News Release Details

Near Term Results Reflect Ongoing Traction of Strategic Growth Initiatives; Continued Investments to Drive Accelerated Growth in 2019

BRENTWOOD, Tenn., Nov. 07, 2018 (GLOBE NEWSWIRE) --  Surgery Partners, Inc. (NASDAQ:SGRY) ("Surgery Partners" or the "Company"), a leading provider of surgical services, today announced results for the third quarter ended September 30, 2018.

• Revenues increased 44.9% to $443.9 million
• Same store revenues increased 11.4% over prior period
• Surgical cases increased 13.9% to 127,199
• Net loss attributable to common stockholders of $29.2 million
• Adjusted EBITDA increased 153.8% to $59.0 million
• Diluted net loss per share of $(0.61)
• Adjusts full year 2018 Adjusted EBITDA guidance to $230 million - $235 million

Wayne DeVeydt, Chief Executive Officer of Surgery Partners, stated, “Our third quarter results were highlighted by strong year over year revenue and surgical case growth, as well as same store volume growth, a trend which has carried over into October. We continue to advance our agenda both operationally and strategically, as we remain focused on pruning the portfolio, investing in our platforms and processes and deploying capital to continue to execute on our inorganic growth opportunities.”

Mr. DeVeydt continued, “Looking ahead to 2019, we firmly believe that the investments we have made in 2018 will drive organic growth across our business and leave us well positioned to make real progress towards our goal of becoming the trusted partner of choice for operating short stay surgical facilities across the United States.”

Tom Cowhey, Chief Financial Officer of Surgery Partners, commented, “Third quarter results demonstrated good progress as we reposition the company for growth in 2019. However, when we considered the seasonal increases that were required to hit our previous projection, coupled with our pruning efforts and continued growth investments, we made a decision to lower our 2018 Adjusted EBITDA projection to a range of $230 to $235 million.”

Third Quarter 2018 Results

Total revenues for the third quarter of 2018 increased 44.9% to $443.9 million from $306.3 million for the third quarter of 2017. Same-facility revenues for the third quarter of 2018 increased 11.4% from the same period last year, with a 10.5% increase in revenue per case and a 0.9% increase in same facility cases. For the third quarter of 2018, the Company’s net loss attributable to common stockholders was $29.2 million compared to $31.8 million for the same period last year. For the third quarter of 2018, the Company’s Adjusted EBITDA increased 153.8% to $59.0 million compared to $23.2 million for the same period last year.

Year to Date 2018 Results

Total revenues year to date 2018 increased 48.3% to $1,306.1 million from $880.9 million for the same period last year. Same-facility revenues year to date 2018 increased 4.6% from the same period last year, with a 6.2% increase in revenue per case offset by a 1.5% decrease in same facility cases. For year to date 2018, the Company’s net loss attributable to common stockholders was $81.9 million compared to $39.0 million for the same period last year. For year to date 2018, the Company’s Adjusted EBITDA increased 60.8% to $161.5 million compared to $100.4 million for the same period last year.

Liquidity

Surgery Partners had cash and cash equivalents of $79.1 million at September 30, 2018 and availability of approximately $60.5 million under its revolving credit facility. Net operating cash inflow, including operating cash flow less distributions to non-controlling interests, was $5.1 million for the third quarter of 2018. The Company’s ratio of total net debt to EBITDA, as calculated under the Company’s credit agreement was 7.75x at the end of the third quarter of 2018.

Guidance

The Company is revising its full-year 2018 guidance to revenue in the range of $1.75 to $1.80 billion and Adjusted EBITDA in the range of $230 million to $235 million. The Company now expects to deploy at least $100 million in capital for acquisitions in FY’18.

Conference Call Information

Surgery Partners will hold a conference call today, November 7, 2018 at 8:30 a.m. (Eastern Time). The conference call can be accessed live over the phone by dialing 1-855-327-6837, or for international callers, 1-631-891-4304. 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 10005798. The replay will be available until November 21, 2018.

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.

About Surgery Partners

Headquartered in Brentwood, 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 180 locations in 32 states, including ambulatory surgery centers, surgical hospitals, a diagnostic laboratory, multi-specialty physician practices and urgent care facilities. For additional information, visit www.surgerypartners.com.

Forward-Looking Statements

This press release contains forward-looking statements, including those regarding growth and our anticipated operating results for 2018 and other similar statements. These statements can be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “continues,” “estimates,” “predicts,” “projects,” “forecasts,” and similar expressions. All forward looking statements are based on current expectations and beliefs as of the date of this release and are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those discussed in, or implied by, the forward-looking statements, including but not limited to, the risks identified and discussed from time to time in the Company’s reports filed with the SEC, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Except as required by law, the Company undertakes no obligation to revise or update publicly any forward-looking statements to reflect events or circumstances after the date of this report, or to reflect the occurrence of unanticipated events or circumstances.

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, Adjusted EBITDA and adjusted net (loss) income, 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.

In connection with the Preferred Private Placement and the Private Sale, as previously disclosed on Form 8-K filed with the Securities and Exchange Commission on September 1, 2017, the Company elected to apply “pushdown” accounting with the change of control effective August 31, 2017, by applying the guidance in Accounting Standards Codification Topic ("ASC") 805, Business Combinations. Accordingly, the consolidated financial statements of the Company for periods before and after August 31, 2017 will reflect different bases of accounting, and the financial positions and results of operations of those periods are not comparable. Throughout the Company's condensed consolidated financial statements and the accompanying notes therein to be filed no later than November 9, 2018, periods prior to the change of control are identified as "Predecessor" and periods after the change of control are identified as "Successor."

SURGERY PARTNERS, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(Amounts in thousands, except shares and per share amounts)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2018				2017				2018				2017
Revenues		$	443,932			$	306,337			$	1,306,076			$	880,873
Operating expenses:
Salaries and benefits		131,441				103,024				395,196				282,933
Supplies		120,123				83,106				355,701				228,350
Professional and medical fees		34,902				25,483				107,294				69,185
Lease expense		21,629				16,061				64,910				43,361
Other operating expenses		26,194				19,022				78,590				51,267
Cost of revenues		334,289				246,696				1,001,691				675,096
General and administrative expenses		19,478				20,378				69,729				54,574
Depreciation and amortization		16,945				10,929				49,379				33,454
Provision for doubtful accounts		11,555				8,524				25,788				19,987
Income from equity investments		(1,861		)		(1,608		)		(6,283		)		(3,860		)
Loss on disposals and deconsolidations, net		12,631				447				15,875				2,048
Transaction and integration costs		7,099				5,326				23,771				8,567
Loss on debt refinancing		—				18,211				—				18,211
Gain on litigation settlement		—				—				—				(3,794		)
Gain on acquisition escrow release		—				(1,000		)		—				(1,000		)
Other (income) expense		(1,207		)		4				(3,601		)		(300		)
Total operating expenses		398,929				307,907				1,176,349				802,983
Operating income (loss)		45,003				(1,570		)		129,727				77,890
Gain on amendment to tax receivable agreement		—				16,392				—				16,392
Interest expense, net		(37,159		)		(34,030		)		(107,368		)		(84,812		)
Income (loss) before income taxes		7,844				(19,208		)		22,359				9,470
Income tax expense (benefit)		5,825				(20,929		)		10,905				(18,300		)
Net income		2,019				1,721				11,454				27,770
Less: Net income attributable to non-controlling interests		(23,000		)		(15,305		)		(69,418		)		(48,579		)
Net loss attributable to Surgery Partners, Inc.		(20,981		)		(13,584		)		(57,964		)		(20,809		)
Less: Amounts attributable to participating securities (1)		(8,245		)		(18,199		)		(23,973		)		(18,199		)
Net loss attributable to common stockholders		$	(29,226	)		$	(31,783	)		$	(81,937	)		$	(39,008	)
Net loss per share attributable to common stockholders
Basic		$	(0.61	)		$	(0.66	)		$	(1.71	)		$	(0.81	)
Diluted (2)		$	(0.61	)		$	(0.66	)		$	(1.71	)		$	(0.81	)
Weighted average common shares outstanding
Basic		48,037,634				48,203,265				48,020,369				48,143,359
Diluted (2)		48,037,634				48,203,265				48,020,369				48,143,359

⁽¹⁾ Includes dividends accrued during the three and nine months ended September 30, 2018 and 2017 for the Series A Preferred Stock. The Series A Preferred Stock does not participate in undistributed losses.

⁽²⁾ The impact of potentially dilutive securities for all periods presented was not considered because the effect would be anti-dilutive in those periods.

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

		September 30,  2018				December 31,  2017
Balance Sheet Data (at period end):
Cash and cash equivalents		$	79,123			$	174,914
Total current assets		463,318				563,225
Total assets		4,558,664				4,622,773
Current maturities of long-term debt		54,106				58,726
Total current liabilities		295,586				303,005
Long-term debt, less current maturities		2,118,567				2,130,556
Total liabilities		2,661,464				2,656,041
Non-controlling interests—redeemable		317,541				299,316
Redeemable preferred stock		350,893				330,806
Total Surgery Partners, Inc. stockholders' equity		571,072				654,731
Non-controlling interests—non-redeemable		657,694				681,879
Total stockholders' equity		1,228,766				1,336,610

		Three Months Ended September 30,								Nine Months Ended September 30,
		2018				2017				2018				2017
Cash Flow Data:
Net cash provided by (used in):
Operating activities		$	29,414			$	10,025			$	99,054			$	66,496
Investing activities		(11,788		)		(718,364		)		(66,611		)		(747,559		)
Capital expenditures		(10,674		)		(5,511		)		(26,618		)		(20,613		)
Payments for acquisitions, net of cash acquired		(7,319		)		(712,853		)		(55,213		)		(727,016		)
Financing activities		(34,572		)		851,006				(128,234		)		811,065
Distributions to non-controlling interests		(24,315		)		(19,946		)		(80,091		)		(56,787		)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2018				2017				2018				2017
Other Data:
Number of surgical facilities as of the end of period		124				124				124				124
Number of consolidated surgical facilities as of the end of period		105				109				105				109
Cases		127,199				111,674				383,713				332,261
Revenue per case		$	3,490			$	2,743			$	3,404			$	2,651
Adjusted EBITDA		$	58,988			$	23,244			$	161,465			$	100,406
Adjusted EBITDA as a % of revenues		13.3		%		7.6		%		12.4		%		11.4		%
Adjusted EPS- Basic		$	(0.19	)		$	(0.39	)		$	(0.63	)		$	(0.37	)
Adjusted EPS- Diluted		$	(0.19	)		$	(0.39	)		$	(0.63	)		$	(0.37	)

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

		Three Months Ended September 30,								Nine Months Ended September 30,
		2018				2017				2018				2017
Same-facility Information:
Cases (3)		136,919				135,742				412,599				418,919
Case growth		0.9		%			N/A			(1.5		)%			N/A
Revenue per case (3)		$	3,460			$	3,132			$	3,376			$	3,178
Revenue per case growth		10.5		%			N/A			6.2		%			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 and optical services that complement our surgical facilities in our existing markets.

		Three Months Ended September 30,								Nine Months Ended September 30,
		2018				2017				2018				2017
Segment Revenues:
Surgical facility services		$	420,514			$	293,360			$	1,234,984			$	814,320
Ancillary services		20,719				10,184				62,655				58,036
Optical services		2,699				2,793				8,437				8,517
Total revenues		$	443,932			$	306,337			$	1,306,076			$	880,873

		Three Months Ended September 30,								Nine Months Ended September 30,
		2018				2017				2018				2017
Adjusted EBITDA:
Surgical facility services		$	74,525			$	48,673			$	216,540			$	146,859
Ancillary services		875				(12,002		)		2,925				(7,791		)
Optical services		571				748				2,087				2,407
All other		(16,983		)		(14,175		)		(60,087		)		(41,069		)
Total adjusted EBITDA		$	58,988			$	23,244			$	161,465			$	100,406

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

The following table reconciles Adjusted EBITDA to income before income taxes in the reported condensed consolidated financial information, the most directly comparable U.S. GAAP financial measure:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2018				2017				2018				2017
Condensed Consolidated Statements of Operations Data (4):
Income before income taxes		$	7,844			$	(19,208	)		$	22,359			$	9,470
Minus:
Net income attributable to non-controlling interests		23,000				15,305				69,418				48,579
Plus:
Interest expense, net		37,159				34,030				107,368				84,812
Depreciation and amortization		16,945				10,929				49,379				33,454
EBITDA		38,948				10,446				109,688				79,157
Plus (minus):
Equity-based compensation expense		1,526				3,311				6,303				5,380
Transaction, integration and acquisition costs (5)		7,489				6,406				25,419				11,134
Reserve adjustments (6)		(2,109		)		—				2,670				—
Loss on disposals and deconsolidations, net		12,631				447				15,875				2,048
Contingent acquisition compensation expense		503				1,815				1,510				5,662
Gain on litigation settlement		—				—				—				(3,794		)
Gain on acquisition escrow release		—				(1,000		)		—				(1,000		)
Gain on amendment to tax receivable agreement		—				(16,392		)		—				(16,392		)
Loss on debt refinancing		—				18,211				—				18,211
Adjusted EBITDA		$	58,988			$	23,244			$	161,465			$	100,406

⁽⁴⁾ The above table reconciles Adjusted EBITDA to income before income taxes as reflected in the unaudited condensed consolidated statements of operations.

When we use the term “Adjusted EBITDA,” it is referring to income before income taxes adjusted for: (a) net income attributable to non-controlling interests, (b) depreciation and amortization, (c) interest expense, net, (d) equity-based compensation expense, (e) contingent acquisition compensation expense, (f) transaction, integration and acquisition costs, (g) reserve adjustments, (h) loss on disposals and deconsolidations, net, (i) gain on litigation settlement, (j) gain on acquisition escrow release, (k) gain on amendment to tax receivable agreement and (l) loss on debt refinancing. We use Adjusted EBITDA as a measure of financial performance. Adjusted EBITDA is a key measure used by management to assess operating performance, make business decisions and allocate resources. 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. 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.

Adjusted EBITDA is not a measurement of financial performance under GAAP, and should not be considered in isolation or as a substitute for net income, operating income 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 our financial performance. We believes such adjustments are appropriate, as the magnitude and frequency of such items can vary significantly and are not related to the assessment of normal operating performance. Our calculation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.

⁽⁵⁾ This amount includes transaction and integration costs of $7.1 million and $5.3 million for the three months ended September 30, 2018 and 2017, respectively, and acquisition costs of $0.4 million and $1.1 million for the three months ended September 30, 2018 and 2017, respectively. This amount includes transaction and integration costs of $23.8 million and $8.6 million for the nine months ended September 30, 2018 and 2017, respectively, and acquisition costs of $1.6 million and $2.6 million for the nine months ended September 30, 2018 and 2017, respectively.

⁽⁶⁾  This amount represents adjustments to revenue in connection with applying consistent policies across the combined company as a result of the integration of Surgery Partners and NSH.

   

SURGERY PARTNERS, INC.
Reconciliation of Non-GAAP Financial Measures
(Amounts in thousands, except shares and per share amounts)

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 (loss) income per share attributable to common stockholders as a supplement to its comparable GAAP measure of net (loss) income per share attributable to common stockholders. Adjusted net (loss) income per share attributable to common stockholders should not be considered a measure of financial performance under GAAP, and the items excluded from adjusted net (loss) income per share attributable to common stockholders are significant components in understanding and assessing financial performance. Adjusted net (loss) income per share attributable to common stockholders should not be considered in isolation or as an alternative to net income per share attributable to common 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 (loss) income used to calculate adjusted net (loss) income per share attributable to common stockholders:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2018				2017				2018				2017
Consolidated Statements of Operations Data:
Net Income		$	2,019			$	1,721			$	11,454			$	27,770
Minus:
Net income attributable to non-controlling interests		23,000				15,305				69,418				48,579
Amounts attributable to participating securities (7)		8,245				18,199				23,973				18,199
Plus (minus):
Equity-based compensation expense		1,526				3,311				6,303				5,380
Transaction, integration and acquisition costs		7,489				6,406				25,419				11,134
Reserve adjustments		(2,109		)		—				2,670				—
Loss on disposals and deconsolidations, net		12,631				447				15,875				2,048
Contingent acquisition compensation expense		503				1,815				1,510				5,662
Gain on litigation settlement		—				—				—				(3,794		)
Gain on amendment to tax receivable agreement		—				(16,392		)		—				(16,392		)
Gain on acquisition escrow release		—				(1,000		)		—				(1,000		)
Loss on debt refinancing		—				18,211				—				18,211
Adjusted net loss attributable to common stockholders		$	(9,186	)		$	(18,985	)		$	(30,160	)		$	(17,759	)
Adjusted net loss per share attributable to common stockholders
Basic		$	(0.19	)		$	(0.39	)		$	(0.63	)		$	(0.37	)
Diluted (8)		$	(0.19	)		$	(0.39	)		$	(0.63	)		$	(0.37	)
Weighted average common shares outstanding
Basic		48,037,634				48,203,265				48,020,369				48,143,359
Diluted (8)		48,037,634				48,203,265				48,020,369				48,143,359

⁽⁷⁾ Includes dividends accrued during the three and nine months ended September 30, 2018 and 2017 for the Series A Preferred Stock. The Series A Preferred Stock does not participate in undistributed losses.

⁽⁸⁾ The impact of potentially dilutive securities for the three and nine months ended September 30, 2018 and 2017, was not considered because the effect would be anti-dilutive in each of those periods.

Contact

Thomas F. Cowhey, Chief Financial Officer
Surgery Partners, Inc.
(615) 234-8940
IR@surgerypartners.com

Source: Surgery Partners, Inc.