Surgery Partners, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The company operates outpatient surgery centers and surgical hospitals, alongside ancillary and optical services. Results span predecessor and successor accounting periods because Bain Capital’s control acquisition on August 31, 2017 triggered pushdown accounting; reported annual comparisons are therefore not fully like-for-like.
Business context and material transactions
- At year-end, the company owned or operated 124 facilities—106 ambulatory surgery centers and 18 surgical hospitals—in 32 states; it held majority interests in 84 and consolidated 108.
- On August 31, 2017, the company acquired NSH Holdco, adding 22 facilities, including 15 surgical hospitals. The filing reports approximately $711.7 million cash consideration net of cash acquired, including escrow. NSH contributed $202.6 million of revenue during its four months included in the annual results.
- Bain Capital became controlling stockholder, with approximately 65.7% of voting power after the common-stock purchase and preferred-stock issuance. The Series A preferred stock accrues a 10% dividend, compounds quarterly, and had a $330.8 million redemption value at year-end.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $1.341 billion | $1.145 billion |
| Operating income / margin | $158.2 million / 11.8% | $196.5 million / 17.2% |
| Net income (consolidated) | $28.7 million | $85.1 million |
| Net income (loss) attributable to Surgery Partners, Inc. | $(53.0) million | $9.5 million |
| Net loss attributable to common stockholders | $(79.0) million | $9.5 million |
| Adjusted EBITDA (non-GAAP) | $164.3 million; 12.3% of revenue | $179.3 million; 15.7% |
| Cash from operating activities | $120.9 million | $125.2 million |
- Revenue increased 17.1%, primarily due to acquisitions, including NSH. Excluding NSH, patient service revenue decreased $8.4 million (0.7%), mainly reflecting hurricane disruption and a reserve adjustment.
- Cost of revenue rose to 75.6% of revenue from 71.7%; management cited higher supply costs associated with a higher-acuity case mix. Ancillary services Adjusted EBITDA fell to a loss of $8.8 million from income of $12.7 million.
- Reported 2017 results included an $8.0 million estimated hurricane-related revenue reduction and a $15.6 million increase in reserves for certain receivables. Management presented normalized revenue of $1.365 billion and Normalized Adjusted EBITDA of $184.2 million; these are non-GAAP measures.
- Net income attributable to non-controlling interests was $81.7 million, reflecting the substantial share of facility economics belonging to physician and other partners. The 2017 common-stockholder loss also reflects preferred dividends and the preferred stock’s redemption-value adjustment.
- Operating cash flow declined $4.3 million year over year. Investing cash outflow was $783.4 million, including $755.1 million of acquisition payments; financing cash inflow was $767.7 million.
- Year-end cash was $174.9 million, working capital $260.2 million, and total debt $2.189 billion. The $75 million revolver had $71.9 million available after letters of credit. Management stated it expected sufficient liquidity for the next 12–18 months.
- Net interest expense was $117.7 million. A hypothetical 100-basis-point increase in LIBOR was estimated to add approximately $13.1 million to annual interest expense. The company reported compliance with credit-agreement covenants at year-end.
Outlook, risks, and unusual items
- The filing provides no specific revenue or earnings guidance. Management’s strategy emphasizes integration of NSH, same-facility growth, physician recruitment, operational efficiency, and selective acquisitions.
- Management cited a one-time 2017 operating-income reduction of $23.2 million from hurricanes and the receivables reserve adjustment. The filing also reports $13.1 million in merger and integration costs and an $18.2 million debt-refinancing loss.
- The Tax Cuts and Jobs Act prompted a provisional $64.0 million deferred-tax remeasurement expense and reduced the estimated remaining Tax Receivable Agreement payments to approximately $65.1 million; the company said its tax accounting remained under review.
- The company received an October 2017 federal civil investigative demand under the False Claims Act concerning medical necessity of certain drug tests dating to 2010. It said it intended to cooperate; the outcome and financial effect were not stated.
- A stockholder lawsuit challenges the 2017 transactions; defendants moved to dismiss. Management said it did not believe the claims had merit. The filing also describes extensive reimbursement, healthcare-compliance, physician-relationship, integration, labor, and leverage risks.
- Management and the auditor identified material weaknesses in financial-reporting controls involving revenue, receivables and allowances, and acquisition/pushdown accounting controls. The auditor issued an adverse opinion on internal control effectiveness, while giving an unqualified opinion on the financial statements. NSH was excluded from the controls assessment.
Important facts for investors to verify
- Whether NSH integration delivers expected savings and growth, and how post-acquisition same-facility trends develop.
- Whether ancillary-services performance and receivables collections improve after the 2017 reserve adjustment.
- Debt-service capacity, refinancing needs—particularly the 2021 notes and related maturity provisions—and sensitivity to variable interest rates.
- Progress and independent testing of the material-weakness remediation plan, including controls at NSH.
- Developments in the drug-testing investigation, transaction-related litigation, and any resulting exposure.
- The final impact of tax-law changes, NOL limitations, and required Tax Receivable Agreement payments.