SGRY

Business Context and Reporting Period

Surgery Partners, Inc. (SGRY) operates a national network of 180 surgical facilities, including 161 ambulatory surgery centers (ASCs) and 19 surgical hospitals across 30 states. The company primarily partners with physicians to provide non-emergency surgical procedures and ancillary services. This Form 10-Q covers the quarterly period ended March 31, 2026.

Key Financial Metrics

Margins: Operating margin was 8.1% in Q1 2026 compared to 8.0% in Q1 2025. Cost of revenues as a percentage of total revenues increased to 80.2% from 79.1%.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 4.5% year-over-year, driven by a 4.4% increase in days-adjusted same-facility revenues. This growth was attributed to a 3.8% increase in revenue per case and a 0.6% increase in same-facility case volumes.
• Profitability: While operating income improved by $3.9 million, net loss attributable to Surgery Partners narrowed slightly to $(35.9) million from $(37.7) million. Adjusted EBITDA decreased 1.5% to $102.3 million.
• Expense Trends: Transaction and integration costs decreased significantly to $15.6 million from $24.7 million due to reduced M&A activity. However, interest expense increased to $69.1 million from $62.2 million, driven by the maturity of prior interest rate swaps and incremental senior unsecured notes.
• Liquidity: Cash and cash equivalents decreased by $57.6 million to $182.3 million, primarily due to net cash used in financing activities ($55.9 million) related to debt paydowns and distributions to non-controlling interests.

Guidance, Outlook, and Risks

Management Commentary: Management continues to focus on improving same-facility performance and selectively acquiring established facilities. The company reported one acquisition in Q1 2026 for $4.2 million. Management believes current cash flows, available cash, and revolver capacity are adequate to meet short- and long-term liquidity needs.

Risks and Contingencies:

• Interest Rate Risk: The company utilizes interest rate caps to manage exposure to variable rate debt. Without these derivatives, interest rate changes could materially affect net earnings.
• Payor Mix: Broad economic factors, including inflation and changes in government or private insurance payments, could negatively affect payor mix and patient volumes.
• Legal Proceedings: The company is subject to ordinary course claims regarding patient treatment and employment practices. Management does not believe any current proceedings will have a material adverse effect.
• Share Repurchase: A new share repurchase program of up to $200 million was authorized in February 2026, though no repurchases were made in Q1 2026.

Investor Verification Checklist

• Debt Servicing: Verify the impact of rising interest rates on the $3.7 billion debt load, specifically the maturity of interest rate swaps and the cost of the 7.250% senior unsecured notes.
• Non-Controlling Interests: Review the significant net income attributable to non-controlling interests ($33.8 million), which reduces the net income available to common shareholders.
• Same-Facility Growth: Confirm the sustainability of the 3.8% increase in revenue per case and the 0.6% volume increase in same-facility operations.
• Valuation Allowance: Note the full valuation allowance on deferred tax assets due to cumulative pre-tax losses, impacting the effective tax rate calculation.
• Liquidity Position: Monitor the $666.1 million revolver availability against the $182.3 million cash balance to assess short-term liquidity resilience.