2010 complied with Medicare coverage requirements. In August 2012, the DOJ released its “Medical Review Guidelines/Resolution Model,” which sets out, for purposes of this investigation, the patient conditions and criteria for the medical necessity of the implantation of ICDs in Medicare beneficiaries and how the DOJ will enforce the repayment obligations of hospitals. Management has established a reserve, as described below, to reflect the current estimate of probable liability for all of the hospitals under review as part of the government’s examination, which commenced in March 2010. We are engaged in potential settlement discussions with the DOJ to resolve this matter, but it is impossible at this time to predict the outcome of those discussions or the amount of any potential resolution.

 

·                  Clinica de la Mama Investigations and Qui Tam ActionAs previously reported, we received a subpoena in May 2012 from the Office of Inspector General (“OIG”) of U.S. Department of Health and Human Services in Atlanta seeking documents from January 2004 through May 2012 related to the relationship that certain of our Georgia and South Carolina hospitals had with Hispanic Medical Management, Inc. (“HMM”). HMM was an unaffiliated entity that owned and operated clinics that provided, among other things, prenatal care predominantly to uninsured patients. The hospitals contracted with HMM for translation, marketing, management and Medicaid eligibility determination services. The civil investigation is being conducted by the Civil Division of the DOJ, the U.S. Attorney’s Office for the Middle District of Georgia and the Georgia Attorney General’s Office, while the parallel criminal investigation is being conducted by the Criminal Division of the DOJ and the U.S. Attorney’s Office for the Northern District of Georgia.

 

The investigations arose out of a qui tam action captioned United States of America, ex. rel. Ralph D. Williams v. Health Management Associates, Inc., et al. filed in the U.S. District Court for the Middle District of Georgia. Tenet and four of its hospital subsidiaries are defendants in the qui tam action, which alleges that the arrangements the hospitals had with HMM violated the federal and state anti-kickback statutes and false claims acts. Both the Georgia Attorney General’s Office, on behalf of the State of Georgia, and the U.S. Attorney’s Office, on behalf of the United States, have intervened in the qui tam action. We submitted answers to the complaints filed by the relator, the State of Georgia and the United States on July 15, 2014 following the court’s denial of our motions to dismiss in June 2014. On July 25, 2014, the civil court granted the United States’ unopposed motion to stay discovery in the case.

 

If we or our subsidiaries were determined to have violated the anti-kickback statutes, the government could require us to reimburse related government program payments received during the subject period, assess civil monetary penalties including treble damages, exclude individuals or subsidiaries from participation in federal healthcare programs, or seek criminal sanctions against current or former employees of our hospital subsidiary companies or the hospital companies themselves. In a Bill of Information filed on July 23, 2014 with the U.S. District Court for the Northern District of Georgia, Atlanta Division, the U.S. Attorney for that District asserted charges of one count of criminal conspiracy against a former owner of HMM (a non-employee of Tenet) related to the agreements between HMM and the Tenet hospitals described above. In a separate Bill of Information also filed with the court on July 23, 2014, the U.S. Attorney asserted charges of one count of criminal conspiracy against a former employee of a Tenet hospital, but such charges relate to an unaffiliated entity. Management has established a reserve, as described below, to reflect the current estimate of probable liability for these matters, but it is impossible at this time to predict the amount and terms of any potential resolution. We will continue to vigorously defend against the government’s allegations.

 

Except with respect to the matter settled in January 2013 involving one hospital, as discussed above, our analysis of each of these pending reviews is still ongoing, and we are unable to predict with any certainty the progress or final outcome of any discussions with government agencies at this time. Based on currently available information, we increased our reserves by approximately $10 million in the three months ended June 30, 2014, resulting in recorded reserves of approximately $38 million in the aggregate for our potential reimbursement obligations with respect to all of the hospitals under review for their billing practices for kyphoplasty and cardiac defibrillator implantation procedures, as well as the Clinica de la Mama matters. Changes in the reserves may be required in the future as additional information becomes available. We cannot predict the ultimate resolution of any governmental review, and the final amounts paid in settlement or otherwise, if any, could differ materially from our currently recorded reserves.

 

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Ordinary Course Matters

 

We are also subject to other claims and lawsuits arising in the ordinary course of business, including potential claims related to, among other things, the care and treatment provided at our hospitals and outpatient facilities, the application of various federal and state labor laws, tax audits and other matters. Although the results of these claims and lawsuits cannot be predicted with certainty, we believe that the ultimate resolution of these ordinary course claims and lawsuits will not have a material effect on our business, financial condition or results of operations.

 

In addition, in June 2014, we agreed on principal terms to settle a previously disclosed class action lawsuit captioned Doe, et al. v. Jo Ellen Smith Medical Foundation, which was filed in the Civil District Court for the Parish of Orleans in Louisiana in March 1997. The plaintiffs pursued a claim for tortious invasion of privacy due to the fact that in April 1996 patient identifying records from a psychiatric hospital we closed in 1995 were temporarily placed in an unsecure location while the hospital was undergoing renovations. The court certified a class of over 5,000 persons; however, only eight individuals (in addition to the two plaintiffs) have been identified to date in the class certification process. The plaintiffs have asserted each member of the class is entitled to common damages under a theory of presumed “common damage” regardless of whether or not any members of the class were actually harmed or even aware of the incident. In an effort to avoid protracted litigation, the parties settled this matter in June 2014 for a maximum potential payment of $32.5 million, subject to the number and type of claims asserted by the class members. The settlement, which will be funded in amounts and on a schedule to be agreed to by the parties, is subject to execution of a final agreement and court approval. In the three months ended June 30, 2014, we established a reserve of $17 million, recorded in discontinued operations, to reflect our current estimate of probable liability for this matter based on anticipated levels of class member participation.

 

New claims or inquiries may be initiated against us from time to time. These matters could (1) require us to pay substantial damages or amounts in judgments or settlements, which individually or in the aggregate could exceed amounts, if any, that may be recovered under our insurance policies where coverage applies and is available, (2) cause us to incur substantial expenses, (3) require significant time and attention from our management, and (4) cause us to close or sell hospitals or otherwise modify the way we conduct business.

 

The table below presents reconciliations of the beginning and ending liability balances in connection with legal settlements and related costs recorded during the six months ended June 30, 2014 and 2013:

 

 

 

Balances at
Beginning
of Period

 

Litigation and
Investigation
Costs

 

Cash
Payments

 

Other

 

Balances at
End of
Period

 

Six Months Ended June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

40

 

$

15

 

$

(6

)

$

(3

)

$

46

 

Discontinued operations

 

6

 

18

 

(6

)

0

 

18

 

 

 

$

46

 

$

33

 

$

(12

)

$

(3

)

$

64

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

5

 

$

2

 

$

(2

)

$

0

 

$

5

 

Discontinued operations

 

5

 

0

 

(1

)

0

 

4

 

 

 

$

10

 

$

2

 

$

(3

)

$

0

 

$

9

 

 

For the six months ended June 30, 2014 and 2013, we recorded costs of $33 million and $2 million, respectively, primarily related to costs associated with various legal proceedings and governmental reviews.

 

NOTE 11. INCOME TAXES

 

During the six months ended June 30, 2014, we recorded income tax expense of $7 million, which includes $3 million to increase our valuation allowance for deferred tax assets. The increase in the valuation allowance relates to an estimated decrease in the future utilization of state net operating loss carryovers.

 

During the six months ended June 30, 2014, there were no adjustments to our estimated liabilities for uncertain tax positions. The total amount of unrecognized tax benefits as of June 30, 2014 was $43 million, of which $34 million, if recognized, would impact our effective tax rate and income tax expense (benefit) from continuing operations.

 

Our practice is to recognize interest and penalties related to income tax matters in income tax expense in our consolidated statements of operations. Total accrued interest and penalties on unrecognized tax benefits as of June 30, 2014 were $5 million, all of which related to continuing operations.

 

As of June 30, 2014, approximately $1 million of unrecognized federal and state tax benefits, as well as reserves for interest and penalties, may decrease in the next 12 months as a result of the settlement of audits, the filing of amended tax returns or the expiration of statutes of limitations.

 

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NOTE 12. EARNINGS (LOSS) PER COMMON SHARE

 

The table below is a reconciliation of the numerators and denominators of our basic and diluted loss per common share calculations for net loss from continuing operations for the three and six months ended June 30, 2014 and 2013. Net loss is expressed in millions and weighted average shares are expressed in thousands.

 

 

 

Net Loss
(Numerator)

 

Weighted
Average
Shares
(Denominator)

 

Per-Share
Amount

 

Three Months Ended June 30, 2014

 

 

 

 

 

 

 

Net loss attributable to Tenet Healthcare Corporation common shareholders for basic earnings per share

 

$

(10

)

97,677

 

$

(0.11

)

Effect of dilutive stock options and restricted stock units

 

0

 

0

 

0.00

 

Net loss attributable to Tenet Healthcare Corporation common shareholders for diluted earnings per share

 

$

(10

)

97,677

 

$

(0.11

)

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2013

 

 

 

 

 

 

 

Net loss attributable to Tenet Healthcare Corporation common shareholders for basic earnings per share

 

$

(53

)

103,010

 

$

(0.52

)

Effect of dilutive stock options and restricted stock units

 

0

 

0

 

0.00

 

Net loss attributable to Tenet Healthcare Corporation common shareholders for diluted earnings per share

 

$

(53

)

103,010

 

$

(0.52

)

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2014

 

 

 

 

 

 

 

Net loss attributable to Tenet Healthcare Corporation common shareholders for basic earnings per share

 

$

(37

)

97,419

 

$

(0.38

)

Effect of dilutive stock options and restricted stock units

 

0

 

0

 

0.00

 

Net loss attributable to Tenet Healthcare Corporation common shareholders for diluted earnings per share

 

$

(37

)

97,419

 

$

(0.38

)

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2013

 

 

 

 

 

 

 

Net loss attributable to Tenet Healthcare Corporation common shareholders for basic earnings per share

 

$

(139

)

103,557

 

$

(1.34

)

Effect of dilutive stock options and restricted stock units

 

0

 

0

 

0.00

 

Net loss attributable to Tenet Healthcare Corporation common shareholders for diluted earnings per share

 

$

(139

)

103,557

 

$

(1.34

)

 

All potentially dilutive securities were excluded from the calculation of diluted loss per share for the three and six months ended June 30, 2014 and 2013 because we did not report income from continuing operations available to shareholders in those periods. In circumstances where we do not have income from continuing operations available to shareholders, the effect of stock options and other potentially dilutive securities is anti-dilutive, that is, a loss from continuing operations available to shareholders has the effect of making the diluted loss per share less than the basic loss per share. Had we generated income from continuing operations available to shareholders in those periods, the effect (in thousands) of employee stock options, restricted stock units and deferred compensation units on the diluted shares calculation would have been an increase in shares of 2,123 and 2,053 for the three and six months ended June 30, 2014, respectively, and 2,326 and 2,282 for the three and six months ended June 30, 2013, respectively.

 

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NOTE 13. FAIR VALUE MEASUREMENTS

 

Our financial assets and liabilities recorded at fair value on a recurring basis primarily relate to investments in available-for-sale securities held by our captive insurance subsidiaries. The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013. The following tables also indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair values. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. We consider a security that trades at least weekly to have an active market. Fair values determined by Level 2 inputs utilize data points that are observable, such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

 

Investments:

 

June 30, 2014

 

Quoted Prices
 in Active
Markets for
Identical Assets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Marketable securities — current

 

$

2

 

$

2

 

$

0

 

$

0

 

Investments in Reserve Yield Plus Fund

 

2

 

0

 

2

 

0

 

Marketable debt securities — noncurrent

 

66

 

27

 

38

 

1

 

 

 

$

70

 

$

29

 

$

40

 

$

1

 

 

Investments:

 

December 31, 2013

 

Quoted Prices
 in Active
Markets for
Identical Assets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Marketable securities — current

 

$

1

 

$

1

 

$

0

 

$

0

 

Investments in Reserve Yield Plus Fund

 

2

 

0

 

2

 

0

 

Marketable debt securities — noncurrent

 

62

 

23

 

38

 

1

 

 

 

$

65

 

$

24

 

$

40

 

$

1

 

 

The fair value of our long-term debt is based on quoted market prices (Level 1). At June 30, 2014 and December 31, 2013, the estimated fair value of our long-term debt was approximately 107.6% and 103.5%, respectively, of the carrying value of the debt.

 

NOTE 14. ACQUISITIONS

 

During the six months ended June 30, 2014, we acquired a majority interest in Texas Regional Medical Center at Sunnyvale, a 70-bed hospital in Sunnyvale, Texas, a suburban community east of Dallas. We also acquired three ambulatory surgery centers, three urgent care centers, one diagnostic imaging center and various physician practice entities in the same period. The fair value of the consideration conveyed in the acquisitions (the “purchase price”) was $42 million.

 

We are required to allocate the purchase prices of the acquired businesses to assets acquired or liabilities assumed and, if applicable, noncontrolling interests based on their fair values. The excess of the purchase price allocation over those fair values is recorded as goodwill. We are in process of finalizing the purchase price allocations, including valuations of the acquired property and equipment primarily for several recent acquisitions; therefore, those purchase price allocations are subject to adjustment once the valuations are completed. During the six months ended June 30, 2014, we made adjustments to purchase price allocations for businesses acquired in 2013 that increased goodwill by approximately $87 million due to additional information received during the period.

 

Preliminary purchase price allocations for the acquisitions made during the six months ended June 30, 2014 are as follows:

 

Current assets

 

$

14

 

Property and equipment

 

19

 

Goodwill

 

71

 

Current liabilities

 

(16

)

Long-term liabilities

 

(17

)

Noncontrolling interests

 

(29

)

Net cash paid

 

$

42

 

 

The goodwill generated from these transactions, a significant portion of which will not be deductible for income tax purposes, can be attributed to the benefits that we expect to realize from operating efficiencies and increased reimbursement.

 

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Approximately $4 million in transaction costs related to prospective and closed acquisitions were expensed during the six months ended June 30, 2014, and are included in impairment and restructuring charges, and acquisition-related costs in the accompanying Condensed Consolidated Statement of Operations.

 

Pro Forma Information - Unaudited

 

The following table provides certain pro forma financial information for Tenet as if the Vanguard acquisition had occurred at the beginning of the year ended December 31, 2013.

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
 June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues

 

$

4,042

 

$

3,940

 

$

7,968

 

$

7,826

 

Income (loss) from continuing operations, before income taxes

 

$

17

 

$

(66

)

$

5

 

$

(198

)

 

NOTE 15. SEGMENT INFORMATION

 

Our core business is hospital operations and other, which is focused on owning and operating acute care hospitals and outpatient facilities. We also own various related healthcare businesses. At June 30, 2014, our subsidiaries operated 79 hospitals, with a total of 20,553 licensed beds, primarily serving urban and suburban communities, as well as 189 outpatient centers and six health plans.

 

We operate revenue cycle management and patient communications and engagement services businesses under our Conifer subsidiary. In addition, Conifer operates a management services business that supports value-based performance through clinical integration, financial risk management and population health management. At June 30, 2014, Conifer provided services to more than 700 Tenet and non-Tenet hospital and other clients nationwide. Conifer’s two largest customers, Tenet and Catholic Health Initiatives, together comprised 82% and 79% of Conifer’s net operating revenues for the six months ended June 30, 2014 and 2013, respectively.

 

The following table includes amounts for each of our reportable segments and the reconciling items necessary to agree to amounts reported in the accompanying Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations:

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

Assets:

 

 

 

 

 

Hospital operations and other

 

$

16,577

 

$

15,874

 

Conifer

 

330

 

256

 

Total

 

$

16,907

 

$

16,130

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Capital expenditures:

 

 

 

 

 

 

 

 

 

Hospital operations and other

 

$

237

 

$

117

 

$

510

 

$

248

 

Conifer

 

5

 

6

 

13

 

8

 

Total

 

$

242

 

$

123

 

$

523

 

$

256

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues:

 

 

 

 

 

 

 

 

 

Hospital operations and other

 

$

3,895

 

$

2,297

 

$

7,676

 

$

4,565

 

Conifer

 

 

 

 

 

 

 

 

 

Tenet

 

138

 

94

 

278

 

186

 

Other customers

 

147

 

125

 

292

 

244

 

 

 

4,180

 

2,516

 

8,246

 

4,995

 

Intercompany eliminations

 

(138

)

(94

)

(278

)

(186

)

Total

 

$

4,042

 

$

2,422

 

$

7,968

 

$

4,809

 

 

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Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

Hospital operations and other

 

$

416

 

$

308

 

$

755

 

$

550

 

Conifer

 

44

 

28

 

92

 

60

 

Total

 

$

460

 

$

336

 

$

847

 

$

610

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

Hospital operations and other

 

$

204

 

$

115

 

$

392

 

$

225

 

Conifer

 

5

 

6

 

10

 

10

 

Total

 

$

209

 

$

121

 

$

402

 

$

235

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

$

460

 

$

336

 

$

847

 

$

610

 

Depreciation and amortization

 

(209

)

(121

)

(402

)

(235

)

Impairment and restructuring charges, and acquisition-related costs

 

(32

)

(11

)

(53