Surgery Partners, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Surgery Partners operates ambulatory surgery centers, surgical hospitals and ancillary healthcare services. At quarter-end, it owned or operated 154 facilities across 31 states; 117 were consolidated for financial reporting.
Financial performance and liquidity
- Q3 revenue: $674.1 million, up 8.6% year over year. Days-adjusted same-facility revenue rose 14.2%, reflecting 11.0% higher revenue per case and 2.9% higher case volume.
- Q3 profitability: Operating income was $82.6 million, compared with $74.1 million; operating margin was approximately 12.3%, versus 11.9%. Consolidated net income was $29.7 million, but $34.6 million was attributable to non-controlling interests, resulting in a $4.9 million net loss attributable to Surgery Partners, or $0.04 per share. Adjusted EBITDA, a non-GAAP measure, was $105.5 million, up 9.7%.
- First nine months: Revenue was $2.008 billion, up 9.6%; operating income was $226.6 million, down from $251.0 million. Net income attributable to the company was a $10.9 million loss versus a $31.2 million loss. Adjusted EBITDA was $295.8 million versus $259.4 million.
- Costs and margins: Cost of revenues was 75.4% of Q3 revenue versus 78.9% a year earlier; nine-month cost of revenues was 77.4% versus 78.7%. Q3 G&A rose to $36.8 million from $17.9 million, increasing from 2.9% to 5.5% of revenue.
- Cash flow: Nine-month operating cash flow was $231.2 million versus $151.6 million. Investing cash outflow was $167.5 million and financing cash outflow was $110.6 million. Cash declined by $46.9 million to $236.0 million. Management reported Q3 operating cash inflow of $104.6 million, versus $29.7 million a year earlier.
- Debt and liquidity: Total debt, including finance lease obligations, was $2.702 billion, versus $2.622 billion at year-end 2022; long-term debt was $2.640 billion. The company had $544.9 million available on its revolver and no revolver borrowings. Cash was $236.0 million; net working capital was approximately $374.8 million.
Material changes versus comparable periods
- Revenue growth reflected stronger same-facility results and acquisitions, partly offset by divestitures. Private insurance increased to 52.4% of Q3 patient-service revenue from 49.5%; government payors declined to 41.0% from 44.2%.
- Q3 net interest expense fell to $49.8 million from $60.7 million, which the company primarily attributed to debt paydown in Q4 2022. Nine-month interest expense decreased to $144.3 million from $173.9 million.
- Q3 G&A and nine-month transaction and integration costs increased. Nine-month results also included an $8.1 million litigation settlement loss, compared with a $32.8 million settlement gain in 2022.
- Nine-month operating cash flow improved partly because the prior-year period included approximately $56 million of Medicare accelerated-payment repayments. The company reported no remaining deferred Medicare accelerated payments or unrecognized grant funds at September 30, 2023.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided in the supplied filing text. Management said it expects operating cash flows, available cash, revolver capacity and anticipated capital-market access to meet short- and long-term liquidity needs.
- Management identified risks from interest rates, inflation, supply-chain issues, payor mix and reimbursement, patient volumes, collections, staffing, physician relationships, regulation, acquisitions and debt. It warned that prolonged economic weakness could constrain capital access and liquidity.
- A May 2023 cybersecurity incident temporarily disrupted certain Idaho-market facilities; the company estimated an approximately $7 million adverse pretax impact for the nine months. It filed an insurance claim but recognized no recovery through September 30.
- Q3 included a $3.6 million litigation settlement loss. Nine-month tax results included a $15.8 million discrete benefit related to entity divestitures and a $1.6 million benefit related to restricted-stock vesting; the effective tax rate was negative 7.7%.
- The company acquired controlling interests in facilities and a physician practice, bought minority interests and management rights, and sold interests in six facilities during the nine months. Goodwill impairment indicators were evaluated; none were identified at quarter-end. Management noted that weaker volumes, higher costs or rates, among other factors, could contribute to a future impairment.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its 2022 Form 10-K.
Important facts for investors to verify
- Whether same-facility revenue growth and higher revenue per case can be sustained, and how payor mix and case volumes develop.
- Drivers of the Q3 G&A increase and the trend in transaction, integration and acquisition costs.
- Debt and lease obligations, interest-rate exposure, upcoming maturities, and continued availability of revolver and capital-market funding.
- Cash conversion and working-capital trends, including collections and distributions to non-controlling interests.
- Insurance recovery, if any, for the cybersecurity incident, and the continuing effects of litigation and Florida regulatory changes.
- Acquisition integration, divestiture proceeds and escrow, goodwill assumptions, and the company’s non-GAAP Adjusted EBITDA adjustments.