Surgery Partners, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparison is with Q1 2018 unless noted. Surgery Partners operated 123 surgical facilities in 31 states, including 108 ambulatory surgery centers and 15 surgical hospitals. It consolidated 106 facilities. Amounts below are in millions of dollars unless otherwise stated.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $416.8 | $411.3; up 1.3% |
| Operating income / margin | $49.6 / 11.9% | $41.2 / 10.0% |
| Net income | $3.5 | $5.1 |
| Net loss attributable to Surgery Partners | $(20.1) | $(17.5) |
| Net loss per common share | $(0.60) | $(0.53) |
| Adjusted EBITDA (non-GAAP) | $50.7 | $47.1 |
| Cash provided by operating activities | $20.5 | $30.0 |
| Cash used in investing / financing | $(18.4) / $(43.9) | $(36.4) / $(55.7) |
- Revenue growth reflected patient service revenue of $410.8, up 1.5%; surgical facility services revenue was $395.8 versus $388.2. Optical revenue declined to $1.1 from $3.0, while other service revenue rose to $4.9 from $3.7.
- Same-facility cases increased 0.6%, or 2.2% adjusted for one fewer workday. Revenue per case grew 4.3% to $3,239; workday-adjusted same-facility revenue growth was 6.7%.
- Cost of revenues fell to 78.2% of revenue from 79.6%; general and administrative expense fell to 5.2% from 5.9%. Depreciation and amortization rose to 4.5% of revenue from 3.8%.
- Net interest expense increased 22.4% to $42.0, or 10.1% of revenue versus 8.3%, primarily reflecting the $180 million incremental term loan funded in October 2018. This increase more than offset improved operating income.
- Operating cash flow declined by $9.5, which management attributed primarily to timing of payroll and trade-payable payments. Capital expenditures were $11.8; the company also paid $7.6 for acquisitions, primarily a physician practice.
- At March 31, cash and cash equivalents were $142.5, current assets $535.3 and current liabilities $359.6. Total debt carrying value was $2,441.7, including $57.1 current maturities and $144.6 in finance lease obligations. Cash, cash equivalents and restricted cash totaled $142.8.
- Revolver availability was $70.9, including $4.1 of letters of credit. Management stated that operating cash flow, available cash and revolver borrowings should meet liquidity needs for the next 12 months.
Material changes, outlook and notable items
- On January 1, 2019, the company adopted the new lease accounting standard. It recognized $288.3 of operating lease right-of-use assets and $292.3 of operating lease liabilities at quarter-end. The $18.0 cumulative adoption adjustment increased retained deficit; prior-period amounts were not restated. Adoption and reclassification also contributed to the increase in reported finance lease obligations.
- The company recorded a $2.4 tax receivable agreement expense in Q1 2019. It reported a $11.5 after-tax derivative loss in other comprehensive income; three interest-rate swaps had $900 million aggregate notional value. Management estimated $6.6 of accumulated swap losses would be reclassified as a reduction to interest expense over the next 12 months.
- After quarter-end, on April 11, 2019, the company issued $430 million of 10.0% senior unsecured notes due 2027 and redeemed all $400 million principal of its 8.875% notes due 2021 at 104.438% of principal plus accrued interest. Revolver commitments were increased by $45 million in connection with the issuance.
- Management described continued focus on same-facility performance, selective acquisitions and new-facility development. It provided no specific revenue or earnings guidance in the filing. Forward-looking outcomes depend on execution of operating initiatives, facility growth and integration, efficiency efforts, weather and other factors.
- The DOJ investigation concerns the medical necessity of certain drug tests dating back to 2010; CMS suspended payments to diagnostic laboratory Logan Laboratories pending investigation. The company reported a non-binding agreement in principle on settlement financial terms and said its $46 million reserve recorded in 2018 was believed sufficient, but additional losses are reasonably possible and not estimable; final terms or resolution could differ materially.
- Other risks include healthcare billing and reimbursement regulation, professional and general liability claims, physician-investor arrangements, interest-rate exposure and litigation. A 100-basis-point increase in LIBOR was estimated to raise quarterly interest expense by approximately $3.6 million. The company reported no material change in its previously disclosed risk factors.
Important facts for investors to verify
- Progress, final terms and total cost of the DOJ settlement, and the status and financial effect of the Logan Laboratories payment suspension.
- Whether same-facility case and revenue growth, including the impact of workday adjustments and revenue per case, is sustained.
- Debt service, refinancing costs and interest-rate sensitivity following the 2027 notes issuance and 2021 notes redemption; confirm post-transaction revolver availability.
- Operating cash conversion and liquidity, given lower year-over-year operating cash flow and substantial debt, lease obligations and distributions to non-controlling holders.
- Effects of lease-standard adoption and the company’s non-GAAP Adjusted EBITDA adjustments when comparing results across periods.