The financial expectations for Tenet Healthcare Corp. are so low that the company's stock actually jumped $1 per share after it reported losing $1.5 billion last year.
The $1.5 billion loss dwarfs the biggest loss HCA suffered during its troubled days. HCA lost $305 million in 1997, but rebounded with $379 million in profits the following year and has posted a profit each year since, including $1.3 billion in 2003.
Tenet, Santa Barbara, Calif., said it won't face a liquidity crisis, as some critics have predicted, despite an expected negative cash flow in 2004 and 2003 losses that equal $3.17 per share. Revenue was down 2.9% to $13.2 billion. The 2003 loss includes impairment and restructuring charges of nearly $1.5 billion in the fourth quarter, largely related to writing down the value of 27 hospitals the company plans to sell. By comparison, Tenet earned $817 million, or $1.64 per share, in 2002. The company repeated its expectation that it will use $500 million to $600 million more in cash in 2004 than it takes in.
Chief Financial Officer Stephen Farber said cash flow would improve by $300 million to $400 million in 2005, and may possibly break even because of improving operations and the sale of hospitals on Tenet's divestiture list. The sales are expected to raise about $300 million in cash, Farber said, but that isn't the only cash flow advantage. Hospitals held for sale typically see a decline in business and an increase in their accounts receivable, Farber told investors during a conference call last week. Both of those are cash drains, so completing the sales of the hospitals, which Tenet expects to accomplish this year, would improve cash flow, he said.
Maryann Hennessey, a healthcare analyst with Criterion Research Group, said the results have made her a little less negative about Tenet. Before the earnings report, Hennessey estimated Tenet was a 50-50 candidate for a bankruptcy filing. Last week's figures, however, beat her estimates for operating earnings and operating cash flow, so she believes Tenet's chances for bankruptcy are down to 25% in the long term and are nearly zero for 2004, barring a major surprise in operations or litigation, she said.
Hennessey also applauded the company's candor. "They're not painting a particularly rosy story, which I think would make me more cautious about whether they're really facing the issues head on," she said. Still, she added, the uncertainty about the raft of government investigations and civil litigation involving the company makes Tenet a very risky investment.
Premila Peters, a high-yield bond analyst with KDP Investment Advisors, also thinks there is a 75% chance that Tenet will avoid bankruptcy. Peters said she is concerned that Tenet reported that its managed-care payers continue to fight it over claims. Those disputes are a contributing factor to the $140 million increase in Tenet's accounts receivable, to $1.4 billion.
Tenet's cash flow statement shows the deterioration of the company's business and the steps it has taken to hoard cash in response. In 2002, Tenet raked in $2.3 billion in net cash from operating activities, but that figure plummeted to $838 million in 2003.
Like other investor-owned chains, Tenet experienced a rise in bad debt, a huge cash flow weakness. The company's provision for doubtful accounts was up 47.6%, to just under $1.6 billion. By comparison, HCA's provision for doubtful accounts was up 39.6%, to $2.2 billion, and Triad Hospitals reported a 48.8% rise in its bad-debt provision, to $397.2 million.
The weakness came despite the fact that Tenet went from paying taxes on 2002 profits to accruing future tax benefits on its 2003 losses. Tenet also allowed its accounts payable to climb nearly $300 million, ending 2003 at $401 million. That suggests that Tenet is working with its vendors and others to stretch out their payment terms, said Jay Taparia, a principal with Sanskar Investments and a certified financial analyst. It's a good short-term strategy to preserve cash, Taparia said, but the strategy's sustainability is uncertain.
Tenet has maximized its cash in other ways. Sales of hospitals, long-term investments and other assets brought in $730 million in 2003, compared with $20 million in asset sales in 2002. The company also sharply cut repurchases of its own stock, to $208 million from $970 million.
In its annual report filed last week with the Securities and Exchange Commission, the company said it has set aside $30.2 million to pay the tentative settlements of two federal investigations. Tenet said it has signed a letter of understanding to settle a 1997 whistleblower lawsuit against its North Ridge Medical Center in Fort Lauderdale, Fla., that alleged the company overpaid when acquiring physician practices as a way to induce referrals, then filed false Medicare cost reports that contained kickback-generated claims. Tenet said the second tentative agreement would settle allegations that it improperly coded the post-discharge status of some Medicare patients from Jan. 1, 1992, to June 30, 2000. HHS' inspector general's office launched a national investigation of transfer and discharge policies in 1997. Both tentative agreements are subject to final government approvals and, in the North Ridge case, the approval of the whistleblower, Sal Barbera, who was the CEO of Tenet Physician Services in South Florida until he was fired in 1996. Tenet owns or operates 100 hospitals, including 31 hospitals it plans to divest.