Surgery Partners, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. The filing covers the three and six months ended June 30, 2021. Surgery Partners operated 123 surgical facilities in 30 states, including 106 ambulatory surgery centers and 17 surgical hospitals. Its results are compared with the periods ended June 30, 2020, when COVID-19 sharply reduced surgical activity.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $543.3 million | $374.7 million | $1,055.7 million | $815.7 million |
| Operating income | $59.5 million | $44.7 million | $123.8 million | $68.2 million |
| Net income (loss), consolidated | $8.8 million | $(3.9) million | $19.6 million | $(12.3) million |
| Net loss attributable to common stockholders | $(26.9) million | $(42.2) million | $(58.2) million | $(79.2) million |
| Adjusted EBITDA (non-GAAP) | $75.9 million | $58.2 million | $148.8 million | $104.7 million |
| Adjusted EBITDA excluding grant funds (non-GAAP) | $73.0 million | $31.2 million | $135.1 million | $77.7 million |
Revenue and margins. Q2 revenue rose 45.0%; same-facility revenue increased 44.8%, reflecting 68.3% more same-facility cases, partly offset by a 14.0% decline in revenue per case. For the first half, revenue rose 29.4%, with same-facility cases up 32.7% and revenue per case down 2.9%. Cost of revenue fell to 78.2% of revenue in Q2 from 85.2%; for the first half it was 79.0%, versus 84.0%. Management attributed the improvement to recovery in case volumes and a return of lower-acuity procedures.
Cash flow and liquidity. First-half cash from operating activities was $52.5 million, down from $211.1 million; investing activities used $40.7 million and financing activities provided $134.8 million. Management said Q2 operating cash inflow was $2.3 million and cash flow after distributions to non-controlling interests was a $29.8 million outflow. At June 30, cash and cash equivalents were $464.8 million, with $163.7 million available under the revolving facility, including $6.3 million of letters of credit.
Debt and capital. Total debt was $2.856 billion, including $1.538 billion of term loans, $915 million of unsecured notes, $137.6 million of other secured loans and $281.7 million of finance leases. The May refinancing replaced the existing term loans with approximately $1.545 billion of new loans; these bear interest at LIBOR plus 3.75% (subject to a 0.75% LIBOR floor) or an alternate base rate plus 2.75%. The revolver maturity was extended to February 2026. The company completed a common-stock offering that generated $248.3 million in net proceeds and converted all Series A preferred shares into approximately 22.6 million common shares.
Material changes versus prior periods
- Revenue and Adjusted EBITDA improved substantially as surgical activity recovered from the pandemic-affected 2020 comparison period. The company nevertheless continued to report a net loss attributable to common stockholders.
- Interest expense increased to $53.4 million in Q2 from $49.2 million and to $106.7 million in the first half from $96.3 million, reflecting prior borrowing and note issuance. The term-loan refinancing also generated a $9.6 million debt-extinguishment loss.
- Government grant support recognized as an operating-expense reduction was lower: $4.9 million in Q2 2021 versus $43.1 million in Q2 2020, and $20.0 million for the first half versus $43.1 million.
- Operating cash flow declined, primarily due to the final DOJ settlement payment, reduced CARES Act-related cash inflows compared with 2020, and temporary expense and spending reductions in the 2020 comparison period.
Outlook, risks, contingencies and unusual items
- No specific financial guidance was provided. Management said it expects cash from operations, cash on hand, revolver capacity, potential government assistance and continued capital-market access to meet short- and long-term liquidity needs, based on current operations.
- Management reported continued improvement in surgical case volumes but said pandemic duration, severity and utilization recovery remain uncertain. Potential risks include renewed restrictions, weaker patient demand or payor mix, collection difficulties, labor and operating-cost pressure, and limits on access to capital.
- Government grants recognized remain subject to evolving HHS interpretation and audit requirements; amounts not yet recognized may be recognized later if conditions are met, but previously recognized amounts could also be affected by revised guidance. Medicare accelerated-payment repayment began in 2021; approximately $20 million was repaid in the first half.
- The company paid $30.7 million plus accrued interest to settle the DOJ investigation in April 2021. A derivative stockholder lawsuit remained in discovery. Management stated it was not aware of other proceedings reasonably likely to have a material adverse effect, while noting ordinary-course litigation and regulatory risks.
- No goodwill impairment indicators were identified at June 30, but management warned that lower-than-expected volumes, higher costs or interest rates, or a decline in company value could lead to a future impairment charge. A 100-basis-point interest-rate change was estimated to affect annual net earnings and cash flow by approximately $3.4 million, after swaps.
- Subsequent to quarter-end, the company acquired controlling interests in three ASCs for $85 million. The filing also reports CARES Act grant recognition, acquisition and integration costs, and the non-cash preferred-stock conversion as notable items.
Key facts investors should verify
- Whether case-volume recovery continues and how revenue per case, procedure mix and payor mix evolve.
- How much future earnings and cash flow depend on government grants, and whether grant-recognition conditions remain satisfied.
- Debt-service capacity, variable-rate exposure, refinancing terms and liquidity after the $85 million post-quarter acquisition.
- The impact of common-share issuance and preferred-stock conversion on share count, ownership and per-share results.
- Progress and potential exposure from the DOJ settlement, stockholder litigation, healthcare regulation and other contingencies.