Surgery Partners, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparison is with Q1 2021. Surgery Partners operates surgical facilities and ancillary healthcare services. At quarter-end it owned or operated 127 facilities across 31 states.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Revenue | $596.2 million | $512.4 million | Up 16.4% |
| Days-adjusted same-facility revenue | Up 8.2% | — | Cases up 6.3%; revenue per case up 1.7% |
| Operating income | $100.4 million | $64.3 million | Includes a $32.8 million litigation settlement gain in 2022 |
| Net income attributable to Surgery Partners | $12.2 million | Loss of $21.0 million | 2021 common-stockholder loss was $31.3 million, including preferred-security allocations |
| Adjusted EBITDA | $77.1 million | $72.9 million | Up 5.8%; non-GAAP measure |
| Adjusted EBITDA excluding grant funds | $76.1 million | $62.2 million | Up 22.3%; non-GAAP measure |
| Operating cash flow | $79.8 million | $50.2 million | Increase primarily reflected litigation settlement proceeds |
Costs and margins: Cost of revenues was $471.4 million, or 79.1% of revenue, compared with 79.8% a year earlier. General and administrative expense was 4.9% of revenue versus 5.2%. Net interest expense increased to $56.3 million from $53.3 million, but declined as a share of revenue to 9.4% from 10.4%. Grant funds recognized fell to $1.2 million from $15.1 million.
Cash and debt: Cash and equivalents were $378.9 million at March 31, down from $389.9 million at year-end. Total debt was $3.093 billion, versus $2.939 billion at December 31; this includes $507.7 million of finance lease obligations. The quarter included a substantial increase in finance leases following lease modifications and reclassification. Revolver availability was $203.0 million, with no revolver borrowings.
Cash uses: Investing activities used $47.1 million, including $18.2 million for property and equipment and $31.1 million for acquisitions, partly offset by $11.5 million from an investment sale. Financing activities used $43.7 million, including $36.2 million of distributions to non-controlling interest holders. The company repaid $17.0 million of debt and borrowed $11.9 million.
Material changes and notable items
- Revenue growth reflected higher surgical case volumes and acquisitions; private insurance increased to 51.1% of surgical-facility patient service revenue from 48.7%, while government payors declined to 42.4% from 44.8%.
- The $32.8 million stockholder-litigation settlement gain was received in March 2022 and materially benefited reported operating income and operating cash flow. The case settlement became final and non-appealable in March, and the case is closed.
- Q1 2022 included $1.2 million of recognized government grants, compared with $15.1 million in Q1 2021. Adjusted EBITDA excluding grants increased more than reported Adjusted EBITDA.
- The company acquired controlling interests in two surgical facilities for $31.1 million cash, net of cash acquired, plus $2.6 million of non-cash consideration. In April, after quarter-end, it acquired additional non-controlling interests for $48.6 million.
- Approximately $18 million of Medicare accelerated payments were repaid during the quarter; about $42 million remained at March 31. The company also expected to pay the remaining deferred payroll taxes in December 2022.
Outlook, risks and contingencies
The filing provides no quantified revenue or earnings guidance. Management said it believed cash from operations, available cash, revolver capacity, government-program funds and continued capital-market access would be adequate for short- and long-term liquidity needs, based on current operations. It also reported continued recovery in surgical volumes but cautioned that the duration and severity of COVID-19 effects remain uncertain.
Risks highlighted include unpredictable procedure volumes, economic conditions that could weaken payor mix or collections, the ability to access capital and service debt, government-program interpretation and repayment requirements, acquisition integration, and complex healthcare regulation. The company noted potential exposure from ordinary-course legal and insurance claims; it reported no known proceedings reasonably likely to have a material adverse effect. No material changes to the prior annual report’s risk factors were reported.
Interest-rate exposure is managed with swaps and caps. At quarter-end, the company reported $1.2 billion of net swap notional and $329.8 million of interest-rate caps; it estimated that $12.0 million would be reclassified from accumulated other comprehensive income as an increase to interest expense over the next 12 months. Management did not expect rate changes to materially affect 2022 net earnings or cash flows, based on debt and hedges at quarter-end.
Important facts for investors to verify
- How much of reported earnings and cash-flow improvement reflects the one-time $32.8 million litigation settlement, versus recurring operations.
- Whether same-facility case growth and revenue per case continue, and how payor mix and reimbursement affect revenue and margins.
- Debt, interest costs, maturities and the effect of the higher finance-lease balance; verify the impact of interest-rate changes despite hedging.
- Progress on Medicare accelerated-payment and deferred-payroll-tax repayments, and the resulting liquidity needs.
- Acquisition performance, integration costs and the impact of the April 2022 $48.6 million investment purchase.
- Potential changes in COVID-19 conditions, healthcare regulation, claim exposure and collection trends.