Surgery Partners, Inc. — Q2 2023 Form 10-Q
Business context and period. Unaudited results cover the quarter and six months ended June 30, 2023, compared with the same 2022 periods. Surgery Partners operates surgical facilities and ancillary services. At quarter-end, it owned or operated 152 facilities in 32 states: 134 ambulatory surgery centers and 18 surgical hospitals.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $667.6M | $615.4M | $1,333.8M | $1,211.6M |
| Operating income | $97.6M | $76.5M | $144.0M | $176.9M |
| Net income (loss) attributable to Surgery Partners | $18.9M | $(18.4)M | $(6.0)M | $(6.2)M |
| Adjusted EBITDA | $100.2M | $86.1M | $190.3M | $163.2M |
| Net interest expense | $47.7M | $56.9M | $94.5M | $113.2M |
| Operating cash flow | $52.1M | $42.1M | $126.6M | $121.9M |
Q2 operating margin was approximately 14.6%, versus 12.4% a year earlier. Cost of revenues was 76.9% of revenue, down from 78.1%; general and administrative expense rose to 4.7% of revenue from 4.2%. Adjusted EBITDA margin was approximately 15.0%, compared with 14.0%. Six-month operating income declined despite revenue growth, while the parent-company net loss narrowed slightly.
Q2 revenue increased 8.5%. Days-adjusted same-facility revenue rose 8.3%, reflecting 5.8% higher revenue per case and 2.3% more cases. For the first half, revenue increased 10.1%; same-facility revenue rose 9.3%, with revenue per case up 5.2% and cases up 3.9%. Growth also included acquisitions. Surgical Facility Services generated $650.2M of Q2 revenue and $126.7M of Adjusted EBITDA; Ancillary Services revenue was $17.4M.
Liquidity, debt and capital allocation
- Cash was $177.4M at June 30, down from $282.9M at year-end 2022. Net cash decreased $105.5M in the first half.
- Net cash used in investing activities was $141.9M, including $50.1M of capital expenditures, $43.5M for acquisitions and $48.4M for equity investments. Financing activities used $90.2M, including $76.9M of distributions to non-controlling holders.
- Total debt was $2,569.5M, down from $2,621.8M at December 31, 2022; this includes $524.9M of finance lease obligations. Long-term debt excluding current maturities was $2,504.8M.
- Revolver availability was $545.9M, including $7.9M of letters of credit, with no revolver borrowings outstanding. Net working capital was approximately $351.6M, versus $427.6M at year-end.
Material developments, outlook and risks
- During the first half, the company acquired controlling interests and management rights, purchased non-controlling interests, and sold interests in four facilities. These transactions contributed acquisition-related costs and gains and losses on disposals or consolidations.
- Q2 included an $8.8M net gain on disposals, consolidations and deconsolidations. The six-month result was a $1.7M net loss, reflecting a $26.7M disposal gain, a $13.7M disposal loss and a $7.1M loss from remeasurement associated with consolidating facilities, among other items.
- A $16.6M discrete tax benefit related to entity divestitures contributed to the Q2 tax benefit of $7.8M; the six-month tax benefit was $9.4M. The resulting effective tax rates were unusually negative: (15.6)% for Q2 and (19.0)% for the first half.
- A May 2023 cybersecurity incident temporarily disrupted Idaho-market facilities and had an estimated $5M adverse pretax impact, including lost revenue and related costs. The company filed an insurance claim; no recovery was recognized in Q2.
- Management said cash from operations, available cash, revolver capacity and anticipated capital-market access should meet short- and long-term liquidity needs. No quantitative earnings or revenue guidance was provided. The company said interest-rate changes were not expected to materially affect 2023 net earnings or cash flows, considering debt and hedges.
- Key risks include reimbursement and payor-contract changes, case and payor mix, staffing and supply costs, acquisition integration, regulation and litigation, debt and interest rates, and economic conditions affecting volumes, collections and access to capital. Management identified no goodwill impairment indicators at June 30, but noted that lower volumes, higher costs or rates, or declines in market values could lead to future impairment. It reported no material change in previously disclosed risk factors and no proceedings believed likely to materially harm the company.
Important facts for investors to verify
- Whether same-facility case growth, revenue per case and operating-cost trends persist, and how much growth is attributable to acquisitions.
- Cash conversion, working-capital needs and the sustainability of cash after capital expenditures, acquisitions and distributions to non-controlling interests.
- Debt maturities, variable-rate exposure, covenant headroom and the effectiveness of interest-rate hedges; the credit agreement benchmark transitioned from LIBOR to SOFR effective July 1, 2023.
- The ultimate insurance recovery, if any, for the cybersecurity incident and any further effects on facility operations.
- The recurring earnings impact of unusual divestiture-related tax benefits, disposal and consolidation items, and elevated transaction and integration costs. Adjusted EBITDA is a non-GAAP measure and may not be comparable with similarly titled measures at other companies.