Surgery Partners, Inc. Announces Third Quarter 2018 Results

November 7, 2018

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

SurgeryPartnersLinear (1).jpg

Source: Surgery Partners, Inc.