Surgery Partners, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. Surgery Partners operates surgical facilities and ancillary services. At quarter-end, it owned or operated 145 facilities in 31 states: 127 ambulatory surgery centers and 18 surgical hospitals.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Revenue | $666.2 million | $596.2 million | Up 11.7% |
| Days-adjusted same-facility revenue | Up 10.3% | — | Revenue per case up 4.8%; same-facility cases up 5.3% |
| Operating income | $46.4 million | $100.4 million | Operating margin approximately 7.0% vs. 16.8% |
| Net income (loss), consolidated | $1.2 million | $42.8 million | Includes earnings attributable to non-controlling interests |
| Net income (loss) attributable to Surgery Partners | $(24.9) million | $12.2 million | Basic and diluted EPS $(0.20) vs. $0.14 |
| Adjusted EBITDA | $90.1 million | $77.1 million | Up 16.9%; non-GAAP measure |
| Operating cash flow | $74.5 million | $79.8 million | Net operating cash flow after distributions to non-controlling interests: $32.6 million vs. $43.6 million |
Cost of revenues was $532.2 million, or 79.9% of revenue, compared with $471.4 million, or 79.1%. General and administrative expense was $32.0 million, or 4.8% of revenue, versus $29.5 million, or 4.9%. Net interest expense decreased to $46.8 million from $56.3 million, which management attributed primarily to debt repayments in Q4 2022.
Cash, debt and liquidity
- Cash and cash equivalents were $245.5 million at March 31, down from $282.9 million at year-end 2022. Net cash decreased $37.4 million during the quarter.
- Total debt was $2.594 billion, including $553.5 million of finance lease obligations; long-term debt, excluding current maturities, was $2.531 billion. The company reported $62.9 million of current debt maturities.
- Revolver availability was $545.9 million, including $7.9 million of letters of credit; there were no revolver borrowings. The company amended the facility in January, increasing outstanding commitments by $203.8 million.
- Net cash used in investing activities was $70.7 million, including $40.7 million for acquisitions and $24.3 million for property and equipment. Financing activities used $41.2 million, including $41.9 million of distributions to non-controlling interest holders.
- Working capital was approximately $393.8 million, down from $427.6 million at December 31, 2022.
Material changes and unusual items
- Revenue growth reflected same-facility performance and acquisitions. Government payors rose to 43.8% of consolidated surgical-facility patient service revenue from 42.4%; private insurance remained 51.1%.
- Q1 2022 results included a $32.8 million stockholder-litigation settlement gain. Q1 2023 included a $3.0 million litigation settlement loss and $4.4 million related to changes in Florida law concerning letters of protection. These and other adjustments affect comparability; Adjusted EBITDA is non-GAAP.
- Q1 2023 included a $10.5 million net loss on disposals, consolidations and deconsolidations, including an $8.5 million loss related to a facility whose asset-group book value exceeded fair value based on a letter of intent. Transaction and integration costs rose to $12.5 million from $7.1 million.
- The effective tax rate was 400.0% in Q1 2023, reflecting the small pretax loss and factors including non-controlling interests, valuation allowances and a discrete tax benefit. The filing cautions that the rate may vary significantly between periods.
- Acquisitions included controlling interests in three surgical facilities and a physician practice. The company also sold an interest in one facility for $8.8 million. In April 2023, it completed sales of two facilities for $23.0 million in cash proceeds.
Outlook, risks and contingencies
The company provided no specific revenue or earnings guidance in the supplied filing text. Management said cash from operations, available cash, revolver capacity and anticipated access to capital markets should meet short- and long-term liquidity needs based on current operations. It noted that higher interest rates, inflation, supply-chain risks and market volatility could pressure payor or case mix, patient volumes, collections, liquidity and access to capital. Other cited risks include reimbursement changes, physician and staff recruitment and retention, acquisition integration, healthcare regulation, litigation and indebtedness. Management reported no material change to the risk factors in its 2022 Form 10-K and no known proceedings expected to materially adversely affect the company. It also reported no goodwill impairment indicators at March 31, while warning that future operating or market changes could result in impairment.
Important facts for investors to verify
- Whether same-facility case and revenue-per-case growth persists, and how acquisitions contribute to reported growth.
- Whether operating margins recover given higher cost of revenues and the unusual litigation, regulatory and disposal items affecting comparisons.
- Debt service, variable-rate exposure and refinancing needs; assess the company’s stated liquidity assumptions and revolver availability.
- Cash conversion and working-capital trends, including collections from government and commercial payors and distributions to non-controlling owners.
- The effects of Florida’s letters-of-protection law, other healthcare regulation and any future legal or reimbursement developments.