Surgery Partners, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Surgery Partners operated 127 surgical facilities across 30 states, including 110 ambulatory surgery centers and 17 surgical hospitals. Results are compared with Q1 2020, when the pandemic began affecting operations.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $512.4 million | $441.0 million |
| Operating income | $64.3 million | $23.5 million |
| Net income (loss) | $10.8 million | $(8.4) million |
| Net loss attributable to common stockholders | $(31.3) million; $(0.57) per share | $(37.0) million; $(0.76) per share |
| Operating cash flow | $50.2 million | $29.2 million |
| Adjusted EBITDA (non-GAAP) | $72.9 million | $46.5 million |
Revenue grew 16.2%; same-facility revenue increased 15.3%, reflecting 7.1% more cases and 7.6% higher revenue per case. Operating margin was approximately 12.5%, versus 5.3%. Cost of revenues declined to 79.8% of revenue from 83.0%. Adjusted EBITDA excluding the net impact of grant funds was $62.2 million, up from $46.5 million; this is a non-GAAP measure.
Interest expense, net, rose to $53.3 million from $47.1 million, principally due to debt issued or drawn in 2020. Total debt was $2.851 billion at quarter end, compared with $2.857 billion at December 31, 2020. Cash and cash equivalents were $541.9 million, up from $317.9 million; revolving-credit availability was $162.5 million, with no revolver borrowings. The company reported $50.2 million of operating cash flow and $18.9 million of operating cash inflows after distributions to non-controlling holders.
Cash was boosted by the February public offering: 8.625 million shares issued for $260.9 million gross proceeds and $248.3 million net proceeds. Capital expenditures were $14.5 million, and the company paid $16.6 million of debt principal. Current assets were $1.018 billion and current liabilities $574.8 million.
Material changes and unusual items
- Recovery in surgical activity from pandemic-related disruption drove much of the year-over-year improvement; acquisitions completed in 2019 and 2020 also contributed.
- The company recognized $15.1 million of government grant funds as a reduction of operating expenses in Q1 2021; no comparable amount was recognized in Q1 2020. Grant recognition depends on evolving HHS guidance and compliance with program conditions.
- Q1 2021 included a $0.9 million net gain on disposals and deconsolidations, compared with a $3.5 million net loss in Q1 2020. The prior-year period also included a $1.2 million litigation settlement charge.
- Net income attributable to non-controlling interests increased to $31.8 million from $19.1 million, so consolidated net income did not translate into positive net income attributable to Surgery Partners common stockholders.
- After quarter end, the company announced an intended May 17, 2021 conversion of all Series A preferred stock into approximately 22.609 million common shares. It also completed a May 3 credit amendment providing approximately $1.545 billion of replacement term loans; the stated maturity is August 31, 2026, subject to an earlier-maturity condition tied to the 2025 notes.
- The company paid $30.7 million plus accrued interest on April 1, 2021 under a previously recorded government settlement. The balance sheet included a $32.2 million accrued legal settlement liability at March 31.
Outlook, risks and contingencies
No quantified revenue or earnings guidance is provided. Management said surgical case volumes continued to improve as restrictions eased, but could not predict the pandemic’s duration, when utilization might return to pre-pandemic levels, or the outlook with certainty. Management believed operating cash flow, cash, revolver capacity, CARES Act funds and capital-market access would be adequate for short- and long-term liquidity needs.
Key risks include renewed or prolonged COVID-19 disruption; uncertainty in case volumes, payor mix, collections and government relief eligibility; substantial debt and interest-rate exposure; and healthcare regulatory, billing and compliance requirements. The company estimated that a 100-basis-point interest-rate change would affect annual net earnings and cash flow by approximately $3.4 million, after swaps. It reported no material change to the risk factors in its 2020 Form 10-K. A derivative-related $21.9 million was estimated to be reclassified as an increase to interest expense over the next 12 months.
The DOJ settlement resolved an investigation involving subsidiaries. Separately, derivative stockholder litigation remained in discovery; the filing also describes ordinary-course claims and potential healthcare regulatory exposure. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether case-volume recovery and same-facility growth continued after the unusually disrupted Q1 2020 comparison.
- How much of reported earnings and EBITDA improvement reflects grant recognition; whether grant funds meet applicable conditions and reporting requirements.
- Cash generation after non-controlling-interest distributions, settlement payments, Medicare accelerated-payment repayments and other obligations.
- Debt refinancing terms, maturity conditions, interest costs, covenant headroom and the company’s ability to manage leverage.
- The timing and final share impact of the preferred-stock conversion, alongside dilution from the 2021 equity offering.
- Developments in the remaining litigation and healthcare regulatory matters, and any resulting changes in liabilities or liquidity.