Surgery Partners, Inc. — Q2 2022 Form 10-Q
Business and period. The unaudited report covers the three and six months ended June 30, 2022, compared with the same 2021 periods. Surgery Partners operates surgical facilities and ancillary services; at quarter-end it owned or operated 133 facilities in 32 states, including 115 ambulatory surgery centers and 18 surgical hospitals.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $615.4 million | $543.3 million | $1,211.6 million | $1,055.7 million |
| Operating income | $76.5 million | $59.5 million | $176.9 million | $123.8 million |
| Consolidated net income | $15.3 million | $8.8 million | $58.1 million | $19.6 million |
| Net loss attributable to common stockholders | $18.4 million ($0.21/share) | $26.9 million ($0.39/share) | $6.2 million ($0.07/share) | $58.2 million ($0.94/share) |
| Adjusted EBITDA | $86.1 million | $75.9 million | $163.2 million | $148.8 million |
| Operating cash flow | $42.1 million | $2.3 million | $121.9 million | $52.5 million |
Q2 revenue grew 13.3%; days-adjusted same-facility revenue increased 6.9%, comprising 4.9% higher revenue per case and 1.9% more cases. For the first half, revenue grew 14.8%; same-facility cases rose 4.0% and revenue per case rose 3.2%. Management attributed growth to case volume and mix, revenue per case, and acquisitions.
Cost of revenues was 78.1% of revenue in Q2 versus 78.2% a year earlier, and 78.6% for the first half versus 79.0%. Q2 G&A was 4.2% of revenue versus 4.5%; first-half G&A was 4.6% versus 4.9%. Q2 interest expense was $56.9 million, or 9.2% of revenue, versus $53.4 million, or 9.8%; first-half interest expense was $113.2 million, or 9.3%, versus $106.7 million, or 10.1%. Adjusted EBITDA margin was approximately 14.0% in Q2, similar to the prior-year quarter.
Liquidity, debt and cash flow
At June 30, cash was $227.4 million, down from $389.9 million at year-end 2021. Working capital was approximately $266.7 million, versus $409.3 million. Total debt was $3,087.7 million, including $68.3 million current maturities; long-term debt was $3,019.4 million. Debt less cash was approximately $2,860.3 million. The company reported $203.0 million available on its revolver and no revolver borrowings.
For the first half, investing activities used $181.4 million, including $74.9 million for acquisitions and $65.8 million for equity-method investments; financing activities used $103.0 million. Cash declined by $162.5 million. Operating cash flow improved year over year, in part because 2022 included $32.8 million of stockholder-litigation proceeds while 2021 included a $32.2 million DOJ settlement payment. The company distributed $75.2 million to non-controlling interest holders in the first half.
Changes, outlook and notable items
- Q2 net loss attributable to common stockholders narrowed to $18.4 million from $26.9 million. First-half attributable loss narrowed to $6.2 million from $58.2 million, with the comparison affected by a $32.8 million litigation settlement gain in 2022, lower grant-fund recognition, and a 2021 debt-extinguishment loss.
- The company recognized only $0.1 million of grant funds as an expense reduction in Q2 and $1.3 million in the first half, versus $4.9 million and $20.0 million in 2021. It repaid approximately $43 million of Medicare accelerated payments in the first half; about $17 million remained at June 30.
- During the first half, the company acquired controlling interests in four facilities for $74.9 million net of cash acquired, and purchased non-controlling interests in facilities and development projects for $65.8 million. It reported $15.3 million of transaction and integration costs for the first half.
- Cash requirements include debt, lease and tax receivable agreement obligations, remaining Medicare accelerated-payment repayments, and deferred payroll taxes. Management said operating cash flows, cash, revolver capacity and anticipated capital-market access should meet short- and long-term liquidity needs.
- No specific financial guidance was provided. Management highlighted uncertainty from COVID-19, inflation, supply-chain disruption, tight labor markets, interest rates, case-volume variability, reimbursement and collections, and acquisition integration. It stated that interest-rate hedges were expected to limit material effects on 2022 earnings or cash flows.
Key investor verification points
- Assess whether same-facility case and revenue-per-case growth can continue, and separate organic growth from acquisition contributions.
- Evaluate leverage, interest-rate exposure, hedge coverage and cash available after distributions, acquisitions and required repayments.
- Distinguish recurring operating performance from litigation proceeds, government grants, and other adjustments included in reported or non-GAAP results.
- Monitor labor, supply and inflation costs, payor mix and collections, and the timing of deferred government-payment and payroll-tax obligations.
- Review acquisition integration, transaction costs, and the company’s reliance on continued access to capital markets; the filing reports no material change to previously disclosed risk factors.