Surgery Partners, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Surgery Partners operated 126 surgical facilities across 30 states: 110 ambulatory surgery centers and 16 surgical hospitals. The filing was signed November 4, 2020.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $496.1 million | $452.0 million | $1,311.8 million | $1,314.2 million |
| Operating income | $18.5 million | $59.0 million | $86.7 million | $164.1 million |
| Net income (loss) | $(34.3) million | $10.9 million | $(46.6) million | $22.5 million |
| Net loss attributable to common stockholders | $(71.6) million | $(24.8) million | $(150.8) million | $(82.0) million |
| Adjusted EBITDA | $61.1 million | $62.2 million | $165.8 million | $174.2 million |
| Adjusted EBITDA excluding grant funds | $66.5 million | $62.2 million | $143.9 million | $174.2 million |
- Revenue and activity: Q3 revenue rose 9.8%; same-facility revenue increased 8.4%, as revenue per case rose 11.9% on a higher-acuity case mix, partly offset by 3.1% fewer cases. For the nine-month period, same-facility cases fell 16.8% and revenue per case rose 17.1%; total revenue was nearly flat.
- Costs and margins: Cost of revenues was 77.0% of revenue in Q3 versus 78.1% a year earlier, but 81.4% for the nine months versus 77.6%. Q3 operating income fell to $18.5 million from $59.0 million, reflecting impairment charges, grant reversal and ongoing pandemic effects. Nine-month operating income declined to $86.7 million from $164.1 million.
- Cash flow: Operating cash flow was $238.0 million for the first nine months, versus $104.1 million in 2019, supported substantially by Medicare accelerated payments and other COVID-19 relief, alongside expense controls. Q3 operating cash flow was $26.9 million, down about $30 million year over year; management cited accounts-payable timing and higher receivables. Nine-month investing cash flow was positive $6.8 million and financing cash flow positive $112.5 million.
- Debt and liquidity: Total debt was $2.822 billion at September 30, up from $2.581 billion at year-end 2019. Cash and cash equivalents were $450.0 million; revolver availability was $112.5 million, including $7.5 million of letters of credit. The company issued $120 million of incremental term loans and $115 million of 10.0% notes due 2027 during 2020. Management said available cash, operating cash flow, revolver capacity, financing, CARES Act funds and cost actions were expected to meet short-term liquidity needs for 12 months.
Material changes and unusual items
- The company recorded $33.5 million of non-cash goodwill impairment: $28.6 million for Ancillary Services and $4.9 million for Alliance. It identified no impairment indicator for Surgical Facilities at September 30.
- It recognized $33.2 million of government grant funds in the first nine months. After revised HHS guidance in September, it reversed $9.9 million previously recognized in Q2; Q3 therefore included a $9.9 million operating-expense charge. October HHS guidance was more favorable, and the company expected it could support additional grant recognition in future periods, but the amount was not yet known.
- The company received approximately $120 million of Medicare accelerated payments, which are repayable, and approximately $53 million of grant funding, subject to eligibility and reporting conditions. The balance sheet included $141.0 million of Medicare accelerated payments and deferred governmental grants at quarter-end. The company also deferred $7.3 million of payroll taxes.
- Interest expense rose to $51.5 million in Q3 from $45.7 million and to $147.8 million for nine months from $134.1 million, primarily reflecting additional borrowings. Approximately $21.8 million of accumulated hedge losses were expected to be reclassified as increased interest expense over the next 12 months.
- Q3 included a $5.1 million gain on sale of anesthesia assets and a $3.5 million loss related to closure of the diagnostic laboratory, among other disposal items. The company sold anesthesia assets and interests in two surgery centers during the nine months.
Outlook, risks and contingencies
- The company withdrew its previously announced full-year 2020 outlook in March and provided no replacement numerical guidance. Management reported improving case volumes as restrictions eased, but could not predict when utilization would return to pre-pandemic levels or whether postponed procedures would be recaptured.
- COVID-19 remained the central uncertainty: renewed restrictions, lower volumes, payor-mix deterioration, unemployment, collection challenges, supply and staffing constraints, and capital-market disruption could adversely affect results, cash flow, liquidity and debt-service capacity. The company also warned that government relief eligibility and accounting guidance could change and result in repayment or reversal of amounts recognized.
- Credit agreement maximum net leverage covenant compliance was waived for the remainder of 2020; an alternative leverage calculation applied for the first three quarters of 2021.
- A federal investigation concerning urine testing was settled in April 2020. The settlement requires $40.0 million plus interest, including $30.7 million plus interest due April 1, 2021; the company recorded an additional $1.2 million charge in the first nine months. Subsidiaries also entered into three- and five-year Corporate Integrity Agreements. A separate derivative stockholder lawsuit remained in discovery.
- After quarter-end, the company acquired an ASC and surgical hospital for a combined $79.8 million, funded with divestiture proceeds and available resources.
Important facts for investors to verify
- Whether surgical case volumes and same-facility performance continued to recover, and how much results depended on higher-acuity case mix.
- The amount and timing of any further CARES Act grant recognition, and repayment timing for Medicare accelerated payments under revised program terms.
- Liquidity and debt-service capacity excluding temporary relief, including the high-cost 10.0% notes and covenant terms.
- Progress on the $40.0 million settlement payment and compliance with the Corporate Integrity Agreements.
- Whether future operating results or market conditions trigger additional goodwill impairment.
Adjusted EBITDA is a non-GAAP measure; it should not be viewed as a substitute for GAAP results or cash flow.