Surgery Partners, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Surgery Partners operates surgical facilities and ancillary healthcare services. At quarter-end it owned or operated 127 facilities in 31 states, including 110 ASCs and 17 surgical hospitals; it consolidated 110 facilities.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $559.2 million | $496.1 million | $1,614.9 million | $1,311.8 million |
| Operating income | $63.6 million | $18.5 million | $187.4 million | $86.7 million |
| Net income (loss) | $8.2 million | ($34.3 million) | $27.8 million | ($46.6 million) |
| Net loss attributable to common stockholders | ($22.9 million) | ($71.6 million) | ($81.1 million) | ($150.8 million) |
| Adjusted EBITDA, non-GAAP | $76.4 million | $61.1 million | $225.2 million | $165.8 million |
| Operating cash flow | $14.9 million | $26.9 million | $67.4 million | $238.0 million |
Margins and operating trends. Q3 cost of revenues was 78.1% of revenue, versus 77.0% a year earlier; general and administrative expense was 4.6%, versus 5.1%. Nine-month cost of revenues improved to 78.7% of revenue from 81.4%. Management reported Q3 same-facility revenue growth of 8.3%, comprising 6.2% more cases and 2.0% higher revenue per case. For nine months, same-facility cases rose 22.4%, while revenue per case fell 1.1%.
Cash, liquidity and debt. Cash and cash equivalents were $330.4 million at September 30, 2021, versus $317.9 million at year-end 2020. Current assets were $841.7 million and current liabilities $540.5 million. Total debt was $2.853 billion, including $60.8 million of current maturities; the company reported $163.0 million of revolver availability, including $7.0 million of letters of credit, and no revolver borrowings. Nine-month operating cash flow fell to $67.4 million from $238.0 million; investing activities used $141.7 million and financing activities provided $86.5 million.
Material changes versus the prior period
- Revenue rose 12.7% in Q3 and 23.1% for nine months, reflecting recovery in surgical volumes and acquisitions. Adjusted EBITDA increased in both periods.
- Despite consolidated net income, Surgery Partners reported a net loss attributable to common stockholders, principally reflecting income allocated to non-controlling interests.
- The company raised $248.3 million net in a February common-stock offering and converted all Series A preferred stock into approximately 22.6 million common shares in May. No preferred shares remained outstanding at quarter-end.
- Debt was approximately level with December 2020. The May term-loan refinancing resulted in a $9.1 million debt-extinguishment loss; the revolver maturity was extended to February 2026.
- Nine-month operating cash flow was lower, partly due to repayment of Medicare advances, the final DOJ settlement payment, and government assistance and cost-saving actions that had supported 2020 cash flow.
Outlook, risks and unusual items
- Outlook: No quantified revenue or earnings guidance is provided. Management said surgical case volumes continued to improve but could not predict when utilization would return to pre-pandemic levels. It believed available cash, operating cash flow, revolver capacity and capital-market access would meet liquidity needs, while noting uncertainty around that assessment.
- COVID-19 and operations: Risks include renewed pandemic effects, unpredictable case volumes, labor and operating costs, changes in payer mix, collection delays and uncertainty over government relief programs. Grant recognition depends on meeting program requirements and could be revised as guidance evolves.
- Government assistance: The company recognized $20.0 million of grant funds as a reduction of operating expenses in the first nine months of 2021, with none recognized in Q3. It had received approximately $67 million in total assistance grants. It had also received approximately $120 million of Medicare accelerated payments in 2020 and repaid approximately $38 million during the first nine months of 2021.
- Other cash obligations: The company expected further Medicare-advance repayments and fourth-quarter payments for deferred payroll taxes and its tax receivable agreement. The final $30.7 million DOJ settlement payment was made in April 2021.
- Contingencies and other exposures: A derivative stockholder lawsuit reached an agreement-in-principle to settle, subject to final terms and court approval. The company also disclosed ordinary-course legal claims, healthcare regulatory and reimbursement risks, and potential future goodwill impairment indicators. A facility closed following Hurricane Ida; related Q3 operating losses were $0.5 million.
- Interest-rate exposure: The company had $1.2 billion of cash-flow-hedge swap notional and $337.5 million of interest-rate caps. Management did not expect rate changes to materially affect 2021 net earnings or cash flows, but estimated $26.3 million of accumulated derivative losses would be reclassified as higher interest expense over the next 12 months.
Important facts for investors to verify
- Whether case-volume recovery persists and whether same-facility revenue per case, cost trends and payer mix support sustainable margins.
- How much of Adjusted EBITDA and reported earnings depends on government grants, acquisition effects and other adjustments; Adjusted EBITDA is a non-GAAP measure.
- Cash conversion and upcoming cash uses, including Medicare advances, deferred payroll taxes, distributions to non-controlling owners and tax receivable agreement payments.
- Debt service capacity, variable-rate exposure, refinancing terms and covenant headroom; the filing does not provide a clear leverage ratio in the summarized text.
- The final outcome of the stockholder litigation and any changes in healthcare regulation, reimbursement or government-grant requirements.