Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

Form 10-Q

 

x       Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2013

 

OR

 

o          Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                   to                 

 

Commission File Number 1-7293

 


 

TENET HEALTHCARE CORPORATION

 (Exact name of Registrant as specified in its charter)

 


 

Nevada
(State of Incorporation)

 

95-2557091
(IRS Employer Identification No.)

 

1445 Ross Avenue, Suite 1400

Dallas, TX  75202

(Address of principal executive offices, including zip code)

 

(469) 893-2200

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the
past 90 days.   Yes 
x No o

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.   Yes x No o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Exchange Act Rule 12b-2).

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2).  Yes o No x

 

As of October 31, 2013, there were 99,226,697 shares of the Registrant’s common stock, $0.05 par value, outstanding.

 

 

 



Table of Contents

 

TENET HEALTHCARE CORPORATION

TABLE OF CONTENTS

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Financial Statements

1

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

51

 

 

 

Item 4.

Controls and Procedures

51

 

 

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

52

 

 

 

Item 1A.

Risk Factors

52

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

52

 

 

 

Item 6.

Exhibits

53

 

i



Table of Contents

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

TENET HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

Dollars in Millions

(Unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

82

 

$

364

 

Accounts receivable, less allowance for doubtful accounts ($440 at September 30, 2013 and $401 at December 31, 2012)

 

1,380

 

1,345

 

Inventories of supplies, at cost

 

154

 

153

 

Income tax receivable

 

3

 

7

 

Current portion of deferred income taxes

 

358

 

354

 

Other current assets

 

583

 

458

 

Total current assets

 

2,560

 

2,681

 

Investments and other assets

 

184

 

162

 

Deferred income taxes, net of current portion

 

396

 

342

 

Property and equipment, at cost, less accumulated depreciation and amortization ($3,756 at September 30, 2013 and $3,494 at December 31, 2012)

 

4,354

 

4,293

 

Goodwill

 

1,120

 

916

 

Other intangible assets, at cost, less accumulated amortization ($490 at September 30, 2013 and $426 at December 31, 2012)

 

723

 

650

 

Total assets

 

$

9,337

 

$

9,044

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

133

 

$

94

 

Accounts payable

 

618

 

722

 

Accrued compensation and benefits

 

383

 

415

 

Professional and general liability reserves

 

74

 

64

 

Accrued interest payable

 

109

 

125

 

Other current liabilities

 

452

 

343

 

Total current liabilities

 

1,769

 

1,763

 

Long-term debt, net of current portion

 

5,690

 

5,158

 

Professional and general liability reserves

 

255

 

292

 

Other long-term liabilities

 

620

 

597

 

Total liabilities

 

8,334

 

7,810

 

Commitments and contingencies

 

 

 

 

 

Redeemable noncontrolling interests in equity of consolidated subsidiaries

 

83

 

16

 

Equity:

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, $0.05 par value; authorized 262,500,000 shares; 143,973,854 shares issued at September 30, 2013 and 142,363,915 shares issued at December 31, 2012

 

7

 

7

 

Additional paid-in capital

 

4,562

 

4,471

 

Accumulated other comprehensive loss

 

(68

)

(68

)

Accumulated deficit

 

(1,398

)

(1,288

)

Common stock in treasury, at cost, 44,807,632 shares at September 30, 2013 and 37,730,431 shares at December 31, 2012

 

(2,278

)

(1,979

)

Total shareholders’ equity

 

825

 

1,143

 

Noncontrolling interests

 

95

 

75

 

Total equity

 

920

 

1,218

 

Total liabilities and equity

 

$

9,337

 

$

9,044

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

1



Table of Contents

 

TENET HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Dollars in Millions, Except Per-Share Amounts

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net operating revenues:

 

 

 

 

 

 

 

 

 

Net operating revenues before provision for doubtful accounts

 

$

2,618

 

$

2,427

 

$

7,841

 

$

7,373

 

Less: Provision for doubtful accounts

 

210

 

206

 

624

 

585

 

Net operating revenues

 

2,408

 

2,221

 

7,217

 

6,788

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

1,172

 

1,050

 

3,499

 

3,166

 

Supplies

 

387

 

376

 

1,158

 

1,164

 

Other operating expenses, net

 

575

 

539

 

1,710

 

1,604

 

Electronic health record incentives

 

(14

)

(13

)

(48

)

(13

)

Depreciation and amortization

 

119

 

110

 

354

 

314

 

Impairment and restructuring charges, and acquisition-related costs

 

20

 

6

 

45

 

12

 

Litigation and investigation costs

 

1

 

0

 

3

 

3

 

Operating income

 

148

 

153

 

496

 

538

 

Interest expense

 

(91

)

(103

)

(292

)

(303

)

Loss from early extinguishment of debt

 

0

 

0

 

(348

)

0

 

Investment earnings

 

0

 

1

 

1

 

2

 

Income (loss) from continuing operations, before income taxes

 

57

 

51

 

(143

)

237

 

Income tax benefit (expense)

 

(16

)

(18

)

57

 

(90

)

Income (loss) from continuing operations, before discontinued operations

 

41

 

33

 

(86

)

147

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

(8

)

4

 

(5

)

7

 

Impairment of long-lived assets and goodwill, and restructuring charges, net

 

0

 

0

 

0

 

(100

)

Litigation and investigation costs

 

(2

)

0

 

(2

)

0

 

Net gains (losses) on sales of facilities

 

0

 

(1

)

0

 

1

 

Income tax benefit (expense)

 

5

 

(4

)

3

 

24

 

Loss from discontinued operations

 

(5

)

(1

)

(4

)

(68

)

Net income (loss)

 

36

 

32

 

(90

)

79

 

Less: Preferred stock dividends

 

0

 

1

 

0

 

11

 

Less: Net income (loss) attributable to noncontrolling interests

 

 

 

 

 

 

 

 

 

Continuing operations

 

8

 

2

 

20

 

7

 

Discontinued operations

 

0

 

(11

)

0

 

(31

)

Net income (loss) attributable to Tenet Healthcare Corporation common shareholders

 

$

28

 

$

40

 

$

(110

)

$

92

 

Amounts attributable to Tenet Healthcare Corporation common shareholders

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations, net of tax

 

$

33

 

$

30

 

$

(106

)

$

129

 

Income (loss) from discontinued operations, net of tax

 

(5

)

10

 

(4

)

(37

)

Net income (loss) attributable to Tenet Healthcare Corporation common shareholders

 

$

28

 

$

40

 

$

(110

)

$

92

 

Earnings (loss) per share attributable to Tenet Healthcare Corporation common shareholders:

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.33

 

$

0.29

 

$

(1.03

)

$

1.25

 

Discontinued operations

 

(0.05

)

0.09

 

(0.04

)

(0.36

)

 

 

$

0.28

 

$

0.38

 

$

(1.07

)

$

0.89

 

Diluted

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.32

 

$

0.28

 

$

(1.03

)

$

1.21

 

Discontinued operations

 

(0.05

)

0.09

 

(0.04

)

(0.35

)

 

 

$

0.27

 

$

0.37

 

$

(1.07

)

$

0.86

 

Weighted average shares and dilutive securities outstanding (in thousands):

 

 

 

 

 

 

 

 

 

Basic

 

100,894

 

104,244

 

102,669

 

103,613

 

Diluted

 

103,098

 

107,311

 

102,669

 

106,904

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

2



Table of Contents

 

TENET HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME

Dollars in Millions

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net income (loss)

 

$

36

 

$

32

 

$

(90

)

$

79

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Adjustments for supplemental executive retirement plans

 

0

 

0

 

0

 

3

 

Other comprehensive income before income taxes

 

0

 

0

 

0

 

3

 

Income tax expense related to items of other comprehensive income

 

0

 

0

 

0

 

0

 

Total other comprehensive income, net of tax

 

0

 

0

 

0

 

3

 

Comprehensive income (loss)

 

36

 

32

 

(90

)

82

 

Less: Preferred stock dividends

 

0

 

1

 

0

 

11

 

Less: Comprehensive income (loss) attributable to noncontrolling interests

 

8

 

(9

)

20

 

(24

)

Comprehensive income (loss) attributable to Tenet Healthcare Corporation common shareholders

 

$

28

 

$

40

 

$

(110

)

$

95

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

TENET HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Dollars in Millions

(Unaudited)

 

 

 

Nine Months Ended
 September 30,

 

 

 

2013

 

2012

 

Net income (loss)

 

$

(90

)

$

79

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

354

 

314

 

Provision for doubtful accounts

 

624

 

585

 

Deferred income tax expense (benefit)

 

(60

)

58

 

Stock-based compensation expense

 

26

 

24

 

Impairment and restructuring charges, and acquisition-related costs

 

45

 

12

 

Litigation and investigation costs

 

3

 

3

 

Loss from early extinguishment of debt

 

348

 

0

 

Amortization of debt discount and debt issuance costs

 

12

 

16

 

Pre-tax loss from discontinued operations

 

7

 

92

 

Other items, net

 

(19

)

(7

)

Changes in cash from operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(662

)

(653

)

Inventories and other current assets

 

(159

)

(106

)

Income taxes

 

(5

)

(2

)

Accounts payable, accrued expenses and other current liabilities

 

(44

)

(23

)

Other long-term liabilities

 

(5

)

20

 

Payments for restructuring charges, acquisition-related costs, and litigation costs and settlements

 

(36

)

(56

)

Net cash used in operating activities from discontinued operations, excluding income taxes

 

(5

)

(19

)

Net cash provided by operating activities

 

334

 

337

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment — continuing operations

 

(398

)

(358

)

Purchases of property and equipment — discontinued operations

 

0

 

(2

)

Purchases of businesses or joint venture interests

 

(142

)

(38

)

Proceeds from sales of facilities and other assets — discontinued operations

 

11

 

45

 

Proceeds from sales of marketable securities, long-term investments and other assets

 

6

 

9

 

Other long-term assets

 

11

 

(5

)

Other items, net

 

3

 

3

 

Net cash used in investing activities

 

(509

)

(346

)

Cash flows from financing activities:

 

 

 

 

 

Repayments of borrowings under credit facility

 

(1,001

)

(1,458

)

Proceeds from borrowing under credit facility

 

1,211

 

1,553

 

Repayments of other borrowings

 

(1,987

)

(76

)

Proceeds from other borrowings

 

1,907

 

292

 

Repurchases of preferred stock

 

0

 

(292

)

Deferred debt issuance costs

 

(31

)

(3

)

Repurchases of common stock

 

(300

)

(26

)

Cash dividends on preferred stock

 

0

 

(13

)

Distributions paid to noncontrolling interests

 

(18

)

(9

)

Contributions from noncontrolling interests

 

98

 

3

 

Proceeds from exercise of stock options

 

22

 

5

 

Other items, net

 

(8

)

3

 

Net cash used in financing activities

 

(107

)

(21

)

Net decrease in cash and cash equivalents

 

(282

)

(30

)

Cash and cash equivalents at beginning of period

 

364

 

113

 

Cash and cash equivalents at end of period

 

$

82

 

$

83

 

Supplemental disclosures:

 

 

 

 

 

Interest paid, net of capitalized interest

 

$

(295

)

$

(288

)

Income tax payments, net

 

$

(5

)

$

(9

)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

TENET HEALTHCARE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1. BASIS OF PRESENTATION

 

Description of Business and Basis of Presentation

 

Tenet Healthcare Corporation (together with our subsidiaries, referred to herein as “Tenet,” the “Company,” “we” or “us”) is an investor-owned health care services company whose subsidiaries and affiliates as of September 30, 2013 primarily operated 49 hospitals with a total of 13,180 licensed beds, 134 outpatient centers and Conifer Health Solutions (“Conifer”), which provides business process solutions to more than 700 hospital and other clients nationwide.

 

This quarterly report supplements our Annual Report on Form 10-K for the year ended December 31, 2012 (“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 our Condensed Consolidated Financial Statements relate to our continuing operations, with dollar amounts expressed in millions (except per-share amounts). All amounts related to shares, share prices and earnings per share have been restated to give retrospective presentation for the reverse stock split described in Note 2 of our Annual Report. Furthermore, certain prior-year amounts have been reclassified to conform to the current-year presentation.

 

Although the Condensed Consolidated Financial Statements and related notes within this document are unaudited, we believe all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. 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 these 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 and nine month periods ended September 30, 2013 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 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; the timing of approval by the Centers for Medicare and Medicaid Services (“CMS”) of Medicaid provider fee revenue programs; trends in patient accounts receivable collectability and associated provisions for doubtful accounts; fluctuations in interest rates; levels of malpractice insurance expense and settlement trends; the timing of when we meet the criteria to recognize electronic health record incentives; impairment of long-lived assets and goodwill; restructuring charges; acquisition-related costs; 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 deferred tax asset 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; gains or losses from early extinguishment of debt; and changes in occupancy levels and patient volumes. Factors that affect patient volumes and, thereby, the results of operations at our hospitals and related health care facilities include, but are not limited to: the business environment, 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; the number of patients with high-deductible health insurance plans or plans with annual or lifetime coverage caps; any unfavorable publicity about us, which impacts our relationships with physicians and patients; changes in health care regulations and the participation of individual states in federal programs; and the timing of elective procedures. These considerations apply to year-to-year comparisons as well.

 

5



Table of Contents

 

Net Operating Revenues Before Provision for Doubtful Accounts

 

We recognize net operating revenues before provision for doubtful accounts in the period in which our services are performed. Net operating revenues before provision for doubtful accounts primarily consist of net patient service revenues that are recorded based on established billing rates (i.e., gross charges), less estimated discounts for contractual and other allowances, principally for patients covered by Medicare, Medicaid, managed care and other health plans, as well as certain uninsured patients under our Compact with Uninsured Patients (“Compact”).

 

The table below shows the sources of net operating revenues before provision for doubtful accounts:

 

 

 

Three Months Ended
 September 30,

 

Nine Months Ended
 September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

General Hospitals:

 

 

 

 

 

 

 

 

 

Medicare

 

$

501

 

$

505

 

$

1,543

 

$

1,666

 

Medicaid

 

206

 

176

 

630

 

587

 

Managed care

 

1,378

 

1,348

 

4,126

 

4,002

 

Indemnity, self-pay and other

 

262

 

261

 

783

 

747

 

Acute care hospitals — other revenue

 

14

 

8

 

53

 

45

 

Other:

 

 

 

 

 

 

 

 

 

Other operations

 

257

 

129

 

706

 

326

 

Net operating revenues before provision for doubtful accounts

 

$

2,618

 

$

2,427

 

$

7,841

 

$

7,373

 

 

Cash and Cash Equivalents

 

We treat highly liquid investments with original maturities of three months or less as cash equivalents. Cash and cash equivalents were approximately $82 million and $364 million at September 30, 2013 and December 31, 2012, respectively. As of September 30, 2013 and December 31, 2012, our book overdrafts were approximately $182 million and $232 million, respectively, which were classified as accounts payable.

 

At September 30, 2013 and December 31, 2012, approximately $51 million and $65 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.

 

Also at September 30, 2013 and December 31, 2012, we had $63 million and $98 million, respectively, of property and equipment purchases accrued for items received but not yet paid. Of these amounts, $50 million and $93 million, respectively, were included in accounts payable.

 

During the nine months ended September 30, 2013 and 2012, we entered into non-cancellable capital leases of approximately $99 million and $54 million, respectively, primarily for equipment.

 

Other Intangible Assets

 

The following table provides information regarding other intangible assets, which are included in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012:

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net Book
Value

 

September 30, 2013:

 

 

 

 

 

 

 

Capitalized software costs

 

$

1,048

 

$

(455

)

$

593

 

Long-term debt issuance costs

 

107

 

(25

)

82

 

Other

 

58

 

(10

)

48

 

Total

 

$

1,213

 

$

(490

)

$

723

 

 

 

 

 

 

 

 

 

December 31, 2012:

 

 

 

 

 

 

 

Capitalized software costs

 

$

927

 

$

(399

)

$

528

 

Long-term debt issuance costs

 

106

 

(25

)

81

 

Other

 

43

 

(2

)

41

 

Total

 

$

1,076

 

$

(426

)

$

650

 

 

6



Table of Contents

 

Estimated future amortization of other intangible assets with finite useful lives as of September 30, 2013 is as follows:

 

 

 

 

 

Years Ending December 31,

 

Later

 

 

 

Total

 

2013

 

2014

 

2015

 

2016

 

2017

 

Years

 

Amortization of intangible assets

 

$

723

 

$

49

 

$

97

 

$

80

 

$

71

 

$

56

 

$

370

 

 

NOTE 2. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

The principal components of accounts receivable are shown in the table below:

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

Continuing operations:

 

 

 

 

 

Patient accounts receivable

 

$

1,735

 

$

1,668

 

Allowance for doubtful accounts

 

(439

)

(396

)

Estimated future recoveries from accounts assigned to our Conifer subsidiary

 

91

 

88

 

Net cost reports and settlements payable and valuation allowances

 

(11

)

(24

)

 

 

1,376

 

1,336

 

Discontinued operations:

 

 

 

 

 

Patient accounts receivable

 

2

 

11

 

Allowance for doubtful accounts

 

(1

)

(5

)

Estimated future recoveries from accounts assigned to our Conifer subsidiary

 

1

 

2

 

Net cost reports and settlements receivable and valuation allowances

 

2

 

1

 

 

 

4

 

9

 

Accounts receivable, net

 

$

1,380

 

$

1,345

 

 

Our self-pay collection rate, which is the blended collection rate for uninsured and balance after insurance accounts receivable, was approximately 28.8% and 28.9% as of September 30, 2013 and December 31, 2012, respectively. These self-pay collection rates include payments made by patients, including co-payments and deductibles paid by patients with insurance. Our estimated collection rate from managed care payers was approximately 98.3% and 98.0% at September 30, 2013 and December 31, 2012, respectively. As of September 30, 2013 and December 31, 2012, our allowance for doubtful accounts for self-pay uninsured accounts was 88.8% and 87.3%, respectively, of our self-pay uninsured patient accounts receivable. As of September 30, 2013 and December 31, 2012, our allowance for doubtful accounts for self-pay balance after insurance accounts was 56.9% and 54.5%, respectively, of our self-pay balance after insurance patient accounts receivable, consisting primarily of co-payments and deductibles owed by patients with insurance. Our self-pay write-offs, including uninsured and balance after insurance accounts, decreased approximately $21 million from $231 million in the nine months ended September 30, 2012 to $210 million in the nine months ended September 30, 2013, primarily due to a decrease in patient account assignments to our Conifer subsidiary. The increase in provision for doubtful accounts primarily related to an increase in uninsured patient revenues and higher co-payments and deductibles owed by patients with insurance in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. As of September 30, 2013 and December 31, 2012, our allowance for doubtful accounts for managed care accounts was 8.7% and 9.4%, respectively, of our managed care patient accounts receivable.

 

Our 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, 2013 and 2012 were approximately $116 million and $106 million, respectively, and for the nine months ended September 30, 2013 and 2012 were approximately $342 million and $322 million, respectively. Our estimated costs (based on the selected operating expenses described above) of caring for charity care patients for the three months ended September 30, 2013 and 2012 were approximately $32 million and $40 million, respectively, and for the nine months ended September 30, 2013 and 2012 were approximately $95 million and $102 million, respectively. Most states include an estimate of the cost of charity care in the determination of a hospital’s eligibility for Medicaid disproportionate share hospital (“DSH”) payments. Revenues attributable to DSH and other state-funded subsidy payments for the three months ended September 30, 2013 and 2012 were approximately $72 million and $56 million, respectively, and for the nine months ended September 30, 2013 and 2012 were approximately $257 million and $210 million, respectively. These payments are intended to mitigate our cost of uncompensated care, as well as reduced Medicaid funding levels.

 

NOTE 3. DISCONTINUED OPERATIONS

 

In the nine months ended September 30, 2013, we recognized a $7 million gain in discontinued operations related to the sale of land.

 

In the three months ended June 30, 2012, our Creighton University Medical Center hospital (“CUMC”) in Nebraska was reclassified into discontinued operations based on the guidance in the Financial Accounting Standards Board’s Accounting

 

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Table of Contents

 

Standards Codification (“ASC”) 360, “Property, Plant and Equipment,” as a result of our plan to sell CUMC. We recorded an impairment charge in discontinued operations of $100 million, consisting of $98 million for the write-down of CUMC’s long-lived assets to their estimated fair values, less estimated costs to sell, and a $2 million charge for the write-down of goodwill related to CUMC in the three months ended June 30, 2012. We completed the sale of CUMC on August 31, 2012. In May 2012, we completed the sale of Diagnostic Imaging Services, Inc. (“DIS”), our former diagnostic imaging center business in Louisiana, for net proceeds of approximately $10 million. As a result of the sale, DIS was reclassified into discontinued operations in the three months ended June 30, 2012, and a gain on sale of approximately $2 million was recognized in discontinued operations.

 

Net operating revenues and income (loss) before income taxes reported in discontinued operations are as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net operating revenues

 

$

3

 

$

38

 

$

6

 

$

150

 

Income (loss) before income taxes

 

(10

)

3

 

(7

)

(92

)

 

Should we dispose of additional hospitals or other assets in the future, we may incur additional asset impairment and restructuring charges in future periods.

 

NOTE 4. IMPAIRMENT AND RESTRUCTURING CHARGES, AND ACQUISITION-RELATED COSTS

 

During the nine months ended September 30, 2013, we recorded impairment and restructuring charges and acquisition-related costs of $45 million, consisting of $2 million relating to the impairment of property, $10 million of restructuring costs, $9 million of employee severance costs, $1 million of lease termination costs, and $23 million of acquisition-related costs.

 

During the nine months ended September 30, 2012, we recorded impairment and restructuring charges and acquisition-related costs of $12 million, consisting of $3 million relating to the impairment of obsolete assets, $4 million of employee severance costs and $5 million of other related costs.

 

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, impairments of long-lived assets and goodwill may occur, and we may incur additional restructuring charges, which could be material.

 

As of September 30, 2013, our continuing operations consisted of two operating segments, our Conifer subsidiary and our hospital and other operations. In the three months ended September 30, 2013, we moved our hospitals in Philadelphia, Pennsylvania from our Southern States region into a separate market. Our hospital and other operations were structured as follows as of September 30, 2013:

 

·            Our California region included all of our hospitals and other operations in California;

 

·            Our Central region included all of our hospitals and other operations in Missouri, New Mexico, Tennessee and Texas;

 

·            Our Florida region included all of our hospitals and other operations in Florida;

 

·            Our Southern States region included all of our hospitals and other operations in Alabama, Georgia, North Carolina and South Carolina; and

 

·            Our two hospitals in Philadelphia, Pennsylvania were 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 hospital operations reportable business segment level.

 

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Table of Contents

 

The tables below are reconciliations of beginning and ending liability balances in connection with restructuring charges recorded during the nine months ended September 30, 2013 and 2012 in continuing and discontinued operations:

 

 

 

Balances at
Beginning of
Period

 

Restructuring
Charges, Net

 

Cash
Payments

 

Other

 

Balances
at End
of Period

 

Nine Months Ended September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

Continuing operations:

 

 

 

 

 

 

 

 

 

 

 

Lease and other costs, and employee severance-related costs in connection with hospital cost-control programs and general overhead-reduction plans

 

$

8

 

$

20

 

$

(20

)

$

(2

)

$

6

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

Employee severance-related costs, and other estimated costs associated with the sale or closure of hospitals and other facilities

 

4

 

0

 

0

 

0

 

4

 

 

 

$

12

 

$

20

 

$

(20

)

$

(2

)

$

10

 

Nine Months Ended September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

Continuing operations:

 

 

 

 

 

 

 

 

 

 

 

Lease and other costs, and employee severance-related costs in connection with hospital cost-control programs and general overhead-reduction plans

 

$

6

 

$

8

 

$

(7

)

$

(0

)

$

7

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

Employee severance-related costs, and other estimated costs associated with the sale or closure of hospitals and other facilities

 

5

 

0

 

0

 

0

 

5

 

 

 

$

11

 

$

8

 

$

(7

)

$

(0

)

$

12

 

 

The above liability balances at September 30, 2013 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, 2013 are expected to be approximately $4 million in 2013 and $6 million thereafter. The column labeled “Other” above represents charges recorded in restructuring expense that are not recorded in the liability account, such as the acceleration of stock-based compensation expense related to severance agreements.

 

NOTE 5. LONG-TERM DEBT AND LEASE OBLIGATIONS

 

The table below shows our long-term debt as of September 30, 2013 and December 31, 2012:

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

Senior notes:

 

 

 

 

 

73¤8%, due 2013

 

$

0

 

$

55

 

97¤8%, due 2014

 

60

 

60

 

91¤4%, due 2015

 

474

 

474

 

63¤4%, due 2020

 

300

 

300

 

8%, due 2020

 

750

 

750

 

67¤8%, due 2031

 

430

 

430

 

Senior secured notes:

 

 

 

 

 

61¤4%, due 2018

 

1,041

 

1,041

 

10%, due 2018

 

0

 

714

 

87/8%, due 2019

 

0

 

925

 

43/4%, due 2020

 

500

 

500

 

41/2%, due 2021

 

850

 

0

 

43/8%, due 2021

 

1,050

 

0

 

Credit facility due 2016

 

210

 

0

 

Capital leases and mortgage notes

 

188

 

119

 

Unamortized note discounts and premium

 

(30

)

(116

)

Total long-term debt

 

5,823

 

5,252

 

Less current portion

 

133

 

94

 

Long-term debt, net of current portion

 

$

5,690

 

$

5,158

 

 

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Table of Contents

 

Credit Agreement

 

We have a senior secured revolving credit facility, as amended November 29, 2011 (“Credit Agreement”), that provides, subject to borrowing availability, for revolving loans in an aggregate principal amount of up to $800 million (which can be increased, subject to certain conditions, to $1 billion), with a $300 million subfacility for standby letters of credit. The Credit Agreement has a scheduled maturity date of November 29, 2016, subject to our repayment or refinancing on or before November 3, 2014 of approximately $238 million of the aggregate outstanding principal amount of our 91/4% senior notes due 2015 (approximately $474 million of which was outstanding at September 30, 2013). If such repayment or refinancing does not occur, borrowings under the Credit Agreement will be due November 3, 2014. The revolving credit facility is collateralized by patient accounts receivable of all of our wholly owned acute care and specialty hospitals. In addition, borrowings under the Credit Agreement are guaranteed by our wholly owned hospital subsidiaries. Outstanding revolving loans accrued interest during a six-month initial period that ended in May 2012 at the rate of either (i) a base rate plus a margin of 1.25% or (ii) the London Interbank Offered Rate (“LIBOR”) plus a margin of 2.25% per annum. Outstanding revolving loans now accrue interest at a base rate plus a margin ranging from 1.00% to 1.50% or LIBOR plus a margin ranging from 2.00% to 2.50% per annum based on available credit. An unused commitment fee was payable on the undrawn portion of the revolving loans at a six-month initial rate that ended in May 2012 of 0.438% per annum. The unused commitment fee now ranges from 0.375% to 0.500% per annum based on available credit. Our borrowing availability is based on a specified percentage of eligible accounts receivable, including self-pay accounts. At September 30, 2013, we had $210 million of cash borrowings outstanding under the revolving credit facility subject to an interest rate of 2.39%, and we had approximately $152 million of standby letters of credit outstanding. Based on our eligible receivables, approximately $415 million was available for borrowing under the revolving credit facility at September 30, 2013.

 

Senior Secured Notes

 

In May 2013, we sold $1.050 billion aggregate principal amount of 43¤8% senior secured notes, which will mature on October 1, 2021. We will pay interest on the 43/8% senior secured notes semi-annually in arrears on January 1 and July 1 of each year, commencing on January 1, 2014. We used a portion of the proceeds from the sale of the notes to purchase approximately $767 million aggregate principal amount outstanding of our 87/8% senior secured notes due 2019 in a tender offer and to call approximately $158 million of the remaining aggregate principal amount outstanding of those notes. In connection with the purchase, we recorded a loss from early extinguishment of debt of $171 million, primarily 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 February 2013, we sold $850 million aggregate principal amount of 41¤2% senior secured notes, which will mature on April 1, 2021. We will pay interest on the 41¤2% senior secured notes semi-annually in arrears on April 1 and October 1 of each year, which payments commenced on October 1, 2013. We used a portion of the proceeds from the sale of the notes to purchase approximately $645 million aggregate principal amount outstanding of our 10% senior secured notes due 2018 in a tender offer and to call approximately $69 million of the remaining aggregate principal amount outstanding of those notes. In connection with the purchase, we recorded a loss from early extinguishment of debt of $177 million, primarily 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. The remaining net proceeds were used for general corporate purposes, including the repayment of borrowings under our senior secured revolving credit facility.

 

NOTE 6. GUARANTEES

 

At September 30, 2013, the maximum potential amount of future payments under our income guarantees to certain physicians who agree to relocate and revenue collection guarantees to hospital-based physician groups providing certain services at our hospitals was $104 million. We had a liability of $76 million recorded for these guarantees included in other current liabilities at September 30, 2013.

 

We have 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 at September 30, 2013 was $2 million. We had a liability of $2 million recorded for these guarantees at September 30, 2013, of which $1 million was included in other current liabilities and $1 million was included in other long-term liabilities.

 

NOTE 7. EMPLOYEE BENEFIT PLANS

 

At September 30, 2013, approximately 2.5 million shares of common stock were 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 (i) options and stock units with different time-based vesting terms, and (ii) performance-based options and restricted stock units that vest subject to the achievement of specified performance goals within a specified timeframe.

 

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Table of Contents

 

Our income from continuing operations for the nine months ended September 30, 2013 and 2012 includes $29 million and $24 million, respectively, of pre-tax compensation costs related to our stock-based compensation arrangements.

 

Stock Options

 

The following table summarizes stock option activity during the nine months ended September 30, 2013:

 

 

 

Options

 

Weighted Average
Exercise Price Per
Share

 

Aggregate
Intrinsic Value

 

Weighted Average
Remaining Life

 

 

 

 

 

 

 

(In Millions)

 

 

 

Outstanding as of December 31, 2012

 

4,289,192

 

$

30.49

 

 

 

 

 

Granted

 

295,639

 

39.31

 

 

 

 

 

Exercised

 

(913,369

)

23.56

 

 

 

 

 

Forfeited/Expired

 

(227,016

)

58.16

 

 

 

 

 

Outstanding as of September 30, 2013

 

3,444,446

 

$

31.26

 

$

40

 

3.5 years

 

Vested and expected to vest at September 30, 2013

 

3,427,698

 

$

31.23

 

$

40

 

3.5 years

 

Exercisable as of September 30, 2013

 

2,880,799

 

$

31.21

 

$

35

 

3.0 years

 

 

There were 913,369 stock options exercised during the nine months ended September 30, 2013 with a $17 million aggregate intrinsic value, and 1,350,222 stock options exercised during the same period in 2012 with a $21 million aggregate intrinsic value.

 

As of September 30, 2013, there were $5 million of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 1.9 years.

 

In the nine months ended September 30, 2013, we granted an aggregate of 295,639 stock options under our 2008 Stock Incentive Plan to certain of our senior officers. These stock options will all vest on the third anniversary of the grant date, subject to the terms of the plan, and will expire on the fifth anniversary of the grant date. In the nine months ended September 30, 2012, we granted an aggregate of 477,500 stock options under our 2008 Stock Incentive Plan to certain of our senior officers; 257,500 of these stock options are subject to time-vesting and 220,000 of these stock options were granted subject to performance-based vesting. Because all conditions were met, the performance-based options will vest and be settled ratably over a three-year period from the grant date.

 

The weighted average estimated fair value of stock options we granted in the nine months ended September 30, 2013 and 2012 was $14.46 and $12.05 per share, respectively. These fair values were calculated based on each grant date, using a binomial lattice model with the following assumptions:

 

 

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

Expected volatility

 

50%

 

52%

 

Expected dividend yield

 

0%

 

0%

 

Expected life

 

3.6 years

 

6.9 years

 

Expected forfeiture rate

 

6%

 

2%

 

Risk-free interest rate

 

0.48%

 

1.06%-1.41%

 

Early exercise threshold

 

100% gain

 

70% gain

 

Early exercise rate

 

50% per year

 

20% 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 on two dates (one in 2010 and one in 2011) with unusual volatility due to an unsolicited acquisition proposal. 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.

 

11



Table of Contents

 

The following table summarizes information about our outstanding stock options at September 30, 2013:

 

 

 

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 $4.569

 

345,066

 

5.4 years

 

$

4.56

 

345,066

 

$

4.56

 

$4.57 to $25.089

 

1,042,631

 

6.2 years

 

20.86

 

774,623

 

20.17

 

$25.09 to $32.569

 

522,889

 

2.8 years

 

29.66

 

522,889

 

29.66

 

$32.57 to $42.529

 

824,077

 

2.5 years

 

41.14

 

528,438

 

42.17

 

$42.53 to $55.129

 

671,033

 

0.4 years

 

48.46

 

671,033

 

48.46

 

$55.13 to $70.249

 

38,750

 

0.2 years

 

62.36

 

38,750

 

62.36

 

 

 

3,444,446

 

3.5 years

 

$

31.26

 

2,880,799

 

$

31.21

 

 

Restricted Stock Units

 

The following table summarizes restricted stock unit activity during the nine months ended September 30, 2013:

 

 

 

Restricted Stock
Units

 

Weighted Average Grant
Date Fair Value Per Unit

 

Unvested as of December 31, 2012

 

2,295,942

 

$

23.40

 

Granted

 

1,233,500

 

40.91

 

Vested

 

(948,539

)

24.13

 

Forfeited

 

(157,128

)

29.48

 

Unvested as of September 30, 2013

 

2,423,775

 

$

31.63

 

 

In the nine months ended September 30, 2013, we granted 815,262 restricted stock units subject to time-vesting, of which 735,129 will vest and be settled ratably over a three-year period from the date of the grant and 80,133 will vest 100% on the fifth anniversary of the grant date. In addition, we granted 206,058 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 grant date. We also awarded a grant of 212,180 restricted stock units to our chief executive officer, of which 106,090 are subject to time-vesting and 106,090 are performance-based. If target conditions are met, 50% of this grant will vest three years from the grant date and the remaining 50% will vest six years from the grant date. The award also allows for an additional 106,090 shares to be issued if higher performance criteria are met. In the nine months ended September 30, 2012, we granted 1,535,187 restricted units subject to time-vesting. In addition, we granted 116,250 performance-based restricted stock units to certain of our senior officers. Because all conditions were met, the performance-based restricted stock units will vest and be settled ratably over a three-year period from the grant date.

 

As of September 30, 2013, there were $57 million of total unrecognized compensation costs related to restricted stock units. These costs are expected to be recognized over a weighted average period of 3.1 years.

 

NOTE 8. EQUITY

 

Mandatory Convertible Preferred Stock

 

In April 2012, we repurchased and subsequently retired 298,700 shares of our 7% mandatory convertible preferred stock with a carrying value of $289 million. In a related private financing, we issued an additional $141 million aggregate principal amount of our 61¤4% senior secured notes due 2018 at a premium for $142 million of cash proceeds and an additional $150 million aggregate principal amount of our 8% senior notes due 2020. On October 1, 2012, the remaining 46,300 shares outstanding of our mandatory convertible preferred stock automatically converted to 1,978,633 shares of our common stock.

 

Share Repurchase Program

 

In October 2012, we announced that our board of directors had authorized the repurchase of up to $500 million of our common stock through a share repurchase program expiring in December 2013. Under the program, shares may be purchased in the open market or through privately negotiated transactions in a manner consistent with applicable securities laws and regulations, including pursuant to a Rule 10b5-1 plan maintained by the Company. Shares will be repurchased at times and in amounts based on market conditions and other factors. Pursuant to the share repurchase program, we paid approximately $400 million to repurchase a total of 10,501,173 shares during the period from the commencement of the program through September 30, 2013.

 

12



Table of Contents

 

Period

 

Total Number of
Shares
Purchased

 

Average Price
Paid Per
Share

 

Total Number of
Shares Purchased as
Part of Publicly
Announced Program

 

Maximum Dollar Value
of Shares That May Yet
Be Purchased Under
the Program

 

 

 

(In Thousands)

 

 

 

(In Thousands)

 

(In Millions)

 

November 1, 2012 through December 31, 2012

 

3,406

 

$

29.36

 

3,406

 

$

400

 

January 1, 2013 through January 31, 2013

 

531

 

37.13

 

531

 

380

 

February 1, 2013 through February 28, 2013

 

914

 

39.30

 

914

 

344

 

March 1, 2013 through March 31, 2013

 

1,010

 

43.95

 

1,010

 

300

 

Three Months Ended March 31, 2013

 

2,455

 

40.74

 

2,455

 

300

 

May 1, 2013 through May 31, 2013

 

933

 

46.78

 

933

 

256

 

June 1, 2013 through June 30, 2013

 

1,065

 

45.71

 

1,065

 

208

 

Three Months Ended June 30, 2013

 

1,998

 

46.21

 

1,998

 

208

 

July 1, 2013 through July 31, 2013

 

166

 

46.08

 

166

 

200

 

August 1, 2013 through August 31, 2013

 

1,045

 

40.43

 

1,045

 

158

 

September 1, 2013 through September 30, 2013

 

1,431

 

40.35

 

1,431

 

100

 

Three Months Ended September 30, 2013

 

2,642

 

40.75

 

2,642

 

100

 

Total

 

10,501

 

$

38.09

 

10,501

 

$

100

 

 

Repurchased shares are recorded based on settlement date and are held as treasury stock.

 

Changes in Redeemable Noncontrolling Interests in Equity of Consolidated Subsidiaries

 

The following table shows the changes in redeemable noncontrolling interests in equity of consolidated subsidiaries during the nine months ended September 30, 2013 and 2012:

 

 

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

Balances at beginning of period

 

$

16

 

$

16

 

Net income

 

7

 

0

 

Distributions paid to noncontrolling interests

 

(2

)

0

 

Sales of joint venture interests

 

52

 

0

 

Purchases of businesses or joint venture interests

 

10

 

0

 

Balances at end of period

 

$

83

 

$

16

 

 

Changes in Shareholders’ Equity

 

The following table shows the changes in consolidated equity during the nine months ended September 30, 2013 and 2012 (dollars in millions, share amounts in thousands):

 

 

 

Tenet Healthcare Corporation Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Additional

 

Other

 

 

 

 

 

 

 

 

 

 

 

Shares
Outstanding

 

Issued Par
Amount

 

Paid-in
Capital

 

Comprehensive
Loss

 

Accumulated
Deficit

 

Treasury
Stock

 

Noncontrolling
Interests

 

Total
Equity

 

Balances at December 31, 2012

 

104,633

 

$

7

 

$

4,471

 

$

(68

)

$

(1,288

)

$

(1,979

)

$

75

 

$

1,218

 

Net income (loss)

 

0

 

0

 

0

 

0

 

(110

)

0

 

13

 

(97

)

Distributions paid to noncontrolling interests

 

0

 

0

 

0

 

0

 

0

 

0

 

(16

)

(16

)

Sales of joint venture interests

 

0

 

0

 

53

 

0

 

0

 

0

 

0

 

53

 

Purchases of businesses or joint venture interests

 

0

 

0

 

0

 

0

 

0

 

0

 

23

 

23

 

Repurchase of common stock

 

(7,095

)

0

 

0

 

0

 

0

 

(300

)

0

 

(300

)

Stock-based compensation expense and issuance of common stock

 

1,628

 

0

 

38

 

0

 

0

 

1

 

0

 

39

 

Balances at September 30, 2013

 

99,166

 

$

7

 

$

4,562

 

$

(68

)

$

(1,398

)

$

(2,278

)

$

95

 

$

920

 

 

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Tenet Healthcare Corporation Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Additional

 

Other

 

 

 

 

 

 

 

 

 

 

 

Shares
Outstanding

 

Issued
Amount

 

Shares
Outstanding

 

Issued Par
Amount

 

Paid-in
Capital

 

Comprehensive
Loss

 

Accumulated
Deficit

 

Treasury
Stock

 

Noncontrolling
Interests

 

Total
Equity

 

Balances at December 31, 2011

 

345

 

$

334

 

103,756

 

$

7

 

$

4,427

 

$

(52

)

$

(1,440

)

$

(1,853

)

$

69

 

$

1,492

 

Net income (loss)

 

0

 

0

 

0

 

0

 

0

 

0

 

103

 

0

 

(24

)

79

 

Distributions paid to noncontrolling interests

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

(9

)

(9

)

Contribution from noncontrolling interests

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

2

 

2

 

Purchases of businesses or joint venture interests

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

7

 

7

 

Other comprehensive income

 

0

 

0

 

0

 

0

 

0

 

3

 

0

 

0

 

0

 

3

 

Preferred stock dividends

 

0

 

0

 

0

 

0

 

(11

)

0

 

0

 

0

 

0

 

(11

)

Repurchase of common stock

 

0

 

0

 

(1,327

)

0

 

0

 

0

 

0

 

(26

)

0

 

(26

)

Repurchase of preferred stock

 

(299

)

(289

)

0

 

0

 

0

 

0

 

0

 

0

 

0

 

(289

)

Stock-based compensation expense and issuance of common stock

 

0

 

0

 

1,990

 

0

 

21

 

0

 

0

 

0

 

0

 

21

 

Balances at September 30, 2012

 

46

 

$

45

 

104,419

 

$

7

 

$

4,437

 

$

(49

)

$

(1,337

)

$

(1,879

)

$

45

 

$

1,269

 

 

NOTE 9. 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 annual policy periods April 1, 2011 through March 31, 2014, 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, 2013 and December 31, 2012, the aggregate current and long-term professional and general liability reserves in our accompanying Condensed Consolidated Balance Sheets were approximately $329 million and $356 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 2.02% and 1.18% at September 30, 2013 and December 31, 2012, respectively.

 

For the policy period June 1, 2013 through May 31, 2014, 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

 

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$10 million of claims in excess of these aggregate self-insurance retentions of $15 million per occurrence are 85% reinsured by THINC with independent reinsurance companies, with THINC retaining 15% or a maximum of $1.5 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, 2012 through May 31, 2013, 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 80% reinsured by THINC with independent reinsurance companies, with THINC retaining 20% or a maximum of $2 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.

 

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 $71 million and $81 million for the nine months ended September 30, 2013 and 2012, respectively.

 

NOTE 10. CLAIMS AND LAWSUITS

 

We operate in a highly regulated and litigious industry. As a result, various lawsuits, claims, and legal and regulatory proceedings have been and can be expected to continue to be instituted or asserted against us. The resolution of any of these matters could have a material adverse effect on our results of operations, financial condition or cash flows in a given period.

 

In accordance with ASC 450, “Contingencies,” and related guidance, we record accruals for estimated losses relating to claims and lawsuits when available information indicates that a loss is probable and the amount of the loss, or a range of loss, can be reasonably estimated. Where a loss on a material matter is reasonably possible and estimable, we disclose an estimate of the loss or a range of loss. In cases where we have not disclosed an estimate, we have concluded that the loss is either not reasonably possible or the loss, or a range of loss, is not reasonably estimable, based on available information.

 

1.                                      Governmental Reviews—Health care companies are subject to numerous investigations by various governmental agencies. Further, private parties have the right to bring qui tam or “whistleblower” lawsuits against companies that allegedly submit false claims for payments to, or improperly retain overpayments from, the government and, in some states, private payers. Certain of our individual facilities have received inquiries from government agencies, and our facilities may receive such inquiries in future periods. The following material governmental reviews, which have been previously reported, are currently pending.

 

·                  Review of Billing Practices for Kyphoplasty Procedures. The U.S. Department of Justice (“DOJ”), in coordination with the Office of Inspector General (“OIG”) of the U.S. Department of Health and Human Services has contacted a number of hospitals nationwide requesting information regarding their billing practices in connection with kyphoplasty procedures. More specifically, the government is investigating the appropriateness of Medicare patients receiving kyphoplasty — which is a minimally invasive spinal procedure used to treat vertebral compression fractures — on an inpatient as opposed to an outpatient basis. In March 2009, one of our hospitals received an information request from the DOJ regarding these procedures and, in July 2010, we were notified that six additional hospitals were also under review. Following a chart review by our external clinical expert and non-binding discussions with the government, we entered into an agreement with the DOJ in January 2013 for approximately $900,000 (which was previously reserved) to settle claims relating to the first hospital to receive an information request. In September 2012, we reached agreement with the DOJ on the appropriate methodology to review the billing practices of a second hospital, and our expert has completed the chart review for that hospital. As a result, in the three months ended December 31, 2012, management established a reserve, as described below, to reflect the current estimate of probable liability for that second hospital. We are unable to calculate an estimate of loss or a range of loss with respect to the five remaining hospitals under review because (i) our external clinical expert has not completed its report on the billing practices of three of those hospitals, and (ii) we have not reached agreement with the DOJ on the appropriate review methodology with respect to the remaining two hospitals. The parties are currently engaged in non-binding discussions regarding a resolution of all remaining matters in dispute, but it is impossible at this time to predict the outcome of those discussions or the amount of any potential resolution.

 

·                  Review of Billing Practices for Cardiac Defibrillator Implantation Procedures. The DOJ has contacted a number of hospitals nationwide requesting information regarding their Medicare billing practices in connection with the implantation of cardiac defibrillators. As previously reported, in March 2010, the DOJ

 

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issued a civil investigative demand to one of our hospitals pursuant to the federal False Claims Act seeking information to determine if procedures to implant cardiac defibrillators at that hospital from 2002 to 2010 were performed in accordance with Medicare coverage requirements. Also as previously reported, in September 2010, the DOJ notified us that its review may extend to billing procedures at 32 of our other hospitals in addition to the hospital that received the original information request. The number of hospitals under review may increase or decrease depending on the timeframe of the government’s examination. The parties are currently engaged in non-binding discussions regarding a resolution of any potential liability associated with claims submitted to Medicare for the implantation of cardiac defibrillators during the relevant period, but it is impossible at this time to predict the outcome of those discussions or the amount of any potential resolution.

 

·                  Review of Arrangements with Local Service Provider. As previously reported, we received a subpoena from the OIG in Atlanta seeking documents from January 2004 through May 2012 related to the relationship that Atlanta Medical Center, North Fulton Regional Hospital, South Fulton Medical Center (now Atlanta Medical Center — South Campus) and Spalding Regional Hospital (all located in Georgia) and Hilton Head Hospital (located in South Carolina) had with Hispanic Medical Management, Inc. (“HMM”). HMM is an unaffiliated entity that owns and operates clinics that provide, among other things, prenatal care predominantly to Hispanic women. The hospitals contracted with HMM for translation, marketing, management and Medicaid eligibility determination services. The parallel criminal and civil investigations, which are being conducted by the U.S. Attorney’s Office for the Middle District of Georgia, the U.S. Attorney’s Office for the Northern District of Georgia, the DOJ and the Georgia Attorney General’s Office, relate to HMM’s relationships with various hospitals. The investigations arose out of a qui tam action captioned United States of America, ex. rel. Ralph D. Williams v. Health Management Associates, Inc., et al. filed in the United States District Court for the Middle District of Georgia. We understand the government’s review focuses on whether the arrangements violated the federal and state anti-kickback statutes and false claims acts. We have produced documents and information responsive to the subpoena, have voluntarily produced additional documents, and have had a series of meetings with representatives of the DOJ and the State of Georgia as part of our ongoing cooperation with the government’s review. On April 30, 2013, the U.S. Attorney’s Office and the DOJ filed a notice that the government was choosing not to intervene in the qui tam suit at the time of the filing. The Georgia Attorney General’s Office filed a notice of intervention on May 31, 2013 and filed its complaint in intervention on July 31, 2013. Our response to both complaints must be filed by November 11, 2013, and we intend to vigorously defend these matters. At this time, we are unable to determine the potential impact, if any, that will result from the final resolution of these investigations.

 

Except with respect to the matter settled in January 2013 involving one hospital, as discussed above, our analysis of these pending reviews is still ongoing, and we are unable to predict with any certainty the progress or final outcome of any discussions with government agencies at this time. Based on currently available information, as of September 30, 2013, we had recorded reserves of approximately $3 million in the aggregate with respect to three hospitals under review for their billing practices for kyphoplasty and cardiac defibrillator implantation procedures. Changes in the reserves may be required in the future as additional information becomes available. We cannot predict the ultimate resolution of any governmental review, and the final amounts paid in settlement or otherwise, if any, could differ materially from our currently recorded reserves.

 

2.                                      Hospital-Related Tort Claim—In August 2013, we settled for $8 million a previously disclosed lawsuit — which is captioned Rosenberg v. Encino-Tarzana Regional Medical Center and Tenet Healthcare Corporation — filed in connection with an alleged April 2006 assault at Tarzana Regional Medical Center (a hospital we divested in 2008). Following a jury trial, and post-trial motions by both parties, the plaintiff had been awarded $9.8 million in damages, attorneys’ fees, interest and expenses. Both parties filed notices appealing all aspects of the final judgment. In the three months ended December 31, 2011, we recorded a reserve of approximately $6 million in discontinued operations for this matter, which reserve was computed as described in our Annual Report on Form 10-K for the year ended December 31, 2011. Following the settlement, we increased the reserve by approximately $2 million in discontinued operations in the three months ended September 30, 2013.

 

3.                                      Class Action Lawsuits Relating to Vanguard Acquisition—On June 24, 2013, we agreed to acquire Vanguard Health Systems, Inc. (“Vanguard”) for $21 per share in cash. On June 25, 2013, a Vanguard stockholder filed a class action lawsuit in the Chancery Court for Davidson County, Tennessee, captioned James A. Kaurich v. Vanguard Health Systems, Inc., et al., and, on June 27, 2013, a second Vanguard stockholder filed a class action lawsuit in the Chancery Court for Davidson County, Tennessee, captioned Marion Edinburgh TTEE FBO Marion Edinburgh Trust U/T/D/ 7/8/1991 v. Vanguard Health Systems, Inc., et al. Both complaints name as defendants Vanguard, Tenet Healthcare Corporation, the merger subsidiary formed for the purpose of completing the merger with Vanguard, and the members of Vanguard’s board of directors, and allege, among other things, that we aided and abetted Vanguard’s directors’ breach of their fiduciary duties with respect to the process and terms of the merger. Both complaints seek to enjoin the merger and to create a constructive trust for the purportedly improper benefits received by Vanguard’s directors.

 

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On August 26, 2013, we and the other defendants entered into a memorandum of understanding (“MOU”) with the plaintiffs regarding the settlement of these lawsuits. Under the terms of the MOU, which is subject to customary conditions and court approval, Vanguard agreed to make certain supplemental disclosures related to the merger and to extend the period for its stockholders to exercise their appraisal rights. The MOU also contemplates that the parties will enter into a stipulation of settlement, and that Vanguard will cover the fees and expenses of the plaintiffs’ counsel for an amount that is less than $1 million. In the event that the parties enter into a stipulation of settlement, a hearing will be scheduled at which the court will consider the fairness, reasonableness and adequacy of the settlement. If the court ultimately approves the settlement, it will resolve and release all claims in all actions that were or could have been brought challenging any aspect of the merger and any related disclosure, among other claims. There can be no assurance that the parties will ultimately enter into a stipulation of settlement or that the court will approve the settlement even if the parties do enter into such stipulation. If the proposed settlement were not to be approved, we would continue to vigorously defend against each of these cases.

 

4.                                      Ordinary Course Matters—Also, as previously reported, we are defendants in a class action lawsuit in which the plaintiffs claim that in April 1996 patient identifying records from a psychiatric hospital that we closed in 1995 were temporarily placed in an unsecure location while the hospital was undergoing renovations. The lawsuit, Doe, et al. v. Jo Ellen Smith Medical Foundation, was filed in the Civil District Court for the Parish of Orleans in Louisiana in March 1997 and is currently pending. The plaintiffs’ claims include allegations of tortious invasion of privacy and negligent infliction of emotional distress. The plaintiffs contend that the class consists of over 5,000 persons; however, only eight individuals have been identified to date in the class certification process. The plaintiffs have asserted each member of the class is entitled to common damages under a theory of presumed “common damage” regardless of whether or not any members of the class were actually harmed or even aware of the incident. We believe there is no authority for an award of common damages under Louisiana law. In addition, we believe that there is no basis for the certification of this proceeding as a class action under applicable federal and Louisiana law precedents. However, the trial court has denied our motions for summary judgment and our motion to decertify the proceeding as a class action, and our attempts to appeal the trial court’s decisions have been unsuccessful. The court is expected to set the matter for trial in the near term. At this time, we are not able to estimate the reasonably possible loss or reasonably possible range of loss given: the small number of class members that have been identified or otherwise responded to the class certification process; the novel theories asserted by plaintiffs, including their assertion that a theory of presumed common damage exists under Louisiana law; and the failure of the plaintiffs to provide any evidence of damages. We intend to vigorously contest the plaintiffs’ claims.

 

In addition to the matters described above, our hospitals are subject to investigations, claims and legal proceedings in the ordinary course of our business. Most of these matters involve allegations of medical malpractice or other injuries suffered at our hospitals. We are also party in the normal course of business to regulatory proceedings and private litigation concerning the terms of our union agreements and the application of various federal and state labor laws, rules and regulations governing, among other things, a variety of workplace wage and hour issues. Furthermore, our hospitals are 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. It is management’s opinion that the ultimate resolution of these ordinary course investigations, claims and legal proceedings will not have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

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.

 

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, 2013 and 2012:

 

 

 

Balances at
Beginning
of Period

 

Litigation and
Investigation
Costs

 

Cash
Payments

 

Balances at
End of
Period

 

Nine Months Ended September 30, 2013

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

5

 

$

3

 

$

(3

)

$

5

 

Discontinued operations

 

5

 

2

 

(1

)

6

 

 

 

$

10

 

$

5

 

$

(4

)

$

11

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2012

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

49

 

$

3

 

$

(48

)

$

4

 

Discontinued operations

 

17

 

0

 

(12

)

5

 

 

 

$

66

 

$

3

 

$

(60

)

$

9

 

 

For the nine months ended September 30, 2013 and 2012, we recorded net litigation and investigation costs of $5 million and $3 million, respectively, primarily related to costs associated with various legal proceedings and governmental reviews.

 

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Table of Contents

 

NOTE 11. INCOME TAXES

 

The total amount of unrecognized tax benefits as of September 30, 2013 was $41 million related to continuing operations, of which $38 million, if recognized, would impact our effective tax rate and income tax expense (benefit).

 

Our practice is to recognize interest and penalties related to income tax matters in income tax expense in our consolidated statements of operations. Total accrued interest and penalties on unrecognized tax benefits as of September 30, 2013 were $5 million, all of which related to continuing operations.

 

As of September 30, 2013, approximately $2 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 12. EARNINGS (LOSS) PER COMMON SHARE

 

The table below is a reconciliation of the numerators and denominators of our basic and diluted earnings (loss) per common share calculations for income (loss) from continuing operations for the three and nine months ended September 30, 2013 and 2012. Income (loss) is expressed in millions and weighted average shares are expressed in thousands.

 

 

 

Income (Loss)
(Numerator)

 

Weighted
Average
Shares
(Denominator)

 

Per-Share
Amount

 

Three Months Ended September 30, 2013

 

 

 

 

 

 

 

Income available to Tenet Healthcare Corporation common shareholders for basic earnings per share

 

$

33

 

100,894

 

$

0.33

 

Effect of dilutive stock options and restricted stock units

 

0

 

2,204

 

(0.01

)

Income available to Tenet Healthcare Corporation common shareholders for diluted earnings per share

 

$

33

 

103,098

 

$

0.32

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2012

 

 

 

 

 

 

 

Income available to Tenet Healthcare Corporation common shareholders for basic earnings per share

 

$

30

 

104,244

 

$

0.29

 

Effect of dilutive stock options and restricted stock units

 

0

 

3,067

 

(0.01

)

Income available to Tenet Healthcare Corporation common shareholders for diluted earnings per share

 

$

30

 

107,311

 

$

0.28

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2013

 

 

 

 

 

 

 

Loss to Tenet Healthcare Corporation common shareholders for basic earnings per share

 

$

(106

)

102,669

 

$

(1.03

)

Effect of dilutive stock options and restricted stock units

 

0

 

0

 

0

 

Loss to Tenet Healthcare Corporation common shareholders for diluted earnings per share

 

$

(106

)

102,669

 

$

(1.03

)

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2012

 

 

 

 

 

 

 

Income available to Tenet Healthcare Corporation common shareholders for basic earnings per share

 

$

129

 

103,613

 

$

1.25

 

Effect of dilutive stock options and restricted stock units

 

0

 

3,291

 

(0.04

)

Income available to Tenet Healthcare Corporation common shareholders for diluted earnings per share

 

$

129

 

106,904

 

$

1.21

 

 

All potentially dilutive securities were excluded from the calculation of diluted earnings (loss) per share for the nine months ended September 30, 2013 because we did not report income from continuing operations in the period. In circumstances where we do not have income from continuing operations, the effect of stock options and other potentially dilutive securities is anti-dilutive, that is, a loss from continuing operations has the effect of making the diluted loss per share less than the basic loss per share. Had we generated income from continuing operations in that period, the effect (in thousands) of employee stock

 

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options, restricted stock units and deferred compensation units on the diluted shares calculation would have been an increase of 2,256. 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, 2013 were 1,226 and 827 shares, respectively, and for the three and nine months ended September 30, 2012 were 3,711 shares for both periods.

 

NOTE 13. 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. The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012. 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, 2013

 

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

 

$

0

 

$

0

 

Investments in Reserve Yield Plus Fund

 

2

 

0

 

2

 

0

 

Marketable debt securities — noncurrent

 

11

 

0

 

10

 

1

 

 

 

$

14

 

$

1

 

$

12

 

$

1

 

 

 

 

December 31, 2012

 

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

 

$

4

 

$

4

 

$

0

 

$

0

 

Investments in Reserve Yield Plus Fund

 

2

 

0

 

2

 

0

 

Marketable debt securities — noncurrent

 

14

 

2

 

11