Company Quick10K Filing
Quick10K
Tenet Healthcare
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$23.90 103 $2,450
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-02-05 Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2019-01-28 M&A, Regulation FD, Exhibits
8-K 2019-01-22 Regulation FD, Exhibits
8-K 2019-01-22 Regulation FD, Exhibits
8-K 2019-01-03 Earnings, Amend Bylaw, Regulation FD, Exhibits
8-K 2018-11-27 Officers, Exhibits
8-K 2018-11-05 Earnings, Exhibits
8-K 2018-08-17 M&A, Regulation FD, Exhibits
8-K 2018-08-06 Earnings, Exhibits
8-K 2018-06-28 Officers
8-K 2018-05-25 Officers, Exhibits
8-K 2018-05-03 Shareholder Vote
8-K 2018-03-23 Enter Agreement, Shareholder Rights, Officers, Amend Bylaw, Regulation FD, Exhibits
8-K 2018-03-05 Enter Agreement, Leave Agreement, Shareholder Rights, Amend Bylaw, Regulation FD, Exhibits
8-K 2018-01-21 Amend Bylaw, Exhibits
8-K 2018-01-11 M&A, Regulation FD, Exhibits
8-K 2018-01-08 Regulation FD
HCA HCA Healthcare
UHS Universal Health Services
HCSG Healthcare Services Group
SEM Select Medical Holdings
MGLN Magellan Health
SGRY Surgery Partners
ARA American Renal Associates Holdings
CLBS Caladrius Biosciences
MYND Mynd Analytics
RHE Regional Health Properties
THC 2018-09-30
Part I. Financial Information
Item 1. Financial Statements
Note 1. Basis of Presentation
Note 2. Accounts Receivable
Note 3. Contract Balances
Note 4. Assets and Liabilities Held for Sale
Note 5. Impairment and Restructuring Charges, and Acquisition-Related Costs
Note 6. Long-Term Debt and Lease Obligations
Note 7. Guarantees
Note 8. Employee Benefit Plans
Note 9. Equity
Note 10. Net Operating Revenues
Note 11. Property and Professional and General Liability Insurance
Note 12. Claims and Lawsuits
Note 13. Redeemable Noncontrolling Interests in Equity of Consolidated Subsidiaries
Note 14. Income Taxes
Note 15. Earnings (Loss) per Common Share
Note 16. Fair Value Measurements
Note 17. Acquisitions
Note 18. Segment Information
Note 19. Recent Accounting Standards
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.A thc-20180930ex31a.htm
EX-31.B thc-20180930ex31b.htm
EX-32 thc-20180930ex32.htm

Tenet Healthcare Earnings 2018-09-30

THC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
Form 10-Q
 
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2018
 
OR
 
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 ¨
 
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.   Yes x No ¨
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company (each as defined in Exchange Act Rule 12b-2).
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
 
 
 
Smaller reporting company ¨
 
Emerging growth company ¨
 
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
 
Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2).   Yes ¨ No x

At October 31, 2018, there were 102,498,300 shares of the Registrant’s common stock, $0.05 par value, outstanding.
 


Table of Contents

TENET HEALTHCARE CORPORATION
TABLE OF CONTENTS

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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,
 
 
2018
 
2017
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
500

 
$
611

Accounts receivable (less allowance for doubtful accounts of $898 at December 31, 2017)
 
2,484

 
2,616

Inventories of supplies, at cost
 
307

 
289

Income tax receivable
 
27

 
5

Assets held for sale
 
128

 
1,017

Other current assets
 
1,046

 
1,035

Total current assets 
 
4,492

 
5,573

Investments and other assets
 
1,462

 
1,543

Deferred income taxes
 
348

 
455

Property and equipment, at cost, less accumulated depreciation and amortization
($5,169 at September 30, 2018 and $4,739 at December 31, 2017)
 
6,888

 
7,030

Goodwill
 
7,313

 
7,018

Other intangible assets, at cost, less accumulated amortization
($990 at September 30, 2018 and $883 at December 31, 2017)
 
1,762

 
1,766

Total assets 
 
$
22,265

 
$
23,385

LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Current portion of long-term debt
 
$
672

 
$
146

Accounts payable
 
1,065

 
1,175

Accrued compensation and benefits
 
814

 
848

Professional and general liability reserves
 
230

 
200

Accrued interest payable
 
330

 
256

Liabilities held for sale
 
71

 
480

Other current liabilities
 
1,042

 
1,227

Total current liabilities 
 
4,224

 
4,332

Long-term debt, net of current portion
 
14,178

 
14,791

Professional and general liability reserves
 
627

 
654

Defined benefit plan obligations
 
476

 
536

Deferred income taxes
 
36

 
36

Other long-term liabilities
 
622

 
631

Total liabilities 
 
20,163

 
20,980

Commitments and contingencies
 


 


Redeemable noncontrolling interests in equity of consolidated subsidiaries
 
1,444

 
1,866

Equity:
 
 
 
 
Shareholders’ equity:
 
 
 
 
Common stock, $0.05 par value; authorized 262,500,000 shares; 150,806,763 shares issued at
September 30, 2018 and 149,384,952 shares issued at December 31, 2017
 
7

 
7

Additional paid-in capital
 
4,733

 
4,859

Accumulated other comprehensive loss
 
(202
)
 
(204
)
Accumulated deficit
 
(2,231
)
 
(2,390
)
Common stock in treasury, at cost, 48,360,191 shares at September 30, 2018
and 48,413,169 shares at December 31, 2017
 
(2,415
)
 
(2,419
)
Total shareholders’ deficit
 
(108
)
 
(147
)
Noncontrolling interests 
 
766

 
686

Total equity 
 
658

 
539

Total liabilities and equity 
 
$
22,265

 
$
23,385


See accompanying Notes to Condensed Consolidated Financial Statements.


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,
 
 
2018
 
2017
 
2018
 
2017
Net operating revenues:
 
 
 
 
 
 
 
 
Net operating revenues before provision for doubtful accounts
 


 
$
4,941

 


 
$
15,310

Less: Provision for doubtful accounts
 


 
355

 


 
1,109

Net operating revenues 
 
$
4,489

 
4,586

 
$
13,694

 
14,201

Equity in earnings of unconsolidated affiliates
 
33

 
38

 
97

 
95

Operating expenses:
 
 
 
 
 
 
 
 
Salaries, wages and benefits
 
2,116

 
2,264

 
6,478

 
6,990

Supplies
 
726

 
740

 
2,248

 
2,285

Other operating expenses, net
 
1,094

 
1,120

 
3,181

 
3,466

Electronic health record incentives
 

 
(1
)
 
(1
)
 
(8
)
Depreciation and amortization
 
204

 
219

 
602

 
662

Impairment and restructuring charges, and acquisition-related costs
 
46

 
329

 
123

 
403

Litigation and investigation costs
 
9

 
6

 
28

 
12

Net losses (gains) on sales, consolidation and deconsolidation of facilities
 
7

 
(104
)
 
(111
)
 
(142
)
Operating income 
 
320

 
51

 
1,243

 
628

Interest expense
 
(249
)
 
(257
)
 
(758
)
 
(775
)
Other non-operating expense, net
 

 
(4
)
 
(2
)
 
(14
)
Loss from early extinguishment of debt
 

 
(138
)
 
(2
)
 
(164
)
Income (loss) from continuing operations, before income taxes 
 
71

 
(348
)
 
481

 
(325
)
Income tax benefit (expense)
 
(6
)
 
60

 
(120
)
 
105

Income (loss) from continuing operations, before discontinued operations 
 
65

 
(288
)
 
361

 
(220
)
Discontinued operations:
 
 
 
 
 
 
 
 
Income (loss) from operations
 

 
(1
)
 
3

 
(1
)
Income tax expense
 

 

 

 

Income (loss) from discontinued operations 
 

 
(1
)
 
3

 
(1
)
Net income (loss)
 
65

 
(289
)
 
364

 
(221
)
Less: Net income available to noncontrolling interests
 
74

 
78

 
248

 
254

Net income available (loss attributable) to Tenet Healthcare Corporation common shareholders 
 
$
(9
)
 
$
(367
)
 
$
116

 
$
(475
)
Amounts available (attributable) to Tenet Healthcare Corporation
common shareholders
 
 
 
 
 
 
 
 
Income (loss) from continuing operations, net of tax
 
$
(9
)
 
$
(366
)
 
$
113

 
$
(474
)
Income (loss) from discontinued operations, net of tax
 

 
(1
)
 
3

 
(1
)
Net income available (loss attributable) to Tenet Healthcare Corporation common shareholders 
 
$
(9
)
 
$
(367
)
 
$
116

 
$
(475
)
Earnings (loss) per share available (attributable) to Tenet Healthcare Corporation common shareholders:
 
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.09
)
 
$
(3.63
)
 
$
1.11

 
$
(4.72
)
Discontinued operations
 

 
(0.01
)
 
0.03

 
(0.01
)
 
 
$
(0.09
)
 
$
(3.64
)
 
$
1.14

 
$
(4.73
)
Diluted
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.09
)
 
$
(3.63
)
 
$
1.09

 
$
(4.72
)
Discontinued operations
 

 
(0.01
)
 
0.03

 
(0.01
)
 
 
$
(0.09
)
 
$
(3.64
)
 
$
1.12

 
$
(4.73
)
Weighted average shares and dilutive securities outstanding (in thousands):
 
 
 
 
 
 
 
 
Basic
 
102,402

 
100,812

 
101,980

 
100,475

Diluted
 
102,402

 
100,812

 
103,802

 
100,475


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,
 
 
2018
 
2017
 
2018
 
2017
Net income (loss)
 
$
65

 
$
(289
)
 
$
364

 
$
(221
)
Other comprehensive income:
 
 
 
 
 
 
 
 
Amortization of net actuarial loss included in other non-operating expense, net
 
3

 
4

 
11

 
12

Unrealized gains on securities held as available-for-sale
 

 
2

 

 
5

Sale of foreign subsidiary
 
37

 

 
37

 

Foreign currency translation adjustments
 

 
5

 
(3
)
 
14

Other comprehensive income before income taxes
 
40

 
11

 
45

 
31

Income tax benefit (expense) related to items of other comprehensive income
 
1

 
(7
)
 

 
(11
)
Total other comprehensive income, net of tax
 
41

 
4

 
45

 
20

Comprehensive net income (loss)
 
106

 
(285
)
 
409

 
(201
)
Less: Comprehensive income available to noncontrolling interests 
 
74

 
78

 
248

 
254

Comprehensive income available (loss attributable) to
Tenet Healthcare Corporation common shareholders
 
 
$
32

 
$
(363
)
 
$
161

 
$
(455
)

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,
 
 
2018
 
2017
Net income (loss)
 
$
364

 
$
(221
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
602

 
662

Provision for doubtful accounts
 

 
1,109

Deferred income tax expense (benefit)
 
110

 
(145
)
Stock-based compensation expense
 
34

 
44

Impairment and restructuring charges, and acquisition-related costs
 
123

 
403

Litigation and investigation costs
 
28

 
12

Net gains on sales, consolidation and deconsolidation of facilities
 
(111
)
 
(142
)
Loss from early extinguishment of debt
 
2

 
164

Equity in earnings of unconsolidated affiliates, net of distributions received
 
9

 
(4
)
Amortization of debt discount and debt issuance costs
 
33

 
33

Pre-tax loss (income) from discontinued operations
 
(3
)
 
1

Other items, net
 
(22
)
 
(19
)
Changes in cash from operating assets and liabilities:
 
 

 
 

Accounts receivable
 
(36
)
 
(1,046
)
Inventories and other current assets
 
73

 
97

Income taxes
 
(14
)
 
(14
)
Accounts payable, accrued expenses and other current liabilities
 
(194
)
 
(141
)
Other long-term liabilities
 
(82
)
 
7

Payments for restructuring charges, acquisition-related costs, and litigation costs and settlements 
 
(113
)
 
(88
)
Net cash used in operating activities from discontinued operations, excluding income taxes
 
(4
)
 
(3
)
Net cash provided by operating activities 
 
799

 
709

Cash flows from investing activities:
 
 

 
 

Purchases of property and equipment — continuing operations
 
(404
)
 
(492
)
Purchases of businesses or joint venture interests, net of cash acquired
 
(97
)
 
(41
)
Proceeds from sales of facilities and other assets
 
498

 
826

Proceeds from sales of marketable securities, long-term investments and other assets
 
165

 
20

Purchases of equity investments
 
(43
)
 
(64
)
Other long-term assets
 
5

 
(16
)
Other items, net
 
(4
)
 
(6
)
Net cash provided by investing activities
 
120

 
227

Cash flows from financing activities:
 
 

 
 

Repayments of borrowings under credit facility
 
(505
)
 
(850
)
Proceeds from borrowings under credit facility
 
505

 
850

Repayments of other borrowings
 
(238
)
 
(4,099
)
Proceeds from other borrowings
 
15

 
3,788

Debt issuance costs
 

 
(62
)
Distributions paid to noncontrolling interests
 
(217
)
 
(178
)
Proceeds from sales of noncontrolling interests
 
14

 
29

Purchases of noncontrolling interests
 
(643
)
 
(722
)
Proceeds from exercise of stock options and employee stock purchase plan
 
15

 
5

Other items, net
 
24

 
16

Net cash used in financing activities
 
(1,030
)
 
(1,223
)
Net decrease in cash and cash equivalents
 
(111
)
 
(287
)
Cash and cash equivalents at beginning of period
 
611

 
716

Cash and cash equivalents at end of period 
 
$
500

 
$
429

Supplemental disclosures:
 
 

 
 

Interest paid, net of capitalized interest
 
$
(652
)
 
$
(617
)
Income tax payments, net
 
$
(24
)
 
$
(54
)
 
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,” “we” or “us”) is a diversified healthcare services company. At September 30, 2018, we operated 68 hospitals, 21 surgical hospitals and approximately 475 outpatient centers in the United States through our subsidiaries, partnerships and joint ventures, including USPI Holding Company, Inc. (“USPI”). Our Conifer Holdings, Inc. (“Conifer”) subsidiary provides healthcare business process services in the areas of hospital and physician revenue cycle management and value-based care solutions to healthcare systems, as well as individual hospitals, physician practices, self-insured organizations, health plans and other entities.
 
This quarterly report supplements our Annual Report on Form 10-K for the year ended December 31, 2017 (“Annual Report”). As permitted by the Securities and Exchange Commission 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).
 
Effective January 1, 2018, we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”) using a modified retrospective method of application to all contracts existing on January 1, 2018. The core principle of the guidance in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For our Hospital Operations and other and Ambulatory Care segments, the adoption of ASU 2014-09 resulted in changes to our presentation for and disclosure of revenue primarily related to uninsured or underinsured patients. Prior to the adoption of ASU 2014-09, a significant portion of our provision for doubtful accounts related to self-pay patients, as well as co-pays, co-insurance amounts and deductibles owed to us by patients with insurance. Under ASU 2014-09, the estimated uncollectable amounts due from these patients are generally considered implicit price concessions that are a direct reduction to net operating revenues, with a corresponding material reduction in the amounts presented separately as provision for doubtful accounts. For the nine months ended September 30, 2018, we recorded approximately $1.052 billion of implicit price concessions as a direct reduction of net operating revenues that would have been recorded as provision for doubtful accounts prior to the adoption of ASU 2014-09. At January 1, 2018, we reclassified $171 million of revenues related to patients who were still receiving inpatient care in our facilities at that date from accounts receivable, less allowance for doubtful accounts, to contract assets, which are included in other current assets in the accompanying Condensed Consolidated Balance Sheet at September 30, 2018. The adoption of ASU 2014-09 also resulted in changes to our presentation and disclosure of customer contract assets and liabilities and the assessment of variable consideration under customer contracts, which are further discussed in Note 3.

Also effective January 1, 2018, we early adopted ASU 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220)” (“ASU 2018-02”), which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded income tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”) and requires certain disclosures about stranded income tax effects. We applied the amendments in ASU 2018-02 in the period of adoption, resulting in a reclassification of $36 million of stranded income tax effects from accumulated other comprehensive loss to accumulated deficit in the three months ended March 31, 2018.

In addition, we adopted ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”) effective January 1, 2018, which supersedes the guidance to classify equity securities with readily determinable fair values into different categories (that is, trading or available-for-sale) and require equity securities (including other ownership interests, such as partnerships, unincorporated joint ventures and limited liability companies) to be measured at fair value with changes in the fair value recognized through net income. Upon adoption of ASU 2016-01 on January 1, 2018, we recorded a cumulative effect adjustment to decrease accumulated deficit by approximately $7 million for unrealized gains on equity securities.

Also effective January 1, 2018, we adopted ASU 2016-15, “Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments” and ASU 2016-18, “Statement of Cash Flows (Topic 230) Restricted Cash,” both of which were applied using a retrospective transition method to each period presented. The adoption of these standards did not have any effect on our statements of cash flows.

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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 are required to make 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, 2018 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 and other supplemental funding levels set by the states in which we operate; the timing of approval by the Centers for Medicare and Medicaid Services of Medicaid provider fee revenue programs; trends in patient accounts receivable collectability and associated implicit price concessions; 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 and other weather-related occurrences; litigation and investigation costs; acquisitions and dispositions of facilities and other assets; gains (losses) on sales, consolidation and deconsolidation of facilities; 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 healthcare facilities include, but are not limited to: changes in federal and state healthcare regulations; the business environment, economic conditions and demographics of local communities in which we operate; 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 healthcare competitors; managed care contract negotiations or terminations; the number of patients with high-deductible health insurance plans; hospital performance data on quality measures and patient satisfaction, as well as standard charges for our services; any unfavorable publicity about us, or our joint venture partners, that impacts our relationships with physicians and patients; and the timing of elective procedures. These considerations apply to year-to-year comparisons as well.
 
Translation of Foreign Currencies
 
We divested European Surgical Partners Limited (“Aspen”) in August of 2018; prior to that time, Aspen’s accounts were measured in its local currency (the pound sterling) and then translated into U.S. dollars. All assets and liabilities were translated using the current rate of exchange at the balance sheet date. Results of operations were translated using the average rates prevailing throughout the period of operations. Translation gains or losses resulting from changes in exchange rates were accumulated in shareholders’ equity until we divested Aspen.
 
Net Operating Revenues
 
ASU 2014-09 was issued to clarify the principles for recognizing revenue, to remove inconsistencies and weaknesses in revenue recognition requirements, and to provide a more robust framework for addressing revenue issues. Our adoption of ASU 2014-09 was accomplished using a modified retrospective method of application, and our accounting policies related to revenues were revised accordingly effective January 1, 2018, as discussed below.

We recognize net operating revenues in the period in which we satisfy our performance obligations under contracts by transferring our services to our customers. Net operating revenues are recognized in the amounts to which we expect to be entitled, which are the transaction prices allocated to the distinct services. Net operating revenues for our Hospital Operations and other and Ambulatory Care segments primarily consist of net patient service revenues, 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”) and other uninsured discount and charity programs. Net operating revenues for our Conifer segment primarily consist of revenues from providing revenue cycle management services to healthcare systems, as well as individual hospitals, physician practices, self-insured organizations, health plans and other entities.

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Net Patient Service Revenues—We report net patient service revenues at the amounts that reflect the consideration to which we expect to be entitled in exchange for providing patient care. These amounts are due from patients, third-party payers (including managed care payers and government programs) and others, and they include variable consideration for retroactive revenue adjustments due to settlement of audits, reviews and investigations. Generally, we bill our patients and third-party payers several days after the services are performed or shortly after discharge. Revenues are recognized as performance obligations are satisfied.

We determine performance obligations based on the nature of the services we provide. We recognize revenues for performance obligations satisfied over time based on actual charges incurred in relation to total expected charges. We believe that this method provides a faithful depiction of the transfer of services over the term of performance obligations based on the inputs needed to satisfy the obligations. Generally, performance obligations satisfied over time relate to patients in our hospitals receiving inpatient acute care services. We measure performance obligations from admission to the point when there are no further services required for the patient, which is generally the time of discharge. We recognize revenues for performance obligations satisfied at a point in time, which generally relate to patients receiving outpatient services, when: (1) services are provided; and (2) we do not believe the patient requires additional services.

Because our patient service performance obligations relate to contracts with a duration of less than one year, we have elected to apply the optional exemption provided in FASB Accounting Standards Codification (“ASC”) 606-10-50-14(a) and, therefore, we are not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The unsatisfied or partially unsatisfied performance obligations referred to above are primarily related to inpatient acute care services at the end of the reporting period. The performance obligations for these contracts are generally completed when the patients are discharged, which generally occurs within days or weeks of the end of the reporting period.

We determine the transaction price based on gross charges for services provided, reduced by contractual adjustments provided to third-party payers, discounts provided to uninsured patients in accordance with our Compact, and implicit price concessions provided primarily to uninsured patients. We determine our estimates of contractual adjustments and discounts based on contractual agreements, our discount policies and historical experience. We determine our estimate of implicit price concessions based on our historical collection experience with these classes of patients using a portfolio approach as a practical expedient to account for patient contracts as collective groups rather than individually. The financial statement effects of using this practical expedient are not materially different from an individual contract approach.

Gross charges are retail charges. They are not the same as actual pricing, and they generally do not reflect what a hospital is ultimately paid and, therefore, are not displayed in our consolidated statements of operations. Hospitals are typically paid amounts that are negotiated with insurance companies or are set by the government. Gross charges are used to calculate Medicare outlier payments and to determine certain elements of payment under managed care contracts (such as stop-loss payments). Because Medicare requires that a hospital’s gross charges be the same for all patients (regardless of payer category), gross charges are what hospitals charge all patients prior to the application of discounts and allowances. 

Revenues under the traditional fee-for-service Medicare and Medicaid programs are based primarily on prospective payment systems. Retrospectively determined cost-based revenues under these programs, which were more prevalent in earlier periods, and certain other payments, such as Indirect Medical Education, Direct Graduate Medical Education, disproportionate share hospital and bad debt expense reimbursement, which are based on our hospitals’ cost reports, are estimated using historical trends and current factors. Cost report settlements under these programs are subject to audit by Medicare and Medicaid auditors and administrative and judicial review, and it can take several years until final settlement of such matters is determined and completely resolved. Because the laws, regulations, instructions and rule interpretations governing Medicare and Medicaid reimbursement are complex and change frequently, the estimates we record could change by material amounts.

We have a system and estimation process for recording Medicare net patient revenue and estimated cost report settlements. As a result, we record accruals to reflect the expected final settlements on our cost reports. For filed cost reports, we record the accrual based on those cost reports and subsequent activity, and record a valuation allowance against those cost reports based on historical settlement trends. The accrual for periods for which a cost report is yet to be filed is recorded based on estimates of what we expect to report on the filed cost reports, and a corresponding valuation allowance is recorded as previously described. Cost reports generally must be filed within five months after the end of the annual cost reporting period. After the cost report is filed, the accrual and corresponding valuation allowance may need to be adjusted.

Settlements with third-party payers for retroactive revenue adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient

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care using the most likely outcome method. These settlements are estimated based on the terms of the payment agreement with the payer, correspondence from the payer and our historical settlement activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved. Estimated settlements are adjusted in future periods as adjustments become known (that is, new information becomes available), or as years are settled or are no longer subject to such audits, reviews and investigations.

Revenues under managed care plans are based primarily on payment terms involving predetermined rates per diagnosis, per-diem rates, discounted fee-for-service rates and/or other similar contractual arrangements. These revenues are also subject to review and possible audit by the payers, which can take several years before they are completely resolved. The payers are billed for patient services on an individual patient basis. An individual patient’s bill is subject to adjustment on a patient-by-patient basis in the ordinary course of business by the payers following their review and adjudication of each particular bill. We estimate the discounts for contractual allowances at the individual hospital level utilizing billing data on an individual patient basis. At the end of each month, on an individual hospital basis, we estimate our expected reimbursement for patients of managed care plans based on the applicable contract terms. Contractual allowance estimates are periodically reviewed for accuracy by taking into consideration known contract terms, as well as payment history. We believe our estimation and review process enables us to identify instances on a timely basis where such estimates need to be revised. We do not believe there were any adjustments to estimates of patient bills that were material to our revenues. In addition, on a corporate-wide basis, we do not record any general provision for adjustments to estimated contractual allowances for managed care plans. Managed care accounts, net of contractual allowances recorded, are further reduced to their net realizable value through implicit price concessions based on historical collection trends for these payers and other factors that affect the estimation process.

We know of no claims, disputes or unsettled matters with any payer that would materially affect our revenues for which we have not adequately provided in the accompanying Condensed Consolidated Financial Statements.

Generally, patients who are covered by third-party payers are responsible for related co-pays, co-insurance and deductibles, which vary in amount. We also provide services to uninsured patients and offer uninsured patients a discount from standard charges. We estimate the transaction price for patients with co-pays, co-insurance and deductibles and for those who are uninsured based on historical collection experience and current market conditions. Under our Compact and other uninsured discount programs, the discount offered to certain uninsured patients is recognized as a contractual allowance, which reduces net operating revenues at the time the self-pay accounts are recorded. The uninsured patient accounts, net of contractual allowances recorded, are further reduced to their net realizable value at the time they are recorded through implicit price concessions based on historical collection trends for self-pay accounts and other factors that affect the estimation process. There are various factors that can impact collection trends, such as changes in the economy, which in turn have an impact on unemployment rates and the number of uninsured and underinsured patients, the volume of patients through our emergency departments, the increased burden of co-pays, co-insurance amounts and deductibles to be made by patients with insurance, and business practices related to collection efforts. These factors continuously change and can have an impact on collection trends and our estimation process. Subsequent changes to the estimate of the transaction price are generally recorded as adjustments to net patient revenues in the period of the change.

We have provided implicit price concessions, primarily to uninsured patients and patients with co-pays, co-insurance and deductibles. The implicit price concessions included in estimating the transaction price represent the difference between amounts billed to patients and the amounts we expect to collect based on our collection history with similar patients. Although outcomes vary, our policy is to attempt to collect amounts due from patients, including co-pays, co-insurance and deductibles due from patients with insurance, at the time of service while complying with all federal and state statutes and regulations, including, but not limited to, the Emergency Medical Treatment and Active Labor Act (“EMTALA”). Generally, as required by EMTALA, patients may not be denied emergency treatment due to inability to pay. Therefore, services, including the legally required medical screening examination and stabilization of the patient, are performed without delaying to obtain insurance information. In non-emergency circumstances or for elective procedures and services, it is our policy to verify insurance prior to a patient being treated; however, there are various exceptions that can occur. Such exceptions can include, for example, instances where (1) we are unable to obtain verification because the patient’s insurance company was unable to be reached or contacted, (2) a determination is made that a patient may be eligible for benefits under various government programs, such as Medicaid or Victims of Crime, and it takes several days or weeks before qualification for such benefits is confirmed or denied, and (3) under physician orders we provide services to patients that require immediate treatment.

We also provide charity care to patients who are financially unable to pay for the healthcare 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. Patient advocates from Conifer’s Medical Eligibility Program screen patients in

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the hospital to determine whether those patients meet eligibility requirements for financial assistance programs. They also expedite the process of applying for these government programs.

Conifer Revenues—Our Conifer segment recognizes revenue from its contracts when Conifer’s performance obligations are satisfied, which is generally as services are rendered. Revenue is recognized in an amount that reflects the consideration to which Conifer expects to be entitled.

At contract inception, Conifer assesses the services specified in its contracts with customers and identifies a performance obligation for each distinct contracted service. Conifer identifies the performance obligations and considers all the services provided under the contract. Conifer generally considers the following distinct services as separate performance obligations:
revenue cycle management services;
value-based care services;
patient communication and engagement services;
consulting services; and
other client-defined projects.
Conifer’s contracts generally consist of fixed-price, volume-based or contingency-based fees. Conifer’s long-term contracts typically provide for Conifer to deliver recurring monthly services over a multi-year period. The contracts are typically priced such that Conifer’s monthly fee to its customer represents the value obtained by the customer in the month for those services. Such multi-year service contracts may have upfront fees related to transition or integration work performed by Conifer to set up the delivery for the ongoing services. Such transition or integration work typically does not result in a separately identifiable obligation; thus, the fees and expenses related to such work are deferred and recognized over the life of the related contractual service period. Revenue for fixed-priced contracts is typically recognized at the time of billing unless evidence suggests that the revenue is earned or Conifer’s obligations are fulfilled in a different pattern. Revenue for volume-based contracts is typically recognized as the services are being performed at the contractually billable rate, which is generally a percentage of collections or a percentage of client net patient revenue.

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 $500 million and $611 million at September 30, 2018 and December 31, 2017, respectively. At September 30, 2018 and December 31, 2017, our book overdrafts were approximately $235 million and $311 million, respectively, which were classified as accounts payable.
 
At September 30, 2018 and December 31, 2017, approximately $165 million and $179 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, and approximately $28 million and $30 million, respectively, of total cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheets were intended for the operations of our health plan-related businesses.
     
Also at September 30, 2018 and December 31, 2017, we had $86 million and $117 million, respectively, of property and equipment purchases accrued for items received but not yet paid. Of these amounts, $61 million and $79 million, respectively, were included in accounts payable.
 
During the nine months ended September 30, 2018 and 2017, we entered into non-cancellable capital leases of approximately $94 million and $82 million, respectively, primarily for equipment.
 
Other Intangible Assets
 
The following tables provide information regarding other intangible assets, which are included in the accompanying Condensed Consolidated Balance Sheets at September 30, 2018 and December 31, 2017: 

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Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
At September 30, 2018:
 
 
 
 
 
 
Capitalized software costs
 
$
1,680

 
$
(842
)
 
$
838

Trade names
 
102

 

 
102

Contracts
 
865

 
(72
)
 
793

Other
 
105

 
(76
)
 
29

Total 
 
$
2,752

 
$
(990
)
 
$
1,762

 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
 Net Book
Value
At December 31, 2017:
 
 
 
 
 
 
Capitalized software costs
 
$
1,582

 
$
(754
)
 
$
828

Trade names
 
102

 

 
102

Contracts
 
859

 
(60
)
 
799

Other
 
106

 
(69
)
 
37

Total 
 
$
2,649

 
$
(883
)
 
$
1,766


 
Estimated future amortization of intangibles with finite useful lives at September 30, 2018 is as follows: 
 
 
 
 
Three Months
Ending
 
Years Ending
 
Later Years
 
 
 
 
December 31,
 
 
 
Total
 
2018
 
2019
 
2020
 
2021
 
2022
 
Amortization of intangible assets
 
$
1,090

 
$
41

 
$
152

 
$
127

 
$
108

 
$
97

 
$
565


 
We recognized amortization expense of $134 million and $125 million in the accompanying Condensed Consolidated Statements of Operations for the nine months ended September 30, 2018 and 2017, respectively.
 
Investments in Debt and Equity Securities

Prior to the adoption of ASU 2016-01 on January 1, 2018, we classified investments in debt and equity securities as either available-for-sale, held-to-maturity or as part of a trading portfolio. At December 31, 2017, we had no significant investments in securities classified as either held-to-maturity or trading. We carried securities classified as available-for-sale at fair value. We reported their unrealized gains and losses, net of taxes, as accumulated other comprehensive income (loss) unless we determined that a loss was other-than-temporary, at which point we would record a loss in our consolidated statements of operations. We included realized gains or losses in our consolidated statements of operations based on the specific identification method.

Subsequent to the adoption of ASU 2016-01 on January 1, 2018, we classify investments in debt securities as either available-for-sale, held-to-maturity or as part of a trading portfolio, but these classifications are no longer applicable to equity securities. At September 30, 2018, we had no significant investments in debt securities classified as either held-to-maturity or trading. We carry debt securities classified as available-for-sale at fair value. We report their unrealized gains and losses, net of taxes, as accumulated other comprehensive income (loss) unless we determine that a loss is other-than-temporary, at which point we would record a loss in our consolidated statements of operations. We carry equity securities at fair value, and we report their unrealized gains and losses in other non-operating expense, net, in our consolidated statements of operations. We include realized gains or losses in our consolidated statements of operations based on the specific identification method.

Investments in Unconsolidated Affiliates
We control 228 of the facilities within our Ambulatory Care segment and, therefore, consolidate their results. We account for many of the facilities our Ambulatory Care segment operates (107 of 335 at September 30, 2018), as well as additional facilities in which our Hospital Operations and other segment holds ownership interests, under the equity method as investments in unconsolidated affiliates and report only our share of net income available to the investee as equity in earnings of unconsolidated affiliates in the accompanying Condensed Consolidated Statements of Operations. Summarized financial information for the equity method investees within our Ambulatory Care segment is included in the following table, as well as summarized financial information for the four North Texas hospitals in which we held minority interests that were operated by our Hospital Operations and other segment through the divestiture of these investments effective March 1, 2018. We recorded a gain of approximately $13 million in the nine months ended September 30, 2018 due to the sales of our minority interests in

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these hospitals. For investments acquired during the reported periods, amounts reflect 100% of the investee’s results beginning on the date of our acquisition of the investment.
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Net operating revenues
 
$
546

 
$
635

 
$
1,667

 
$
1,819

Net income
 
$
126

 
$
143

 
$
374

 
$
376

Net income available to the investees
 
$
80

 
$
93

 
$
240

 
$