Surgery Partners, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company operates surgical facilities and ancillary services; at quarter-end it owned or operated 127 facilities in 30 states, including 111 ambulatory surgery centers and 16 surgical hospitals. COVID-19 began materially affecting operations in mid-March.
Financial performance and condition
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $441.0 million | $416.8 million; up 5.8% |
| Operating income | $23.5 million; 5.3% operating margin | $49.6 million; 11.9% margin |
| Net loss attributable to Surgery Partners | $27.5 million | $20.1 million loss |
| Net loss attributable to common stockholders; diluted loss per share | $37.0 million; $0.76 | $28.6 million; $0.60 |
| Adjusted EBITDA | $46.5 million; 10.5% of revenue | $50.7 million; 12.2% of revenue |
| Cash provided by operating activities | $29.2 million | $20.5 million |
| Cash and cash equivalents at quarter-end | $194.6 million | $92.7 million at December 31, 2019 |
| Total debt at carrying value | $2,686.8 million | $2,580.7 million at December 31, 2019 |
Cost of revenues rose to $366.2 million, or 83.0% of revenue, from $326.1 million, or 78.2%. Net interest expense increased to $47.1 million from $42.0 million. Cash used in investing activities was $7.7 million; financing activities provided $80.4 million, including $158.4 million of borrowings and $52.8 million of debt principal payments. The company reported $112.9 million drawn on its $120 million revolving facility at March 31, with only $0.1 million available after letters of credit.
Changes versus the prior-year quarter
- Same-facility revenue increased 2.5%, while same-facility cases declined 8.0%. Adjusted for operating days, same-facility revenue increased 0.9% and cases declined 9.4%. Higher revenue per case reflected a more favorable mix as lower-acuity procedures declined first.
- Revenue growth was more than offset by higher operating costs, lower operating income, and increased interest expense. Adjusted EBITDA fell by $4.2 million.
- Operating cash flow improved, primarily due to timing of payroll and trade-payable payments. Debt increased following the March draw on the revolving facility.
Outlook, risks, and unusual items
- COVID-19 and outlook: The company withdrew its previously announced full-year 2020 outlook on March 18. It expected revenue to remain negatively affected into Q2 and warned that materially lower surgical volumes could cause substantially higher losses and lower, potentially negative, Adjusted EBITDA in Q2 and subsequent quarters. The duration of volume declines and recapture of postponed procedures were uncertain.
- Response and liquidity: Management cited furloughs, changes to salaried employees’ pay arrangements, vendor and lessor negotiations, and corporate payroll reductions. It said available cash, operating cash flow, financing, government relief, and cost actions were expected to cover short-term liquidity needs, while warning that prolonged disruption could impair liquidity and debt repayment capacity.
- Subsequent financing and covenant change: The company drew an additional $120 million term loan on April 22, bearing interest at LIBOR plus 8% (or the specified alternate base rate plus 7%). A credit amendment waived the maximum consolidated net leverage covenant for the remainder of 2020.
- Government assistance: By the filing date, the company had received approximately $45 million in provider grants, subject to program conditions, and approximately $120 million in Medicare accelerated payments that must be repaid. These amounts were not recognized in Q1 results. The company also began deferring its employer Social Security payroll-tax match in April.
- Settlement: On April 14, Logan Labs and Tampa Pain agreed to pay $40 million plus interest to resolve a federal investigation concerning the medical necessity of certain urine drug tests. Payment includes $7.5 million in claims held in suspense, $1.8 million plus interest shortly after settlement, and $30.7 million plus interest on April 1, 2021. The company had recorded a $46 million charge in 2018 and an additional $1.2 million in Q1 2020. The subsidiaries also entered into three- and five-year corporate integrity agreements; the settlement contains no admission of liability.
- Other notable items: The company recorded a $15.2 million income tax benefit, including approximately $11.9 million of discrete benefits. It recognized a $25.2 million derivative-related other comprehensive loss. No goodwill impairment indicators were identified at March 31, but management warned future COVID-19-related developments could lead to impairment.
- Key risks: Uncertain procedure volumes and recovery, supply and staffing constraints, changes in payor mix and patient collections, access to capital, high debt and interest costs, healthcare regulation, and potential litigation or uninsured claims. Management said disclosure controls were effective and reported no material change in internal controls.
Important facts for investors to verify
- Subsequent quarterly filings: actual surgical case volumes, revenue, margins, and any recovery or recapture of postponed procedures.
- Cash use and liquidity, including repayment of Medicare advances, use of grant funds, and any additional borrowing or asset sales.
- Debt balances, interest expense, the $120 million incremental loan’s cost, and compliance with amended covenant terms.
- Settlement payments and compliance with the corporate integrity agreements.
- Whether COVID-19 effects, lower volumes, or market conditions trigger goodwill or other asset impairment charges.