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Tenet's Accounting of Finances Grows Less Conservative

October 03, 2012 | About:
GMI Ratings

GMI Ratings

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Tenet Healthcare Corp. (THC)’s accounting of its finances has grown less conservative in recent months. Now, as the healthcare services company’s cash dwindles, CEO Trevor Fetter is taking on even more risk with a plan to raise debt, buy back shares and make acquisitions.

Tenet said on Oct. 1 that it is raising $800 million of debt. Even before this plan, Tenet had above four times more debt than equity as of June 30.

Why did Tenet need so much money? It said it will spend around $400 million on acquisitions in the near term in an effort to "enhance the company’s primary business lines, including acute care hospitals, outpatient facilities, and business process services." This means Fetter and his team will have to estimate the value of many Tenet assets during the near term, as it takes some time before managers can know whether their acquisitions go according to plan and generate the revenues anticipated.

Fetter and his team are also planning to issue one new Tenet Health Care share in exchange for every four existing shares and have the authorization to buy back $500 million of Tenet stock. While managers can boost a company's earnings per share by reducing the number of shares available for sale, spending money in order to improve core business operations would have a longer-term positive impact.

To be sure, Fetter and his team are also taking other steps to boost profits. Tenet said this June that it was aiming to slash costs in various ways ranging from managing labor productivity with “enhanced tools, data and concepts” to eliminating products.

The managers have achieved incredible results on efficiency. The trailing 12-month average of Tenet’s selling, general and administrative expenses (SG&A) amounted to $193 million as of June 30, or more than 2% of its total operating expenses versus the industry average of nearly 18%. As of Dec. 2011, Tenet’s SG&A had amounted to $546 million, or more than 6% of total operating expenses. These numbers are relatively easy to manipulate because company managers have the discretion to decide what counts as what kind of cost; for example, the salaries of researchers who are exploring an unfruitful topic are always an expense, but if those people are developing a new device that’s almost ready to become a product, their salaries could be an asset until they’re expensed upon the product’s sale.

This isn’t the only source of profits that have short-term quality. Fetter trumpeted on a conference call with analysts this August that his company’s "substantial NOL [net operating loss], which is worth more than $1 a share shields much of our future profitability from taxation.” The average amount of tax that the company deferred to pay in the near future as of June 30 amounted to $346.8 million, up from $295.8 million as of Dec. 2011. Meanwhile the average amount of tax that Tenet deferred to pay in the far future dropped to $427.4 million from $533.2 million during the same time frames. Tax savings, again, do not have the same quality as earnings actually made from core operations.

In part due to such developments, Tenet’s financial data gave it an Accounting and Governance Risk (AGR ®) score of 20 as of June, indicating more risk than 80% of comparable companies. Before this year, the company’s financial data had given it scores reflecting average risk during most quarters in the past three years.

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Region: North America

Country: United States

Sector: Healthcare

Industry: Healthcare Facilities

Market Cap: $2,575.5 mm (Mid Cap)

AGR Rating: Aggressive (20)

ESG Rating: D

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Rating: 5.0/5 (3 votes)

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