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EX-32 - EXHIBIT 32 - TENET HEALTHCARE CORPex32.htm
EX-31.B - EXHIBIT 31.B - TENET HEALTHCARE CORPex31b.htm
EX-31.A - EXHIBIT 31.A - TENET HEALTHCARE CORPex31a.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 June 30, 2017
 
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, a smaller reporting company or an emerging growth company (each as defined in Exchange Act Rule 12b-2).
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
 
 
 
Smaller reporting company ☐
 
Emerging growth company ☐
 
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2).   Yes ☐ No ☒

At July 31, 2017, there were 100,820,539 shares of the Registrant’s common stock, $0.05 par value, outstanding.
 



TENET HEALTHCARE CORPORATION
TABLE OF CONTENTS


i


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Dollars in Millions
(Unaudited)
 
 
June 30,
 
December 31,
 
 
2017
 
2016
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
475

 
$
716

Accounts receivable, less allowance for doubtful accounts
($966 at June 30, 2017 and $1,031 at December 31, 2016)
 
2,706

 
2,897

Inventories of supplies, at cost
 
316

 
326

Income tax receivable
 
7

 
4

Assets held for sale
 
705

 
29

Other current assets
 
1,173

 
1,285

Total current assets 
 
5,382

 
5,257

Investments and other assets
 
1,238

 
1,250

Deferred income taxes
 
1,020

 
871

Property and equipment, at cost, less accumulated depreciation and amortization
($4,826 at June 30, 2017 and $4,974 at December 31, 2016)
 
7,738

 
8,053

Goodwill
 
7,157

 
7,425

Other intangible assets, at cost, less accumulated amortization
($839 at June 30, 2017 and $772 at December 31, 2016)
 
1,806

 
1,845

Total assets 
 
$
24,341

 
$
24,701

LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Current portion of long-term debt
 
$
143

 
$
191

Accounts payable
 
1,086

 
1,329

Accrued compensation and benefits
 
749

 
872

Professional and general liability reserves
 
208

 
181

Accrued interest payable
 
238

 
210

Liabilities held for sale
 
51

 
9

Accrued legal settlement costs
 
1

 
8

Other current liabilities
 
1,861

 
1,234

Total current liabilities 
 
4,337

 
4,034

Long-term debt, net of current portion
 
15,012

 
15,064

Professional and general liability reserves
 
644

 
613

Defined benefit plan obligations
 
618

 
626

Deferred income taxes
 
296

 
279

Other long-term liabilities
 
598

 
610

Total liabilities 
 
21,505

 
21,226

Commitments and contingencies
 


 


Redeemable noncontrolling interests in equity of consolidated subsidiaries
 
1,781

 
2,393

Equity:
 
 
 
 
Shareholders’ equity:
 
 
 
 
Common stock, $0.05 par value; authorized 262,500,000 shares; 149,127,794 shares
issued at June 30, 2017 and 148,106,249 shares issued at December 31, 2016
 
7

 
7

Additional paid-in capital
 
4,819

 
4,827

Accumulated other comprehensive loss
 
(242
)
 
(258
)
Accumulated deficit
 
(1,794
)
 
(1,742
)
Common stock in treasury, at cost, 48,417,575 shares at June 30, 2017 and
48,420,650 shares at December 31, 2016
 
(2,417
)
 
(2,417
)
Total shareholders’ equity 
 
373

 
417

Noncontrolling interests 
 
682

 
665

Total equity 
 
1,055

 
1,082

Total liabilities and equity 
 
$
24,341

 
$
24,701

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 June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Net operating revenues:
 
 
 
 
 
 
 
 
Net operating revenues before provision for doubtful accounts
 
$
5,173

 
$
5,220

 
$
10,369

 
$
10,640

Less: Provision for doubtful accounts
 
371

 
352

 
754

 
728

Net operating revenues 
 
4,802

 
4,868

 
9,615

 
9,912

Equity in earnings of unconsolidated affiliates
 
28

 
30

 
57

 
54

Operating expenses:
 
 
 
 
 
 
 
 
Salaries, wages and benefits
 
2,346

 
2,309

 
4,726

 
4,704

Supplies
 
780

 
773

 
1,545

 
1,584

Other operating expenses, net
 
1,159

 
1,213

 
2,346

 
2,455

Electronic health record incentives
 
(6
)
 
(21
)
 
(7
)
 
(21
)
Depreciation and amortization
 
222

 
215

 
443

 
427

Impairment and restructuring charges, and acquisition-related costs
 
41

 
22

 
74

 
50

Litigation and investigation costs
 
1

 
114

 
6

 
287

Gains on sales, consolidation and deconsolidation of facilities
 
(23
)
 
(1
)
 
(38
)
 
(148
)
Operating income 
 
310

 
274

 
577

 
628

Interest expense
 
(260
)
 
(244
)
 
(518
)
 
(487
)
Other non-operating expense, net
 
(5
)
 
(5
)
 
(10
)
 
(11
)
Loss from early extinguishment of debt
 
(26
)
 

 
(26
)
 

Net income from continuing operations, before income taxes 
 
19

 
25

 
23

 
130

Income tax benefit (expense)
 
12

 
16

 
45

 
(51
)
Net income from continuing operations, before discontinued operations 
 
31

 
41

 
68

 
79

Discontinued operations:
 
 
 
 
 
 
 
 
Income (loss) from operations
 
2

 
(2
)
 

 
(7
)
Income tax benefit (expense)
 
(1
)
 

 

 
1

Net income (loss) from discontinued operations 
 
1

 
(2
)
 

 
(6
)
Net income
 
32

 
39

 
68

 
73

Less: Net income attributable to noncontrolling interests
 
87

 
85

 
176

 
178

Net loss attributable to Tenet Healthcare Corporation common
shareholders
 
 
$
(55
)
 
$
(46
)
 
$
(108
)
 
$
(105
)
Amounts attributable to Tenet Healthcare Corporation common shareholders
 
 
 
 
 
 
 
 
Net loss from continuing operations, net of tax
 
$
(56
)
 
$
(44
)
 
$
(108
)
 
$
(99
)
Net income (loss) from discontinued operations, net of tax
 
1

 
(2
)
 

 
(6
)
Net loss attributable to Tenet Healthcare Corporation common
shareholders
 
 
$
(55
)
 
$
(46
)
 
$
(108
)
 
$
(105
)
Earnings (loss) per share available (attributable) to Tenet Healthcare Corporation common shareholders:
 
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.56
)
 
$
(0.44
)
 
$
(1.08
)
 
$
(1.00
)
Discontinued operations
 
0.01

 
(0.02
)
 

 
(0.06
)
 
 
$
(0.55
)
 
$
(0.46
)
 
$
(1.08
)
 
$
(1.06
)
Diluted
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.56
)
 
$
(0.44
)
 
$
(1.08
)
 
$
(1.00
)
Discontinued operations
 
0.01

 
(0.02
)
 

 
(0.06
)
 
 
$
(0.55
)
 
$
(0.46
)
 
$
(1.08
)
 
$
(1.06
)
Weighted average shares and dilutive securities outstanding (in thousands):
 
 
 
 
 
 
 
 
Basic
 
100,612

 
99,341

 
100,306

 
99,054

Diluted
 
100,612

 
99,341

 
100,306

 
99,054


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 June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Net income
 
$
32

 
$
39

 
$
68

 
$
73

Other comprehensive income:
 
 
 
 
 
 
 
 
Amortization of net actuarial loss included in other non-operating expense, net
 
4

 
3

 
8

 
3

Unrealized gains (losses) on securities held as available-for-sale
 
1

 
(2
)
 
3

 
1

Foreign currency translation adjustments
 
6

 
(43
)
 
9

 
(41
)
Other comprehensive income (loss) before income taxes
 
11

 
(42
)
 
20

 
(37
)
Income tax benefit (expense) related to items of other comprehensive income (loss)
 
2

 
(1
)
 
(4
)
 
(2
)
Total other comprehensive income (loss), net of tax
 
13

 
(43
)
 
16

 
(39
)
Comprehensive net income (loss)
 
45

 
(4
)
 
84

 
34

Less: Comprehensive income attributable to noncontrolling interests 
 
87

 
85

 
176

 
178

Comprehensive loss attributable to Tenet Healthcare Corporation common shareholders 
 
$
(42
)
 
$
(89
)
 
$
(92
)
 
$
(144
)

See accompanying Notes to Condensed Consolidated Financial Statements.


3


TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in Millions
(Unaudited)
 
 
Six Months Ended
June 30,
 
 
2017
 
2016
Net income
 
$
68

 
$
73

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
443

 
427

Provision for doubtful accounts
 
754

 
728

Deferred income tax expense (benefit)
 
(81
)
 
37

Stock-based compensation expense
 
29

 
35

Impairment and restructuring charges, and acquisition-related costs
 
74

 
50

Litigation and investigation costs
 
6

 
287

Gains on sales, consolidation and deconsolidation of facilities
 
(38
)
 
(148
)
Loss from early extinguishment of debt
 
26

 

Equity in earnings of unconsolidated affiliates, net of distributions received
 
4

 
10

Amortization of debt discount and debt issuance costs
 
22

 
21

Pre-tax loss from discontinued operations
 

 
7

Other items, net
 
(25
)
 
(2
)
Changes in cash from operating assets and liabilities:
 
 

 
 

Accounts receivable
 
(673
)
 
(725
)
Inventories and other current assets
 
160

 
(30
)
Income taxes
 
(7
)
 
(17
)
Accounts payable, accrued expenses and other current liabilities
 
(345
)
 
(106
)
Other long-term liabilities
 
48

 
34

Payments for restructuring charges, acquisition-related costs, and litigation costs and settlements 
 
(62
)
 
(99
)
Net cash used in operating activities from discontinued operations, excluding income taxes
 
(2
)
 

Net cash provided by operating activities 
 
401

 
582

Cash flows from investing activities:
 
 

 
 

Purchases of property and equipment — continuing operations
 
(348
)
 
(413
)
Purchases of businesses or joint venture interests, net of cash acquired
 
(26
)
 
(94
)
Proceeds from sales of facilities and other assets
 
74

 
573

Proceeds from sales of marketable securities, long-term investments and other assets
 
16

 
24

Purchases of equity investments
 
(2
)
 
(35
)
Other long-term assets
 
(12
)
 
(3
)
Other items, net
 
(10
)
 
2

Net cash provided by (used in) investing activities
 
(308
)
 
54

Cash flows from financing activities:
 
 

 
 

Repayments of borrowings under credit facility
 
(100
)
 
(1,195
)
Proceeds from borrowings under credit facility
 
100

 
1,195

Repayments of other borrowings
 
(1,029
)
 
(76
)
Proceeds from other borrowings
 
837

 

Debt issuance costs
 
(29
)
 

Distributions paid to noncontrolling interests
 
(123
)
 
(95
)
Proceeds from sales of noncontrolling interests
 
14

 
15

Purchases of noncontrolling interests
 
(5
)
 
(177
)
Proceeds from employee stock plan purchases
 
3

 
3

Other items, net
 
(2
)
 
(6
)
Net cash used in financing activities
 
(334
)
 
(336
)
Net increase (decrease) in cash and cash equivalents
 
(241
)
 
300

Cash and cash equivalents at beginning of period
 
716

 
356

Cash and cash equivalents at end of period 
 
$
475

 
$
656

Supplemental disclosures:
 
 

 
 

Interest paid, net of capitalized interest
 
$
(468
)
 
$
(467
)
Income tax payments, net
 
$
(44
)
 
$
(29
)
 
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 June 30, 2017, we operated 80 hospitals, 20 short-stay surgical hospitals and over 470 outpatient centers in the United States, as well as nine facilities in the United Kingdom, through our subsidiaries, partnerships and joint ventures, including USPI Holding Company, Inc. (“USPI joint venture”). Our Conifer Holdings, Inc. (“Conifer”) subsidiary provides healthcare business process services in the areas of hospital and physician revenue cycle management and value-based care solutions to healthcare 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, 2016 (“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).  In addition to the impact of the new accounting standards discussed below, certain prior-year amounts have also been reclassified to conform to the current-year presentation, primarily related to the detail of other intangible assets in Note 1 and the line items presented in the changes in shareholders’ equity table in Note 8.
 
Effective January 1, 2017, we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-09, “Compensation—Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which affects all entities that issue share-based payment awards to their employees. The guidance in ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Upon adoption of ASU 2016-09, we recorded previously unrecognized excess tax benefits of approximately $56 million as a deferred tax asset and a cumulative effect adjustment to retained earnings as of January 1, 2017. Prospectively, all excess tax benefits and deficiencies will be recognized as income tax benefit or expense in our consolidated statement of operations when awards vest.
 
Also effective January 1, 2017, we early adopted ASU 2017-07, “Compensation—Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”), which the FASB issued in March 2017. The amendments in ASU 2017-07 apply to all employers that offer to their employees defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715 of the FASB Accounting Standards Codification. The guidance in ASU 2017-07 requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the statement of operations separately from the service cost component and outside a subtotal of income from operations. The line item or items used in the statement of operations to present the other components of net benefit cost must be disclosed. The amendments in ASU 2017-07 must be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the statement of operations. As a result of the adoption of ASU 2017-07, we reclassified approximately $14 million of net benefit cost from salaries, wages and benefits expense to other non-operating income (expense), net, in the accompanying Condensed Consolidated Statement of Operations for both of the six month periods ended June 30, 2017 and 2016. Upon adoption of ASU 2017-07, we also reclassified approximately $6 million and $8 million of net benefit cost from salaries, wages and benefits expense to other non-operating income (expense), net for the three month periods ended September 30, 2016 and December 31, 2016, respectively, and we reclassified approximately $21 million of net benefit cost from salaries, wages and benefits expense to other non-operating income (expense), net for the year ended December 31, 2015.

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

5


circumstances in which we operate. Actual results may vary from those estimates. Financial and statistical information we report to other regulatory agencies may be prepared on a basis other than GAAP or using different assumptions or reporting periods and, therefore, may vary from amounts presented herein. Although we make every effort to ensure that the information we report to those agencies is accurate, complete and consistent with applicable reporting guidelines, we cannot be responsible for the accuracy of the information they make available to the public.
 
Operating results for the three and six month periods ended June 30, 2017 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 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; gains (losses) on sales, consolidation and deconsolidation of facilities; 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, 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. Deferred U.S. taxes have not been provided with respect to translation gains or losses because Aspen’s accumulated earnings are indefinitely reinvested outside the United States.
 
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.


6


The table below shows the sources of net operating revenues before provision for doubtful accounts from continuing operations:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
Hospital Operations and other:
 
 

 
 

 
 

 
 

Net patient revenues from acute care hospitals, related outpatient facilities and physician practices
 
 
 
 
 
 
 
 
Medicare
 
$
852

 
$
915

 
$
1,754

 
$
1,814

Medicaid
 
291

 
296

 
566

 
670

Managed care
 
2,664

 
2,539

 
5,343

 
5,302

Indemnity, self-pay and other
 
449

 
484

 
874

 
936

Net patient revenues(1)
 
4,256

 
4,234

 
8,537

 
8,722

Health plans
 
25

 
136

 
90

 
263

Revenue from other sources
 
164

 
174

 
309

 
324

Hospital Operations and other total prior to inter-segment eliminations
 
4,445

 
4,544

 
8,936

 
9,309

Ambulatory Care
 
483

 
452

 
945

 
889

Conifer
 
400

 
386

 
802

 
771

Inter-segment eliminations
 
(155
)
 
(162
)
 
(314
)
 
(329
)
Net operating revenues before provision for doubtful accounts 
 
$
5,173

 
$
5,220

 
$
10,369

 
$
10,640

 

(1)
Net patient revenues include revenues from physician practices of $190 million and $186 million for the three months ended June 30, 2017 and 2016, respectively, and $380 million and $379 million for the six months ended June 30, 2017 and 2016, respectively.

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 $475 million and $716 million at June 30, 2017 and December 31, 2016, respectively. At June 30, 2017 and December 31, 2016, our book overdrafts were approximately $187 million and $279 million, respectively, which were classified as accounts payable.
 
At June 30, 2017 and December 31, 2016, approximately $160 million and $147 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 approximately $84 million and $85 million, respectively, of total cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheets were intended for the operations of our health plan-related businesses.
 
Also at June 30, 2017 and December 31, 2016, we had $92 million and $179 million, respectively, of property and equipment purchases accrued for items received but not yet paid. Of these amounts, $57 million and $141 million, respectively, were included in accounts payable.
 
During the six months ended June 30, 2017 and 2016, we entered into non-cancellable capital leases of approximately $43 million and $77 million, respectively, primarily for equipment.
 
Other Intangible Assets
 
The following tables provide information regarding other intangible assets, which are included in the accompanying Condensed Consolidated Balance Sheets at June 30, 2017 and December 31, 2016: 
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
At June 30, 2017:
 
 
 
 
 
 
Capitalized software costs
 
$
1,581

 
$
(728
)
 
$
853

Trade names
 
106

 

 
106

Contracts
 
849

 
(51
)
 
798

Other
 
109

 
(60
)
 
49

Total 
 
$
2,645

 
$
(839
)
 
$
1,806


7


 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
 Net Book
Value
At December 31, 2016:
 
 
 
 
 
 
Capitalized software costs
 
$
1,572

 
$
(681
)
 
$
891

Trade names
 
106

 

 
106

Contracts
 
845

 
(43
)
 
802

Other
 
94

 
(48
)
 
46

Total 
 
$
2,617

 
$
(772
)
 
$
1,845

 
Estimated future amortization of intangibles with finite useful lives at June 30, 2017 is as follows: 
 
 
 
 
Six Months
Ending
 
Years Ending
 
Later
Years
 
 
 
 
December 31,
 
 
 
Total
 
2017
 
2018
 
2019
 
2020
 
2021
 
Amortization of intangible assets
 
$
1,146

 
$
90

 
$
152

 
$
132

 
$
101

 
$
89

 
$
582

 
We recognized amortization expense of $81 million and $78 million in the accompanying Condensed Consolidated Statements of Operations for the six months ended June 30, 2017 and 2016, respectively.
 
Investments in Unconsolidated Affiliates
We control 219 of the facilities within our Ambulatory Care segment and, therefore, consolidate their results. We account for many of the facilities our Ambulatory Care segment operates (107 of 326 at June 30, 2017) and four of the hospitals our Hospital Operations and other segment operates, as well as 11 additional facilities in which our Hospital Operations and other segment holds ownership interests, 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 the equity method investees within our Ambulatory Care segment and the four equity method investee hospitals operated by our Hospital Operations and other segment are included in the following table. For investments acquired during the reported periods, amounts reflect 100% of the investee’s results beginning on the date of our acquisition of the investment.
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
Net operating revenues
 
$
600

 
$
615

 
$
1,184

 
$
1,193

Net income
 
$
118

 
$
130

 
$
233

 
$
235

Net income attributable to the investees
 
$
73

 
$
89

 
$
149

 
$
158


NOTE 2. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
 
The principal components of accounts receivable are shown in the table below: 
 
 
June 30,
2017
 
December 31, 2016
Continuing operations:
 
 

 
 

Patient accounts receivable
 
$
3,558

 
$
3,799

Allowance for doubtful accounts
 
(966
)
 
(1,031
)
Estimated future recoveries
 
129

 
141

Net cost reports and settlements payable and valuation allowances
 
(17
)
 
(14
)
 
 
2,704

 
2,895

Discontinued operations
 
2

 
2

Accounts receivable, net 
 
$
2,706

 
$
2,897

 
At June 30, 2017 and December 31, 2016, our allowance for doubtful accounts was 27.2% and 27.1%, 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.
 

8


We also provide charity care to patients who are 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 and which exclude the costs of our health plan businesses) 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 six months ended June 30, 2017 and 2016:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
Estimated costs for:
 
 

 
 

 
 

 
 

Self-pay patients
 
$
160

 
$
151

 
$
320

 
$
295

Charity care patients
 
33

 
29

 
63

 
68

Total
 
$
193

 
$
180

 
$
383

 
$
363

Medicaid DSH and other supplemental revenues
 
$
164

 
$
215

 
$
322

 
$
442

 
    
At June 30, 2017 and December 31, 2016, we had approximately $380 million and $537 million, respectively, of receivables recorded in other current assets and approximately $97 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 June 30, 2017, we entered into a definitive agreement for the sale of our hospitals, physician practices and related assets in Houston, Texas and the surrounding area. In accordance with the guidance in the FASB’s Accounting Standards Codification (“ASC”) 360, “Property, Plant and Equipment,” we classified $705 million of our Houston-area assets as “assets held for sale” in current assets and the related liabilities of $51 million as “liabilities held for sale” in current liabilities in the accompanying Condensed Consolidated Balance Sheet at June 30, 2017. These assets and liabilities were recorded at the lower of their carrying amount or their fair value less estimated costs to sell. There was no impairment recorded for the write-down of assets held for sale to their estimated fair value, less estimated costs to sell, as a result of this anticipated transaction.

Assets and liabilities classified as held for sale at June 30, 2017, all of which were in the Hospital Operations and other segment, were comprised of the following:
Accounts receivable
 
$
113

Other current assets
 
25

Investments and other long-term assets
 
3

Property and equipment
 
217

Other intangible assets
 
37

Goodwill
 
310

Current liabilities
 
(48
)
Long-term liabilities
 
(3
)
Net assets held for sale
 
$
654


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 the three months ended March 31, 2017, we completed the sale of our health plan businesses in Michigan at a transaction price of approximately $16 million and recognized a gain on sale of approximately $9 million. In the three months ended June 30, 2017, we completed the sales of certain of our health plan businesses in Arizona and Texas at transaction prices of approximately $13 million and $12 million, respectively, and recognized gains on the sales of approximately $13 million and $10 million, respectively.
 
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. 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 $25 million are included in

9


accounts receivable, less allowance for doubtful accounts, in the accompanying Condensed Consolidated Balance Sheet at June 30, 2017.

NOTE 4. IMPAIRMENT AND RESTRUCTURING CHARGES, AND ACQUISITION-RELATED COSTS
 
During the six months ended June 30, 2017, we recorded impairment and restructuring charges and acquisition-related costs of $74 million primarily related to our Hospital Operations and other segment, consisting of an approximately $15 million impairment of two equity method investments, $30 million of employee severance costs, $7 million of contract and lease termination fees, $2 million to write-down intangible assets, $7 million of other restructuring costs, and $13 million in acquisition-related costs, which include $2 million of transaction costs and $11 million of acquisition integration charges.

During the six months ended June 30, 2016, we recorded impairment and restructuring charges and acquisition-related costs of $50 million primarily related to our Hospital Operations and other segment, consisting of approximately $17 million of employee severance costs, $1 million of contract and lease termination fees, $2 million to write-down intangible assets, $2 million of other restructuring costs, and $28 million in acquisition-related costs, which include $3 million of transaction costs and $25 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 June 30, 2017, our continuing operations consisted of three reportable segments, Hospital Operations and other, Ambulatory Care and Conifer. Our Hospital Operations and other segment was structured as follows at June 30, 2017:
 
Our Eastern region included all of our segment operations in Alabama, Florida, Illinois, Massachusetts, Michigan, Missouri, Pennsylvania, South Carolina and Tennessee;

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

Our Western region included all of our segment operations in Arizona and California.
 
These regions are reporting units used to perform our goodwill impairment analysis and are one level below our reportable business segments. We also perform a goodwill impairment analysis for our Ambulatory Care and Conifer reporting units.
 
We periodically incur costs to implement restructuring efforts for specific operations, which are recorded in our consolidated statements 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. LONG-TERM DEBT AND LEASE OBLIGATIONS

The table below shows our long-term debt at June 30, 2017 and December 31, 2016:
 
 
June 30,
2017
 
December 31,
2016
Senior unsecured notes:
 
 

 
 

5.000% due 2019
 
$
1,100

 
$
1,100

5.500% due 2019
 
500

 
500

6.750% due 2020
 
300

 
300

8.000% due 2020
 
750

 
750

8.125% due 2022
 
2,800

 
2,800

6.750% due 2023
 
1,900

 
1,900

6.875% due 2031
 
430

 
430

Senior secured notes:
 
 

 
 

6.250% due 2018
 
1,041

 
1,041

4.750% due 2020
 
500

 
500

6.000% due 2020
 
1,800

 
1,800

Floating % due 2020
 

 
900

4.500% due 2021
 
850

 
850

4.375% due 2021
 
1,050

 
1,050

7.500% due 2022
 
750

 
750

4.625% due 2024
 
830

 

Capital leases
 
684

 
735

Mortgage notes
 
81

 
84

Unamortized issue costs, note discounts and premiums
 
(211
)
 
(235
)
Total long-term debt 
 
15,155

 
15,255

Less current portion
 
143

 
191

Long-term debt, net of current portion 
 
$
15,012

 
$
15,064

 
Senior Secured Notes
 
 On June 14, 2017, we sold $830 million aggregate principal amount of our 4.625% senior secured first lien notes, which will mature on July 15, 2024 (the “2024 Secured First Lien Notes”). We will pay interest on the 2024 Secured First Lien Notes semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2018. The proceeds from the sale of the 2024 Secured First Lien Notes were used, after payment of fees and expenses, together with cash on hand, to deposit with the trustee an amount sufficient to fund the redemption of all $900 million in aggregate principal amount of our floating rate senior secured notes due 2020 (the “2020 Floating Rate Notes”) on July 14, 2017, thereby fully discharging the 2020 Floating Rate Notes as of June 14, 2017. In connection with the redemption, we recorded a loss from early extinguishment of debt of approximately $26 million, primarily related to the difference between the redemption price and the par value of the notes, as well as the write-off of associated unamortized note discounts and issuance costs. Several other debt refinancing transactions were completed in July and August 2017, as further described in Note 18.

Credit Agreement
 
We have a senior secured revolving credit facility (as amended, the “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. Obligations under the Credit Agreement, which has a scheduled maturity date of December 4, 2020, are guaranteed by substantially all of our domestic wholly owned hospital subsidiaries and are secured by a first-priority lien on the accounts receivable owned by us and the subsidiary guarantors. 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 (“LIBOR”) 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 June 30, 2017, 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 June 30, 2017.
 

11


Letter of Credit Facility
 
We have a letter of credit facility (as amended, the “LC 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). Obligations under the LC Facility are guaranteed and secured by a first-priority pledge of the capital stock and other ownership interests of certain of our wholly owned domestic hospital subsidiaries on an equal ranking basis with our senior secured first lien notes. On September 15, 2016, we entered into an amendment to the existing letter of credit facility agreement 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 and 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.

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 June 30, 2017, we had approximately $108 million of standby letters of credit outstanding under the LC Facility.
 
NOTE 6. GUARANTEES
 
At June 30, 2017, 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 $123 million. We had a total liability of $96 million recorded for these guarantees included in other current liabilities at June 30, 2017.
 
At June 30, 2017, 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, $17 million relates to the obligations of consolidated subsidiaries, which obligations are recorded in the accompanying Condensed Consolidated Balance Sheet at June 30, 2017.
 
NOTE 7. EMPLOYEE BENEFIT PLANS
 
In recent years, we have granted both options and restricted stock units to certain of our employees. 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. Typically, options and time-based restricted stock units 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 performance-based options that vest subject to the achievement of specified performance goals within a specified time frame. At June 30, 2017, assuming outstanding performance-based restricted stock units and options for which performance has not yet been determined will achieve target performance, approximately 5.9 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 (approximately 4.9 million shares remain available if we assume maximum performance for outstanding performance-based restricted stock units and options for which performance has not yet been determined).
 
Our Condensed Consolidated Statements of Operations for the six months ended June 30, 2017 and 2016 include $29 million and $31 million, respectively, of pre-tax compensation costs related to our stock-based compensation arrangements.
 

12


Stock Options
 
The following table summarizes stock option activity during the six months ended June 30, 2017:
 
 
Options
 
Weighted Average
Exercise Price
Per Share
 
Aggregate
Intrinsic Value
 
Weighted Average
Remaining Life
 
 
 
 
 
 
(In Millions)
 
 
Outstanding at December 31, 2016
 
1,435,921

 
$
22.87

 
 
 
 
Granted
 
987,781

 
18.99

 
 
 
 
Exercised
 
(11,175
)
 
4.56

 
 
 
 
Forfeited/Expired
 
(187,458
)
 
26.07

 
 
 
 
Outstanding at June 30, 2017
 
2,225,069

 
$
20.97

 
$
3

 
5.4 years
Vested and expected to vest at June 30, 2017
 
2,225,069

 
$
20.97

 
$
3

 
5.4 years
Exercisable at June 30, 2017
 
1,237,288

 
$
22.55

 
$
2

 
1.9 years

There were 11,175 and 104,815 stock options exercised during the six months ended June 30, 2017 and 2016, respectively, with aggregate intrinsic values of less than $1 million and approximately $1 million, respectively.
 
At June 30, 2017, there were $7 million of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 2.7 years.
 
In the six months ended June 30, 2017, we granted an aggregate of 987,781 stock options under our 2008 Stock Incentive Plan to certain of our senior officers. The stock options will all vest on the third anniversary of the grant date, subject to achieving a closing stock price of at least $23.74 (a 25% premium above the March 1, 2017 grant-date closing stock price of $18.99) for at least 20 consecutive trading days within three years of the grant date, and will expire on the tenth anniversary of the grant date. In the six months ended June 30, 2016, there were no stock options granted.
 
The weighted average estimated fair value of stock options we granted in the six months ended June 30, 2017 was $8.52 per share. The fair values were calculated based on the grant date, using a Monte Carlo simulation with the following assumptions:
 
 
Six Months Ended June 30, 2017
Expected volatility
 
49%
Expected dividend yield
 
0%
Expected life
 
6.2 years
Expected forfeiture rate
 
0%
Risk-free interest rate
 
2.15%
 
The expected volatility used in the Monte Carlo simulation incorporates historical and implied share-price volatility and is based on an analysis of historical prices of our stock and open-market exchanged options. The expected volatility reflects the historical volatility for a duration consistent with the contractual life of the options, and the volatility implied by the trading of options to purchase our stock on open-market exchanges. The historical share-price volatility excludes the movements in our stock price on two dates (April 8, 2011 and April 11, 2011) with unusual volatility due to an unsolicited acquisition proposal. The expected life of options granted is derived from Tenet’s historical stock option exercise behavior, adjusted for the exercisable period (i.e., from the third anniversary through the tenth anniversary of the grant date). The risk-free interest rates are based on zero-coupon United States Treasury yields in effect at the date of grant consistent with the expected exercise time frames.
 

13


The following table summarizes information about our outstanding stock options at June 30, 2017:
 
 
Options Outstanding
 
Options Exercisable
Range of Exercise Prices 
 
Number of
Options
 
Weighted Average
Remaining
Contractual Life
 
Weighted Average
Exercise Price
 
Number of
Options
 
Weighted Average
Exercise Price
$0.00 to $4.569 
 
159,711

 
1.7 years
 
$
4.56

 
159,711

 
$
4.56

$4.57 to $19.759
 
988,081

 
9.7 years
 
18.99

 
300

 
14.52

$19.76 to $32.569 
 
822,890

 
2.3 years
 
20.87

 
822,890

 
20.87

$32.57 to $42.529
 
254,387

 
0.7 years
 
39.31

 
254,387

 
39.31

 
 
2,225,069

 
5.4 years
 
$
20.97

 
1,237,288

 
$
22.55


Restricted Stock Units
 
The following table summarizes restricted stock unit activity during the six months ended June 30, 2017
 
 
Restricted Stock
Units
 
Weighted Average Grant
Date Fair Value Per Unit
Unvested at December 31, 2016
 
3,174,533

 
$
38.75

Granted
 
614,208

 
18.72

Vested
 
(1,291,475
)
 
35.95

Forfeited
 
(52,135
)
 
36.64

Unvested at June 30, 2017
 
2,445,131

 
$
35.46

 
In the six months ended June 30, 2017, we granted 614,208 restricted stock units, of which 601,305 will vest and be settled ratably over a three-year period from the grant date. The vesting of the remaining 12,903 restricted stock units is contingent on our achievement of specified performance goals for the years 2017 to 2019. Provided the goals are achieved, the performance-based restricted stock units will vest and settle on the third anniversary of the grant date. The actual number of performance-based restricted stock units that could vest will range from 0% to 200% of the 12,903 units granted, depending on our level of achievement with respect to the performance goals.
 
At June 30, 2017, there were $55 million of total unrecognized compensation costs related to restricted stock units. These costs are expected to be recognized over a weighted average period of 1.9 years.
 
Employee Retirement Plans
 
In both of the six-month periods ended June 30, 2017 and 2016, we recognized (i) service cost related to one of our frozen nonqualified defined benefit pension plans of approximately $1 million in salaries, wages and benefits expense, and (ii) other components of net periodic pension cost and net periodic postretirement benefit cost related to our frozen qualified and nonqualified defined benefit plans of approximately $14 million in other non-operating income (expense), net, in the accompanying Condensed Consolidated Statements of Operations.
 

14


NOTE 8. EQUITY
 
Changes in Shareholders’ Equity
 
The following table shows the changes in consolidated equity during the six months ended June 30, 2017 and 2016 (dollars in millions, share amounts in thousands):
 
 
Tenet Healthcare Corporation Shareholders’ Equity
 
 
 
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 
Treasury
Stock
 
Noncontrolling
Interests
 
Total Equity
 
 
Shares
Outstanding
 
Issued Par
Amount
 
 
 
 
 
 
Balances at December 31, 2016
 
99,686

 
$
7

 
$
4,827

 
$
(258
)
 
$
(1,742
)
 
$
(2,417
)
 
$
665

 
$
1,082

Net income (loss)
 

 

 

 

 
(108
)
 

 
71

 
(37
)
Distributions paid to noncontrolling interests
 

 

 

 

 

 

 
(65
)
 
(65
)
Other comprehensive income
 

 

 

 
16

 

 

 

 
16

Accretion of redeemable noncontrolling interests
 

 

 
(29
)
 

 

 

 

 
(29
)
Purchases (sales) of businesses and noncontrolling interests
 

 

 
(4
)
 

 

 

 
11

 
7

Cumulative effect of accounting change
 

 

 

 

 
56

 

 

 
56

Stock-based compensation expense, tax benefit and issuance of common stock
 
1,024

 

 
25

 

 

 

 

 
25

Balances at June 30, 2017
 
100,710

 
$
7

 
$
4,819

 
$
(242
)
 
$
(1,794
)
 
$
(2,417
)
 
$
682

 
$
1,055

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2015
 
98,495

 
$
7

 
$
4,815

 
$
(164
)
 
$
(1,550
)
 
$
(2,417
)
 
$
267

 
$
958

Net income (loss)
 

 

 

 

 
(105
)
 

 
62

 
(43
)
Distributions paid to noncontrolling interests
 

 

 

 

 

 

 
(51
)
 
(51
)
Other comprehensive loss
 

 

 

 
(39
)
 

 

 

 
(39
)
Purchases (sales) of businesses and noncontrolling interests
 

 

 
(36
)
 

 

 

 
114

 
78

Purchase accounting adjustments
 

 

 

 

 

 

 
237

 
237

Stock-based compensation expense and issuance of common stock
 
1,021

 

 
12

 

 

 

 

 
12

Balances at June 30, 2016
 
99,516

 
$
7

 
$
4,791

 
$
(203
)
 
$
(1,655
)
 
$
(2,417
)
 
$
629

 
$
1,152

 
Our noncontrolling interests balances at June 30, 2017 and December 31, 2016 were comprised of $91 million and $89 million, respectively, from our Hospital Operations and other segment, and $591 million and $576 million, respectively, from our Ambulatory Care segment. Our net income attributable to noncontrolling interests for the six months ended June 30, 2017 and 2016 in the table above were comprised of $9 million and $5 million, respectively, from our Hospital Operations and other segment, and $62 million and $57 million, respectively, from our Ambulatory Care segment.
 
NOTE 9. PROPERTY AND PROFESSIONAL AND GENERAL LIABILITY INSURANCE
 
Property Insurance
 
We have property, business interruption and related insurance coverage to mitigate the financial impact of catastrophic events or perils that is subject to deductible provisions based on the terms of the policies. These policies are on an occurrence basis. For the policy period April 1, 2017 through March 31, 2018, we have coverage totaling $850 million per occurrence, after deductibles and exclusions, with annual aggregate sub-limits of $100 million for floods, $200 million for earthquakes and a per-occurrence sub-limit of $200 million for named windstorms with no annual aggregate. With respect to fires and other perils, excluding floods, earthquakes and named windstorms, the total $850 million limit of coverage per occurrence applies. Deductibles are 5% of insured values up to a maximum of $25 million for California earthquakes and wind-related claims, and 2% of insured values for New Madrid fault earthquakes, with a maximum per claim deductible of $25 million. Other covered losses, including floods, fires and other perils, have a minimum deductible of $1 million.
 

15


Professional and General Liability Reserves
 
At June 30, 2017 and December 31, 2016, the aggregate current and long-term professional and general liability reserves in our accompanying Condensed Consolidated Balance Sheets were approximately $852 million and $794 million, respectively. These reserves include the reserves recorded by our captive insurance subsidiaries and our self-insured retention reserves recorded based on modeled estimates for the portion of our professional and general liability risks, including incurred but not reported claims, for which we do not have insurance coverage. We estimated the reserves for losses and related expenses using expected loss-reporting patterns discounted to their present value under a risk-free rate approach using a Federal Reserve seven-year maturity rate of 2.14% at June 30, 2017 and 2.25% at December 31, 2016.
 
If the aggregate limit of any of our professional and general liability policies is exhausted, in whole or in part, it could deplete or reduce the limits available to pay any other material claims applicable to that policy period.
 
Included in other operating expenses, net, in the accompanying Condensed Consolidated Statements of Operations is malpractice expense of $167 million and $164 million for the six months ended June 30, 2017 and 2016, respectively.
 
NOTE 10. CLAIMS AND LAWSUITS
 
We operate in a highly regulated and litigious industry. Healthcare companies are subject to numerous investigations by various governmental agencies. Further, private parties have the right to bring qui tam or “whistleblower” lawsuits against companies that allegedly submit false claims for payments to, or improperly retain overpayments from, the government and, in some states, private payers. We and our subsidiaries have received inquiries in recent years from government agencies, and we may receive similar inquiries in future periods. We are also subject to class action lawsuits, employment-related claims and other legal actions in the ordinary course of business. Some of these actions may involve large demands, as well as substantial defense costs. We cannot predict the outcome of current or future legal actions against us or the effect that judgments or settlements in such matters may have on us.
 
We are also subject to a non-prosecution agreement, as described in our Annual Report. If we fail to comply with this agreement, we could be subject to criminal prosecution, substantial penalties and exclusion from participation in federal healthcare programs, any of which could adversely impact our business, financial condition, results of operations or cash flows.
 
We record accruals for estimated losses relating to claims and lawsuits when available information indicates that a loss is probable and we can reasonably estimate the amount of the loss or a range of loss. Significant judgment is required in both the determination of the probability of a loss and the determination as to whether a loss is reasonably estimable. These determinations are updated at least quarterly and are adjusted to reflect the effects of negotiations, settlements, rulings, advice of legal counsel and technical experts, and other information and events pertaining to a particular matter. If a loss on a material matter is reasonably possible and estimable, we disclose an estimate of the loss or a range of loss. In cases where we have not disclosed an estimate, we have concluded that the loss is either not reasonably possible or the loss, or a range of loss, is not reasonably estimable, based on available information.
 
Securities Litigation
 
On February 10, 2017, the U.S. District Court for the Northern District of Texas consolidated two previously disclosed lawsuits filed by purported shareholders of the Company’s common stock against the Company and several current and former executive officers into a single matter captioned In re Tenet Healthcare Corporation Securities Litigation. On April 11, 2017, the four court-appointed lead plaintiffs filed a consolidated amended class action complaint asserting violations of the federal securities laws. The plaintiffs are seeking class certification on behalf of all persons who acquired the Company’s common stock between February 28, 2012 and August 1, 2016. The complaint alleges that false or misleading statements or omissions concerning the Company’s financial performance and compliance policies, specifically with respect to the previously disclosed civil qui tam litigation and parallel criminal investigation of the Company and certain of its subsidiaries (together, the “Clinica de la Mama matters”), caused the price of the Company’s common stock to be artificially inflated. In addition, the plaintiffs claim that the defendants violated GAAP by failing to disclose an estimate of the possible loss or a range of loss related to the Clinica de la Mama matters. On June 12, 2017, the Company filed a motion to dismiss the consolidated complaint on behalf of all defendants. The Company intends to vigorously defend against the allegations in the purported shareholder class action.

Shareholder Derivative Litigation
 
In January 2017, the Dallas County District Court consolidated two previously disclosed shareholder derivative lawsuits filed by purported shareholders of the Company’s common stock on behalf of the Company against current and former

16


officers and directors into a single matter captioned In re Tenet Healthcare Corporation Shareholder Derivative Litigation. The plaintiffs filed a consolidated shareholder derivative petition in February 2017.  A separate shareholder derivative lawsuit, captioned Horwitz, derivatively on behalf of Tenet Healthcare Corporation, was filed in January 2017 in the U.S. District Court for the Northern District of Texas. The consolidated shareholder derivative petition and the Horowitz complaint generally track the allegations in the securities class action complaint described above and claim that the plaintiffs did not make demand on the current directors to bring the lawsuits because such a demand would have been futile. Both shareholder derivative matters were stayed in the second quarter of 2017 pending the final resolution of the motion to dismiss in the consolidated securities litigation. The Company intends to vigorously defend against the allegations in the purported shareholder derivative lawsuits.
 
Antitrust Class Action Lawsuit Filed by Registered Nurses in San Antonio
 
In Maderazo, et al. v. VHS San Antonio Partners, L.P. d/b/a Baptist Health Systems, et al., filed in June 2006 in the U.S. District Court for the Western District of Texas, a purported class of registered nurses employed by three unaffiliated San Antonio-area hospital systems allege those hospital systems, including Baptist Health System, and other unidentified San Antonio regional hospitals violated Section §1 of the federal Sherman Act by conspiring to depress nurses’ compensation and exchanging compensation-related information among themselves in a manner that reduced competition and suppressed the wages paid to such nurses. The suit seeks unspecified damages (subject to trebling under federal law), interest, costs and attorneys’ fees. The case was stayed from 2008 through mid-2015. At this time, we are awaiting the court’s ruling on class certification and will continue to vigorously defend ourselves against the plaintiffs’ allegations. It remains impossible at this time to predict the outcome of these proceedings with any certainty; however, we believe that the ultimate resolution of this matter will not have a material effect on our business, financial condition or results of operations.
 
Ordinary Course Matters
 
We are also subject to other claims and lawsuits arising in the ordinary course of business, including potential claims related to, among other things, the care and treatment provided at our hospitals and outpatient facilities, the application of various federal and state labor laws, tax audits and other matters. Although the results of these claims and lawsuits cannot be predicted with certainty, we believe that the ultimate resolution of these ordinary course claims and lawsuits will not have a material effect on our business or financial condition.
 
New claims or inquiries may be initiated against us from time to time. These matters could (1) require us to pay substantial damages or amounts in judgments or settlements, which, individually or in the aggregate, could exceed amounts, if any, that may be recovered under our insurance policies where coverage applies and is available, (2) cause us to incur substantial expenses, (3) require significant time and attention from our management, and (4) cause us to close or sell hospitals or otherwise modify the way we conduct business.
 
The table below presents reconciliations of the beginning and ending liability balances in connection with legal settlements and related costs recorded during the six months ended June 30, 2017 and 2016
 
 
Balances at
Beginning
of Period
 
Litigation and
investigation
Costs
 
Cash
Payments
 
Balances at
End of
Period
Six Months Ended June 30, 2017
 
 
 
 
 
 
 
 
Continuing operations
 
$
12

 
$
6

 
$
(13
)
 
$
5

Discontinued operations
 

 

 

 

 
 
$
12

 
$
6

 
$
(13
)
 
$
5

Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
Continuing operations
 
$
299

 
$
287

 
$
(57
)
 
$
529

Discontinued operations
 

 

 

 

 
 
$
299

 
$
287

 
$
(57
)
 
$
529

 
For the six months ended June 30, 2017 and 2016, we recorded costs of $6 million and $287 million, respectively, in continuing operations in connection with significant legal proceedings and governmental investigations.

NOTE 11. REDEEMABLE NONCONTROLLING INTERESTS IN EQUITY OF CONSOLIDATED SUBSIDIARIES
 
As previously disclosed, as part of the formation of our USPI joint venture in 2015, we entered into a put/call agreement (the “Put/Call Agreement”) with respect to the equity interests in the joint venture held by our joint venture partners. In January 2016, Welsh, Carson, Anderson & Stowe (“Welsh Carson”), on behalf of our joint venture partners, delivered a put notice for the minimum number of shares they were required to put to us in 2016 according to the Put/Call Agreement. In

17


April 2016, we paid approximately $127 million to purchase those shares, which increased our ownership interest in the USPI joint venture to approximately 56.3%. On May 1, 2017, we amended and restated the Put/Call Agreement to provide for, among other things, the acceleration of our acquisition of certain shares of our USPI joint venture. Under the terms of the amendment, we agreed to pay Welsh Carson, on or before July 3, 2017, approximately $711 million to buy 23.7% of our USPI joint venture, which amount will be subject to adjustment for actual 2017 financial results in accordance with the terms of the Put/Call Agreement. Following the execution of the amendment, we recorded the present value of the liability for this purchase in other current liabilities, with an offset to redeemable noncontrolling interest of $687 million for the carrying amount of the shares and $21 million to additional paid-in capital for the difference between the carrying value and present value of the purchase price for these shares. At June 30, 2017, we had a liability of $716 million recorded in other current liabilities in the accompanying Condensed Consolidated Balance Sheet for the purchase of these shares, as well as the final adjustment to the 2016 purchase price.
 
The amended and restated Put/Call Agreement also provides that the remaining 15% ownership interest in our USPI joint venture held by our Welsh Carson joint venture partners will be subject to put options in equal shares in each of 2018 and 2019. In the event our Welsh Carson joint venture partners do not exercise these put options, we will have the option, but not the obligation, to buy 7.5% of our USPI joint venture from them in 2018 and another 7.5% in 2019. In connection with such puts or calls, we will have the ability to choose whether to settle the purchase price in cash or shares of our common stock.
 
The following table shows the changes in redeemable noncontrolling interests in equity of consolidated subsidiaries during the six months ended June 30, 2017 and 2016:
 
 
Six Months Ended
June 30,
 
 
2017
 
2016
Balances at beginning of period 
 
$
2,393

 
$
2,266

Net income
 
105

 
116

Distributions paid to noncontrolling interests
 
(58
)
 
(44
)
Purchase accounting adjustments
 

 
(47
)
Accretion of redeemable noncontrolling interests
 
29

 

Purchases and sales of businesses and noncontrolling interests, net
 
(688
)
 
(16
)
Balances at end of period 
 
$
1,781

 
$
2,275

 
The following tables show the composition by segment of our redeemable noncontrolling interests balances at June 30, 2017 and December 31, 2016, as well as our net income attributable to redeemable noncontrolling interests for the six months ended June 30, 2017 and 2016:
 
 
June 30,
2017
 
December 31, 2016
Hospital Operations and other
 
$
528

 
$
520

Ambulatory Care
 
1,071

 
1,715

Conifer
 
182

 
158

Redeemable noncontrolling interests
 
$
1,781

 
$
2,393


 
 
Six Months Ended
June 30,
 
 
2017
 
2016
Hospital Operations and other
 
$
12

 
$
15

Ambulatory Care
 
70

 
78

Conifer
 
23

 
23

Net income attributable to redeemable noncontrolling interests
 
$
105

 
$
116


NOTE 12. INCOME TAXES
 
During the three months ended June 30, 2017, we recorded an income tax benefit of $12 million in continuing operations on pre-tax income of $19 million compared to an income tax benefit of $16 million on pre-tax income of $25 million during the three months ended June 30, 2016. During the six months ended June 30, 2017, we recorded an income tax benefit of $45 million in continuing operations on pre-tax income of $23 million compared to income tax expense of $51 million on pre-tax income of $130 million during the six months ended June 30, 2016. Our provision for income taxes during interim reporting periods is calculated by applying an estimate of the annual effective tax rate for the full year to “ordinary” income or loss (pre-tax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. In calculating

18


“ordinary” income, non-taxable income or loss attributable to non-controlling interests has been deducted from pre-tax income or loss in the determination of the annualized effective tax rate used to calculate income taxes for the quarter. In addition, certain state income taxes have been treated as discrete items in calculating income taxes for the quarter. The reconciliation between the amount of recorded income tax expense (benefit) and the amount calculated at the statutory federal tax rate is shown in the following table:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Tax expense at statutory federal rate of 35%
$
7

 
$
9

 
$
8

 
$
46

State income taxes, net of federal income tax benefit
12

 
(6
)
 
5

 
7

Tax benefit attributable to noncontrolling interests
(28
)
 
(26
)
 
(54
)
 
(47
)
Nondeductible goodwill

 

 

 
29

Nontaxable gains

 

 

 
(17
)
Nondeductible litigation

 
7

 

 
33

Change in tax contingency reserves, including interest

 

 
(2
)
 
(3
)
Stock-based compensation
1

 

 
9

 

Other items
(4
)
 

 
(11
)
 
3

 
$
(12
)
 
$
(16
)
 
$
(45
)
 
$
51

 
During the six months ended June 30, 2017, we decreased our estimated liabilities for uncertain tax positions by $2 million, net of related deferred tax assets. The total amount of unrecognized tax benefits at June 30, 2017 was $33 million, of which $30 million, if recognized, would impact our effective tax rate and income tax expense (benefit) from continuing operations. 
 
Our practice is to recognize interest and penalties related to income tax matters in income tax expense in our consolidated statements of operations. Total accrued interest and penalties on unrecognized tax benefits at June 30, 2017 were $4 million, all of which related to continuing operations.
 
At June 30, 2017, approximately $3 million of unrecognized federal and state tax benefits, as well as reserves for interest and penalties, may decrease in the next 12 months as a result of the settlement of audits, the filing of amended tax returns or the expiration of statutes of limitations.
 

19


NOTE 13. LOSS PER COMMON SHARE
 
The following table is a reconciliation of the numerators and denominators of our basic and diluted loss per common share calculations for our continuing operations for three and six months ended June 30, 2017 and 2016. Loss attributable to our common shareholders is expressed in millions and weighted average shares are expressed in thousands.
 
 
Loss Attributable
to Common
Shareholders
(Numerator)
 
Weighted
Average Shares
(Denominator)
 
Per-Share
Amount
Three Months Ended June 30, 2017
 
 

 
 

 
 

Net loss attributable to Tenet Healthcare Corporation common shareholders
for basic loss per share
 
$
(56
)
 
100,612

 
$
(0.56
)
Effect of dilutive stock options, restricted stock units and deferred compensation units
 

 

 

Net loss attributable to Tenet Healthcare Corporation common shareholders for diluted loss per share
 
$
(56
)
 
100,612

 
$
(0.56
)
 
 
 
 
 
 
 
Three Months Ended June 30, 2016
 
 

 
 

 
 

Net loss attributable to Tenet Healthcare Corporation common shareholders
for basic loss per share
 
$
(44
)
 
99,341

 
$
(0.44
)
Effect of dilutive stock options, restricted stock units and deferred compensation units
 

 

 

Net loss attributable to Tenet Healthcare Corporation common shareholders for diluted loss per share
 
$
(44
)
 
99,341

 
$
(0.44
)
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
 
 
 
 
 
Net loss attributable to Tenet Healthcare Corporation common shareholders
for basic loss per share
 
$
(108
)
 
100,306

 
$
(1.08
)
Effect of dilutive stock options, restricted stock units and deferred compensation units
 

 

 

Net loss attributable to