Surgery Partners, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and nine months ended September 30, 2022. Surgery Partners operates surgical facilities and ancillary services; at quarter-end it owned or operated 145 facilities in 32 states, including 126 ambulatory surgery centers and 19 surgical hospitals.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $620.6 million | $559.2 million | $1,832.2 million | $1,614.9 million |
| Operating income | $74.1 million | $63.6 million | $251.0 million | $187.4 million |
| Net income (loss) attributable to common stockholders | ($25.0) million | ($22.9) million | ($31.2) million | ($81.1) million |
| Adjusted EBITDA | $96.2 million | $76.4 million | $259.4 million | $225.2 million |
| Net interest expense | $60.7 million | $54.2 million | $173.9 million | $160.9 million |
- Q3 revenue increased 11.0%; same-facility revenue rose 5.1%, reflecting 3.3% more cases and 1.8% higher revenue per case. Nine-month revenue increased 13.5%, including 3.8% growth in days-adjusted same-facility case volume and 2.7% higher revenue per case.
- Q3 cost of revenue was 78.9% of revenue versus 78.1% a year earlier. For the first nine months it was 78.7% in both years. Q3 operating margin was approximately 11.9%, compared with 11.4%; Adjusted EBITDA margin was approximately 15.5%, compared with 13.7%.
- Nine-month operating cash flow was $151.6 million versus $67.4 million. Investing used $235.7 million and financing used $151.0 million; cash declined $235.1 million to $154.8 million. Q3 operating cash inflow was $29.7 million; after distributions to non-controlling holders, net operating cash flow was an outflow of $5.6 million.
- At September 30, cash was $154.8 million, working capital was approximately $114.0 million, and revolving-credit availability was $342.0 million, including outstanding letters of credit. Total debt was $3,219.5 million, including $116.9 million of current maturities; the revolver had no borrowings. Debt rose from $2,938.8 million at year-end 2021, with finance-lease reclassifications contributing to the increase.
- Management said cash from operations, available cash, revolver capacity and anticipated capital-market access should meet short- and long-term liquidity needs. This is management’s assessment, not a guarantee.
Material changes and unusual items
- Revenue growth reflected higher case volumes, favorable case mix and acquisitions. Cost of revenue also increased, primarily with acquisitions. Management cited cost-management initiatives for lower Q3 general and administrative expense as a percentage of revenue.
- Nine-month 2022 results included a $32.8 million stockholder-litigation settlement gain; the case was closed after court approval, and the company received the proceeds in March. Nine-month 2021 included $20.0 million of recognized grant funds and a $9.1 million debt-extinguishment loss, versus $1.8 million of grant funds and no comparable debt-extinguishment loss in 2022.
- In September 2022, the company acquired a controlling interest in a surgical hospital. It reported $61.0 million of deferred consideration and $39.4 million of assumed debt; it said both were paid in October using available cash. It also acquired interests in other facilities and practices and invested $95.1 million in non-controlling interests in facilities and de novo developments during the nine months.
- Net income attributable to non-controlling interests exceeded consolidated net income in Q3, resulting in a loss attributable to Surgery Partners common stockholders despite consolidated net income of $5.6 million.
Outlook, risks and contingencies
The filing provides no specific revenue, earnings or cash-flow guidance. Management noted uncertainty from COVID-19, inflation, supply-chain disruption and a competitive labor market, which may raise labor and supply costs or affect case volumes. Other cited risks include interest-rate and market volatility, payer mix and payment timing, receivable collection, regulatory and reimbursement changes, acquisition integration, and the possibility of goodwill impairment if assumptions such as case volumes, costs or interest rates worsen. The company uses swaps and caps to manage variable-rate exposure and stated it did not expect rate changes to materially affect 2022 net earnings or cash flows.
The company continued repaying Medicare accelerated payments: approximately $56 million in the first nine months, leaving about $4 million deferred at September 30. It also anticipated further CARES Act payroll-tax repayments during 2022. Management reported no known liability proceeding reasonably possible to have a material adverse effect, while noting ordinary-course claims and that some damages may not be insured. Healthcare regulatory compliance, including Medicare, Medicaid and fraud-and-abuse requirements, remains a material ongoing risk.
Important facts for investors to verify
- Whether same-facility case growth, revenue per case and margins persist as labor, supply and other operating costs evolve.
- How the company funds acquisition-related obligations, capital spending, distributions to non-controlling holders and debt maturities while maintaining liquidity.
- The effect of floating-rate debt, future refinancing conditions and hedging arrangements on interest expense and cash flows.
- Whether acquisition integration, de novo development and acquired-facility valuations meet expectations, including the assumptions underlying goodwill and impairment assessments.
- How much reported performance depends on non-recurring litigation proceeds, government grants and other adjustments used in non-GAAP measures.