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Analyst Blog

Yesterday, Tenet Healthcare Corp. (THC - Analyst Report) released its first-quarter 2012 preliminary financial results. Reported net income for the quarter under review stood at $58 million or 13 cents per share, lagging the year-ago quarter’s earnings of $73 million or 14 cents per share.

Net operating revenue was $2.35 billion, up 2.2% from $2.30 billion in the prior-year quarter. However, reported revenues lagged the Zacks Consensus Estimate of $2.48 billion.

During the reported quarter, Tenet’s net patient revenue per adjusted patient day crept up 1.6% on a year-over-year basis to $2,518, primarily due to improved terms in the commercial managed care contracts, partially offset by an adverse shift in payer mix.

Total admissions inched down 0.1% during the quarter, while adjusted admissions climbed 2.8% year over year. Surgeries increased 6.6% and emergency department visits improved 5.2%.

Additionally, bad debt expense increased 6.0% to $193 million from $182 million in the first quarter of 2011. Tenet posted adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $314 million in the reported quarter, down 17% from $379 million in the prior-year quarter. Adjusted EBITDA margin was 13.4% compared with 16.5% in the year-ago quarter.

Adjusted EBITDA for both the reported quarter and the year-ago quarter include state provider fees, Health Information Technology incentives, payer settlements and gains. Adjusted EBITDA also includes $77 million from an industry-wide Medicare inpatient prospective payment settlement in the reported quarter and $75 million in incremental revenue from the California and Pennsylvania Provider Fee programs in the year-ago quarter.

Financial Update

Tenet exited the reported quarter with cash and cash equivalents of $104 million, down from $113 million at 2011 end. The cash balance in the first quarter of 2012 was negatively impacted by annual cash payments related to some compensation and benefit expenses and seasonal repayment of debt obligations.

The cash balance was also impacted by $26 million spent on buying back 5.3 million shares. Tenet’s capital expenditures were $136 million in the quarter, compared with $116 million in the prior-year quarter.

Outlook

Tenet raised its 2012 adjusted EBITDA guidance to $1.250–1.375 billion from $1.225–1.350 billion, due to the impact of certain favorable payer settlements, possible termination of a large managed care contract and revised Medicare inpatient payment rates, effective October 1, 2012.

Adjusted EBITDA is expected to be higher in the second half of the year compared with the first half, primarily due to net revenue of $120 million from the California Provider Fee 30-Month Program and $35 million from Healthcare Information Technology incentive payments, both of which are expected to be realized in the fourth quarter. Consequently, Tenet expects adjusted EBITDA to be $225–250 million in the second half of 2012.

Revenue and adjusted EBITDA guidance include $190 million and $10 million, respectively, from Tenet’s holding in Creighton University Medical Center (CUMC). However, the company is planning to sell its stake in the CUMC to Alegent Health and has signed a non-binding agreement for the same.

Tenet expects to realize $63 million from the sale, including working capital. The transaction is expected to culminate in the second quarter of 2012, subject to agreement finalization as well as customary closing conditions. The company expects a non-cash impairment pre-tax charge of $100 million, or $50 million post-tax, due to the sale.

The preliminary results were released in connection with the repurchase of mandatory convertible preference shares by Tenet. The company bought back $299 million worth of preference stock, which would have been converted into about 51 million equity shares on October 1, 2012, had the preference shares not been repurchased.

The buyback was financed by the issue of $150 million worth of 8% senior notes due August 1, 2020 and $141.2 million of 6.25% senior secured notes due November 1, 2018.

Universal Health Services Inc. (UHS - Snapshot Report), a rival of Tenet, declared first-quarter 2012 adjusted net income of $1.13 per share, lagging the Zacks Consensus Estimate by 3 cents and the year-ago earnings by 2 cents.

Tenet carries a Zacks #2 Rank, implying a short-term Buy rating. Considering the fundamentals, we maintain our long-term Neutral recommendation on the shares.

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