Surgery Partners, Inc. Announces Second Quarter 2017 Results

August 8, 2017

Transaction with National Surgical Healthcare Progressing as Planned with Third Quarter Close Date

NASHVILLE, Tenn., Aug. 08, 2017 (GLOBE NEWSWIRE) -- Surgery Partners, Inc. (NASDAQ:SGRY) ("Surgery Partners" or the "Company"), a leading provider of surgical services, today announced results for the second quarter ended June 30, 2017.

  • Revenues decreased 0.5% compared to second quarter 2016 to $288.4 million
  • Same facility revenue increased 2.0% over second quarter 2016 to $296.5 million
  • Net loss attributable to Surgery Partners was $4.5 million, compared to net income of $2.1 million in the second quarter 2016
  • Adjusted EBITDA was $37.1 million, compared to $46.0 million in the second quarter 2016
  • Diluted EPS of $(0.09) per share compared to $0.04 per share in the second quarter 2016

“We believe that the shift to high quality, outpatient care remains a secular growth driver for Surgery Partners, and our model of partnering with physicians offers an attractive solution for patients and payors,” said Mike Doyle, Chief Executive Officer. “However, like many of our peers, Surgery Partners experienced slower than normal utilization and adverse payor mix during the second quarter of 2017.”

“While we were disappointed with our overall results for the quarter, we were able to continue our record of same facility revenue growth and expansion of higher acuity cases. Unfortunately, the broader industry trend of slower volumes and a shift to less favorable payors created challenges to achieving our financial goals this period. Our performance was hindered by three factors: the slowing of patient volumes, an adverse payor mix and slow improvement of our integrated physician practice acquisition. We believe we will see sequential improvement of these factors through the remainder of the year.”

“In addition, as discussed on previous calls, total revenue reflects the anticipated lapse of a break-even anesthesia contract to an unaffiliated provider. The contract was neutral to EBITDA, but dilutive to revenue by approximately $8.8 million in the second quarter.”

“We remain excited about the prospects for our business and are pleased that the previously announced acquisition of National Surgical Healthcare is progressing as planned. We have secured regulatory approval, finalized financing and expect to close on the transaction during the third quarter. As we continue to build out our network of services, I would like to thank our physicians and employees for their continued dedication to delivering high quality health care.”

As of June 30, 2017, the Company owned or operated 103 surgical facilities primarily in partnership with physicians and, on a select basis, physicians and health systems, in addition to a network of 59 physician practices.

Second Quarter 2017 Results

Total revenues for the second quarter of 2017 decreased 0.5% to $288.4 million from $289.7 million for the second quarter of 2016, which included approximately $8.8 million of revenue from the anesthesia contract. Excluding this contract from both periods, we would have achieved revenue growth of 2.7%. Same facility revenues for the second quarter of 2017 increased 2.0% to $296.5 million from $290.7 million in the same period last year. Same facility revenue per case increased 1.5% and same facility cases increased 0.4%.

For the second quarter of 2017, the Company’s net loss attributable to Surgery Partners was $4.5 million compared to net income of $2.1 million for the same period last year. For the second quarter of 2017, the Company's Adjusted EBITDA was $37.1 million compared to Adjusted EBITDA of $46.0 million for the same period last year.

Year to Date 2017 Results

Total revenues year to date 2017 increased 3.2% to $574.5 million from $556.8 million for the same period last year, which included approximately $17.8 million of revenue from the anesthesia contract. Excluding this contract from both periods, we would have achieved revenue growth of 6.6%. Same facility revenues for year to date 2017 increased 5.0% to $581.4 million from $553.7 million in the same period last year. Results were driven by increased same facility revenue per case of 3.7% and same facility case growth of 1.3%.

For year to date 2017, the Company’s net loss attributable to Surgery Partners was $7.2 million compared to a net loss of $5.1 million for the same period last year. For year to date 2017, the Company's Adjusted EBITDA was $77.2 million compared to Adjusted EBITDA of $84.5 million for the same period last year.

Liquidity

Surgery Partners had cash and cash equivalents of $57.0 million at June 30, 2017 and availability of $55.9 million under its revolving credit facility. Net operating cash flow, including operating cash flow less distributions to non-controlling interests, was $4.0 million for the second quarter of 2017, which reflects approximately $35.0 million of cash interest payments which were not reflected in the prior quarter, along with $2.9 million of merger transaction and integration related costs. The Company’s ratio of total debt to EBITDA at the end of the second quarter of 2017, as calculated under the Company’s credit agreement, was 6.9x.

Full Year 2017 Guidance

For 2017, the Company is modifying the guidance provided on our conference call in March of this year to reflect the recent softness in healthcare utilization and payor mix shift experienced during the quarter. On a standalone basis, the Company now anticipates revenue in the range of $1.18 billion to $1.20 billion and Adjusted EBITDA in the range of $174.0 million to $181.0 million for the full year 2017. Including the partial year impact of NSH, revenue would be in the range of $1.34 billion to $1.36 billion and Adjusted EBITDA in the range of $199.0 million to $207.0 million. This new guidance does not incorporate any smaller, one-off acquisitions this year and assumes that we experience a return to higher demand in the second half of the year, but not to the extent that we forecast previously.

Conference Call Information

Surgery Partners will hold its conference call tomorrow, August 9, 2017 at 8:30 a.m. (Eastern Time). The conference call can be accessed live over the phone by dialing 1-877-407-0792, or for international callers, 1-201-689-8263. A replay will be available two hours after the call and can be accessed by dialing 1-844-512-2921 or for international callers, 1-412-317-6671. The passcode for the live call and the replay is 13667317. The replay will be available until August 23, 2017.

Interested investors and other parties may also listen to a simultaneous webcast of the conference call by logging onto the Investor Relations section of the Company's website at www.surgerypartners.com. The on-line replay will remain available for a limited time beginning immediately following the call.

To learn more about Surgery Partners, please visit the Company's website at www.surgerypartners.com. Surgery Partners uses its website as a channel of distribution for material Company information. Financial and other material information regarding Surgery Partners is routinely posted on the Company's website and is readily accessible.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements, which have been included in reliance of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, involve risks and uncertainties and assumptions relating to our operations, financial condition, business, prospects, growth strategy and liquidity, which may cause our actual results to differ materially from those projected by such forward-looking statements, and the Company cannot give assurances that such statements will prove to be correct. You can identify forward-looking statements because they do not relate strictly to historical or current facts. These statements may include words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “outlook,” “potential,” “project,” “projection,” “plan,” “intend,” “seek,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.

The forward-looking statements appear in a number of places throughout this press release and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate. All forward-looking statements are subject to risks and uncertainties, including but not limited to those risks and uncertainties described in “Risk Factors” in our soon to be filed Quarterly Report on form 10-Q for the three months ended June 30, 2017 that may cause actual results to differ materially from those that we expected.

The forward-looking statements made in this press release are made only as of the date of the hereof. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information or otherwise. More information about potential factors that could affect our business and financial results is included in our filings with the Securities and Exchange Commission.

Use of Non-GAAP Financial Measures

In addition to the results prepared in accordance with generally accepted accounting principles in the United States ("GAAP") provided throughout this press release, Surgery Partners has presented the following non-GAAP financial measures: EBITDA and Adjusted EBITDA, which exclude various items detailed in the attached "Reconciliation of Non-GAAP Financial Measures".

These non-GAAP financial measures are not intended to replace financial performance measures determined in accordance with GAAP. Rather, they are presented as supplemental measures of the Company's performance that management believes may enhance the evaluation of the Company's ongoing operating results. These non-GAAP financial measures are not presented in accordance with GAAP, and the Company’s computation of these non-GAAP financial measures may vary from those used by other companies. These measures have limitations as an analytical tool, and should not be considered in isolation or as a substitute or alternative to net income or loss, operating income or loss, cash flows from operating activities, total indebtedness or any other measures of operating performance, liquidity or indebtedness derived in accordance with GAAP.

About Surgery Partners

Headquartered in Nashville, Tennessee, Surgery Partners is a leading healthcare services company with a differentiated outpatient delivery model focused on providing high quality, cost effective solutions for surgical and related ancillary care in support of both patients and physicians. Founded in 2004, Surgery Partners is one of the largest and fastest growing surgical services businesses in the country, with more than 150 locations in 29 states, including ambulatory surgery centers, surgical hospitals, a diagnostic laboratory, multi-specialty physician practices and urgent care facilities.

 

SURGERY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except shares and per share amounts)
(Unaudited)

 
    Three Months Ended June 30,   Six Months Ended June 30,
    2017   2016   2017   2016
                 
Revenues   $ 288,353     $ 289,681     $ 574,536     $ 556,755  
Operating expenses:                
Salaries and benefits   90,022     93,791     179,909     180,677  
Supplies   74,084     66,915     145,244     130,577  
Professional and medical fees   22,577     20,304     43,702     39,957  
Lease expense   13,674     13,074     27,300     25,508  
Other operating expenses   16,095     14,768     32,245     28,836  
Cost of revenues   216,452     208,852     428,400     405,555  
General and administrative expenses(1)   18,655     15,023     34,196     27,220  
Depreciation and amortization   11,417     9,702     22,525     19,271  
Provision for doubtful accounts   5,788     3,544     11,463     7,417  
Income from equity investments   (1,052 )   (1,082 )   (2,252 )   (1,840 )
Loss on disposal or impairment of long-lived assets, net   405     1,331     1,601     1,125  
Gain on litigation settlement   (3,794 )       (3,794 )    
Loss on debt refinancing               8,281  
Merger transaction and integration costs   2,904     1,325     3,241     4,497  
Electronic health records incentive income   (161 )   (2 )   (302 )   (95 )
Other expense (income)       40     (2 )   97  
Total operating expenses   250,614     238,733     495,076     471,528  
Operating income   37,739     50,948     79,460     85,227  
Interest expense, net   (25,600 )   (26,235 )   (50,782 )   (48,388 )
Income before income taxes   12,139     24,713     28,678     36,839  
Income tax expense   512     2,420     2,629     4,190  
Net income   11,627     22,293     26,049     32,649  
Less:  Net income attributable to non-controlling interests   (16,098 )   (20,173 )   (33,274 )   (37,720 )
Net (loss) income attributable to Surgery Partners, Inc.   $ (4,471 )   $ 2,120     $ (7,225 )   $ (5,071 )
                 
Net (loss) income per share attributable to common stockholders                
Basic   $ (0.09 )   $ 0.04     $ (0.15 )   $ (0.11 )
Diluted (2)   $ (0.09 )   $ 0.04     $ (0.15 )   $ (0.11 )
Weighted average common shares outstanding                
Basic   48,145,729     48,019,652     48,112,909     48,018,228  
Diluted (2)   48,145,729     48,129,041     48,112,909     48,018,228  

(1) Includes contingent acquisition compensation expense of $1.8 million and $1.5 million for the three months ended June 30, 2017 and 2016, respectively, and $3.8 million and $1.5 million for the six months ended June 30, 2017 and 2016, respectively.

(2) The impact of potentially dilutive securities for the three and six months ended June 30, 2017 and the six months ended June 30, 2016 was not considered because the effect would be anti-dilutive in those periods.

 

SURGERY PARTNERS, INC.
Unaudited Selected Financial and Operating Data
(Amounts in thousands, except shares and per share amounts)

 
  June 30, 2017   December 31, 2016
       
Balance Sheet Data (at period end):      
Cash and cash equivalents $ 57,034     $ 69,699  
Total current assets 352,311     361,955  
Total assets 2,671,487     2,304,958  
       
Current maturities of long-term debt 29,919     27,822  
Total current liabilities 186,002     186,725  
Long-term debt, less current maturities 1,795,265     1,414,421  
Total liabilities 2,179,719     1,799,763  
       
Total Surgery Partners, Inc. stockholders' equity 6,252     9,677  
Non-controlling interests-non-redeemable 309,264     314,997  
Total stockholders' equity 315,516     324,674  

 

  Three Months Ended June 30,   Six Months Ended June 30,
  2017   2016   2017   2016
               
Cash Flow Data:              
Net cash provided by (used in):              
Operating activities $ 21,601     $ 48,793     $ 56,471     $ 74,037  
Investing activities (22,570 )   (114,514 )   (29,195 )   (133,367 )
Capital expenditures (8,752 )   (8,546 )   (15,102 )   (20,350 )
Investments in new businesses (13,888 )   (105,968 )   (14,163 )   (113,017 )
Financing activities 2,037     (17,727 )   (39,941 )   52,996  
Distributions to non-controlling interests (17,579 )   (14,849 )   (36,841 )   (32,362 )

 

  Three Months Ended June 30,   Six Months Ended June 30,
  2017   2016   2017   2016
Other Data:              
Number of surgical facilities as of the end of period 103     103     103     103  
Number of consolidated surgical facilities as of the end of period 93     92     93     92  
Cases 111,758     107,931     220,587     208,687  
Revenue per case $ 2,580     $ 2,684     $ 2,605     $ 2,668  
Adjusted EBITDA $ 37,055     $ 46,032     $ 77,162     $ 84,457  
Adjusted EBITDA as a % of revenues 12.9 %   15.9 %   13.4 %   15.2 %
Adjusted EPS- Basic (0.01 )   0.16     0.03     0.26  
Adjusted EPS- Diluted (0.01 )   0.16     0.03     0.26  

 

SURGERY PARTNERS, INC.
Supplemental Information
(Unaudited, in thousands, except cases and growth rates)

 
  Three Months Ended June 30,   Six Months Ended June 30,
  2017   2016   2017   2016
Same-facility Information:              
Cases (3) 112,314     111,818     218,300     215,530  
Case growth 0.4 %   N/A     1.3 %   N/A  
Revenue per case (3) $ 2,640     $ 2,600     $ 2,663     $ 2,569  
Revenue per case growth 1.5 %   N/A     3.7 %   N/A  

(3) Same-facility revenues include revenues from our consolidated and non-consolidated surgical facilities (excluding facilities acquired in new markets or divested during the current and prior periods) along with the revenues from our ancillary services comprised of a diagnostic laboratory, multi-specialty physician practices, urgent care facilities, anesthesia services, optical services and specialty pharmacy services that complement our surgical facilities in our existing markets.

  Three Months Ended June 30,   Six Months Ended June 30,
  2017   2016   2017   2016
Segment Revenues:              
Surgical facility services $ 262,810     $ 263,783     $ 520,960     $ 509,453  
Ancillary services 22,640     22,503     47,852     40,283  
Optical services 2,903     3,395     5,724     7,019  
  Total revenues $ 288,353     $ 289,681     $ 574,536     $ 556,755  

Adjusted EBITDA is the primary profit/loss metric reviewed by the CODM in making key business decisions and on allocation of resources. The segment disclosures below provide a reconciliation from adjusted EBITDA back to net income in the reported condensed consolidated financial information.

  Three Months Ended June 30,   Six Months Ended June 30,
  2017   2016   2017   2016
Segment Adjusted EBITDA:              
Surgical facility services $ 49,946     $ 54,311     $ 98,187     $ 99,971  
Ancillary services 429     3,068     4,211     6,568  
Optical services 883     849     1,659     1,728  
  Total segment adjusted EBITDA (4) $ 51,258     $ 58,228     $ 104,057     $ 108,267  
               
General and administrative expenses $ (18,655 )   $ (15,023 )   $ (34,196 )   $ (27,220 )
Non-cash stock compensation expense 1,435     502     2,069     635  
Contingent acquisition compensation expense 1,814     1,530     3,847     1,530  
Acquisition related costs 1,203     795     1,385     1,245  
Total adjusted EBITDA (4) $ 37,055     $ 46,032     $ 77,162     $ 84,457  
               
Net income attributable to non-controlling interests $ 16,098     $ 20,173     $ 33,274     $ 37,720  
Depreciation and amortization (11,417 )   (9,702 )   (22,525 )   (19,271 )
Interest expense, net (25,600 )   (26,235 )   (50,782 )   (48,388 )
Income tax expense (512 )   (2,420 )   (2,629 )   (4,190 )
Non-cash stock compensation expense (1,435 )   (502 )   (2,069 )   (635 )
Contingent acquisition compensation expense (1,814 )   (1,530 )   (3,847 )   (1,530 )
Merger transaction, integration and practice acquisition costs (5) (4,137 )   (2,192 )   (4,728 )   (6,108 )
Gain on litigation settlement 3,794         3,794      
Loss on disposal or impairment of long-lived assets, net (405 )   (1,331 )   (1,601 )   (1,125 )
Loss on debt refinancing             (8,281 )
Total net income $ 11,627     $ 22,293     $ 26,049     $ 32,649  

(4) The above table reconciles adjusted EBITDA by segment to net income as reflected in the unaudited condensed consolidated statements of operations.

When we use the term “Adjusted EBITDA,” it is referring to net income minus (a) net income attributable to non-controlling interests plus (b) depreciation and amortization, (c) interest expense, net, (d) income tax expense, (e) non-cash stock compensation expense, (f) contingent acquisition compensation expense, (g) merger transaction, integration and practice acquisition costs, (h) gain on litigation, (i) loss on disposal or impairment of long-lived assets and (j) loss on debt refinancing. Non-controlling interests represent the interests of third parties, such as physicians, and in some cases, healthcare systems that own an interest in surgical facilities that we consolidate for financial reporting purposes. Our operating strategy is to apply a market-based approach in structuring its partnerships with individual market dynamics driving the structure. We believe that it is helpful to investors to present Adjusted EBITDA as defined above because it excludes the portion of net income attributable to these third-party interests and clarifies for investors our portion of Adjusted EBITDA generated by our surgical facilities and other operations.

We use Adjusted EBITDA as a measure of liquidity. It is included because we believe that it provides investors with additional information about its ability to incur and service debt and make capital expenditures.

Adjusted EBITDA is not a measurement of financial performance or liquidity under GAAP. It should not be considered in isolation or as a substitute for net income, operating income, cash flows from operating, investing or financing activities, or any other measure calculated in accordance with generally accepted accounting principles. The items excluded from Adjusted EBITDA are significant components in understanding and evaluating financial performance and liquidity. Our calculation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.

(5) This amount includes merger transaction and integration costs of $2.9 million and $1.3 million for the three months ended June 30, 2017 and 2016, respectively, and practice acquisition costs of $1.2 million and $867,000 for the three months ended June 30, 2017 and 2016, respectively.

This amount includes merger transaction and integration costs of $3.2 million and $4.5 million for the six months ended June 30, 2017 and 2016, respectively, and practice acquisition costs of $1.5 million and $1.6 million for the six months ended June 30, 2017 and 2016, respectively.

     

SURGERY PARTNERS, INC.
Reconciliation of Non-GAAP Financial Measures
(Unaudited, Amounts in thousands)

From time to time, the Company incurs certain non-recurring gains or losses that are normally nonoperational in nature and that it does not consider relevant in assessing its ongoing operating performance. When significant, Surgery Partners’ management and Board of Directors typically exclude these gains or losses when evaluating the Company’s operating performance and in certain instances when evaluating performance for incentive compensation purposes. Additionally, the Company believes that certain investors and equity analysts exclude these or similar items when evaluating the Company’s current or future operating performance and in making informed investment decisions regarding the Company. Accordingly, the Company provides adjusted net income per share attributable to Surgery Partners, Inc. stockholders as a supplement to its comparable GAAP measure of net income per share attributable to Surgery Partners, Inc. Adjusted net income per share attributable to Surgery Partners, Inc. stockholders should not be considered a measure of financial performance under GAAP, and the items excluded from adjusted net income per share attributable to Surgery Partners, Inc. stockholders are significant components in understanding and assessing financial performance. Adjusted net income per share attributable to Surgery Partners, Inc. stockholders should not be considered in isolation or as an alternative to net income per share attributable to Surgery Partners, Inc. stockholders as presented in the consolidated financial statements.

The following table reconciles net income as reflected in the consolidated statements of operations to adjusted net income used to calculate adjusted net income per share attributable to Surgery Partners, Inc. stockholders:

    Three Months Ended June 30,   Six Months Ended June 30,
    2017   2016   2017   2016
Consolidated Statements of Operations Data:                
Net Income   $ 11,627     $ 22,293     $ 26,049     $ 32,649  
Less:                
Net income attributable to non-controlling interests   16,098     20,173     33,274     37,720  
Plus:                
Merger transaction, integration and practice acquisition costs   4,137     2,192     4,728     6,108  
Non-cash stock compensation expense   1,435     502     2,069     635  
Contingent acquisition compensation expense   1,814     1,530     3,847     1,530  
Loss on debt refinancing               8,281  
Gain on litigation settlement   (3,794 )       (3,794 )    
Loss on disposal or impairment of long-lived assets, net   405     1,331     1,601     1,125  
Adjusted net (loss) income   $ (474 )   $ 7,675     $ 1,226     $ 12,608  
                 
Adjusted net (loss) income per share                
Basic   $ (0.01 )   $ 0.16     $ 0.03     $ 0.26  
Diluted(6)   $ (0.01 )   $ 0.16     $ 0.03     $ 0.26  
Weighted average common shares outstanding:                
Basic   48,145,729     48,019,652     48,112,909     48,018,228  
Diluted(6)   48,145,729     48,129,041     48,302,307     48,118,788  

(6) The impact of potentially dilutive securities for the three ended June 30, 2017 was not considered because the effect would be anti-dilutive in the period.

 

Contact

Teresa Sparks, CFO
Surgery Partners, Inc.
(615) 234-8940
IR@surgerypartners.com

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Surgery Partners