Surgery Partners, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The company operates surgical facilities and ancillary services; at quarter-end it owned or operated 127 facilities in 30 states.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $374.7 million | $445.4 million | $815.7 million | $862.2 million |
| Operating income | $44.7 million | $55.5 million | $68.2 million | $105.1 million |
| Net income (loss) | $(3.9) million | $8.1 million | $(12.3) million | $11.6 million |
| Net loss attributable to common stockholders | $(42.2) million | $(28.6) million | $(79.2) million | $(57.2) million |
| Adjusted EBITDA | $58.2 million | $61.2 million | $104.7 million | $112.0 million |
| Operating cash flow | Six-month figure: $211.1 million | Prior-year six-month figure: $47.2 million |
Q2 same-facility revenue fell 18.6%; cases declined 38.6%, partly offset by a 32.4% increase in revenue per case, reflecting a shift toward higher-acuity procedures. Cost of revenues was 85.2% of Q2 revenue versus 76.4% a year earlier. Q2 operating income included $43.1 million of recognized government grant funds, so reported results reflect material relief funding.
Cash and cash equivalents were $326.3 million at June 30, 2020, compared with $92.7 million at year-end 2019. The company also reported $113.2 million of available revolver capacity. Total debt was $2.686 billion, including $1.547 billion of term loans, $370 million of 2025 notes, $430 million of 2027 notes, other secured debt and finance leases. Interest expense was $49.2 million in Q2 and $96.3 million for the first half. Series A preferred stock had a $414.2 million redemption value.
Six-month operating cash flow benefited from $120 million of repayable Medicare accelerated payments, $43.1 million in recognized grant funds, expense reductions and payment deferrals. The cash-flow statement reports $124.7 million from Medicare accelerated payments and deferred governmental grants within operating working-capital changes; these amounts should not be treated as recurring operating cash generation.
Changes versus prior period
- Q2 revenue declined 15.9% year over year; first-half revenue declined 5.4%. COVID-19-related procedure cancellations and reduced operating hours were the principal stated cause.
- Q2 adjusted EBITDA decreased to $58.2 million from $61.2 million, while common-stockholder loss widened to $42.2 million from $28.6 million.
- Interest expense increased, partly reflecting new borrowing. The company drew a $120 million incremental term loan in April at LIBOR plus 8% (or alternate base rate plus 7%).
- Debt rose from $2.581 billion at December 31, 2019 to $2.686 billion at June 30, 2020. The company amended its revolver covenants, waiving the maximum leverage test for the remainder of 2020 and providing an alternative calculation for the first three quarters of 2021.
Outlook, risks and unusual items
- The company withdrew its previously announced 2020 outlook in March and provided no replacement guidance. Management said case volumes improved gradually through Q2 as restrictions eased, but could not predict when volumes would return to pre-pandemic levels or whether cancelled procedures would be recaptured.
- COVID-19 risks include renewed restrictions, prolonged volume weakness, supply and staffing disruptions, worsening payer mix and collections, reduced access to capital, and pressure on liquidity and debt-service capacity. Management stated that available cash, financing, government assistance and cost actions were expected to meet short-term liquidity needs; this depends on uncertain operating conditions and capital access.
- The company received approximately $48 million in grants and $120 million in Medicare advances during the first half. Grant recognition is conditional on compliance with program terms; advances must be repaid through offsets to future Medicare claims. Approximately $4.3 million of payroll taxes had also been deferred.
- A $40 million settlement, plus interest, resolved a federal investigation concerning urine drug testing. The settlement schedule includes $7.5 million of forfeited claims, an initial payment and $30.7 million plus interest due April 1, 2021. The settlement involves no admission of liability and requires corporate integrity agreements.
- On July 30, 2020, after quarter-end, the company issued $115 million of additional 10% senior unsecured notes due 2027. It also agreed to sell certain anesthesia-business assets; closing was expected within 60 to 90 days of the July 20 agreement.
- No goodwill impairment indicators were identified at June 30, but management warned that lower-than-expected volumes, stock or debt-value declines, higher rates or increased costs could lead to future impairment.
Investor facts to verify
- Subsequent case volumes, procedure recapture and any renewed pandemic-related operating restrictions.
- Cash generation excluding Medicare advances, grants, payroll-tax deferrals and other temporary working-capital effects.
- Repayment timing and terms for Medicare advances, grant compliance and any future grant recognition.
- Debt service, refinancing access, revolver availability and compliance with amended covenants, including the high-cost incremental loan and 10% notes.
- Completion and proceeds of the anesthesia-asset sale, and payment of the remaining settlement amount.