Surgery Partners, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed March 11, 2016. The company completed its IPO in October 2015. The filing’s quarterly figures are unaudited.
Business context
Surgery Partners operates outpatient surgical facilities and related healthcare businesses. At year-end it owned or operated 101 facilities—96 ambulatory surgery centers and five surgical hospitals—in 29 states, and 46 physician practices. It consolidated 90 facilities. The 2014 Symbion acquisition added 55 facilities, making reported year-over-year comparisons substantially affected by acquisition timing.
Financial and operating performance
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue | $959.9 million | $403.3 million |
| Operating income / margin | $144.8 million / 15.1% | $50.8 million / 12.6% |
| Net income (loss) attributable to Surgery Partners | $1.4 million | $(65.9) million |
| Adjusted EBITDA / margin | $158.1 million / 16.5% | $77.0 million / 19.1% |
| Operating cash flow | $84.5 million | $21.9 million |
| Cash and working capital at year-end | $57.9 million / $129.6 million | $74.9 million / $127.3 million |
| Total debt at year-end | $1.258 billion | $1.361 billion |
- Consolidated net income was $72.8 million in 2015, but $71.4 million was attributable to non-controlling interests; parent-attributable income was $1.4 million. The unusually large income tax benefit of $149.0 million reflected release of substantially all of the deferred-tax valuation allowance, alongside a $119.9 million tax receivable agreement expense.
- Management reported 2015 operating margin of 19.7% excluding specified merger/integration, debt extinguishment, IPO and related items; it cited a 21.5% 2014 pro forma margin. Adjusted EBITDA is a non-GAAP measure and excludes significant expenses; it should not be treated as GAAP earnings or cash flow.
- Same-facility cases increased 5.2% and revenue per case rose 5.3% in 2015; management reported approximately 10.7% same-facility revenue growth. These measures include facilities meeting the company’s stated same-facility definition.
- Fourth-quarter revenue was $263.3 million; net income attributable to Surgery Partners was $16.7 million, versus losses attributable to the company in each of the first three quarters.
- Net cash used in investing was $134.8 million, including $33.4 million of property and equipment purchases and acquisition spending. Financing cash flow was $33.4 million. Operating cash flow excluding stated IPO/integration costs and prior-year settlements was $110.1 million, a management-adjusted figure.
Changes versus prior periods
Revenue rose 138.0% and operating income increased from $50.8 million to $144.8 million, principally because 2015 included a full year of Symbion, acquired in November 2014. On a reported basis, cost of revenue rose to 69.7% of revenue from 63.0%, while Adjusted EBITDA margin declined to 16.5% from 19.1%. The filing says 2014 pro forma operating margin was 21.5%, underscoring that reported growth does not by itself demonstrate improved underlying margins.
Debt declined by approximately $103.8 million year over year. The company used IPO proceeds to repay $243.5 million of second-lien principal, incurring a $16.1 million debt-extinguishment loss, including a $7.3 million prepayment penalty.
Outlook, risks and unusual items
- No numerical revenue, earnings or margin guidance is provided. Management’s stated strategy is to grow organically, expand ancillary services, recruit physicians and pursue selective acquisitions. Management believed liquidity was sufficient for the next 12–18 months, while also evaluating financing alternatives to reduce debt, extend maturities or relax covenants.
- Leverage remains significant: most borrowings were variable-rate, debt was secured by substantially all relevant assets, and year-end revolver availability was $21.6 million. A 100-basis-point LIBOR increase was estimated to raise annual interest expense by approximately $6.6 million. The company reported compliance with debt covenants at year-end.
- The tax receivable agreement generally requires payment to pre-IPO owners of 85% of specified realized or deemed tax savings. The company estimated approximately $119.7 million of total payments if the related tax benefits are realized; certain events can accelerate payments and pressure liquidity.
- A Medicaid contractor audit of an Idaho surgical hospital asserted approximately $4.7 million of overpayments and penalties for 2009–2012 claims. The company appealed and was awaiting the outcome. Two hospitals without emergency rooms had patient-transfer protocols that the filing says could be viewed as inconsistent with CMS guidance.
- Key business risks include reimbursement cuts and payor-mix shifts, physician retention and utilization, integration and acquisition execution, collection risk, healthcare fraud-and-abuse and referral regulations, licensing/accreditation, privacy and cybersecurity, litigation, and exposure to labor and supply costs. The company disclosed that its arrangements do not wholly fit applicable Anti-Kickback Statute safe harbors.
- Revenue concentration was notable: the Idaho Falls hospital represented 18.8% of 2015 revenue; Florida facilities 14.9%; Texas facilities 11.2%. The filing reported no known legal proceeding expected by management to have a material adverse effect, but disclosed the pending Medicaid audit and other ordinary-course claims.
Important facts for investors to verify
- Reconcile the Business Overview’s stated $879.7 million of 2015 revenue with audited consolidated revenue of $959.9 million and surgical facility segment revenue of $884.1 million; the filing text does not explain the difference clearly.
- Assess underlying profitability using acquisition-adjusted results and the company’s non-GAAP reconciliations, rather than reported growth or Adjusted EBITDA alone.
- Confirm current debt balances, revolver availability, covenant headroom, interest-rate exposure and the company’s ability to fund acquisition, lease and tax receivable agreement obligations.
- Track the Idaho Medicaid audit appeal, hospital emergency-care compliance, and any developments concerning physician ownership, management-fee and referral arrangements.
- Evaluate cash conversion and receivables: days sales outstanding increased to 60 from 52, and the allowance for doubtful accounts rose to 9.3% of receivables from 3.5%.
- Consider governance and ownership: H.I.G. controlled approximately 55% of outstanding common stock at year-end; the company relied on certain NASDAQ controlled-company exemptions and had no current plan to pay dividends.