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NOTE 1. BASIS OF PRESENTATION
Description of Business
Tenet Healthcare Corporation (together with our subsidiaries, referred to as “Tenet,” the “Company,” “we” or “us”) is an investor-owned health care services company whose subsidiaries and affiliates principally operate general hospitals and related health care facilities. At September 30, 2010, our subsidiaries operated 49 general hospitals and a critical access hospital, with a combined total of 13,430 licensed beds, serving urban and rural communities in 11 states. We also own an interest in a health maintenance organization (“HMO”) and operate: various related health care facilities, including a long-term acute care hospital and a number of medical office buildings (all of which are located on, or nearby, one of our general hospital campuses); physician practices; captive insurance companies; and other ancillary health care businesses (including outpatient surgery centers, diagnostic imaging centers, and occupational and rural health care clinics).
Basis of Presentation
This quarterly report supplements our Annual Report on Form 10-K for the year ended December 31, 2009 (“Annual Report”). As permitted by the Securities and Exchange Commission (“SEC”) 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 the Condensed Consolidated Financial Statements relate to our continuing operations, with dollar amounts expressed in millions (except per-share amounts).
Although the Condensed Consolidated Financial Statements and related notes within this document are unaudited, we believe all adjustments considered necessary for fair presentation have been included. In preparing our financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), we must use estimates and assumptions that affect the amounts reported in our Condensed Consolidated Financial Statements and 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-month and nine-month periods ended September 30, 2010 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 trends in patient accounts receivable collectability and associated provisions for doubtful accounts; 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 funding levels set by the states in which we operate; fluctuations in interest rates; levels of malpractice insurance expense and settlement trends; impairment of long-lived assets and goodwill; restructuring charges; losses, costs and insurance recoveries related to natural disasters; litigation and investigation costs; acquisitions and dispositions of facilities and other assets; income tax rates and 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; and changes in occupancy levels and patient volumes. Factors that affect patient volumes and, thereby, our results of operations at our hospitals and related health care facilities include, but are not limited to: the business environments, economic conditions and demographics of local communities; 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 health care competitors; managed care contract negotiations or terminations; any unfavorable publicity about us, which impacts our relationships with physicians and patients; changes in health care regulation; and the timing of elective procedures. These considerations apply to year-to-year comparisons as well.
Cash Equivalents
We treat highly liquid investments with original maturities of three months or less as cash equivalents. Cash and cash equivalents were approximately $398 million and $690 million at September 30, 2010 and December 31, 2009, respectively. As of September 30, 2010 and December 31, 2009, our book overdrafts were approximately $167 million and $255 million, respectively, which were classified as accounts payable.
At September 30, 2010 and December 31, 2009, approximately $106 million and $92 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.
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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, 2010 |
December 31, 2009 |
|||||||
|
Continuing operations: |
||||||||
|
Patient accounts receivable |
$ | 1,458 | $ | 1,466 | ||||
|
Allowance for doubtful accounts |
(338 | ) | (341 | ) | ||||
|
Estimated future recoveries from accounts assigned to collection agencies |
33 | 35 | ||||||
|
Net cost report settlements payable and valuation allowances |
(27 | ) | (24 | ) | ||||
| 1,126 | 1,136 | |||||||
|
Discontinued operations: |
||||||||
|
Patient accounts receivable |
18 | 44 | ||||||
|
Allowance for doubtful accounts |
(17 | ) | (28 | ) | ||||
|
Estimated future recoveries from accounts assigned to collection agencies |
2 | 3 | ||||||
|
Net cost report settlements receivable and valuation allowances |
— | 3 | ||||||
| 3 | 22 | |||||||
|
Accounts receivable, net |
$ | 1,129 | $ | 1,158 | ||||
As of September 30, 2010, our estimated collection rates on managed care accounts and self-pay accounts were approximately 98.3% and 29.1%, respectively, which included collections from point-of-service through collections by our collection agency subsidiary. The comparable managed care and self-pay collection rates as of December 31, 2009 were approximately 98.0% and 30.1%, respectively.
Accounts that are pursued for collection through our 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. 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 over an 18-month look-back period, and other relevant factors. Future changes in these factors related to self-pay accounts and self-pay balance after insurance accounts as a result of a change in the estimated collection rates could have a material impact on our future results of operations.
Accounts assigned to our collection agency subsidiary are written off and excluded from patient accounts receivable and allowance for doubtful accounts; however, an estimate of future recoveries from all accounts at our collection agency subsidiary is determined based on historical experience and recorded on our hospitals’ books as a component of accounts receivable in the accompanying Condensed Consolidated Balance Sheets.
The 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 for the three months ended September 30, 2010 and 2009 were $97 million and $99 million, respectively, and for the nine months ended September 30, 2010 and 2009 were $285 million and $272 million, respectively. We also provide charity care to patients who are financially unable to pay for the health care 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 or in provision for doubtful accounts. Most states include an estimate of the cost of charity care in the determination of a hospital’s eligibility for Medicaid disproportionate share hospital payments. The estimated costs (based on the selected operating expenses described above) of caring for charity care patients for the three months ended September 30, 2010 and 2009 were $36 million and $30 million, respectively, and for the nine months ended September 30, 2010 and 2009 were $90 million and $88 million, respectively. Our method of measuring the estimated costs uses adjusted self-pay/charity patient days multiplied by selected operating expenses per adjusted patient day. The adjusted self-pay/charity patient days represents actual self-pay/charity patient days adjusted to include self-pay/charity outpatient services by multiplying actual self-pay/charity patient days by the sum of gross self-pay/charity inpatient revenues and gross self-pay/charity outpatient revenues and dividing the results by gross self-pay/charity inpatient revenues.
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NOTE 3. DISCONTINUED OPERATIONS
Effective April 1, 2010, we completed the sale of certain of our owned assets at NorthShore Regional Medical Center (“NorthShore”), located in Slidell, Louisiana, for approximately $16 million of cash proceeds. At that time, we also terminated our operating lease agreement for the hospital.
We classified $17 million of our assets of NorthShore as “assets held for sale” in current assets in the accompanying Condensed Consolidated Balance Sheets at December 31, 2009. These assets primarily consisted of property and equipment and were recorded at the lower of the assets’ carrying amount or their fair value less estimated costs to sell. We derive fair value estimates from definitive sales agreements, appraisals, established market values of comparable assets, or internal estimates of future net cash flows. Fair value estimates can change by material amounts in subsequent periods. Many factors and assumptions can impact fair value estimates, including the future financial results of hospitals in discontinued operations and how they are operated by us until they are divested, changes in health care industry trends and regulations until the hospitals are divested, and whether we ultimately divest the hospital assets to buyers who will continue to operate the assets as general hospitals or utilize the assets for other purposes. In certain cases, these fair value estimates assume the highest and best use of the assets in the future, to a market place participant, is other than as a hospital. In these cases, the estimates are based on the fair value of the real property and equipment if utilized other than as a hospital. Fair value estimates do not include the costs of closing hospitals in discontinued operations or other future operating costs, which could be substantial. Accordingly, the ultimate net cash realized from the sale of hospital assets could be significantly less than fair value estimates. Because we do not intend to sell the accounts receivable of hospitals in discontinued operations, the receivables are included in our consolidated net accounts receivable in the accompanying Condensed Consolidated Balance Sheets.
Net operating revenues and loss before income taxes reported in discontinued operations are as follows:
| Three Months
Ended September 30, |
Nine Months
Ended September 30, |
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| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Net operating revenues |
$ | — | $ | 25 | $ | 22 | $ | 179 | ||||||||
|
Loss before income taxes |
(3 | ) | (3 | ) | (5 | ) | (32 | ) | ||||||||
We recorded $1 million of net impairment and restructuring charges in discontinued operations during the nine months ended September 30, 2010, consisting of a $3 million write-down of land to expected sales proceeds related to a previously divested hospital, partially offset by $1 million of impairment credits in discontinued operations relating to an increase in the estimated fair values of NorthShore’s long-lived assets, less estimated costs to sell, and $1 million for a reduction in reserves recorded in previous periods.
We recorded $16 million of net impairment and restructuring charges in discontinued operations during the nine months ended September 30, 2009, consisting of $5 million for the write-down of long-lived assets to their estimated fair values, less estimated costs to sell, $3 million for the write-down of goodwill related to NorthShore, and $8 million in employee severance, lease termination and other exit costs.
Should we dispose of additional hospitals or other assets in the future, we may incur additional asset impairment and restructuring charges in future periods.
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NOTE 4. IMPAIRMENT AND RESTRUCTURING CHARGES
During the nine months ended September 30, 2010, we recorded $1 million of net impairment and restructuring charges. We recorded $3 million for the write-down of buildings, equipment and other long-lived assets, primarily capitalized software costs classified in other intangible assets, of one of our previously impaired hospitals to their estimated fair values primarily due to a decline in the fair value of real estate in the market in which the hospital operates and a decline in the estimated fair value of equipment. Material adverse trends in our most recent estimates of future undiscounted cash flows of the hospital, consistent with our prior estimates during 2009 and 2008 when impairment charges were recorded at this hospital, indicated the carrying value of the hospital’s long-lived assets was not recoverable from the estimated future cash flows. We believe the most significant factors contributing to the continuing adverse financial trends include reductions in volumes of insured patients, shifts in payer mix from commercial to governmental payers combined with reductions in reimbursement rates from governmental payers, and high levels of uninsured patients. As a result, we updated the estimate of the fair value of the hospital’s long-lived assets and compared the fair value estimate to the carrying value of the hospital’s long-lived assets. Because the fair value estimate was lower than the carrying value of the hospital’s long-lived assets, an impairment charge was recorded for the difference in the amounts. Unless the anticipated future financial trends of this hospital improve to the extent that the estimated future undiscounted cash flows exceed the carrying value of the long-lived assets, this hospital is at risk of future impairments, particularly if we spend significant amounts of capital at the hospital without generating a corresponding increase in the hospital’s fair value or if the fair value of the hospital’s real estate or equipment continues to decline. This charge was partially offset by a $2 million credit related to the collection of a note receivable due from a buyer of one of our previously divested hospitals, which had been fully reserved in a prior year.
During the nine months ended September 30, 2009, we recorded net impairment and restructuring charges of $13 million, consisting of a $6 million net impairment charge for the write-down of buildings, equipment and other long-lived assets, primarily capitalized software costs classified in other intangible assets, of one of our previously impaired hospitals as described above to their estimated fair values, primarily due to a decline in the fair value of real estate in the market in which the hospital operates, $4 million of employee severance and other related costs, and a $3 million impairment charge for the write-down of a note receivable due from a buyer of one of our previously divested hospitals as a result of the buyer filing for bankruptcy.
Our impairment tests presume stable, improving or, in some cases, declining results in our hospitals, which are based on programs and initiatives being implemented that are designed to achieve the hospital’s most recent projections. If these projections are not met, or if in the future negative trends occur that impact our future outlook, further impairments of long-lived assets and goodwill may occur, and we may incur additional restructuring charges.
Our continuing operations are structured as follows:
| • |
Our California region includes all of our hospitals in California and Nebraska; |
| • |
Our Central region includes all of our hospitals in Missouri, Tennessee and Texas; |
| • |
Our Florida region includes all of our hospitals in Florida; |
| • |
Our Southern States region includes all of our hospitals in Alabama, Georgia, North Carolina and South Carolina; and |
| • |
Our two hospitals in Philadelphia, Pennsylvania are part of a separate market. |
These regions and our Philadelphia market are reporting units used to perform our goodwill impairment analysis and are one level below our operating segment level. Future restructuring of our regions or markets that changes our goodwill reporting units could also result in future impairments of our goodwill.
The tables below are reconciliations of beginning and ending liability balances in connection with restructuring charges recorded during the nine months ended September 30, 2010 and 2009 in continuing and discontinued operations:
| Balances at Beginning of Period |
Restructuring Charges, Net |
Cash Payments |
Other | Balances at End of Period |
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|
Nine Months Ended September 30, 2010 |
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|
Continuing operations: |
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|
Lease and other costs, and employee severance-related costs in connection with hospital cost-control programs and general overhead-reduction plans |
$ | 6 | $ | — | $ | (3 | ) | $ | — | $ | 3 | |||||||||
|
Discontinued operations: |
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Employee severance-related costs, and other estimated costs associated with the sale or closure of hospitals and other facilities |
8 | (1 | ) | (1 | ) | — | 6 | |||||||||||||
| $ | 14 | $ | (1 | ) | $ | (4 | ) | $ | — | $ | 9 | |||||||||
|
Nine Months Ended September 30, 2009 |
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|
Continuing operations: |
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|
Lease and other costs, and employee severance-related costs in connection with hospital cost-control programs and general overhead-reduction plans |
$ | 12 | $ | 5 | $ | (8 | ) | $ | (1 | ) | $ | 8 | ||||||||
|
Discontinued operations: |
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Employee severance-related costs, and other estimated costs associated with the sale or closure of hospitals and other facilities |
15 | 8 | (13 | ) | — | 10 | ||||||||||||||
| $ | 27 | $ | 13 | $ | (21 | ) | $ | (1 | ) | $ | 18 | |||||||||
The above liability balances at September 30, 2010 are included in other current liabilities and other long-term liabilities in the accompanying Condensed Consolidated Balance Sheets. Cash payments to be applied against these accruals at September 30, 2010 are expected to be approximately $1 million in 2010 and $8 million thereafter.
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NOTE 5. LONG-TERM DEBT AND LEASE OBLIGATIONS
The table below shows our long-term debt as of September 30, 2010 and December 31, 2009:
| September 30, 2010 |
December 31, 2009 |
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|
Senior notes: |
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|
6 3/8%, due 2011 |
$ | 65 | $ | 65 | ||||
|
6 1/2%, due 2012 |
57 | 57 | ||||||
|
7 3/8%, due 2013 |
216 | 1,000 | ||||||
|
9 7/8%, due 2014 |
60 | 100 | ||||||
|
9 1/4%, due 2015 |
474 | 489 | ||||||
|
8%, due 2020 |
600 | — | ||||||
|
6 7/8%, due 2031 |
430 | 430 | ||||||
|
Senior secured notes: |
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|
9%, due 2015 |
714 | 714 | ||||||
|
10%, due 2018 |
714 | 714 | ||||||
|
8 7/8%, due 2019 |
925 | 925 | ||||||
|
Capital leases and mortgage notes |
7 | 7 | ||||||
|
Unamortized note discounts |
(203 | ) | (227 | ) | ||||
|
Total long-term debt |
4,059 | 4,274 | ||||||
|
Less current portion |
2 | 2 | ||||||
|
Long-term debt, net of current portion |
$ | 4,057 | $ | 4,272 | ||||
Credit Agreement
At September 30, 2010, we had a five-year, $800 million senior secured revolving credit facility, which was scheduled to mature on November 16, 2011. There were no cash borrowings outstanding under the revolving credit facility at September 30, 2010, and we had approximately $185 million of letters of credit outstanding. Based on our eligible receivables, approximately $460 million was available for borrowing under the revolving credit facility at September 30, 2010.
On October 19, 2010, we entered into an amended and restated credit agreement that, among other things, extended the term of our existing senior secured revolving credit facility (“Amended Credit Agreement”). The Amended Credit Agreement is scheduled to expire on October 19, 2015; however, this date could be accelerated to as early as the fourth quarter of 2014 if 80% of our notes due in 2015 are not repaid, defeased or refinanced 60 business days prior to their maturity. The Amended Credit Agreement provides, subject to borrowing availability, for revolving loans in an aggregate principal amount of up to $800 million, with a $300 million subfacility for letters of credit. The Amended Credit Agreement continues to be collateralized by patient accounts receivable of all of our wholly owned acute care and specialty hospitals. In addition, borrowings under the agreement are guaranteed by our wholly owned hospital subsidiaries. Outstanding revolving loans accrue interest during a six-month initial period at the rate of either (i) a base rate plus a margin of 2.00% or (ii) the London Interbank Offered Rate (“LIBOR”) plus a margin of 3.00% per annum. Thereafter, outstanding revolving loans accrue interest at a base rate plus a margin ranging from 1.75% to 2.25% or LIBOR plus a margin ranging from 2.75% to 3.25% per annum based on available credit. An unused commitment fee will be payable on the undrawn portion of the revolving loans at a six-month initial rate of 0.50% per annum. Thereafter, the unused commitment fee will range from 0.375% to 0.625% per annum based on available credit. Our borrowing availability is based on a specified percentage of eligible accounts receivable.
Senior Notes
In August 2010, we sold $600 million aggregate principal amount of 8% senior notes due 2020. The notes will mature on August 1, 2020. We will pay interest on the 8% senior notes semi-annually in arrears on February 1 and August 1 of each year, commencing February 1, 2011. The notes are general unsecured senior debt obligations that rank equally in right of payment with all of our other unsecured senior indebtedness, but are effectively subordinated to our senior secured notes, the obligations of our subsidiaries and any obligations under our Amended Credit Agreement to the extent of the collateral. For the benefit of the holders of the 8% senior notes, we have agreed to file on or prior to December 2, 2010 an exchange offer registration statement with the SEC pursuant to which we will offer to exchange the outstanding 8% senior notes for registered notes having substantially the same terms as the outstanding notes. If we fail to complete the exchange offer by August 2011, we will be required to pay a special interest payment (0.25% per annum to 1.0%) until the exchange offer is completed.
Also in August 2010, we repurchased approximately $782 million aggregate principal amount of our 7 3/8% senior notes due 2013 and $6 million aggregate principal amount of our 9 7/8% senior notes due 2014 for approximately $835 million, representing approximately $831 million in principal payments and approximately $4 million in accrued and unpaid interest through the dates of purchase. We repurchased the senior notes with the net proceeds of approximately $585 million from our sale of new 8% senior notes due 2020 as described above and cash on hand. In connection with these purchases, we recorded a loss from early extinguishment of debt of approximately $52 million related to the difference between the purchase prices and the par values of the purchased notes, as well as the write-off of unamortized note discounts, issuance costs and unrecognized interest rate hedge settlements associated with the notes.
In July 2010, we repurchased $34 million aggregate principal amount of our 9 7/8% senior notes due 2014 and approximately $7 million aggregate principal amount of our 9 1/4% senior notes due 2015 for total cash of approximately $43 million, representing approximately $43 million in principal payments and less than $1 million in accrued and unpaid interest through the dates of purchase. In connection with these purchases, we recorded a loss from early extinguishment of debt of approximately $3 million related to the difference between the purchase prices and the par values of the purchased notes, as well as the write-off of unamortized note discounts and issuance costs.
In June 2010, we repurchased $2 million aggregate principal amount of our 7 3/8% senior notes due 2013 and $2 million aggregate principal amount of our 9 1/4% senior notes due 2015 for total cash of approximately $4 million. In March 2010, we repurchased $6 million aggregate principal amount of our 9 1/4% senior notes due 2015 for cash of approximately $6 million.
LIBOR Cap Agreement
The fair value of our LIBOR cap agreement included in investments and other assets in the accompanying Condensed Consolidated Balance Sheets was less than $1 million at September 30, 2010. During the nine months ended September 30, 2010, approximately $3 million in losses from mark-to-market adjustments of the LIBOR cap agreement were included as interest expense in the accompanying Condensed Consolidated Statements of Operations. See Note 14 for the disclosure of the fair value of the LIBOR cap agreement.
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NOTE 6. GUARANTEES
Consistent with our policy on physician relocation and recruitment, we provide income guarantee agreements to certain physicians who agree to relocate to our communities to fill a community need in a hospital’s service area and commit to remain in practice there for a specified period of time. Under such agreements, we are required to make payments to the physicians in excess of the amounts they earn in their practices up to the amount of the income guarantee. The income guarantee periods are typically 12 months. If a physician does not fulfill his or her commitment period to the community, which is typically three years subsequent to the guarantee period, we seek recovery of the income guarantee payments from the physician on a prorated basis. We also provide revenue collection guarantees to hospital-based physician groups providing certain services at our hospitals with terms generally ranging from one to three years.
At September 30, 2010, the maximum potential amount of future payments under our income and revenue collection guarantees was $90 million. We had a liability of $77 million recorded for the fair value of these guarantees included in other current liabilities at September 30, 2010.
At September 30, 2010, we also guaranteed minimum rent revenue to certain landlords who built medical office buildings on or near our hospital campuses. The maximum potential amount of future payments under these guarantees was $10 million. We had a liability of $5 million recorded for the fair value of these guarantees, of which $1 million was included in other current liabilities and $4 million was included in other long-term liabilities, at September 30, 2010.
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NOTE 7. EMPLOYEE BENEFIT PLANS
At September 30, 2010, there were approximately 25 million shares of common stock 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 restricted stock units typically vest one-third on each of the first three anniversary dates of the grant; however, from time to time, we grant performance-based options and restricted stock units that vest subject to the achievement of specified performance goals within a specified timeframe.
Our income from continuing operations for both the nine months ended September 30, 2010 and 2009 includes $18 million of pre-tax compensation costs related to our stock-based compensation arrangements ($11 million after-tax).
Stock Options
The following table summarizes stock option activity during the nine months ended September 30, 2010:
| Options | Weighted Average Exercise Price Per Share |
Aggregate Intrinsic Value |
Weighted Average Remaining Life |
|||||||||||||
| (In Millions) | ||||||||||||||||
|
Outstanding as of December 31, 2009 |
48,317,255 | $ | 10.58 | |||||||||||||
|
Granted |
964,008 | 5.03 | ||||||||||||||
|
Exercised |
(1,823,678 | ) | 1.21 | |||||||||||||
|
Forfeited/Expired |
(1,801,106 | ) | 15.19 | |||||||||||||
|
Outstanding as of September 30, 2010 |
45,656,479 | $ | 10.66 | $ | 69 | 5.6 years | ||||||||||
|
Vested and expected to vest at September 30, 2010 |
44,851,612 | $ | 10.83 | $ | 66 | 5.6 years | ||||||||||
|
Exercisable as of September 30, 2010 |
29,578,487 | $ | 15.55 | $ | 19 | 4.1 years | ||||||||||
There were 1,823,678 stock options exercised during the nine months ended September 30, 2010 with an $8 million aggregate intrinsic value, and no stock options exercised during the same period in 2009.
In the nine months ended September 30, 2010, we granted an aggregate of 964,008 stock options under our 2008 Stock Incentive Plan to certain of our senior officers. Half of these stock options are subject to time-vesting and the remainder are subject to performance-based vesting. If all conditions are met, the performance-based stock options will vest and be settled ratably over a three-year period from the date of the grant.
As of September 30, 2010, there were $9 million of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 1.5 years.
The weighted average estimated fair value of stock options we granted in the nine months ended September 30, 2010 was $2.89 per share for our top 11 employees. We did not grant stock options to any other employees in the nine months ended September 30, 2010. The weighted average estimated fair values of stock options we granted in the nine months ended September 30, 2009 was $0.67 per share. These fair values were calculated based on each grant date, using a binomial lattice model with the following assumptions:
| Nine Months Ended September 30, 2010 |
Nine Months
Ended September 30, 2009 |
|||||
| Top Eleven Employees |
Top Eleven Employees |
All
Other Employees |
||||
|
Expected volatility |
53% | 57%-61% | 57%-61% | |||
|
Expected dividend yield |
0% | 0% | 0% | |||
|
Expected life |
7 years | 7 years | 5 years | |||
|
Expected forfeiture rate |
3.29% | 4% | 20% | |||
|
Risk-free interest rate |
2% | 3.02%-3.43% | 2.34%-2.81% | |||
|
Early exercise threshold |
75% gain | 75% gain | 50% gain | |||
|
Early exercise rate |
20% per year | 20% per year | 45% per year | |||
The expected volatility used in the binomial lattice model incorporated historical and implied share-price volatility and was 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 during the period October 1, 2002 through December 31, 2002 due to unique events occurring during that time, which caused extreme volatility in our stock price. The expected life of options granted is derived from the output of the binomial lattice model and represents the period of time that the options are expected to be outstanding. This model incorporates an early exercise assumption in the event of a significant increase in stock price. 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 timeframes.
The following table summarizes information about our outstanding stock options at September 30, 2010:
| 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 $1.149 |
19,020,328 | 8.4 years | $ | 1.14 | 5,232,016 | $ | 1.14 | |||||||||||||
|
$1.15 to $10.639 |
11,273,388 | 6.3 years | 7.25 | 8,983,708 | 7.89 | |||||||||||||||
|
$10.64 to $13.959 |
2,891,801 | 3.4 years | 12.11 | 2,891,801 | 12.11 | |||||||||||||||
|
$13.96 to $17.589 |
3,611,661 | 2.3 years | 17.09 | 3,611,661 | 17.09 | |||||||||||||||
|
$17.59 to $28.759 |
2,605,096 | 0.6 years | 27.33 | 2,605,096 | 27.33 | |||||||||||||||
|
$28.76 and over |
6,254,205 | 0.9 years | 34.41 | 6,254,205 | 34.41 | |||||||||||||||
| 45,656,479 | 5.6 years | $ | 10.66 | 29,578,487 | $ | 15.55 | ||||||||||||||
Restricted Stock Units
The following table summarizes restricted stock unit activity during the nine months ended September 30, 2010:
| Restricted Stock Units |
Weighted Average Grant Date Fair Value Per Unit |
|||||||
|
Unvested as of December 31, 2009 |
4,806,441 | $ | 5.82 | |||||
|
Granted |
5,139,299 | 5.03 | ||||||
|
Vested |
(2,487,187 | ) | 5.75 | |||||
|
Forfeited |
(1,027,513 | ) | 6.38 | |||||
|
Unvested as of September 30, 2010 |
6,431,040 | $ | 5.13 | |||||
In the nine months ended September 30, 2010, we granted 4,081,030 restricted stock units subject to time-vesting. In addition, we granted 832,030 performance-based restricted stock units to certain of our senior officers. If all conditions are met, the performance-based restricted stock units will vest and be settled ratably over a three-year period from the date of the grant. In the nine months ended September 30, 2010, we also granted 226,239 restricted stock units to our directors, which vested immediately on the grant date and may be settled in cash, shares of our common stock or a combination of cash and stock. The fair value of the restricted stock units granted to directors will be adjusted based on our share price at the end of each calendar quarter. Annual grants of restricted stock units to our directors settle on the earlier of the third anniversary of the date of the grant or termination of board service, unless settlement has been deferred by the director. Initial grants of restricted stock units to newly appointed directors are settled only upon termination of board service.
As of September 30, 2010, there were $21 million of total unrecognized compensation costs related to restricted stock units. These costs are expected to be recognized over a weighted average period of 2.6 years.
|
|||
NOTE 8. EQUITY
We accrued dividends on our 7% mandatory convertible preferred stock for the period September 25, 2009 through December 31, 2009 of approximately $6 million, or $18.67 per share, and paid the dividends in January 2010. We accrued approximately $6 million, or $17.50 per share, for dividends on the mandatory convertible preferred stock in the three months ended March 31, 2010, June 30, 2010 and September 30, 2010, and paid the dividends in April 2010, July 2010, and October 2010, respectively.
The following table shows the changes in consolidated equity during the nine months ended September 30, 2010 and 2009 (dollars in millions, share amounts in thousands):
| Tenet Healthcare Corporation Shareholders’ Equity | ||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | |||||||||||||||||||||||||||||||||||||||
| Shares Outstanding |
Issued Amount |
Shares Outstanding |
Issued Par Amount |
Additional Paid-in Capital |
Accumulated Other Comprehensive Loss |
Accumulated Deficit |
Treasury Stock |
Noncontrolling Interests |
Total Equity |
|||||||||||||||||||||||||||||||
|
Balances at December 31, 2009 |
345,000 | $ | 334 | 481,135 | $ | 27 | $ | 4,461 | $ | (32 | ) | $ | (2,665 | ) | $ | (1,479 | ) | $ | 51 | $ | 697 | |||||||||||||||||||
|
Net income |
— | — | — | — | — | — | 1,063 | — | 7 | 1,070 | ||||||||||||||||||||||||||||||
|
Distributions paid to noncontrolling interests |
— | — | — | — | — | — | — | — | (6 | ) | (6 | ) | ||||||||||||||||||||||||||||
|
Contributions from noncontrolling interests |
— | — | — | — | — | — | — | — | 1 | 1 | ||||||||||||||||||||||||||||||
|
Other comprehensive income |
— | — | — | — | — | 2 | — | — | — | 2 | ||||||||||||||||||||||||||||||
|
Preferred stock dividends |
— | — | — | — | (18 | ) | — | — | — | — | (18 | ) | ||||||||||||||||||||||||||||
|
Stock-based compensation expense and issuance of common stock |
— | — | 4,192 | — | 18 | — | — | — | — | 18 | ||||||||||||||||||||||||||||||
|
Balances at September 30, 2010 |
345,000 | $ | 334 | 485,327 | $ | 27 | $ | 4,461 | $ | (30 | ) | $ | (1,602 | ) | $ | (1,479 | ) | $ | 53 | $ | 1,764 | |||||||||||||||||||
|
Balances at December 31, 2008 |
— | $ | — | 477,173 | $ | 26 | $ | 4,445 | $ | (37 | ) | $ | (2,852 | ) | $ | (1,479 | ) | $ | 44 | $ | 147 | |||||||||||||||||||
|
Net income |
— | — | — | — | — | — | 160 | — | 8 | 168 | ||||||||||||||||||||||||||||||
|
Distributions paid to noncontrolling interests |
— | — | — | — | — | — | — | — | (5 | ) | (5 | ) | ||||||||||||||||||||||||||||
|
Other comprehensive income |
— | — | — | — | — | 10 | — | — | — | 10 | ||||||||||||||||||||||||||||||
|
Issuance of mandatory convertible preferred stock |
345,000 | 334 | — | — | — | — | — | — | — | 334 | ||||||||||||||||||||||||||||||
|
Preferred stock dividends |
— | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Stock-based compensation expense and issuance of common stock |
— | — | 3,927 | — | 19 | — | — | — | — | 19 | ||||||||||||||||||||||||||||||
|
Balances at September 30, 2009 |
345,000 | $ | 334 | 481,100 | $ | 26 | $ | 4,464 | $ | (27 | ) | $ | (2,692 | ) | $ | (1,479 | ) | $ | 47 | $ | 673 | |||||||||||||||||||
|
|||
NOTE 9. OTHER COMPREHENSIVE INCOME
The table below shows each component of other comprehensive income for the three and nine months ended September 30, 2010 and 2009:
| Three Months
Ended September 30, |
Nine Months
Ended September 30, |
|||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Net income (loss) |
$ | 940 | $ | (1 | ) | $ | 1,070 | $ | 168 | |||||||
|
Other comprehensive income |
||||||||||||||||
|
Unrealized gains on securities available for sale |
— | 1 | 1 | 3 | ||||||||||||
|
Reclassification adjustments for realized losses included in net income |
1 | — | 1 | 7 | ||||||||||||
|
Other comprehensive income before income taxes |
1 | 1 | 2 | 10 | ||||||||||||
|
Income tax benefit related to items of other comprehensive income |
— | 3 | — | — | ||||||||||||
|
Total other comprehensive income, net of tax |
1 | 4 | 2 | 10 | ||||||||||||
|
Comprehensive income |
941 | 3 | 1,072 | 178 | ||||||||||||
|
Less: Preferred stock dividends |
6 | — | 18 | — | ||||||||||||
|
Less: Comprehensive income attributable to noncontrolling interests |
2 | 2 | 7 | 8 | ||||||||||||
|
Comprehensive income attributable to Tenet Healthcare Corporation common shareholders |
$ | 933 | $ | 1 | $ | 1,047 | $ | 170 | ||||||||
|
|||
NOTE 10. 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 periods April 1, 2010 through March 31, 2011 and April 1, 2009 through March 31, 2010, we have coverage totaling $600 million per occurrence, after deductibles and exclusions, with annual aggregate sub-limits of $100 million each for floods and earthquakes and a per-occurrence sub-limit of $100 million for windstorms with no annual aggregate. With respect to fires and other perils, excluding floods, earthquakes and windstorms, the total $600 million limit of coverage per occurrence applies. Deductibles are 5% of insured values up to a maximum of $25 million for floods, 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 fires and other perils, have a minimum deductible of $1 million.
Professional and General Liability Insurance
At September 30, 2010 and December 31, 2009, the aggregate current and long-term professional and general liability reserves on our Condensed Consolidated Balance Sheets were approximately $516 million and $572 million, respectively. These reserves include the reserves recorded by our captive insurance subsidiaries and our self-insured retention reserves recorded based on actuarial 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 1.91% and 2.69% at September 30, 2010 and December 31, 2009, respectively.
For the policy period June 1, 2010 through May 31, 2011, our hospitals generally have a self-insurance retention of $5 million per occurrence for all claims incurred. Our captive insurance company, The Healthcare Insurance Corporation (“THINC”), retains $10 million per occurrence coverage above our hospitals’ $5 million self-insurance retention level. The next $10 million of claims in excess of these aggregate self-insurance retentions of $15 million per occurrence are 55% reinsured by THINC with independent reinsurance companies, with THINC retaining 45% or a maximum of $4.5 million. Claims in excess of $25 million are covered by our excess professional and general liability insurance policies with major independent insurance companies, on a claims-made basis, subject to an aggregate limit of $175 million.
For the policy period June 1, 2009 through May 31, 2010 our hospitals generally have a self-insurance retention of $5 million per occurrence for all claims incurred. THINC retains $10 million per occurrence coverage above our hospitals’ $5 million self-insurance retention level. The next $10 million of claims in excess of these aggregate self-insurance retentions of $15 million per occurrence are 65% reinsured by THINC with independent reinsurance companies, with THINC retaining 35% or a maximum of $3.5 million. Claims in excess of $25 million are covered by our excess professional and general liability insurance policies with major independent insurance companies, on a claims-made basis, subject to an aggregate limit of $175 million, with Tenet retaining 20% of the initial $50 million layer in excess of $25 million per claim or a maximum of $10 million.
If the aggregate limit of any of our excess professional and general liability policies is exhausted, in whole or in part, it could deplete or reduce the excess 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 $28 million and $27 million for the three months ended September 30, 2010 and 2009, respectively, and $64 million and $75 million for the nine months ended September 30, 2010 and 2009, respectively.
|
|||
NOTE 11. CLAIMS AND LAWSUITS
Because we provide health care services in a highly regulated industry, we have been and expect to continue to be subject to various lawsuits, claims and regulatory proceedings from time to time. The ultimate resolution of these matters, individually or in the aggregate, whether as a result of litigation or settlement, could have a material adverse effect on our business (both in the near and long term), financial condition, results of operations or cash flows. We are currently a party to a number of legal and regulatory proceedings, including those reported below. Where specific amounts are sought in any of the following matters, those amounts are disclosed. For all other matters discussed below, where a loss is reasonably possible and estimable, an estimate of the loss or a range of loss is provided. In cases where we have not provided an estimate, a loss is not reasonably possible or an amount of loss is not reasonably estimable at this time.
| 1. | Governmental Reviews—Certain of our hospitals are parties to the following regulatory reviews. Our analysis of the likelihood and amount of liability in several of these matters is still ongoing, and we are unable to predict the timing and outcome of these reviews at this time. However, based on the status of these matters to date, we have recorded reserves of approximately $27 million as of September 30, 2010. |
| • |
Self-Disclosure – Inpatient Rehabilitation Facilities Review. Pursuant to the five-year corporate integrity agreement (“CIA”) we entered into with the Office of Inspector General (“OIG”) of the U.S. Department of Health and Human Services in September 2006, we notified the OIG in October 2007 that we had completed a preliminary review of admissions to our inpatient rehabilitation unit at South Fulton Medical Center in East Point, Georgia that suggested further review was necessary to determine whether South Fulton had received Medicare overpayments reportable under our CIA. In January 2008, we submitted this matter into the OIG’s voluntary self-disclosure protocol. The OIG subsequently accepted our submission. In February 2009, we received a letter from the U.S. Department of Justice (“DOJ”), which is participating in this matter with the OIG, requesting additional information regarding the basis for our self-disclosure, as well as information related to admissions at our other active and divested inpatient rehabilitation hospitals and units for the period 2000 to the date of the letter. The government has since limited the scope of its review to the period May 15, 2005 through December 31, 2007. In addition, the government asked to examine a limited sample of patient files at two inpatient rehabilitation facilities besides South Fulton Medical Center before it determines if its review should extend to our other inpatient rehabilitation units. That examination was completed and presented to the government in March 2010. We are continuing to work with the DOJ and the OIG regarding their review. |
| • |
Kyphoplasty Review. The DOJ, through the U.S. Attorney’s Office in the Western District of New York, and the OIG have contacted a number of hospitals, including several of our hospitals, requesting information regarding their billing practices for kyphoplasty procedures. Kyphoplasty is a surgical procedure used to treat pain and related conditions associated with certain vertebrae injuries. The DOJ and the OIG requested the information in connection with their review of the appropriateness of Medicare patients receiving kyphoplasty procedures on an inpatient as opposed to an outpatient basis. We have provided, or are in the process of providing, the requested information on a voluntary basis. |
| • |
Florida Medical Center Partial Hospitalization Program. In February 2009, the fiscal intermediary for our Florida Medical Center began a probe review of the group billing practices of that facility’s partial hospitalization program, a psychiatric treatment program that had the capacity to treat 15 patients on an outpatient basis. We also examined the records reviewed by the fiscal intermediary and independently determined that patients had multiple outpatient admissions with lengths of stay longer than expected for this program. As a result of our review of this matter, we closed the program and, pursuant to our CIA, notified the OIG about our findings in June 2009. |
| • |
Review of ICD Implantation Procedures. In March 2010, the DOJ issued a civil investigative demand (“CID”) pursuant to the federal False Claims Act to one of our hospitals. The CID requested information regarding Medicare claims submitted by our hospital in connection with the implantation of implantable cardioverter defibrillators (“ICDs”) during the period 2002 to the present. We believe the government is seeking this information in order to determine if ICD implantation procedures were performed in accordance with Medicare coverage requirements. In September 2010, the DOJ notified us that it also intends to review records and documents from a number of our other hospitals in addition to the hospital that originally received the CID. We understand that the DOJ has submitted similar requests to other hospital companies as well. We are cooperating fully with the government; to date, the DOJ has not asserted any claim against our hospitals. |
| 2. | Pending Wage and Hour Actions—We are defendants in two coordinated lawsuits in Los Angeles Superior Court alleging that our hospitals violated certain provisions of California’s labor laws and applicable wage and hour regulations. The cases are: McDonough, et al. v. Tenet Healthcare Corporation and Tien, et al. v. Tenet Healthcare Corporation. The plaintiffs in both cases have sought back pay, statutory penalties, interest and attorneys’ fees. The plaintiffs’ requests for class certification were ultimately denied in November 2008; however, the plaintiffs are currently appealing that ruling. We are also subject from time to time to regulatory proceedings and private litigation concerning the application of various federal and state labor laws, rules and regulations governing a variety of workplace wage and hour issues. |
| 3. | Class Action Lawsuits Resulting from Hurricane Katrina—We are presently defending three lawsuits filed in late 2005 by and on behalf of patients, their family members and others who were present and allegedly injured at two of our former New Orleans area hospitals – Memorial Medical Center and Lindy Boggs Medical Center – during Hurricane Katrina and its aftermath. The plaintiffs allege that the hospitals were negligent in failing to properly prepare for the storm, failing to evacuate patients ahead of the storm, and failing to have a properly configured emergency generator system, among other allegations of general negligence. The plaintiffs are seeking damages in various and unspecified amounts for the alleged wrongful death of some patients, aggravation of pre-existing illnesses or injuries to patients who survived and were successfully evacuated, and the inability of patients and others to evacuate the hospitals for several days under challenging conditions. Class certification has been granted in two of the suits. The class includes all persons at Memorial Medical Center between August 29 and September 2, 2005, excluding employees, who sustained injuries or died, as well as family members who themselves sustained injury as a result of such injuries or deaths to any person at Memorial, excluding employees, during that time. The Civil District Court for the Parish of Orleans will administer the class proceedings; a trial of “bellwether plaintiff” claims (which is a set of plaintiffs’ claims deemed representative of claims by all class members) is scheduled for March 2011. The class certification hearing in the remaining case, which was also filed in the Civil District Court for the Parish of Orleans, has been postponed and not rescheduled at the request of the plaintiffs’ attorneys. We are unable to predict the ultimate resolution of these lawsuits, but we intend to continue to vigorously defend the hospitals in these matters. |
| 4. | Ordinary Course Matters—In addition to the matters described above, our hospitals are subject to investigations, claims and lawsuits in the ordinary course of our business. Most of these matters involve allegations of medical malpractice or other injuries suffered at our hospitals. Our hospitals are also routinely subject to sales and use tax audits and personal property tax audits by the state and local government jurisdictions in which they do business. The results of the audits are frequently disputed, and such disputes are ordinarily resolved by administrative appeals or litigation. |
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.
We record reserves for claims and lawsuits when they are probable and can be reasonably estimated. For matters where the likelihood or extent of a loss is not probable or cannot be reasonably estimated, we have not recognized the potential liabilities that may result in the accompanying Condensed Consolidated Financial Statements.
The table below presents reconciliations of the beginning and ending liability balances in connection with legal settlements and related costs recorded during the nine months ended September 30, 2010 and 2009:
| Balances
at Beginning of Period |
Litigation
and Investigation Costs |
Cash Payments |
Other | Balances at End of Period |
||||||||||||||||
|
Nine Months Ended September 30, 2010 |
||||||||||||||||||||
|
Continuing operations |
$ | 95 | $ | 6 | $ | (72 | ) | $ | 1 | $ | 30 | |||||||||
|
Discontinued operations |
— | — | — | — | — | |||||||||||||||
| $ | 95 | $ | 6 | $ | (72 | ) | $ | 1 | $ | 30 | ||||||||||
|
Nine Months Ended September 30, 2009 |
||||||||||||||||||||
|
Continuing operations |
$ | 240 | $ | 13 | $ | (157 | ) | $ | — | $ | 96 | |||||||||
|
Discontinued operations |
— | — | — | — | — | |||||||||||||||
| $ | 240 | $ | 13 | $ | (157 | ) | $ | — | $ | 96 | ||||||||||
For the nine months ended September 30, 2010 and 2009, we recorded net costs of $6 million and $13 million, respectively, in connection with significant legal proceedings and investigations. “Other” activity includes the transfer of a previously recorded reserve to the litigation reserve.
|
|||
NOTE 12. INCOME TAXES
The provision for income taxes in the nine months ended September 30, 2010 includes an income tax benefit of $1.034 billion in continuing operations related to a decrease in the valuation allowance for our deferred tax assets and other tax adjustments. The net decrease in the valuation allowance during the nine months ended September 30, 2010 is primarily attributable to the estimated realization of deferred tax assets resulting from the utilization of net operating loss carryforwards against current year and future years’ taxable income. During the three months ended September 30, 2010, after considering all available evidence, both positive (including cumulative profits, carryforward periods for utilization of federal net operating loss carryovers and other factors) and negative (including cumulative losses in past years and other factors), we concluded that the valuation allowance against our deferred tax assets should be reduced by approximately $987 million. The remaining $87 million balance in the valuation allowance as of September 30, 2010 is primarily attributable to certain state net operating loss carryovers and federal tax credits that, more likely than not, will expire unutilized. Based on the improvement of our operating results in 2009 and 2010 and our assessment of projected future results of operations, we determined that realization of the deferred income tax benefit was more likely than not. As a result, our judgment about the need for this valuation allowance has changed and the reduction in the valuation allowance has been recorded as a benefit in the provision for income taxes from continuing operations.
During the nine months ended September 30, 2010, we increased our estimated liabilities for uncertain tax positions by $13 million, related to continuing operations, primarily as a result of audit settlements. The total amount of unrecognized tax benefits as of September 30, 2010 was $45 million ($33 million related to continuing operations and $12 million related to discontinued operations), of which $34 million, if recognized, would impact our effective tax rate and income tax expense (benefit) ($22 million related to continuing operations and $12 million related to discontinued operations).
Our practice is to recognize interest and penalties related to income tax matters in income tax expense in our Condensed Consolidated Statements of Operations. Approximately $3.8 million of interest and penalties related to accrued liabilities for uncertain tax positions ($0.3 million of expense related to continuing operations and $3.5 million of expense related to discontinued operations) are included in our Condensed Consolidated Statement of Operations in the nine months ended September 30, 2010. Total accrued interest and penalties on unrecognized tax benefits as of September 30, 2010 were $59 million ($24 million related to continuing operations and $35 million related to discontinued operations).
The audit of our tax returns for the years ended December 31, 2006 and December 31, 2007 has been completed by the Internal Revenue Service (“IRS”). These returns include deductions for amounts paid in connection with our 2006 civil settlement with the federal government and upon which taxes had been paid by us in previous taxable years. We filed tax refund claims to recover such previously paid taxes, and we received tax refunds of approximately $200 million as of December 31, 2009. Upon completion of the audit, we reached a settlement with the IRS, which was approved by the Congressional Joint Committee on Taxation subsequent to September 30, 2010, in which we agreed to repay approximately $12 million of the refunds previously received plus approximately $2 million of interest.
In connection with an audit of our tax returns for the fiscal years ended May 31, 1998 through the transition period ended December 31, 2002, the IRS issued a statutory notice of tax deficiency asserting an aggregate tax deficiency of $204 million plus interest. This amount does not include an advance tax payment of $85 million we made in December 2006, an overpayment by us of $20 million for one of the years in the audit period, and the impact of our net operating losses from 2004, which would reduce the tax deficiency by $31 million. We have reached a settlement with IRS counsel of all disputed issues in this case. The settlement is subject to approval by the Tax Court and resulted in a payment by us of approximately $60 million in December 2009 to satisfy accrued taxes and interest.
As of September 30, 2010, approximately $17 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.
|
|||
NOTE 13. EARNINGS PER COMMON SHARE
The table below is a reconciliation of the numerators and denominators of our basic and diluted earnings per common share calculations for income from continuing operations for the three and nine months ended September 30, 2010 and 2009. Income is expressed in millions and weighted average shares are expressed in thousands.
| Income (Numerator) |
Weighted Average Shares (Denominator) |
Per- Share Amount |
||||||||||
|
Three Months Ended September 30, 2010 |
||||||||||||
|
Income available to Tenet Healthcare Corporation common shareholders for basic earnings per share |
$ | 932 | 485,210 | $ | 1.92 | |||||||
|
Effect of dilutive stock options, restricted stock units and mandatory convertible preferred stock |
6 | 74,640 | (0.24 | ) | ||||||||
|
Income available to Tenet Healthcare Corporation common shareholders for diluted earnings per share |
$ | 938 | 559,850 | $ | 1.68 | |||||||
|
Three Months Ended September 30, 2009 |
||||||||||||
|
Income available to Tenet Healthcare Corporation common shareholders for basic earnings per share |
$ | 2 | 481,008 | $ | — | |||||||
|
Effect of dilutive stock options and restricted stock units |
— | 17,076 | — | |||||||||
|
Income available to Tenet Healthcare Corporation common shareholders for diluted earnings per share |
$ | 2 | 498,084 | $ | — | |||||||
|
Nine Months Ended September 30, 2010 |
||||||||||||
|
Income available to Tenet Healthcare Corporation common shareholders for basic earnings per share |
$ | 1,050 | 483,912 | $ | 2.17 | |||||||
|
Effect of dilutive stock options, restricted stock units and mandatory convertible preferred stock |
18 | 76,288 | (0.26 | ) | ||||||||
|
Income available to Tenet Healthcare Corporation common shareholders for diluted earnings per share |
$ | 1,068 | 560,200 | $ | 1.91 | |||||||
|
Nine Months Ended September 30, 2009 |
||||||||||||
|
Income available to Tenet Healthcare Corporation common shareholders for basic earnings per share |
$ | 197 | 479,942 | $ | 0.41 | |||||||
|
Effect of dilutive stock options, restricted stock units and mandatory convertible preferred stock |
— | 9,746 | (0.01 | ) | ||||||||
|
Income available to Tenet Healthcare Corporation common shareholders for diluted earnings per share |
$ | 197 | 489,688 | $ | 0.40 | |||||||
Stock options (in thousands) whose exercise price exceeded the average market price of our common stock and, therefore, were not included in the computation of diluted shares for the three and nine months ended September 30, 2010 were 26,260 and 22,243 shares, respectively, and for the three and nine months ended September 30, 2009 were 27,376 and 27,582 shares, respectively. For the three months ended September 30, 2009, the inclusion of the 3,189 shares of common stock (in thousands) issuable under the conversion feature of our mandatory convertible preferred stock would be anti-dilutive; therefore, those shares were excluded from the computation of diluted shares.
|
|||
NOTE 14. FAIR VALUE MEASUREMENTS
Our financial assets and liabilities recorded at fair value on a recurring basis primarily relate to investments in available-for-sale securities held by our captive insurance subsidiaries and our LIBOR cap agreement. The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009. The following tables also indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair values. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. We consider a security that trades at least weekly to have an active market. Fair values determined by Level 2 inputs utilize data points that are observable, such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.
| September 30, 2010 |
Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
|
Investments: |
||||||||||||||||
|
Marketable securities—current |
$ | 1 | $ | 1 | $ | — | $ | — | ||||||||
|
Investments in Reserve Yield Plus Fund |
1 | — | 1 | — | ||||||||||||
|
Marketable securities—noncurrent |
28 | 5 | 22 | 1 | ||||||||||||
| $ | 30 | $ | 6 | $ | 23 | $ | 1 | |||||||||
|
Derivative Contract (see Note 5): |
||||||||||||||||
|
LIBOR cap agreement asset |
$ | — | $ | — | $ | — | $ | — | ||||||||
| December 31, 2009 |
Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
|
Investments: |
||||||||||||||||
|
Marketable securities—current |
$ | 11 | $ | 11 | $ | — | $ | — | ||||||||
|
Investments in Reserve Yield Plus Fund |
2 | — | 2 | — | ||||||||||||
|
Marketable debt securities—noncurrent |
30 | 7 | 22 | 1 | ||||||||||||
| $ | 43 | $ | 18 | $ | 24 | $ | 1 | |||||||||
|
Derivative Contract: |
||||||||||||||||
|
LIBOR cap agreement asset |
$ | 3 | $ | — | $ | 3 | $ | — | ||||||||
The change in the fair value of our auction rate securities valued using significant unobservable inputs is shown below:
|
Fair value recorded at December 31, 2009 |
$ | 1 | ||
|
Adjustment to record reduction in estimated fair value of auction rate securities |
— | |||
|
Fair value recorded at September 30, 2010 |
$ | 1 | ||
|
Fair value recorded at December 31, 2008 |
$ | 1 | ||
|
Adjustment to record reduction in estimated fair value of auction rate securities |
— | |||
|
Fair value recorded at September 30, 2009 |
$ | 1 | ||
At September 30, 2010, one of our captive insurance subsidiaries held $1 million of preferred stock and other securities that were distributed from auction rate securities whose auctions have failed due to sell orders exceeding buy orders. We were not required to record an other-than-temporary impairment of these securities during the nine months ended September 30, 2010 or 2009.
Our non-financial assets and liabilities not permitted or required to be measured at fair value on a recurring basis typically relate to long-lived assets held and used, long-lived assets held for sale and goodwill. We are now required to provide additional disclosures about fair value measurements as part of our financial statements for each major category of assets and liabilities measured at fair value on a non-recurring basis. The following table presents this information as of September 30, 2010 and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair values. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities, which generally are not applicable to non-financial assets and liabilities. Fair values determined by Level 2 inputs utilize data points that are observable, such as definitive sales agreements, appraisals or established market values of comparable assets. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability and include situations where there is little, if any, market activity for the asset or liability, such as internal estimates of future cash flows.
| September 30, 2010 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
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Long-lived assets held and used |
$ | 24 | $ | — | $ | 24 | $ | — | ||||||||
As described in Note 4, we recorded a $3 million impairment charge in continuing operations in the nine months ended September 30, 2010 for the write-down of buildings, equipment and other long-lived assets, primarily capitalized software costs classified in other intangible assets, of one of our previously impaired hospitals to their estimated fair values primarily due to a decline in the fair value of real estate in the market in which the hospital operates and a decline in the estimated fair value of equipment.
The fair value of our long-term debt is based on quoted market prices. At September 30, 2010 and December 31, 2009, the estimated fair value of our long-term debt was approximately 105.6% and 103.2%, respectively, of the par value of the debt.
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NOTE 15. ACQUISITIONS
During the three months ended September 30, 2010, we acquired various diagnostic imaging centers located in California, Florida, South Carolina and Tennessee. We are required to allocate the purchase price of these facilities to assets acquired or liabilities assumed based on their fair values. The excess of the purchase price allocation over those fair values is recorded as goodwill. The aggregate purchase price of these acquisitions was $42 million, which we funded with cash on hand. Approximately $1 million and $3 million in acquisition costs related to prospective and closed acquisitions were expensed during the three and nine months ended September 30, 2010, respectively. We are in process of finalizing the valuations of the property and equipment acquired; therefore, the fair values set forth below are subject to adjustment once the valuations are completed.
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Property and equipment |
$ | 14 | ||
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Goodwill |
28 | |||
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Net cash paid |
$ | 42 | ||
Substantially all of the facilities will be operated as off-campus departments of one of our neighboring hospitals and are subject to regulatory requirements specific to off-campus hospital operations. The goodwill generated from these transactions, which we anticipate will be fully deductible for income tax purposes, can be attributed to the benefits that we expect to realize from operating efficiencies and increased reimbursement.
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NOTE 16. RECENTLY ISSUED ACCOUNTING STANDARDS
The following summarizes noteworthy recently issued accounting standards:
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In August 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Updates (“ASU”) 2010-24, “Health Care Entities (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries,” which clarifies that a health care entity should not net insurance recoveries against a related claim liability. The guidance provided in this ASU is effective for the fiscal years, and interim periods within those years, beginning after December 15, 2010. The adoption of this standard is not expected to have any impact on our financial condition, results of operations or cash flows. |
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In August 2010, the FASB issued ASU 2010-23, “Health Care Entities (Topic 954): Measuring Charity Care for Disclosure,” which prescribes a specific measurement basis of charity care for disclosure. The guidance provided in this ASU is effective for fiscal years beginning after December 15, 2010. The adoption of this standard is not expected to have any impact on our financial condition, results of operations or cash flows. |
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NOTE 17. SUBSEQUENT EVENTS
Sale of Medical Office Buildings
In October 2010, we sold nine medical office buildings in Florida for aggregate cash proceeds of $46 million. In connection with the sale, we expect to recognize an impairment charge of approximately $3 million in the three months ending December 31, 2010.
California Provider Fee
On October 7, 2010, the Centers for Medicare and Medicaid Services (“CMS”) approved the fee-for-service portion of California’s program to impose a provider fee on hospitals that, combined with federal matching funds, will be used to provide supplemental Medi-Cal payments to hospitals in the state. CMS has not yet approved the managed care portion of the program. This program proposes to provide supplemental Medi-Cal payments for up to 21 months retroactive to April 2009 and expiring on December 31, 2010. Subsequent to September 30, 2010, we made two installment payments under this program totaling approximately $64 million, and we have received one installment payment from Medi-Cal of approximately $33 million to date. We received invoices for our payments to be made under the program from the California Department of Health Care Services as of September 30, 2010; accordingly, we recorded the $134 million liability for our required payments as of September 30, 2010, which is classified as other current liabilities in the accompanying Condensed Consolidated Balance Sheet as of September 30, 2010, and recorded a corresponding associated amount in other current assets in that Condensed Consolidated Balance Sheet. If CMS approves the managed care portion of the program before the end of this year, we would recognize all of the $64 million of net revenues in the three months ending December 31, 2010.