Surgery Partners, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with Q1 2023 unless stated otherwise. Surgery Partners operates surgical facilities and ancillary services. At quarter-end, it owned or operated 165 facilities across 33 states: 147 ambulatory surgery centers and 18 surgical hospitals. It consolidated 124 facilities.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 / prior date |
|---|---|---|
| Revenue | $717.4 million | $666.2 million; up 7.7% |
| Operating income / margin | $76.0 million / 10.6% | $46.4 million / 7.0% |
| Net income (consolidated) | $24.3 million | $1.2 million |
| Net loss attributable to Surgery Partners; diluted loss per share | $12.4 million; $0.10 | $24.9 million; $0.20 |
| Adjusted EBITDA (non-GAAP) | $97.5 million; 13.6% of revenue | $90.1 million; 13.5% of revenue |
| Operating cash flow | $40.7 million | $74.5 million |
| Capital expenditures; acquisition payments, net | $21.0 million; $54.6 million | $24.3 million; $40.7 million |
| Cash and cash equivalents | $185.2 million | $195.9 million at December 31, 2023 |
| Total debt; current maturities | $2,871.0 million; $77.2 million | $2,775.1 million; $73.3 million at December 31, 2023 |
| Revolver availability | $607.3 million, including letters of credit | Not stated for comparison |
| Net working capital | $372.5 million | $372.0 million at December 31, 2023 |
Cost of revenues was $562.1 million, or 78.4% of revenue, versus $532.2 million, or 79.9%. General and administrative expense was 4.6% of revenue versus 4.8%; depreciation and amortization was 4.7% versus 5.1%. Net interest expense was $47.3 million, or 6.6% of revenue, compared with $46.8 million, or 7.0%. The company’s effective tax rate was 15.3%; the prior-year rate was 400.0%, reflecting a very small pretax loss and tax items.
Material changes and operating developments
- Revenue rose 7.7%; patient service revenue increased 7.4%. Days-adjusted same-facility revenue grew 10.2%, reflecting 8.8% higher revenue per case and 1.3% more cases. Management attributed growth to same-facility performance and acquisitions, net of divestitures.
- Surgical Facility Services revenue was $692.7 million versus $649.0 million; Ancillary Services revenue was $24.7 million versus $17.2 million. Surgical Facility Services Adjusted EBITDA was $126.7 million versus $118.8 million.
- Cost of revenues increased, which management primarily attributed to a higher volume of high-acuity procedures and acquisitions; as a share of revenue, it nevertheless declined. Adjusted EBITDA increased 8.2%, which management attributed to revenue growth, cost management and acquisitions.
- Operating cash flow fell by $33.8 million, primarily due to the timing of working-capital transactions and accrued payroll and benefits. Investing cash use increased to $83.1 million, while financing provided $31.7 million, principally reflecting net Revolver borrowings tied to acquisition timing.
- During Q1, the company acquired controlling interests in two surgical facilities and several physician practices for $66.0 million cash, net of cash acquired, plus $1.1 million non-cash consideration; $11.4 million remained deferred at quarter-end. It also sold part of its interest in a facility, deconsolidating it, for $1.5 million net proceeds.
Outlook, risks and unusual items
- Management said cash from operations, available cash, Revolver capacity and anticipated access to capital markets should meet short- and long-term liquidity needs. No numerical revenue or earnings guidance was provided in the filing text.
- On April 10, 2024, after quarter-end, the company issued $800 million of 7.25% senior unsecured notes due 2032. Proceeds were used to redeem all outstanding 6.75% notes due 2025 and 10.00% notes due 2027, pay related interest and costs, and for general corporate purposes, including possible acquisitions.
- On April 30, 2024, the company purchased a controlling interest in a surgical hospital and two physician practices, and a non-controlling interest in an ASC, for $188.2 million using available resources. Purchase accounting was not yet complete at filing.
- Q1 transaction and integration costs were $17.4 million, compared with $12.5 million; the Adjusted EBITDA reconciliation also includes $1.5 million of de novo start-up costs in 2024. The company reported a $1.8 million litigation settlement gain, while the 2023 quarter had a $3.0 million settlement loss and included $4.4 million related to Florida law changes concerning letters of protection. The Q1 2024 facility deconsolidation generated a $2.7 million pretax gain included within the reported net loss on disposals, consolidations and deconsolidations of $1.5 million.
- Key stated risks include changes in government and commercial reimbursement, payor and case mix, patient volumes and collections; physician and healthcare-worker recruitment and retention; supply-chain pressures; acquisition integration; regulation and litigation; cybersecurity; interest rates, inflation and market access; and substantial indebtedness. Management reported no legal proceedings it believes would materially adversely affect the company and no material changes to the 2023 Form 10-K risk factors. It identified no goodwill impairment indicators at March 31, while noting that weaker volumes, higher costs or rates, or lower valuations could lead to a future impairment.
- The company had $1.2 billion of interest-rate swaps and $157.9 million of interest-rate caps outstanding at March 31, generally maturing March 31, 2025. It estimated $52.2 million of accumulated derivative gains would be reclassified as a reduction to interest expense over the next 12 months. On April 9, it entered into additional caps with $1.4 billion notional, effective March 31, 2025, and maturing in 2028.
- Management concluded disclosure controls were effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether same-facility case growth and the 8.8% increase in revenue per case are sustainable, and how payor and surgical case mix affect margins.
- Whether operating cash flow recovers from the Q1 working-capital-related decline and supports ongoing capital spending, distributions and acquisitions.
- The all-in financing cost and effect on interest expense, leverage and maturities of the 2032 notes issuance and redemption of the 2025 and 2027 notes.
- Funding and integration of the $188.2 million April acquisition, and final purchase-price allocations and goodwill from recent acquisitions.
- Adjusted EBITDA adjustments and the gap between consolidated net income and the net loss attributable to Surgery Partners shareholders, including the effect of non-controlling interests.