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EX-31.(A) - EX-31.(A) - TENET HEALTHCARE CORPthc-20150930xex31a.htm
EX-32 - EX-32 - TENET HEALTHCARE CORPthc-20150930xex32.htm
EX-31.(B) - EX-31.(B) - TENET HEALTHCARE CORPthc-20150930xex31b.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-Q

 

 

 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended September 30, 2015

 

 

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  No 

 

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  No 

 

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 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

 

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

 

At October 29, 2015, there were 99,669,208 shares of the Registrant’s common stock, $0.05 par value, outstanding.

 

 

 


 

i


 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

TENET HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

Dollars in Millions

(Unaudited)

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

2015

 

2014

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

450

 

$

193

Accounts receivable, less allowance for doubtful accounts

($913 at September 30, 2015 and $852 at December 31, 2014)

 

 

2,525

 

 

2,404

Inventories of supplies, at cost

 

 

275

 

 

276

Income tax receivable

 

 

33

 

 

2

Current portion of deferred income taxes

 

 

625

 

 

747

Assets held for sale

 

 

1,186

 

 

2

Other current assets

 

 

1,202

 

 

1,093

Total current assets 

 

 

6,296

 

 

4,717

Investments and other assets

 

 

1,029

 

 

384

Deferred income taxes, net of current portion

 

 

82

 

 

116

Property and equipment, at cost, less accumulated depreciation and amortization ($4,145 at September 30, 2015 and $4,478 at December 31, 2014)

 

 

7,330

 

 

7,733

Goodwill

 

 

6,606

 

 

3,913

Other intangible assets, at cost, less accumulated amortization ($699 at September 30, 2015 and $671 at December 31, 2014)

 

 

1,830

 

 

1,278

Total assets 

 

$

23,173

 

$

18,141

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of long-term debt

 

$

112

 

$

112

Accounts payable

 

 

1,206

 

 

1,179

Accrued compensation and benefits

 

 

821

 

 

852

Professional and general liability reserves

 

 

185

 

 

189

Accrued interest payable

 

 

307

 

 

194

Liabilities held for sale

 

 

226

 

 

 —

Other current liabilities

 

 

1,236

 

 

1,051

Total current liabilities 

 

 

4,093

 

 

3,577

Long-term debt, net of current portion

 

 

14,642

 

 

11,695

Professional and general liability reserves

 

 

566

 

 

492

Defined benefit plan obligations

 

 

621

 

 

633

Other long-term liabilities

 

 

551

 

 

558

Total liabilities 

 

 

20,473

 

 

16,955

Commitments and contingencies

 

 

 

 

 

 

Redeemable noncontrolling interests in equity of consolidated subsidiaries

 

 

1,682

 

 

401

Equity:

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

Common stock, $0.05 par value; authorized 262,500,000 shares; 146,774,768 shares issued at September 30, 2015 and 145,578,735 shares issued at December 31, 2014

 

 

7

 

 

7

Additional paid-in capital

 

 

4,798

 

 

4,614

Accumulated other comprehensive loss

 

 

(173)

 

 

(182)

Accumulated deficit

 

 

(1,453)

 

 

(1,410)

Common stock in treasury, at cost, 47,182,492 shares at September 30, 2015 and 47,196,902 shares at December 31, 2014

 

 

(2,377)

 

 

(2,378)

Total shareholders’ equity 

 

 

802

 

 

651

Noncontrolling interests 

 

 

216

 

 

134

Total equity 

 

 

1,018

 

 

785

Total liabilities and equity 

 

$

23,173

 

$

18,141

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 


 

TENET HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Dollars in Millions, Except Per-Share Amounts

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Nine Months Ended 

 

 

September 30, 

 

September 30, 

 

    

2015

    

2014

    

2015

    

2014

Net operating revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues before provision for doubtful accounts

 

$

5,063

 

$

4,424

 

$

14,694

 

$

13,087

Less: Provision for doubtful accounts

 

 

371

 

 

249

 

 

1,086

 

 

949

Net operating revenues 

 

 

4,692

 

 

4,175

 

 

13,608

 

 

12,138

Equity in earnings of unconsolidated affiliates

 

 

28

 

 

4

 

 

48

 

 

9

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

 

2,258

 

 

2,028

 

 

6,568

 

 

5,905

Supplies

 

 

752

 

 

665

 

 

2,146

 

 

1,942

Other operating expenses, net

 

 

1,151

 

 

1,032

 

 

3,325

 

 

3,066

Electronic health record incentives

 

 

(7)

 

 

(5)

 

 

(46)

 

 

(72)

Depreciation and amortization

 

 

185

 

 

207

 

 

589

 

 

609

Impairment and restructuring charges, and acquisition-related costs

 

 

44

 

 

37

 

 

266

 

 

90

Litigation and investigation costs

 

 

50

 

 

4

 

 

67

 

 

19

Operating income 

 

 

287

 

 

211

 

 

741

 

 

588

Interest expense

 

 

(248)

 

 

(186)

 

 

(664)

 

 

(558)

Loss from early extinguishment of debt

 

 

 —

 

 

(24)

 

 

 —

 

 

(24)

Investment earnings

 

 

1

 

 

 —

 

 

 —

 

 

 —

Net income from continuing operations, before income taxes 

 

 

40

 

 

1

 

 

77

 

 

6

Income tax benefit (expense)

 

 

(11)

 

 

18

 

 

 —

 

 

11

Net income from continuing operations, before discontinued operations 

 

 

29

 

 

19

 

 

77

 

 

17

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(1)

 

 

(2)

 

 

(4)

 

 

(17)

Litigation and investigation costs

 

 

 —

 

 

 —

 

 

3

 

 

(18)

Income tax benefit

 

 

 —

 

 

1

 

 

 —

 

 

13

Net loss from discontinued operations 

 

 

(1)

 

 

(1)

 

 

(1)

 

 

(22)

Net income (loss) 

 

 

28

 

 

18

 

 

76

 

 

(5)

Less: Net income attributable to noncontrolling interests

 

 

57

 

 

9

 

 

119

 

 

44

Net income available (loss attributable) to Tenet Healthcare Corporation common shareholders 

 

$

(29)

 

$

9

 

$

(43)

 

$

(49)

Amounts available (attributable) to Tenet Healthcare Corporation common shareholders

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations, net of tax

 

$

(28)

 

$

10

 

$

(42)

 

$

(27)

Net loss from discontinued operations, net of tax

 

 

(1)

 

 

(1)

 

 

(1)

 

 

(22)

Net income available (loss attributable) to Tenet Healthcare Corporation common shareholders 

 

$

(29)

 

$

9

 

$

(43)

 

$

(49)

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.28)

 

$

0.10

 

$

(0.42)

 

$

(0.27)

Discontinued operations

 

 

(0.01)

 

 

(0.01)

 

 

(0.01)

 

 

(0.23)

 

 

$

(0.29)

 

$

0.09

 

$

(0.43)

 

$

(0.50)

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.28)

 

$

0.10

 

$

(0.42)

 

$

(0.27)

Discontinued operations

 

 

(0.01)

 

 

(0.01)

 

 

(0.01)

 

 

(0.23)

 

 

$

(0.29)

 

$

0.09

 

$

(0.43)

 

$

(0.50)

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

99,537

 

 

98,036

 

 

99,160

 

 

97,625

Diluted

 

 

99,537

 

 

100,926

 

 

99,160

 

 

97,625

 

See accompanying Notes to Condensed Consolidated Financial Statements.

2


 

TENET HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

Dollars in Millions

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Nine Months Ended 

 

 

September 30, 

 

September 30, 

 

    

2015

    

2014

    

2015

    

2014

Net income (loss)

 

$

28

 

$

18

 

$

76

 

$

(5)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

3

 

 

1

 

 

8

 

 

4

Unrealized gains (losses) on securities held as available-for-sale

 

 

(2)

 

 

(1)

 

 

(1)

 

 

2

Foreign currency translation adjustments

 

 

3

 

 

 —

 

 

3

 

 

 —

Other comprehensive income before income taxes 

 

 

4

 

 

 —

 

 

10

 

 

6

Income tax expense related to items of other comprehensive income

 

 

 —

 

 

 —

 

 

(1)

 

 

(2)

Total other comprehensive income, net of tax 

 

 

4

 

 

 —

 

 

9

 

 

4

Comprehensive net income (loss)

 

 

32

 

 

18

 

 

85

 

 

(1)

Less: Comprehensive income attributable to noncontrolling interests 

 

 

57

 

 

9

 

 

119

 

 

44

Comprehensive net income available (loss attributable) to Tenet Healthcare Corporation common shareholders 

 

$

(25)

 

$

9

 

$

(34)

 

$

(45)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

3


 

TENET HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in Millions

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended 

 

 

September 30, 

 

    

2015

    

2014

Net income (loss) 

 

$

76

 

$

(5)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

589

 

 

609

Provision for doubtful accounts

 

 

1,086

 

 

949

Deferred income tax benefit

 

 

(10)

 

 

(22)

Stock-based compensation expense

 

 

50

 

 

41

Impairment and restructuring charges, and acquisition-related costs

 

 

266

 

 

90

Litigation and investigation costs

 

 

67

 

 

19

Loss from early extinguishment of debt

 

 

 —

 

 

24

Amortization of debt discount and debt issuance costs

 

 

32

 

 

21

Pre-tax loss from discontinued operations

 

 

1

 

 

35

Other items, net

 

 

(26)

 

 

(16)

Changes in cash from operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(1,124)

 

 

(1,309)

Inventories and other current assets

 

 

(62)

 

 

12

Income taxes

 

 

(5)

 

 

(7)

Accounts payable, accrued expenses and other current liabilities

 

 

39

 

 

120

Other long-term liabilities

 

 

31

 

 

38

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

 

 

(157)

 

 

(115)

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

 

 

(18)

 

 

(16)

Net cash provided by operating activities 

 

 

835

 

 

468

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment — continuing operations

 

 

(566)

 

 

(734)

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

 

 

(720)

 

 

(185)

Proceeds from sales of facilities and other assets

 

 

28

 

 

4

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

 

 

18

 

 

8

Purchases of equity investments

 

 

(18)

 

 

(6)

Other long-term assets

 

 

(6)

 

 

(4)

Other items, net

 

 

(8)

 

 

3

Net cash used in investing activities 

 

 

(1,272)

 

 

(914)

Cash flows from financing activities:

 

 

 

 

 

 

Repayments of borrowings under credit facility

 

 

(1,880)

 

 

(1,965)

Proceeds from borrowings under credit facility

 

 

1,770

 

 

1,560

Repayments of other borrowings

 

 

(2,011)

 

 

(655)

Proceeds from other borrowings

 

 

3,208

 

 

1,608

Debt issuance costs

 

 

(76)

 

 

(26)

Distributions paid to noncontrolling interests

 

 

(65)

 

 

(30)

Contributions from noncontrolling interests

 

 

3

 

 

15

Purchase of noncontrolling interests

 

 

(254)

 

 

 —

Proceeds from exercise of stock options

 

 

15

 

 

23

Other items, net

 

 

(16)

 

 

3

Net cash provided by financing activities 

 

 

694

 

 

533

Net increase in cash and cash equivalents

 

 

257

 

 

87

Cash and cash equivalents at beginning of period

 

 

193

 

 

113

Cash and cash equivalents at end of period 

 

$

450

 

$

200

Supplemental disclosures:

 

 

 

 

 

 

Interest paid, net of capitalized interest

 

$

(519)

 

$

(487)

Income tax refunds (payments), net

 

$

(6)

 

$

(5)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

4


 

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 diversified healthcare services company. At September 30, 2015, we operated 83 hospitals (one of which is temporarily closed for repairs), 19 short-stay surgical hospitals, over 425 outpatient centers and nine facilities in the United Kingdom through our subsidiaries, partnerships and joint ventures, including USPI Holding Company, Inc. (“USPI joint venture”). The results of 164 of these facilities, in which we hold noncontrolling interests, are recorded using the equity method of accounting. Our Conifer Holdings, Inc. (“Conifer”) subsidiary provides healthcare business process services in the areas of revenue cycle management and technology-enabled performance improvement and health management solutions to hospitals, health systems, integrated delivery networks, self-insured organizations and health plans.

 

Effective June 16, 2015, we completed the transaction that combined our interests in 49 freestanding ambulatory surgery centers and 20 freestanding imaging centers with all of the short-stay surgery center assets held by United Surgical Partners International, Inc. (“USPI”) into our new USPI joint venture. We also refinanced approximately $1.5 billion of existing USPI debt and paid approximately $424 million to align the respective valuations of the assets contributed to the joint venture. We currently own 50.1% of the USPI joint venture. In addition, we completed the acquisition of European Surgical Partners Ltd. (“Aspen”) for approximately $226 million on June 16, 2015. Aspen has nine private hospitals and clinics in the United Kingdom.

 

This quarterly report supplements our Annual Report on Form 10-K for the year ended December 31, 2014 (“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, primarily due to the USPI joint venture, acquisition of Aspen and the formation of our new Ambulatory Care separate reportable business segment.

 

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 are required to make 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 nine month periods ended September 30, 2015 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

5


 

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; acquisition-related costs; 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; the number of patients with high-deductible health insurance plans; 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.

 

Translation of Foreign Currencies

 

The accounts of Aspen were measured in its local currency (the pound sterling) and then translated into U.S. dollars. All assets and liabilities were translated using the current rate of exchange at the balance sheet date. Results of operations were translated using the average rates prevailing throughout the period of operations. Translation gains or losses resulting from changes in exchange rates are accumulated in shareholders’ equity.

 

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 from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Nine Months Ended 

 

 

September 30, 

 

September 30, 

 

    

2015

    

2014

    

2015

    

2014

General Hospitals:

 

 

 

 

 

 

 

 

 

 

 

 

Medicare

 

$

817

 

$

824

 

$

2,565

 

$

2,517

Medicaid

 

 

361

 

 

340

 

 

1,095

 

 

1,010

Managed care

 

 

2,514

 

 

2,308

 

 

7,420

 

 

6,634

Indemnity, self-pay and other

 

 

426

 

 

349

 

 

1,247

 

 

1,137

Acute care hospitals — other revenue

 

 

11

 

 

10

 

 

39

 

 

47

Other:

 

 

 

 

 

 

 

 

 

 

 

 

Other operations

 

 

934

 

 

593

 

 

2,328

 

 

1,742

Net operating revenues before provision for doubtful accounts 

 

$

5,063

 

$

4,424

 

$

14,694

 

$

13,087

 

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 $450 million and $193 million at September 30, 2015 and December 31, 2014, respectively. At September 30, 2015 and December 31, 2014, our book overdrafts were approximately $254 million and $264 million, respectively, which were classified as accounts payable.

6


 

 

At September 30, 2015 and December 31, 2014, approximately $206 million and $157 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 and our health plans.

 

Also at September 30, 2015 and December 31, 2014, we had $101 million and $150 million, respectively, of property and equipment purchases accrued for items received but not yet paid. Of these amounts, $60 million and $112 million, respectively, were included in accounts payable.

 

During the nine months ended September 30, 2015 and 2014, we entered into non-cancellable capital leases excluding those of acquired businesses of approximately $113 million and $112 million, respectively, primarily for buildings and equipment.

 

Other Intangible Assets

 

The following tables provide information regarding other intangible assets, which are included in the accompanying Condensed Consolidated Balance Sheets at September 30, 2015 and December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

    

Gross

    

 

 

    

 

 

 

 

Carrying

 

Accumulated

 

Net Book

 

 

Amount

 

Amortization

 

Value

At September 30, 2015:

 

 

 

 

 

 

 

 

 

Capitalized software costs

 

$

1,344

 

$

(570)

 

$

774

Long-term debt issuance costs

 

 

319

 

 

(74)

 

 

245

Trade names

 

 

106

 

 

 —

 

 

106

Contracts

 

 

653

 

 

(19)

 

 

634

Other

 

 

107

 

 

(36)

 

 

71

Total 

 

$

2,529

 

$

(699)

 

$

1,830

 

 

 

 

 

 

 

 

 

 

 

 

    

Gross

    

 

 

    

 

 

 

 

Carrying

 

Accumulated

 

Net Book

 

 

Amount

 

Amortization

 

Value

At December 31, 2014:

 

 

 

 

 

 

 

 

 

Capitalized software costs

 

$

1,412

 

$

(586)

 

$

826

Long-term debt issuance costs

 

 

245

 

 

(49)

 

 

196

Trade names

 

 

106

 

 

 —

 

 

106

Contracts

 

 

57

 

 

(6)

 

 

51

Other

 

 

129

 

 

(30)

 

 

99

Total 

 

$

1,949

 

$

(671)

 

$

1,278

 

Estimated future amortization of intangibles with finite useful lives at September 30, 2015 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ending December 31, 

 

Later

 

 

    

Total

    

2015

    

2016

    

2017

    

2018

    

2019

    

Years

 

Amortization of intangible assets

 

$

1,367

 

$

70

 

$

226

 

$

201

 

$

177

 

$

140

 

$

553

 

 

Investments in Unconsolidated Affiliates

We control 143 of the facilities operated by our Ambulatory Care segment and, therefore, consolidate their results  (141 are consolidated within our Ambulatory Care segment and two are consolidated within our Hospital Operations and other segment). However, we account for a majority of the facilities our Ambulatory Care segment operates (157 of 300 at September 30, 2015) under the equity method as investments in unconsolidated affiliates and report only our share of net income attributable to the investee as equity in earnings of unconsolidated affiliates in the accompanying Condensed Consolidated Statements of Operations. Summarized financial information for our most significant equity method investee is included in the following table. Amounts reflect 100% of the investee’s results beginning on June 16, 2015 (the date of our acquisition of the investment).

7


 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Nine Months Ended 

 

 

September 30, 

 

September 30, 

 

    

2015

    

2015

Net operating revenues

 

$

206

 

$

241

Net income

 

$

52

 

$

61

Net income attributable to the investee

 

$

24

 

$

28

 

 

 

 

NOTE 2. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

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

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

2015

 

2014

Continuing operations:

 

 

 

 

 

 

Patient accounts receivable

 

$

3,354

 

$

3,178

Allowance for doubtful accounts

 

 

(913)

 

 

(851)

Estimated future recoveries from accounts assigned to our Conifer subsidiary

 

 

140

 

 

125

Net cost reports and settlements payable and valuation allowances

 

 

(59)

 

 

(51)

 

 

 

2,522

 

 

2,401

Discontinued operations

 

 

3

 

 

3

Accounts receivable, net 

 

$

2,525

 

$

2,404

 

At September 30, 2015 and December 31, 2014, our allowance for doubtful accounts was 27.2% and 26.8%, respectively, of our patient accounts receivable. 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. At September 30, 2015 and December 31, 2014, our allowance for doubtful accounts for self-pay was 80.6% and 78.0%, respectively, of our self-pay patient accounts receivable, including co-pays and deductibles owed by patients with insurance. At September 30, 2015 and December 31, 2014, our allowance for doubtful accounts for managed care was 6.4% and 6.5%, respectively, of our managed care patient accounts receivable.

 

We also provide charity care to patients who are financially unable to pay for the healthcare services they receive. Most patients who qualify for charity care are charged a per-diem amount for services received, subject to a cap. Except for the per-diem amounts, our policy is not to pursue collection of amounts determined to qualify as charity care; therefore, we do not report these amounts in net operating revenues. 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. These payments are intended to mitigate our cost of uncompensated care, as well as reduced Medicaid funding levels. The table below shows our 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 and charity care patients, as well as revenues attributable to DSH and other supplemental revenues we recognized in the three and nine months ended September 30, 2015 and 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Nine Months Ended 

 

 

September 30, 

 

September 30, 

 

    

2015

    

2014

 

2015

    

2014

Estimated costs for:

 

 

 

 

 

 

 

 

 

 

 

 

Self-pay patients

 

$

171

 

$

135

 

$

503

 

$

488

Charity care patients

 

$

50

 

$

42

 

$

123

 

$

137

DSH and other supplemental revenues

 

$

208

 

$

178

 

$

675

 

$

493

 

At September 30, 2015 and December 31, 2014, we had approximately $352 million and $399 million, respectively, of receivables recorded in other current assets and approximately $131 million and $212 million,

8


 

respectively, of payables recorded in other current liabilities in the accompanying Condensed Consolidated Balance Sheets related to California’s provider fee program.

 

NOTE 3. ASSETS AND LIABILITIES HELD FOR SALE

 

In the three months ended June 30, 2015, we entered into a definitive agreement for the sale of the assets of our Saint Louis University Hospital (“SLUH”) to Saint Louis University. In accordance with the guidance in the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) 360, “Property, Plant and Equipment,” we classified SLUH’s assets as “assets held for sale” in current assets and SLUH’s liabilities as “liabilities held for sale” in current liabilities in our Condensed Consolidated Balance Sheet at June 30, 2015. These assets and liabilities were recorded at the lower of their carrying amount or their fair value less estimated costs to sell. As a result of this anticipated transaction, we recorded an impairment charge of $147 million for the write-down of assets held for sale to their estimated fair value, less estimated costs to sell, in the three months ended June 30, 2015. We completed the sale of SLUH on August 31, 2015 at a transaction price of approximately $32 million, excluding working capital and subject to customary purchase price adjustments. Because we did not sell SLUH’s accounts receivable related to the pre-closing period, net receivables of approximately $51 million are included in accounts receivable, less allowance for doubtful accounts, in the accompanying Condensed Consolidated Balance Sheet at September 30, 2015.

 

Our hospitals, physician practices and related assets in Georgia and North Carolina also met the criteria to be classified as assets held for sale in the three months ended June 30, 2015. In accordance with the guidance in ASC 360, we have classified $554 million and $274 million of our assets in Georgia and North Carolina, respectively, as “assets held for sale” in current assets and $103 million and $83 million of our liabilities in Georgia and North Carolina, respectively, as “liabilities held for sale” in current liabilities in the accompanying Condensed Consolidated Balance Sheet at September 30, 2015. These assets and liabilities were recorded at the lower of their carrying amount or their fair value less estimated costs to sell. There were no impairment charges recorded as a result of these anticipated transactions. These transactions are subject to the execution of definitive asset sales agreements and customary closing conditions, including regulatory approvals.

 

During the three months ended March 31, 2015, we entered into a definitive agreement to form a joint venture with Baylor Scott & White Health involving the ownership and operation of Centennial Medical Center, Doctors Hospital at White Rock Lake, Lake Pointe Medical Center and Texas Regional Medical Center at Sunnyvale (collectively, “our North Texas hospitals”) – which are currently operated by certain of our subsidiaries – and Baylor Medical Center at Garland – which is currently owned and operated by Baylor Scott & White Health, which will hold a majority ownership interest in the joint venture. In accordance with the guidance in ASC 360, we have classified $358 million of assets of our North Texas hospitals as “assets held for sale” in current assets and $40 million of liabilities of our North Texas hospitals as “liabilities held for sale” in current liabilities in the accompanying Condensed Consolidated Balance Sheet at September 30, 2015. These assets and liabilities were recorded at the lower of their carrying amount or their fair value less estimated costs to sell. There were no impairment charges recorded as a result of this anticipated transaction, which is subject to customary closing conditions.

 

Assets and liabilities classified as held for sale at September 30, 2015, all of which were in the Hospital Operations and other segment, were comprised of the following:

 

 

 

 

 

Accounts receivable

    

$

58

Other current assets

 

 

63

Property and equipment

 

 

778

Goodwill

 

 

206

Other long-term assets

 

 

81

Current liabilities

 

 

(53)

Long-term liabilities

 

 

(173)

Net assets held for sale

 

$

960

 

 

9


 

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

 

During the nine months ended September 30, 2015, we recorded impairment and restructuring charges and acquisition-related costs of $266 million, consisting of a $147 million charge to write-down assets held for sale to their estimated fair value, less estimated costs to sell, as a result of us entering into a definitive agreement for the sale of SLUH during the three months ended June 30, 2015, as further described in Note 3, $16 million of employee severance costs, $5 million of restructuring costs, $15 million of contract and lease termination fees, and $83 million in acquisition-related costs, which include $48 million of transaction costs and $35 million of acquisition integration charges.

 

During the nine months ended September 30, 2014, we recorded impairment and restructuring charges and acquisition-related costs of $90 million, consisting of $14 million of employee severance costs, $6 million of contract and lease termination fees, $19 million of restructuring costs, and $51 million in acquisition-related costs, which include $7 million of transaction costs and $44 million of acquisition integration charges.

 

Our impairment tests presume stable, improving or, in some cases, declining operating results in our facilities, which are based on programs and initiatives being implemented that are designed to achieve the facility’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.

 

At September 30, 2015, our continuing operations consisted of three reportable segments, Hospital Operations and other, Conifer and Ambulatory Care. Within our Hospital Operations and other segment, our regions and markets are reporting units used to perform our goodwill impairment analysis and are one level below our reportable business segment level. Our Ambulatory Care segment consists of the operations of our USPI joint venture and our Aspen facilities.

 

During the three months ended June 30, 2015, within our Hospital Operations and other segment, we combined our Central region with our Resolute Health, San Antonio and South Texas markets to create our new Texas region, and we moved our hospitals and other operations in Tennessee from our Texas region to our Southern region. Our Hospital Operations and other segment was structured as follows at September 30, 2015:

 

·

Our Texas region included all of our hospitals and other operations in Missouri, New Mexico and Texas;

 

·

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

 

·

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

 

·

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

 

·

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

 

·

Our Detroit market included all of our hospitals and other operations in the Detroit, Michigan area.

 

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.

 

10


 

NOTE 5. SHORT-TERM BORROWINGS AND LONG-TERM DEBT AND LEASE OBLIGATIONS

 

Interim Loan Agreement

 

During the three months ended March 31, 2015, we entered into a new interim loan agreement (the “Interim Loan Agreement”) providing for a 364-day secured term loan facility in the aggregate principal amount of $400 million. On June 16, 2015, we repaid the $400 million aggregate principal amount of the term loan (plus accrued interest of $1 million) outstanding under the Interim Loan Agreement as of that day. We had used the proceeds of the term loan (i) to repay outstanding obligations under our Credit Agreement (defined below), and (ii) to pay certain costs, fees and expenses incurred in connection with entering into the Interim Loan Agreement. Amounts borrowed under the Interim Loan Agreement and repaid or prepaid may not be reborrowed. As a result, the Interim Loan Agreement was terminated as of June 16, 2015.

 

Long-Term Debt and Lease Obligations

 

The table below shows our long-term debt at September 30, 2015 and December 31, 2014:

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2015

 

2014

 

Senior notes:

 

 

 

 

 

 

 

5%, due 2019

 

$

1,100

 

$

1,100

 

51/2%, due 2019

 

 

500

 

 

500

 

63/4%, due 2020

 

 

300

 

 

300

 

8%, due 2020

 

 

750

 

 

750

 

81/8%, due 2022

 

 

2,800

 

 

2,800

 

63/4%, due 2023

 

 

1,900

 

 

 —

 

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

 

Floating % due 2020

 

 

900

 

 

 —

 

41/2%, due 2021

 

 

850

 

 

850

 

43/8%, due 2021

 

 

1,050

 

 

1,050

 

Credit facility due 2016

 

 

110

 

 

220

 

Capital leases and mortgage notes

 

 

758

 

 

487

 

Unamortized note discounts and premium

 

 

(35)

 

 

(21)

 

Total long-term debt 

 

 

14,754

 

 

11,807

 

Less current portion

 

 

112

 

 

112

 

Long-term debt, net of current portion 

 

$

14,642

 

$

11,695

 

 

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 domestic 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 (“LIBOR”) 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 September 30, 2015, we had $110 million of cash borrowings outstanding under the Credit Agreement subject to an interest rate of 2.16%, and we had approximately $5 million of standby letters

11


 

of credit outstanding. Based on our eligible receivables, approximately $885 million was available for borrowing under the Credit Agreement at September 30, 2015.

 

Letter of Credit Facility

 

On March 7, 2014, we entered into a letter of credit facility agreement (“LC Facility”) that provides for the issuance of standby and documentary letters of credit (including certain letters of credit originally issued under our 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 domestic 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 September 30, 2015, we had approximately $105 million of standby letters of credit outstanding under the LC Facility.

 

Senior Secured Notes and Senior Unsecured Notes

 

In June 2015, we sold $900 million aggregate principal amount of floating rate senior secured notes, which will mature on June 15, 2020 (the “Secured Notes”), and assumed $1.9 billion aggregate principal amount of 63/4% senior notes, which will mature on June 15, 2023 (the “Unsecured Notes” and, together with the Secured Notes, the “Notes”), issued by THC Escrow Corporation II. We will pay interest on the Secured Notes quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, which payments commenced on September 15, 2015. The Secured Notes accrue interest at a rate per annum, reset quarterly, equal to LIBOR plus 31/2%. We will pay interest on the Unsecured Notes semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 2015. The proceeds from the sale of the Notes were used to repay borrowings outstanding under our Interim Loan Agreement and Credit Agreement, as well as to refinance the debt of USPI and to pay the cash consideration in respect of our USPI joint venture and Aspen acquisition.

 

Secured Notes. The indenture governing the Secured Notes contains covenants and terms (including terms regarding mandatory redemption) that are similar to those in the indentures governing our existing senior secured notes as described in our Annual Report, except we are permitted under the indenture governing the Secured Notes to incur secured debt so long as, at the time of and after giving effect to the incurrence of such debt, the aggregate amount of all such secured debt (including the aggregate principal amount of Secured Notes outstanding at such time) does not exceed the greater of (i) $8.5 billion or (ii) the amount that would cause the secured debt ratio (as defined in the indenture) to exceed 4.0 to 1.0 and, provided further, that the aggregate amount of all such debt secured by a lien on par to the lien securing the Secured Notes does not exceed the greater of (a) $6.4 billion or (b) the amount that would cause the secured debt ratio to exceed 3.0 to 1.0. In addition, pursuant to the Secured Notes indenture, we may, at our option, redeem the Secured Notes, in whole or in part, at any time prior to June 15, 2016 at a redemption price equal to 100% of the principal amount of the notes being redeemed plus the make-whole premium set forth in the Secured Notes indenture, together with accrued and unpaid interest thereon, if any, to the redemption date. From and after June 15, 2016, we may, at our option, redeem the Secured Notes in whole or in part at the redemption prices specified in the Secured Notes indenture.

 

All of our senior secured notes are guaranteed by certain of our domestic hospital company subsidiaries and secured by a first-priority pledge of the capital stock and other ownership interests of those subsidiaries. All of our senior secured notes and the related subsidiary guarantees are our and the subsidiary guarantors’ senior secured obligations. All of our senior secured notes rank equally in right of payment with all of our other senior secured indebtedness. Our senior secured notes rank senior to any subordinated indebtedness that we or such subsidiary guarantors may incur; they are

12


 

effectively senior to our and such subsidiary guarantors’ existing and future unsecured indebtedness and other liabilities to the extent of the value of the collateral securing the notes and the subsidiary guarantees; they are effectively subordinated to our and such subsidiary guarantors’ obligations under our Credit Agreement and the LC Facility to the extent of the value of the collateral securing borrowings thereunder; and they are structurally subordinated to all obligations of our nonguarantor subsidiaries.

 

Unsecured Notes. The indenture governing the Unsecured Notes contains covenants and terms (including terms regarding mandatory and optional redemption) that are similar to those in the indentures governing our existing unsecured senior notes as described in our Annual Report. All of our senior unsecured 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 above, the obligations of our subsidiaries, and any obligations under our Credit Agreement and the LC Facility to the extent of the collateral.

 

NOTE 6. GUARANTEES

 

At September 30, 2015, 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 $100 million. We had a total liability of $80 million recorded for these guarantees, $24 million in other current liabilities and $56 million in liabilities held for sale, at September 30, 2015.

 

At September 30, 2015, we also had issued guarantees of the indebtedness and other obligations of our investees to third parties, the maximum potential amount of future payments under which was approximately $36 million. Of the total, $9 million relates to the obligations of consolidated subsidiaries, which obligations are recorded in the accompanying Condensed Consolidated Balance Sheet at September 30, 2015.

 

NOTE 7. EMPLOYEE BENEFIT PLANS

 

At September 30, 2015, approximately 3.3 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, certain special retention awards may have longer vesting periods. In addition, from time to time, we grant 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 nine months ended September 30, 2015 and 2014 includes $52 million and $38 million, respectively, of pretax compensation costs related to our stock-based compensation arrangements recorded in salaries, wages and benefits in the accompanying Condensed Consolidated Statements of Operations.

 

13


 

Stock Options

 

The following table summarizes stock option activity during the nine months ended September 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Weighted Average

    

 

 

    

 

 

 

 

 

 

 

Exercise Price

 

Aggregate

 

Weighted Average

 

 

 

Options

 

Per Share

 

Intrinsic Value

 

Remaining Life

 

 

 

 

 

 

 

 

 

(In Millions)

 

 

 

 

Outstanding at December 31, 2014

 

1,984,149

 

$

24.42

 

 

 

 

 

 

 

Granted

 

 —

 

 

 —

 

 

 

 

 

 

 

Exercised

 

(321,619)

 

 

31.36

 

 

 

 

 

 

 

Forfeited/Expired

 

(36,438)

 

 

42.08

 

 

 

 

 

 

 

Outstanding at September 30, 2015

 

1,626,092

 

$

22.65

 

$

24

 

3.4

years

 

Vested and expected to vest at September 30, 2015

 

1,609,942

 

$

22.48

 

$

24

 

3.4

years

 

Exercisable at September 30, 2015

 

1,347,641

 

$

19.21

 

$

24

 

3.6

years

 

 

There were 321,619 stock options exercised during the nine months ended September 30, 2015 with an aggregate intrinsic value of $8 million, and 691,050 stock options exercised during the same period in 2014 with a $13 million aggregate intrinsic value.

 

At September 30, 2015, there were less than