Surgery Partners, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports quarterly results, including fourth-quarter 2019. Amounts are in U.S. dollars; financial figures are in millions unless otherwise noted.
Business context and reporting period
Surgery Partners owns and operates surgical facilities, primarily in partnership with physicians. At year-end it operated 128 facilities in 30 states: 112 ambulatory surgery centers and 16 surgical hospitals. It held majority interests in 85 facilities and consolidated 107 for financial reporting. Approximately 525,000 procedures were performed in 2019. Surgical facility services generated 95% of revenue; ancillary services and optical services made up most of the balance.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $1,831.4 | $1,771.5 |
| Operating income | $235.9 | $77.8 |
| Operating margin | 12.9% | 4.4% |
| Net income (loss), consolidated | $45.1 | $(95.6) |
| Net loss attributable to Surgery Partners, Inc. | $(74.8) | $(205.7) |
| Net loss attributable to common stockholders | $(110.5) | $(238.1) |
| Adjusted EBITDA (non-GAAP) | $258.6 | $234.8 |
| Adjusted EBITDA margin | 14.1% | 13.3% |
| Cash from operating activities | $129.5 | $144.6 |
| Cash and cash equivalents at year-end | $92.7 | $184.3 |
| Working capital at year-end | $127.4 | $239.0 |
| Total debt, including finance leases | $2,580.7 | $2,326.5 |
Cost of revenues was 76.9% of revenue in both years. Interest expense rose to $178.9 from $147.0, or 9.8% of revenue versus 8.3%. Capital expenditures were $73.6. Cash operating inflows after distributions to non-controlling interest holders were $8.3. The company reported $112.9 of available revolver capacity, net of letters of credit.
Fourth quarter: Revenue was $517.2, compared with $491.2 in Q4 2018. Consolidated net income was $22.6, while net loss attributable to Surgery Partners was $19.2 and loss per common share was $0.59.
Material changes versus the prior comparable period
- Full-year revenue increased 3.4%. Same-facility revenue grew 7.6%, comprising 5.5% higher revenue per case and 2.0% case growth. Management reported six consecutive quarters of same-facility case-volume growth through Q4.
- Adjusted EBITDA increased 10.1%; operating income improved substantially, while the company continued to report a loss attributable to the parent and common stockholders.
- Lower general and administrative expense and reduced impairment and litigation charges supported the improvement. In 2018, the company recorded $74.4 of impairment charges and a $46.0 charge related to the government investigation. In 2019, impairment charges were $7.9 and the litigation-related charge was $0.2.
- Interest expense increased following $180.0 of incremental term borrowing in 2018 and the 2019 issuance of $430.0 of 10.0% notes. The notes replaced the 8.875% notes due 2021; the refinancing produced an $11.7 debt-extinguishment loss.
- Operating cash flow decreased by $15.1. Cash declined by $91.6 during 2019, with financing cash use including $121.2 of distributions to non-controlling holders.
- Capital spending rose to $73.6 from $39.8. The company made acquisitions and investments, while 2018 included acquisitions with substantially higher cash outlay and divestitures.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing provides no quantified earnings or revenue guidance. Management said it believed liquidity was sufficient for the next 12–18 months and was exploring financing alternatives, including extending maturities or relaxing covenants. As of the filing date, it was monitoring COVID-19 and planning for possible business impacts; elective-procedure cancellations, staffing and supply disruptions were identified risks.
- Debt and liquidity: Debt was approximately $2.6 billion, including a $1.439 billion term loan due 2024, $370.0 of 6.75% notes due 2025, and $430.0 of 10.0% notes due 2027. The revolver matures in 2022. The company reported compliance with debt covenants at year-end, but leverage, interest costs, refinancing needs and restrictive covenants remain significant risks.
- Government investigation: Federal demands concerned the medical necessity of certain drug tests dating back to 2010. CMS lifted its payment suspension on Logan Laboratories in December 2019. A related complaint was unsealed in January 2020; the company reported a non-binding agreement in principle with DOJ on settlement financial terms. The company maintained its $46.0 reserve but said additional losses were reasonably possible and not estimable; a corporate integrity agreement could add costs.
- Other exposures: The business depends on government and private-payor reimbursement, physician relationships, staffing and facility accreditation, and compliance with complex healthcare laws. Changes in reimbursement, payor mix, case mix, regulation, or referral relationships could materially affect results. The company also cited litigation, billing audits, cybersecurity, and collection risks.
- Other notable items: Adoption of lease accounting in 2019 added $294.0 of operating lease assets and liabilities at transition. Goodwill was $3.4 billion; the Alliance reporting unit recorded a $2.5 impairment, and its fair value equaled carrying value after the charge. Series A preferred stock carried a 10% compounded dividend; its year-end redemption value was $395.0, with $69.5 of cumulative unpaid preferred dividends.
Most important facts for investors to verify
- Review subsequent disclosures on the DOJ investigation, settlement terms, adequacy of the $46.0 reserve, and any compliance-agreement costs.
- Track elective procedure volumes, same-facility growth, revenue per case, and the effects of COVID-19 and later operating conditions.
- Assess debt-service capacity, cash generation after non-controlling distributions, refinancing options, and compliance with debt covenants.
- Reconcile consolidated net income with the much larger losses attributable to the parent and common stockholders, including preferred-stock dividends and non-controlling interests.
- Monitor goodwill impairment assumptions, liquidity, and the company’s ability to realize tax attributes while meeting tax receivable agreement payments.