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EX-32 - EX-32 - TENET HEALTHCARE CORPthc-20160930xex32.htm
EX-31.(B) - EX-31.(B) - TENET HEALTHCARE CORPthc-20160930xex31b.htm
EX-31.(A) - EX-31.(A) - TENET HEALTHCARE CORPthc-20160930xex31a.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, 2016

 

 

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 26, 2016, there were 99,635,674, 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, 

 

 

2016

 

2015

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

649

 

$

356

Accounts receivable, less allowance for doubtful accounts

 ($981 at September 30, 2016 and $887 at December 31, 2015)

 

 

2,786

 

 

2,704

Inventories of supplies, at cost

 

 

322

 

 

309

Income tax receivable

 

 

11

 

 

7

Assets held for sale

 

 

17

 

 

550

Other current assets

 

 

1,331

 

 

1,245

Total current assets 

 

 

5,116

 

 

5,171

Investments and other assets

 

 

1,324

 

 

1,175

Deferred income taxes

 

 

840

 

 

776

Property and equipment, at cost, less accumulated depreciation and amortization ($4,957 at September 30, 2016 and $4,323 at December 31, 2015)

 

 

7,965

 

 

7,915

Goodwill

 

 

7,376

 

 

6,970

Other intangible assets, at cost, less accumulated amortization ($761 at September 30, 2016 and $659 at December 31, 2015)

 

 

1,853

 

 

1,675

Total assets 

 

$

24,474

 

$

23,682

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of long-term debt

 

$

184

 

$

127

Accounts payable

 

 

1,228

 

 

1,380

Accrued compensation and benefits

 

 

809

 

 

880

Professional and general liability reserves

 

 

185

 

 

177

Accrued interest payable

 

 

308

 

 

205

Liabilities held for sale

 

 

13

 

 

101

Accrued legal settlement costs

 

 

527

 

 

294

Other current liabilities

 

 

1,293

 

 

1,144

Total current liabilities 

 

 

4,547

 

 

4,308

Long-term debt, net of current portion

 

 

14,323

 

 

14,383

Professional and general liability reserves

 

 

620

 

 

578

Defined benefit plan obligations

 

 

586

 

 

595

Deferred income taxes

 

 

320

 

 

37

Other long-term liabilities

 

 

606

 

 

557

Total liabilities 

 

 

21,002

 

 

20,458

Commitments and contingencies

 

 

 

 

 

 

Redeemable noncontrolling interests in equity of consolidated subsidiaries

 

 

2,307

 

 

2,266

Equity:

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

Common stock, $0.05 par value; authorized 262,500,000 shares; 147,949,048 shares issued at September 30, 2016 and 146,920,454 shares issued at December 31, 2015

 

 

7

 

 

7

Additional paid-in capital

 

 

4,801

 

 

4,815

Accumulated other comprehensive loss

 

 

(200)

 

 

(164)

Accumulated deficit

 

 

(1,663)

 

 

(1,550)

Common stock in treasury, at cost, 48,420,844 shares at September 30, 2016 and 48,425,298 shares at December 31, 2015

 

 

(2,417)

 

 

(2,417)

Total shareholders’ equity 

 

 

528

 

 

691

Noncontrolling interests 

 

 

637

 

 

267

Total equity 

 

 

1,165

 

 

958

Total liabilities and equity 

 

$

24,474

 

$

23,682

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, 

 

    

2016

    

2015

    

2016

    

2015

Net operating revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues before provision for doubtful accounts

 

$

5,216

 

$

5,063

 

$

15,856

 

$

14,694

Less: Provision for doubtful accounts

 

 

367

 

 

371

 

 

1,095

 

 

1,086

Net operating revenues 

 

 

4,849

 

 

4,692

 

 

14,761

 

 

13,608

Equity in earnings of unconsolidated affiliates

 

 

31

 

 

28

 

 

85

 

 

48

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

 

2,314

 

 

2,258

 

 

7,032

 

 

6,568

Supplies

 

 

767

 

 

752

 

 

2,351

 

 

2,146

Other operating expenses, net

 

 

1,231

 

 

1,151

 

 

3,686

 

 

3,325

Electronic health record incentives

 

 

(2)

 

 

(7)

 

 

(23)

 

 

(46)

Depreciation and amortization

 

 

205

 

 

185

 

 

632

 

 

589

Impairment and restructuring charges, and acquisition-related costs

 

 

31

 

 

44

 

 

81

 

 

266

Litigation and investigation costs

 

 

4

 

 

50

 

 

291

 

 

67

Gains on sales, consolidation and deconsolidation of facilities

 

 

(3)

 

 

 —

 

 

(151)

 

 

 —

Operating income 

 

 

333

 

 

287

 

 

947

 

 

741

Interest expense

 

 

(243)

 

 

(248)

 

 

(730)

 

 

(664)

Investment earnings (losses)

 

 

(1)

 

 

1

 

 

2

 

 

 —

Net income from continuing operations, before income taxes

 

 

89

 

 

40

 

 

219

 

 

77

Income tax expense

 

 

(10)

 

 

(11)

 

 

(61)

 

 

 —

Net income from continuing operations, before discontinued operations

 

 

79

 

 

29

 

 

158

 

 

77

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

2

 

 

(1)

 

 

(5)

 

 

(1)

Income tax expense

 

 

(1)

 

 

 —

 

 

 —

 

 

 —

Net income (loss) from discontinued operations

 

 

1

 

 

(1)

 

 

(5)

 

 

(1)

Net income

 

 

80

 

 

28

 

 

153

 

 

76

Less: Net income attributable to noncontrolling interests

 

 

88

 

 

57

 

 

266

 

 

119

Net loss attributable to Tenet Healthcare Corporation common shareholders 

 

$

(8)

 

$

(29)

 

$

(113)

 

$

(43)

Amounts available (attributable) to Tenet Healthcare Corporation common shareholders

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations, net of tax

 

$

(9)

 

$

(28)

 

$

(108)

 

$

(42)

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

 

 

1

 

 

(1)

 

 

(5)

 

 

(1)

Net loss attributable to Tenet Healthcare Corporation common shareholders 

 

$

(8)

 

$

(29)

 

$

(113)

 

$

(43)

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.09)

 

$

(0.28)

 

$

(1.09)

 

$

(0.42)

Discontinued operations

 

 

0.01

 

 

(0.01)

 

 

(0.05)

 

 

(0.01)

 

 

$

(0.08)

 

$

(0.29)

 

$

(1.14)

 

$

(0.43)

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.09)

 

$

(0.28)

 

$

(1.09)

 

$

(0.42)

Discontinued operations

 

 

0.01

 

 

(0.01)

 

 

(0.05)

 

 

(0.01)

 

 

$

(0.08)

 

$

(0.29)

 

$

(1.14)

 

$

(0.43)

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

99,523

 

 

99,537

 

 

99,210

 

 

99,160

Diluted

 

 

99,523

 

 

99,537

 

 

99,210

 

 

99,160

 

See accompanying Notes to Condensed Consolidated Financial Statements.

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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, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Net income

 

$

80

 

$

28

 

$

153

 

$

76

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss included in net periodic benefit costs

 

 

5

 

 

3

 

 

8

 

 

8

 

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

 

 

2

 

 

(2)

 

 

3

 

 

(1)

 

Foreign currency translation adjustments

 

 

(3)

 

 

3

 

 

(44)

 

 

3

 

Other comprehensive income (loss) before income taxes 

 

 

4

 

 

4

 

 

(33)

 

 

10

 

Income tax expense related to items of other comprehensive income (loss)

 

 

(1)

 

 

 —

 

 

(3)

 

 

(1)

 

Total other comprehensive income (loss), net of tax 

 

 

3

 

 

4

 

 

(36)

 

 

9

 

Comprehensive net income

 

 

83

 

 

32

 

 

117

 

 

85

 

Less: Comprehensive income attributable to noncontrolling interests 

 

 

88

 

 

57

 

 

266

 

 

119

 

Comprehensive loss attributable to Tenet Healthcare Corporation common shareholders

 

$

(5)

 

$

(25)

 

$

(149)

 

$

(34)

 

 

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, 

 

    

2016

    

2015

Net income

 

$

153

 

$

76

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

 

 

 

 

 

 

Depreciation and amortization

 

 

632

 

 

589

Provision for doubtful accounts

 

 

1,095

 

 

1,086

Deferred income tax expense (benefit)

 

 

32

 

 

(10)

Stock-based compensation expense

 

 

51

 

 

50

Impairment and restructuring charges, and acquisition-related costs

 

 

81

 

 

266

Litigation and investigation costs

 

 

291

 

 

67

Gains on sales, consolidation and deconsolidation of facilities

 

 

(151)

 

 

 —

Equity in earnings of unconsolidated affiliates, net of distributions received

 

 

2

 

 

(48)

Amortization of debt discount and debt issuance costs

 

 

33

 

 

32

Pre-tax loss from discontinued operations

 

 

5

 

 

1

Other items, net

 

 

(3)

 

 

22

Changes in cash from operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(1,156)

 

 

(1,124)

Inventories and other current assets

 

 

(95)

 

 

(62)

Income taxes

 

 

(1)

 

 

(5)

Accounts payable, accrued expenses and other current liabilities

 

 

(35)

 

 

39

Other long-term liabilities

 

 

48

 

 

31

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

 

 

(132)

 

 

(157)

Net cash provided by (used in) operating activities from discontinued operations, excluding income taxes

 

 

1

 

 

(18)

Net cash provided by operating activities 

 

 

851

 

 

835

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment — continuing operations

 

 

(614)

 

 

(566)

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

 

 

(96)

 

 

(720)

Proceeds from sales of facilities and other assets

 

 

573

 

 

28

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

 

 

36

 

 

18

Purchases of equity investments

 

 

(37)

 

 

(18)

Other long-term assets

 

 

(15)

 

 

(6)

Other items, net

 

 

3

 

 

(8)

Net cash used in investing activities

 

 

(150)

 

 

(1,272)

Cash flows from financing activities:

 

 

 

 

 

 

Repayments of borrowings under credit facility

 

 

(1,195)

 

 

(1,880)

Proceeds from borrowings under credit facility

 

 

1,195

 

 

1,770

Repayments of other borrowings

 

 

(112)

 

 

(2,011)

Proceeds from other borrowings

 

 

4

 

 

3,208

Debt issuance costs

 

 

(1)

 

 

(76)

Distributions paid to noncontrolling interests 

 

 

(151)

 

 

(65)

Proceeds from sale of noncontrolling interests

 

 

19

 

 

4

Purchase of noncontrolling interests

 

 

(180)

 

 

(254)

Proceeds from exercise of stock options

 

 

4

 

 

15

Other items, net

 

 

9

 

 

(17)

Net cash provided by (used in) financing activities 

 

 

(408)

 

 

694

Net increase in cash and cash equivalents

 

 

293

 

 

257

Cash and cash equivalents at beginning of period

 

 

356

 

 

193

Cash and cash equivalents at end of period 

 

$

649

 

$

450

Supplemental disclosures:

 

 

 

 

 

 

Interest paid, net of capitalized interest

 

$

(596)

 

$

(519)

Income tax payments, net

 

$

(33)

 

$

(6)

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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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, 2016, we operated 79 hospitals, 20 short-stay surgical hospitals, approximately 470 outpatient centers, nine facilities in the United Kingdom and six health plans (certain of which are classified as held for sale, as described in Note 3) through our subsidiaries, partnerships and joint ventures, including USPI Holding Company, Inc. (“USPI joint venture”). We hold noncontrolling interests in 129 facilities, which 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 health systems, as well as individual hospitals, physician practices, self-insured organizations, health plans and other entities.

 

This quarterly report supplements our Annual Report on Form 10-K for the year ended December 31, 2015 (“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 reclassified to conform to the current-year presentation.

 

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, 2016 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 and other weather-related occurrences; 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

5


 

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, or our joint venture partners, that 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 European Surgical Partners, Limited (“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 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, 

 

 

    

2016

    

2015

    

2016

    

2015

    

 

General Hospitals:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Medicare

 

$

809

 

$

817

 

$

2,547

 

$

2,565

 

 

Medicaid

 

 

342

 

 

361

 

 

1,013

 

 

1,095

 

 

Managed care

 

 

2,599

 

 

2,514

 

 

7,632

 

 

7,420

 

 

Indemnity, self-pay and other

 

 

311

 

 

426

 

 

1,212

 

 

1,247

 

 

Acute care hospitals — other revenue

 

 

4

 

 

11

 

 

25

 

 

39

 

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other operations

 

 

1,151

 

 

934

 

 

3,427

 

 

2,328

 

 

Net operating revenues before provision for doubtful accounts 

 

$

5,216

 

$

5,063

 

$

15,856

 

$

14,694

 

 

 

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 $649 million and $356 million at September 30, 2016 and December 31, 2015, respectively. At September 30, 2016 and December 31, 2015, our book overdrafts were approximately $201 million and $301 million, respectively, which were classified as accounts payable.

 

At September 30, 2016 and December 31, 2015, approximately $201 million and $171 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 plan-related businesses.

 

6


 

Also at September 30, 2016 and December 31, 2015, we had $123 million and $133 million, respectively, of property and equipment purchases accrued for items received but not yet paid. Of these amounts, $78 million and $95 million, respectively, were included in accounts payable.

 

During the nine months ended September 30, 2016 and 2015, we entered into non-cancellable capital leases of approximately $110 million and $113 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, 2016 and December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

    

Gross

    

 

 

    

 

 

 

 

Carrying

 

Accumulated

 

Net Book

 

 

Amount

 

Amortization

 

Value

At September 30, 2016:

 

 

 

 

 

 

 

 

 

Capitalized software costs

 

$

1,565

 

$

(677)

 

$

888

Trade names

 

 

106

 

 

 —

 

 

106

Contracts

 

 

847

 

 

(39)

 

 

808

Other

 

 

96

 

 

(45)

 

 

51

Total 

 

$

2,614

 

$

(761)

 

$

1,853

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Gross

    

 

 

    

 

 

 

 

Carrying

 

Accumulated

 

Net Book

 

 

Amount

 

Amortization

 

Value

At December 31, 2015:

 

 

 

 

 

 

 

 

 

Capitalized software costs

 

$

1,456

 

$

(594)

 

$

862

Trade names

 

 

106

 

 

 —

 

 

106

Contracts

 

 

653

 

 

(26)

 

 

627

Other

 

 

119

 

 

(39)

 

 

80

Total 

 

$

2,334

 

$

(659)

 

$

1,675

 

Estimated future amortization of intangibles with finite useful lives at September 30, 2016 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ending December 31, 

 

Later

 

 

    

Total

    

2016

    

2017

    

2018

    

2019

    

2020

    

Years

 

Amortization of intangible assets

 

$

1,196

 

$

41

 

$

178

 

$

164

 

$

131

 

$

116

 

$

566

 

 

Investments in Unconsolidated Affiliates

We control 216 of the facilities operated by our Ambulatory Care segment and, therefore, consolidate their results (212 are consolidated within our Ambulatory Care segment and four are consolidated within our Hospital Operations and other segment). We account for many of the facilities our Ambulatory Care segment operates (114 of 330 at September 30, 2016) and four of the hospitals our Hospital Operations and other segment operates 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 these equity method investees is included in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Nine Months Ended 

 

 

September 30, 

 

September 30, 

 

 

2016

    

2016

Net operating revenues

 

$

610

 

$

1,803

Net income

 

$

129

 

$

364

Net income attributable to the investees

 

$

83

 

$

241

 

 

 

 

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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, 

 

 

2016

 

2015

Continuing operations:

 

 

 

 

 

 

Patient accounts receivable

 

$

3,666

 

$

3,486

Allowance for doubtful accounts

 

 

(981)

 

 

(887)

Estimated future recoveries

 

 

141

 

 

144

Net cost reports and settlements payable and valuation allowances

 

 

(42)

 

 

(42)

 

 

 

2,784

 

 

2,701

Discontinued operations

 

 

2

 

 

3

Accounts receivable, net 

 

$

2,786

 

$

2,704

 

At September 30, 2016 and December 31, 2015, our allowance for doubtful accounts was 26.8% and 25.4%, 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, 2016 and December 31, 2015, our allowance for doubtful accounts for self-pay was 83.0% and 80.6%, respectively, of our self-pay patient accounts receivable, including co-pays and deductibles owed by patients with insurance. At September 30, 2016 and December 31, 2015, our allowance for doubtful accounts for managed care was 9.7% and 7.5%, 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, and revenues attributable to Medicaid DSH and other supplemental revenues we recognized in three and nine months ended September 30, 2016 and 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended 

 

 

September 30, 

 

September 30, 

 

    

2016

    

2015

    

2016

    

2015

Estimated costs for:

 

 

 

 

 

 

 

 

 

 

 

 

Self-pay patients

 

$

167

 

$

171

 

$

477

 

$

503

Charity care patients

 

$

37

 

$

50

 

$

109

 

$

123

Medicaid DSH and other supplemental revenues

 

$

249

 

$

208

 

$

691

 

$

675

 

At September 30, 2016 and December 31, 2015, we had approximately $561 million and $387 million, respectively, of receivables recorded in other current assets and approximately $176 million and $139 million, 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 September 30, 2016, certain of our health plan assets and liabilities met the criteria to be classified as held for sale. In accordance with the guidance in the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) 360, “Property, Plant and Equipment,” we classified $16 million of our health plan assets

8


 

as “assets held for sale” in current assets and $13 million of our health plan liabilities as “liabilities held for sale” in current liabilities in the accompanying Condensed Consolidated Balance Sheet at September 30, 2016.

 

Our hospitals, physician practices and related assets in Georgia met the criteria to be classified as assets held for sale in the three months ended June 30, 2015. In accordance with  ASC 360, we classified $549 million of our assets in Georgia as “assets held for sale” in current assets and $101 million of our liabilities in Georgia as “liabilities held for sale” in current liabilities in the accompanying Condensed Consolidated Balance Sheet at December 31, 2015. We completed the sale of our Georgia assets on March 31, 2016 at a transaction price of approximately $575 million and recognized a gain on sale of approximately $113 million. Because we did not sell the related accounts receivable with respect to the pre-closing period, net receivables of approximately $61 million are included in accounts receivable, less allowance for doubtful accounts in the accompanying Condensed Consolidated Balance Sheet at September 30, 2016.

 

 

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

 

During the nine months ended September 30, 2016, we recorded impairment and restructuring charges and acquisition-related costs of $81 million primarily related to our Hospital Operations and other segment, consisting of approximately $2 million to write-down other intangible assets, $26 million of employee severance costs, $9 million of restructuring costs, $4 million of contract and lease termination fees, and $40 million in acquisition-related costs, which include $5 million of transaction costs and $35 million of acquisition integration charges.

 

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 Saint Louis University Hospital in the period, $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.

 

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, 2016, our continuing operations consisted of three reportable segments, Hospital Operations and other, Ambulatory Care and Conifer. 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.

 

Our Hospital Operations and other segment was structured as follows at September 30, 2016:

 

·

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, Missouri, South Carolina and Tennessee;

 

·

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

 

·

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.

 

9


 

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.

 

NOTE 5. LONG-TERM DEBT AND LEASE OBLIGATIONS

 

The table below shows our long-term debt at September 30, 2016 and December 31, 2015:

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2016

 

2015

 

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

 

 

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

 

 

900

 

41/2% due 2021

 

 

850

 

 

850

 

43/8% due 2021

 

 

1,050

 

 

1,050

 

Capital leases and mortgage notes

 

 

818

 

 

852

 

Unamortized issue costs, note discounts and premiums

 

 

(232)

 

 

(263)

 

Total long-term debt 

 

 

14,507

 

 

14,510

 

Less current portion

 

 

184

 

 

127

 

Long-term debt, net of current portion 

 

$

14,323

 

$

14,383

 

 

Credit Agreement

 

On December 4, 2015, we entered into an amendment to our existing senior secured revolving credit facility (as amended, “Credit Agreement”) in order to, among other things, (i) extend the scheduled maturity date of the facility, (ii) reduce the rates of certain interest and fees payable under the facility, and (iii) remove certain restrictions with respect to the borrowing base eligibility of certain accounts receivable. The Credit Agreement 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 December 4, 2020, is collateralized by patient accounts receivable of substantially all of our domestic wholly owned hospitals. In addition, borrowings under the Credit Agreement are guaranteed by substantially all of our wholly owned domestic hospital subsidiaries. Outstanding revolving loans accrue interest at a base rate plus a margin ranging from 0.25% to 0.75% per annum or the London Interbank Offered Rate plus a margin ranging from 1.25% to 1.75% per annum, in each case based on available credit. An unused commitment fee payable on the undrawn portion of the revolving loans ranges from 0.25% to 0.375% 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, 2016, we had no cash borrowings outstanding under the Credit Agreement, and we had approximately $2 million of standby letters of credit outstanding. Based on our eligible receivables, approximately $998 million was available for borrowing under the Credit Agreement at September 30, 2016.

 

Letter of Credit Facility

 

We have a letter of credit facility that provides for the issuance of standby and documentary 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). On

10


 

September 15, 2016, we entered into an amendment to our existing letter of credit facility agreement (as amended, “LC Facility”) in order to, among other things, (i) extend the scheduled maturity date of the LC Facility to March 7, 2021, (ii) reduce the margin payable with respect to unreimbursed drawings under letters of credit issued under the LC Facility and with respect to undrawn letters of credit issued under the LC Facility, and (iii) reduce the commitment fee payable with respect to the undrawn portion of the commitments under the LC Facility. Obligations under the LC Facility 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 that we have not reimbursed within three business days after notice thereof will accrue interest at a base rate plus a margin equal to 0.50% per annum. An unused commitment fee is payable at an initial rate of 0.25% per annum with a step up to 0.375% per annum should our secured debt to EBITDA ratio equal or exceed 3.00 to 1.00 at the end of any fiscal quarter. A fee on the aggregate outstanding amount of issued but undrawn letters of credit will accrue at a rate of 1.50% 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, 2016, we had approximately $144 million of standby letters of credit outstanding under the LC Facility.

 

NOTE 6. GUARANTEES

 

At September 30, 2016, 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 $90 million. We had a total liability of $82 million recorded for these guarantees included in other current liabilities at September 30, 2016.

 

At September 30, 2016, 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 $28 million. Of the total, $15 million relates to the obligations of consolidated subsidiaries, which obligations are recorded in the accompanying Condensed Consolidated Balance Sheet at September 30, 2016.

 

NOTE 7. EMPLOYEE BENEFIT PLANS

 

At September 30, 2016, approximately 7.1 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 time-based 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, we grant performance-based restricted stock units (and, in prior years, have granted performance-based options) that vest subject to the achievement of specified performance goals within a specified timeframe.

 

Our Condensed Consolidated Statements of Operations for the nine months ended September 30, 2016 and 2015 include $46 million and $52 million, respectively, of pre-tax compensation costs related to our stock-based compensation arrangements recorded in salaries, wages and benefits.

 

11


 

Stock Options

 

The following table summarizes stock option activity during the nine months ended September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Weighted Average

    

 

 

    

 

 

 

 

 

 

 

Exercise Price

 

Aggregate

 

Weighted Average

 

 

 

Options

 

Per Share

 

Intrinsic Value

 

Remaining Life

 

 

 

 

 

 

 

 

 

(In Millions)

 

 

 

 

Outstanding at December 31, 2015

 

1,606,842

 

$

22.87

 

 

 

 

 

 

 

Granted

 

 —

 

 

 —

 

 

 

 

 

 

 

Exercised

 

(110,715)