Surgery Partners, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. The filing was signed March 1, 2022. The company owns and operates surgical facilities and related services; at year-end it operated or partnered in 126 facilities across 31 states (108 ASCs and 18 surgical hospitals), and consolidated 109 facilities.
Financial performance and position
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $2,225.1 million | $1,860.1 million |
| Operating income | $302.2 million | $183.0 million |
| Net income (loss) | $70.7 million | $1.3 million |
| Net loss attributable to Surgery Partners | $(70.9) million | $(116.1) million |
| Net loss attributable to common stockholders | $(81.2) million; $(1.12) per share | $(155.6) million; $(3.19) per share |
| Adjusted EBITDA (non-GAAP) | $339.6 million | $256.6 million |
| Adjusted EBITDA excluding grant funds (non-GAAP) | $314.3 million | $225.5 million |
| Cash from operating activities | $87.1 million | $246.9 million |
| Cash and cash equivalents at year-end | $389.9 million | $317.9 million |
| Total debt carrying value | $2,938.8 million | $2,856.8 million |
Revenue increased 19.6%; days-adjusted same-facility revenue rose 18.1%, reflecting 17.6% growth in same-facility cases and 0.5% growth in revenue per case. Operating margin was approximately 13.6% versus 9.8% in 2020. Adjusted EBITDA margin was approximately 15.3% versus 13.8%; these EBITDA measures are non-GAAP and exclude specified items.
Cost of revenue was 77.9% of revenue, compared with 79.6% in 2020. Net interest expense increased to $221.0 million from $201.8 million. Capital expenditures were $57.6 million; operating cash flow less cash purchases of property and equipment was approximately $29.5 million, before acquisitions and other investing activity. Days sales outstanding improved to 67 from 69.
At year-end, the company had $203.0 million of available revolving-credit capacity, net of $7.0 million in letters of credit. Its debt included a $1.534 billion term loan, $370 million of 6.75% notes due 2025, $545 million of 10.00% notes due 2027, and other debt and finance leases. The company reported covenant compliance. Total contractual obligations, including estimated debt interest, operating leases and tax receivable agreement payments, were $4.59 billion.
Material changes versus FY2020
- Revenue and Adjusted EBITDA rose as surgical volumes recovered from pandemic-related disruptions and acquisitions contributed. The company cautions that utilization may not return to pre-pandemic levels.
- Operating cash flow declined by $159.8 million, primarily reflecting repayment of Medicare advance payments, the prior-year benefit from relief funds and expense reductions, and the 2021 DOJ settlement payment.
- The company acquired controlling interests in eight surgical facilities and two physician practices for $285.8 million net of cash acquired; it sold interests in three surgery centers, a physician practice and other assets for $6.0 million net proceeds.
- Two common-stock offerings generated $554.2 million in net proceeds. Bain Capital’s Series A preferred shares converted into approximately 22.6 million common shares; year-end common shares outstanding rose to 89.3 million from 50.5 million.
- In 2021 the company recorded a $9.1 million debt-extinguishment loss related to its credit-agreement amendments. It recorded no goodwill impairment, versus $33.5 million in 2020.
Outlook, risks and unusual items
Management did not provide quantified revenue, earnings or case-volume guidance in the supplied filing text. It stated that cash from operations, available cash, revolver capacity and access to capital markets were expected to meet short- and long-term liquidity needs, while emphasizing uncertainty around the pandemic and economic conditions.
- COVID-19 and operations: Case volumes remained exposed to resurgences, procedure restrictions, staffing constraints and supply-chain disruption. Rising labor costs, changes in payor or case mix, and patient collection risks could pressure margins and cash flow.
- Reimbursement and regulation: The business depends on government and private payors; payment reductions, contract terms, healthcare reform, certificate-of-need limits, and complex fraud-and-abuse and physician-referral rules pose material risks. The company states its arrangements do not fully qualify for certain Anti-Kickback Statute safe harbors.
- Leverage and liquidity: High debt, variable interest rates, restrictive covenants and refinancing needs could constrain investment and debt service. The company also faces future repayments of deferred payroll taxes and Medicare advances. It estimated up to $22.0 million remained payable under its tax receivable agreement.
- Government assistance: The company recognized $37.9 million of grant funds in 2021 and received approximately $27 million in grants that year. Recognition remains subject to evolving HHS guidance and could be revised or recouped. It also repaid approximately $60 million of Medicare advances in 2021.
- Litigation and contingencies: Logan Laboratories and Tampa Pain paid $30.7 million plus interest in April 2021 as the final DOJ settlement payment. A derivative stockholder case settlement was approved February 11, 2022 and was expected to become final and non-appealable March 14, 2022. The filing reports ordinary-course claims and audits but no known professional-liability proceeding reasonably likely to have a material adverse effect.
- Governance and other items: Bain Capital held approximately 54.9% of voting power at year-end, and the company relied on certain controlled-company governance exemptions. An American Group President notified the company of plans to retire later in 2022 under a retirement and consulting agreement.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective at year-end. The auditor identified surgical-hospital accounts-receivable price-concession estimates as a critical audit matter.
Most important facts for investors to verify
- Whether same-facility case growth and recovery persist, and how volumes, reimbursement and case mix compare with pre-pandemic levels.
- How much of reported earnings and EBITDA growth reflects recurring operations versus acquisitions, government grants and adjustments; review the company’s non-GAAP reconciliations.
- Cash conversion and liquidity after Medicare advance repayments, deferred payroll taxes, acquisition spending, distributions to non-controlling owners and debt service.
- Debt maturities, interest-rate exposure and refinancing terms, especially the 2025 notes and the term-loan maturity provisions.
- Share-count dilution from the 2021 offerings and preferred conversion, and Bain Capital’s continuing control and governance exemptions.
- Any revisions, conditions or repayment obligations related to recognized government grant funds, and the final status and financial effects of litigation and regulatory matters.