Tenet Beats, Affirms Outlook

Tenet Healthcare Corp. (THC - Analyst Report) reported third-quarter income from continuing operations, net of tax of $16 million or 4 cents per share, beating the Zacks Consensus Estimate of 1 cent and operating loss of $14 million or 1 cent per share in the prior-year quarter.

Operating income for the reported quarter excludes $8 million post-tax related to litigation, restructuring and impairment expenses. Prior-year operating income excludes a tax benefit of $981 million related to carry forward of net operating loss and $35 million post-tax related to loss on early extinguishment of debt.

Including these items, Tenet’s third-quarter income from continuing operations comes to $8 million or 2 cents per share, down from $932 million or $1.68 per share in the year-ago quarter.

The improved results were due to growth in admissions, outpatient visits and surgeries, which were partly offset by the rise in bad debt and operating expenses.

Tenet’s net income was $6.0 million in the reported quarter, showing a substantial decline from $932.0 million in the prior-year quarter.

Net operating revenues also improved to $2.34 billion, up 3.5% from $2.26 billion in the prior-year quarter. It also surpassed the Zacks Consensus Estimate of $2.33 billion.

During the reported quarter, Tenet’s net patient revenues per adjusted patient day increased 1.5% on a year-over-year basis to $2,406, primarily as a result of improved pricing of commercial managed care contracts.

Admissions increased 1.5% during the quarter, while paying admissions increased 1.6%. Additionally, both outpatient visits and paying outpatient visits increased 3.4%. Adjusted admissions also increased 2.3% year-over-year.

Tenet witnessed a year-over-year increase of 3.0% in total controllable operating expenses in the reported quarter. This increase includes the impact of increased annual salary of Tenet’s employees and investments in Medicaid health information technology (HIT).

Bad debt expense surged to $193 million, showing an increase of $6 million year-over-year in the reported quarter.

Tenet posted adjusted EBITDA of $195 million in the reported quarter, down 3.9% year-over-year from $203 million in the prior-year quarter. Adjusted EBITDA margin was 8.3%.

Financial Update

Tenet exited the quarter with cash and cash equivalents of $185 million, down $79 million from $264 million on June 30, 2010.

The decrease in cash resulted from the use of $124 million for repurchase of 24.0 million shares and $14 million for purchase of an outpatient center and some assets. Tenet’s capital expenditures were $100 million in the quarter, compared to $120 million in the prior-year quarter.

Net cash generated from operating activities was $148 million, against $128 million in the third quarter of 2010.

Till October 31, 2011, Tenet repurchased 59.7 million shares at an average price of $5.03 under its $400 million share repurchase program announced in May 2011. Total expenditure for the repurchase amounted to $300 million.

As of September 30, 2011, total assets of Tenet were $8.29 billion and shareholders’ equity was $1.70 billion.

Outlook for 2011

Tenet reaffirmed its expectations for adjusted EBITDA of $1.175 billion to $1.275 billion.

Peer Take

Universal Health Services Inc. (UHS - Snapshot Report), a rival of Tenet declared its third-quarter earnings of $85.1 million or 86 cents per share, beating the Zacks Consensus Estimate by a penny.

Another competitor, HCA Inc. (HCA - Snapshot Report) reported net income of 11 cents per share in the third quarter of 2011.

Tenet carries a Zacks #3 Rank, implying a short-term Hold rating, with no clear directional pressure in the near term.

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