Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 1, 2018
 
Surgery Partners, Inc.
(Exact Name of Registrant as Specified in Charter)
Delaware
001-37576
47-3620923
(State or Other Jurisdiction
of Incorporation)
(Commission
File Number)
(IRS Employer
Identification No.)
310 Seven Springs Way, Suite 500
Brentwood, Tennessee 37027
(Address of Principal Executive Offices) (Zip Code)
 
(615) 234-5900
(Registrant's Telephone Number, Including Area Code)
 
Not Applicable
(Former Name or Former Address, If Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o    Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o    Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o    Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. o
 





Item 2.02 Results of Operations and Financial Condition.
On March 1, 2018, Surgery Partners, Inc. issued a press release announcing results for the fourth quarter and full year ended December 31, 2017. See the press release attached as Exhibit 99.1.
In accordance with General Instruction B.2 of Form 8-K, the information in this Current Report on Form 8-K, including Exhibit 99.1, shall not be deemed "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933.
Surgery Partners makes reference to non-GAAP financial information in the attached press release and a reconciliation of GAAP to non-GAAP results is provided therein.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits.
99.1 Press release dated March 1, 2018.





SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
SURGERY PARTNERS, INC.
 
 
By:
/s/ R. David Kretschmer
R. David Kretschmer
Chief Strategy and Transformation Officer and
interim Chief Financial Officer
Date: March 1, 2018





EXHIBIT INDEX
Exhibit
Number
 
Description
 
 
 
99.1
 




Exhibit

Exhibit 99.1

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12096577&doc=3
SURGERY PARTNERS, INC. ANNOUNCES FOURTH QUARTER AND FULL YEAR 2017 RESULTS

NASHVILLE, Tenn., March 1, 2018 (GLOBE NEWSWIRE)  - Surgery Partners, Inc. (NASDAQ:SGRY) ("Surgery Partners" or the "Company"), a leading provider of surgical services, today announced results for the fourth quarter and full year ended December 31, 2017.
Highlights for the Fourth Quarter 2017:
Revenues increased 50.4% to $460.3 million
Same-facility revenues increased 1.6% to $492.8 million
Net loss of $(40.0) million in the fourth quarter 2017, inclusive of net non-cash charges of $38.7 million related to the estimated impact of the Tax Cuts and Jobs Act
Adjusted EBITDA increased 27.5% to $63.9 million
Diluted net loss per share of $(0.83), including a net impact of $(0.80) per share related to the aforementioned impact of the Tax Cuts and Jobs Act

Highlights for 2017:
Revenues increased 17.1% to $1.3 billion
Same-facility revenues increased 4.7% over 2016 to $1.8 billion
Net loss of $(79.0) million inclusive of net non-cash charges of $38.7 million related to the estimated impact of the Tax Cuts and Jobs Act
Adjusted EBITDA decreased 8.4% over 2016 to $164.3 million
Normalized Adjusted EBITDA increased 2.7% to $184.2
Diluted net loss per share of $(1.64), including a net impact of $(0.80) per share related to the aforementioned impact of the Tax Cuts and Jobs Act
Wayne DeVeydt, Chief Executive Officer of Surgery Partners, stated, “I am excited to have joined Surgery Partners at this critical juncture for our Company. At a time when the industry is focused on combating the increased cost of healthcare through more affordable, high quality solutions, our unique business model has the Company positioned on the right side of the cost equation and fully aligned with the goals and objectives of consumers, physicians, and payors.”
Mr. DeVeydt continued, “As we look to build upon our solid fourth quarter results, in the near-term we are focused on payor alignment, physician recruitment to fuel our growth objectives, and leveraging our national scale with the assets from NSH in the fold. We anticipate these efforts to have a positive contribution to the business in 2018, with more material increases in 2019 as we begin to recognize the full benefit of these efforts. We remain committed to playing a critical role to lower costs and improve patient outcomes across the healthcare landscape with a focus on the areas where we can win as we seek to enhance the value proposition for all of our stakeholders.”
Fourth Quarter 2017 Results
Total revenues for the fourth quarter of 2017 increased 50.4% to $460.3 million from $306.0 million for the fourth quarter of 2016. Same-facility revenues for the fourth quarter of 2017 increased 1.6% from the same period last year, with 0.5% decrease in same facility cases more than offset by 2.1% increase in revenue per case. For the fourth quarter of 2017, the Company’s net loss was $40.0 million compared to net income of $16.9 million for the same period last year. For the fourth quarter of 2017, the Company’s Adjusted EBITDA increased 27.5% to $63.9 million compared to $50.1 million for the same period last year.
Results for the fourth quarter of 2017 include a net non-cash charge of $38.7 million related to the estimated impact of the Tax Cuts and Jobs Act on our deferred tax assets and liabilities. This estimate may be refined as further information becomes available.

1


Full Year 2017 Results
Total revenues for 2017 increased 17.1% to $1.3 billion from $1.1 billion for 2016. Same-facility revenues for 2017 increased 4.7% from 2016. The increase was driven by 0.9% case growth and 3.8% increase in revenue per case. For the full year 2017, the Company’s net loss was $79.0 million compared to net income of $9.5 million for the same period last year. For the year 2017, the Company’s Adjusted EBITDA decreased 8.4% to $164.3 million compared to $179.3 million for 2016.
Liquidity
Surgery Partners had cash and cash equivalents of $175 million at December 31, 2017 and availability of approximately $72 million under its revolving credit facility. Net operating cash flow, including operating cash flow less distributions to non-controlling interests, was $27.4 million for the fourth quarter of 2017. For the full year, net operating cash flow was $37.1 million. The Company’s ratio of total net debt to EBITDA, as calculated under the Company’s credit agreement, at the end of the fourth quarter of 2017, was 7.2x.
David Kretschmer, Interim CFO of Surgery Partners, commented, “Having recently assumed both the interim CFO role as well as my long-term appointment as Chief Strategy and Transformation officer, I am impressed by the strength of our team and the many assets we have in place at Surgery Partners. I firmly believe that our strong balance sheet, favorable market opportunities, and competitive positioning will provide an ideal foundation to evolve our business towards the next level of growth. I look forward to leading the Company’s finance organization in the near-term while also working with the rest of the leadership team to further develop and execute a long-term strategy that drives growth and value across all of our various stakeholders during this important time for the organization.”
Guidance
The Company expects to provide 2018 guidance on the fourth quarter and full year 2017 conference call.
Conference Call Information
Surgery Partners will hold a conference call today, March 1, 2018 at 8:30 a.m. (Eastern Time). The conference call can be accessed live over the phone by dialing 1-877-451-6152, or for international callers, 1-201-389-0879. 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 13676851. The replay will be available until March 15, 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 2017 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 Quarterly Reports on Form 10-Q for the quarterly periods ended September 30, 2017 and June 30, 2017, filed on November 9, 2017 and August 9, 2017, respectively.

2


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. In addition, the financial information for the fiscal year ended December 31, 2017 is unaudited and subject to quarter-end and year-end adjustments in connection with the completion of our customary financial closing procedures. Such changes could be material.
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: Normalized Revenues, EBITDA, Adjusted EBITDA and Normalized 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.

3


SURGERY PARTNERS, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(Amounts in thousands, except shares and per share amounts)
 
 
Three Months Ended
December 31,
 
Year Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Revenues
 
$
460,346

 
$
306,001

 
$
1,341,219

 
$
1,145,438

Operating expenses:
 
 
 
 
 
 
 
 
Salaries and benefits
 
133,619

 
90,774

 
416,552

 
357,175

Supplies
 
125,987

 
72,755

 
354,337

 
269,239

Professional and medical fees
 
33,807

 
20,372

 
102,992

 
81,185

Lease expense
 
21,010

 
13,435

 
64,371

 
52,147

Other operating expenses
 
24,281

 
16,911

 
75,548

 
61,450

Cost of revenues
 
338,704

 
214,247

 
1,013,800

 
821,196

General and administrative expenses (1)
 
21,376

 
18,041

 
75,950

 
60,246

Depreciation and amortization
 
18,474

 
10,567

 
51,928

 
39,551

Provision for doubtful accounts
 
8,765

 
8,281

 
28,752

 
24,212

Income from equity investments
 
(2,607
)
 
(1,757
)
 
(6,467
)
 
(4,764
)
(Gain) loss on disposal or impairment of long-lived assets, net
 
(328
)
 
658

 
1,720

 
2,355

Merger transaction and integration costs
 
4,487

 
2,377

 
13,054

 
8,738

Loss on debt refinancing
 

 

 
18,211

 
11,876

Gain on litigation settlement
 
(8,740
)
 
(14,101
)
 
(12,534
)
 
(14,101
)
Gain on acquisition escrow release
 
(167
)
 

 
(1,167
)
 

Electronic health records incentive expense (income)
 
38

 
(677
)
 
(260
)
 
(408
)
Other (income) expense
 

 
(42
)
 
(2
)
 
55

Total operating expenses
 
380,002

 
237,594

 
1,182,985

 
948,956

Operating income
 
80,344

 
68,407

 
158,234

 
196,482

Gain on amendment to tax receivable agreement
 

 

 
16,392

 

Tax receivable agreement benefit (expense)
 
25,329

 

 
25,329

 
(3,733
)
Interest expense, net
 
(32,857
)
 
(25,708
)
 
(117,669
)
 
(100,571
)
Income before income taxes
 
72,816

 
42,699

 
82,286

 
92,178

Income tax expense
 
71,850

 
4,599

 
53,550

 
7,095

Net income
 
966

 
38,100

 
28,736

 
85,083

Less: Net income attributable to non-controlling interests
 
(33,142
)
 
(21,238
)
 
(81,721
)
 
(75,630
)
Net (loss) income attributable to Surgery Partners, Inc.
 
(32,176
)
 
16,862

 
(52,985
)
 
9,453

Less: Amounts attributable to participating securities (2)
 
(7,848
)
 

 
(26,047
)
 

Net (loss) income attributable to common stockholders
 
$
(40,024
)
 
$
16,862

 
$
(79,032
)
 
$
9,453

 
 
 
 
 
 
 
 
 
Net (loss) income per share attributable to common stockholders
 
 
 
 
 
 
 
 
Basic
 
$
(0.83
)
 
$
0.35

 
$
(1.64
)
 
$
0.20

Diluted (3)
 
$
(0.83
)
 
$
0.35

 
$
(1.64
)
 
$
0.20

Weighted average common shares outstanding
 
 
 
 
 
 
 
 
Basic
 
48,319,851

 
48,019,652

 
48,187,844

 
48,018,944

Diluted (3)
 
48,319,851

 
48,217,454

 
48,187,844

 
48,190,738

(1) Includes contingent acquisition compensation expense of $1.4 million and $2.0 million for the three months ended December 31, 2017 and 2016, respectively. Includes contingent acquisition compensation expense of $7.1 million and $5.1 million for the years ended December 31, 2017 and 2016, respectively.
(2) Includes accrued dividends of $7.8 million for the three months ended December 31, 2017. Includes accrued dividends of $10.4 million and a mark to redemption adjustment of $15.6 million for the Series A Preferred Stock for the year ended December 31. 2017. There were no participating securities during the 2016 periods.
(3) The impact of potentially dilutive securities for three months and year ended December 31, 2017 was not considered because the effect would be anti-dilutive in those periods.

4


SURGERY PARTNERS, INC.
Selected Financial and Operating Data
(Amounts in thousands, except shares and per share amounts)
 
 
December 31,
2017
 
December 31,
2016
 
 
 
 
 
Balance Sheet Data (at period end):
 
 
 
 
Cash and cash equivalents
 
$
174,914

 
$
69,699

Total current assets
 
563,225

 
361,955

Total assets
 
4,622,773

 
2,304,958

 
 
 
 
 
Current maturities of long-term debt
 
58,726

 
27,822

Total current liabilities
 
303,005

 
186,725

Long-term debt, less current maturities
 
2,130,556

 
1,414,421

Total liabilities
 
2,656,041

 
1,799,763

 
 
 
 
 
Total Surgery Partners, Inc. stockholders' equity
 
654,731

 
9,677

Non-controlling interests—non-redeemable
 
681,879

 
314,997

Total stockholders' equity
 
1,336,610

 
324,674

 
 
Three Months Ended
December 31,
 
Year Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Cash Flow Data:
 
 
 
 
 
 
 
 
Net cash provided by (used in):
 
 
 
 
 
 
 
 
Operating activities
 
$
54,447

 
$
32,376

 
$
120,943

 
$
125,239

Investing activities
 
(35,890
)
 
(30,354
)
 
(783,449
)
 
(184,749
)
Capital expenditures
 
(8,987
)
 
(10,732
)
 
(29,600
)
 
(39,109
)
Investments in new businesses
 
(28,086
)
 
(20,387
)
 
(755,102
)
 
(146,405
)
Financing activities
 
(43,344
)
 
12,468

 
767,721

 
71,276

Distributions to non-controlling interests
 
(27,046
)
 
(16,335
)
 
(83,833
)
 
(65,778
)
 
 
Three Months Ended
December 31,
 
Year Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Other Data:
 
 
 
 
 
 
 
 
Number of surgical facilities as of the end of period
 
124

 
104

 
124

 
104

Number of consolidated surgical facilities as of the end of period
 
108

 
94

 
108

 
94

 
 
 
 
 
 
 
 
 
Cases
 
136,108

 
113,234

 
468,443

 
428,742

Revenue per case
 
$
3,382

 
$
2,702

 
$
2,863

 
$
2,672

Normalized Revenues
 
$
460,346

 
$
306,001

 
$
1,364,791

 
$
1,145,438

Adjusted EBITDA
 
$
63,895

 
$
50,058

 
$
164,301

 
$
179,263

Adjusted EBITDA as a % of revenues
 
13.9
%
 
16.4
%
 
12.3
%
 
15.7
%
Normalized Adjusted EBITDA
 
$
63,895

 
$
50,058

 
$
184,169

 
$
179,263

Normalized Adjusted EBITDA as a % of normalized revenues
 
13.9
%
 
16.4
%
 
13.5
%
 
15.7
%
Adjusted EPS- Basic
 
$
(1.39
)
 
$
0.19

 
$
(1.76
)
 
$
0.67

Adjusted EPS- Diluted
 
$
(1.39
)
 
$
0.19

 
$
(1.76
)
 
$
0.66


5


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


 
Three Months Ended
December 31,
 
Year Ended
December 31,

 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Same-facility Information:
 
 
 
 
 
 
 
 
Cases (3) (4)
 
146,786

 
147,519

 
550,405

 
545,718

Case growth
 
(0.5
)%
 
N/A

 
0.9
%
 
N/A

Revenue per case (3) (4)
 
$
3,357

 
$
3,287

 
$
3,309

 
$
3,189

Revenue per case growth
 
2.1
 %
 
N/A

 
3.8
%
 
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.
(4) The normalization impact of the hurricanes and the non-recurring adjustment to revenue on the same-facility information above was $23.6 million in revenues and 2,828 cases for the year ended December 31, 2017.

 
 
Three Months Ended
December 31,
 
Year Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Segment Revenues:
 
 
 
 
 
 
 
 
Surgical facility services
 
$
438,863

 
$
275,849

 
$
1,253,183

 
$
1,042,097

Ancillary services
 
18,885

 
27,869

 
76,921

 
90,836

Optical services
 
2,598

 
2,283

 
11,115

 
12,505

Total revenues
 
$
460,346

 
$
306,001

 
$
1,341,219

 
$
1,145,438


 
 
Three Months Ended
December 31,
 
Year Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Adjusted EBITDA:
 
 
 
 
 
 
 
 
Surgical facility services
 
$
82,813

 
$
60,900

 
$
229,672

 
$
214,218

Ancillary services
 
(990
)
 
3,544

 
(8,781
)
 
12,685

Optical services
 
543

 
304

 
2,950

 
3,308

All other
 
(18,471
)
 
(14,690
)
 
(59,540
)
 
(50,948
)
Total adjusted EBITDA
 
63,895

 
50,058

 
164,301

 
179,263



6


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

The following table reconciles normalized revenues to revenues, the most directly comparable U.S. GAAP financial measure:
 
 
Three Months Ended
December 31,
 
Year Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
 
Revenues
 
$
460,346

 
$
306,001

 
$
1,341,219

 
$
1,145,438

Hurricane estimated impact
 

 

 
8,000

 

Reserve adjustment
 

 

 
15,572

 

Normalized Revenues
 
$
460,346

 
$
306,001

 
$
1,364,791

 
$
1,145,438


The following table reconciles Normalized Adjusted EBITDA and 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
December 31,
 
Year Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Normalized Adjusted EBITDA
 
$
63,895

 
$
50,058

 
$
184,169

 
$
179,263

Hurricane estimated impact
 

 

 
(5,000
)
 

Reserve adjustment
 

 

 
(14,868
)
 

Adjusted EBITDA (5)
 
63,895

 
50,058

 
164,301

 
179,263

 
 
 
 
 
 
 
 
 
Net income attributable to non-controlling interests
 
33,142

 
21,238

 
81,721

 
75,630

Depreciation and amortization
 
(18,474
)
 
(10,567
)
 
(51,928
)
 
(39,551
)
Interest expense, net
 
(32,857
)
 
(25,708
)
 
(117,669
)
 
(100,571
)
Non-cash stock compensation expense
 
(204
)
 
(695
)
 
(5,584
)
 
(2,021
)
Contingent acquisition compensation expense
 
(1,377
)
 
(2,032
)
 
(7,039
)
 
(5,092
)
Merger transaction, integration and practice acquisition costs (6)
 
(5,873
)
 
(3,038
)
 
(17,007
)
 
(11,617
)
Gain on litigation settlement
 
8,740

 
14,101

 
12,534

 
14,101

Gain on acquisition escrow
 
167

 

 
1,167

 

Gain (loss) on disposal or impairment of long-lived assets, net
 
328

 
(658
)
 
(1,720
)
 
(2,355
)
Gain on amendment to tax receivable agreement
 

 

 
16,392

 

Tax receivable agreement benefit (expense)
 
25,329

 

 
25,329

 
(3,733
)
Loss on debt refinancing
 

 

 
(18,211
)
 
(11,876
)
Income before income taxes
 
$
72,816

 
$
42,699

 
$
82,286

 
$
92,178

(5) 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 minus (a) net income attributable to non-controlling interests plus (b) depreciation and amortization, (c) interest expense, net, (d) non-cash stock compensation expense, (e) contingent acquisition compensation expense, (f) merger transaction, integration and practice acquisition costs, minus (g) gain on litigation settlement, (h) gain on acquisition escrow release, (plus)/minus (i) (loss)/gain on disposal or impairment of long-lived assets, net, minus (j) gain on amendment to tax receivable agreement, (plus)/minus (k) tax receivable agreement (expense)/benefit and plus (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.

7


(6) This amount includes merger transaction and integration costs of $4.5 million and $2.4 million for the three months ended December 31, 2017 and 2016, respectively, and practice acquisition costs of $1.4 million and $0.6 million for the three months ended December 31, 2017 and 2016, respectively.
This amount includes merger transaction and integration costs of $13.1 million and $8.7 million for the years ended December 31, 2017 and 2016, respectively, and practice acquisition costs of $3.9 million and $2.9 million for the years ended December 31, 2017 and 2016, respectively.
    


8


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 income per share attributable to common stockholders as a supplement to its comparable GAAP measure of net income per share attributable to common stockholders. Adjusted net 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 income per share attributable to common stockholders are significant components in understanding and assessing financial performance. Adjusted net 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 income used to calculate adjusted net income per share attributable to common stockholders:
 
 
Three Months Ended
December 31,
 
Year Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
 
Net Income
 
$
966

 
$
38,100

 
$
28,736

 
$
85,083

Less:
 
 
 
 
 
 
 
 
Net income attributable to non-controlling interests
 
33,142

 
21,238

 
81,721

 
75,630

Amounts attributable to participating securities (6)
 
7,848

 

 
26,047

 

Plus:
 
 
 
 
 
 
 
 
Non-cash stock compensation expense
 
204

 
695

 
5,584

 
2,021

Contingent acquisition compensation expense
 
1,377

 
2,032

 
7,039

 
5,092

Merger transaction, integration and practice acquisition costs
 
5,873

 
3,038

 
17,007

 
11,617

Gain on litigation settlement
 
(8,740
)
 
(14,101
)
 
(12,534
)
 
(14,101
)
Gain on acquisition escrow
 
(167
)
 

 
(1,167
)
 

(Gain) loss on disposal or impairment of long-lived assets, net
 
(328
)
 
658

 
1,720

 
2,355

Gain on amendment to tax receivable agreement
 

 

 
(16,392
)
 
 
Tax receivable agreement (benefit) expense
 
(25,329
)
 

 
(25,329
)
 
3,733

Loss on debt refinancing
 

 

 
18,211

 
11,876

Adjusted net (loss) income attributable to common stockholders
 
$
(67,134
)
 
$
9,184

 
$
(84,893
)
 
$
32,046

 
 
 
 
 
 
 
 
 
Adjusted net (loss) income per share attributable to common stockholders
 
 
 
 
 
 
 
 
Basic
 
$
(1.39
)
 
$
0.19

 
$
(1.76
)
 
$
0.67

Diluted (7)
 
$
(1.39
)
 
$
0.19

 
$
(1.76
)
 
$
0.66

Weighted average common shares outstanding
 
 
 
 
 
 
 
 
Basic
 
48,319,851

 
48,019,652

 
48,187,844

 
48,018,944

Diluted (7)
 
48,319,851

 
48,217,454

 
48,187,844

 
48,190,738


(6) Includes accrued dividends of $7.8 million for the three months ended December 31, 2017. Includes accrued dividends of $10.5 million and a mark to redemption adjustment of $15.6 million for the Series A Preferred Stock for the year ended December 31. 2017. There were no participating securities during the 2016 periods.
(7) The impact of potentially dilutive securities for the three months and year ended December 31, 2017 was not considered because the effect would be anti-dilutive in each of those periods.


9


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 consolidated financial statements and the accompanying notes therein to be filed on or before March 16, 2018, periods prior to the change of control are identified as "Predecessor" and periods after the change of control are identified as "Successor."
The following table reconciles the consolidated statement of operations for the year ended December 31, 2017 presented above, to the Successor and Predecessor periods:
 
 
Successor
 
 
 
Predecessor
 
 
September 1 to
December 31,
 
 
 
January 1 to
August 31,
 
 
2017
 
 
 
2017
 
 
 
 
 
 
 
Revenues
 
$
592,604

 
 
 
$
748,615

Operating expenses:
 
 
 
 
 
 
Salaries and benefits
 
175,403

 
 
 
241,149

Supplies
 
161,015

 
 
 
193,322

Professional and medical fees
 
45,061

 
 
 
57,931

Lease expense
 
27,868

 
 
 
36,503

Other operating expenses
 
32,281

 
 
 
43,267

Cost of revenues
 
441,628

 
 
 
572,172

General and administrative expenses (8)
 
29,153

 
 
 
46,797

Depreciation and amortization
 
21,804

 
 
 
30,124

Provision for doubtful accounts
 
12,455

 
 
 
16,297

Income from equity investments
 
(3,319
)
 
 
 
(3,148
)
(Gain) loss on disposal or impairment of long-lived assets, net
 
5

 
 
 
1,715

Merger transaction and integration costs
 
7,470

 
 
 
5,584

Loss on debt refinancing
 

 
 
 
18,211

Gain on litigation settlement
 
(8,740
)
 
 
 
(3,794
)
Gain on acquisition escrow release
 
(167
)
 
 
 
(1,000
)
Electronic health records incentive expense (income)
 
45

 
 
 
(305
)
Other income
 

 
 
 
(2
)
Total operating expenses
 
500,334

 
 
 
682,651

Operating income
 
92,270

 
 
 
65,964

Gain on amendment to tax receivable agreement
 
1,098

 
 
 
15,294

Tax receivable agreement benefit
 
25,329

 
 
 

Interest expense, net
 
(48,740
)
 
 
 
(68,929
)
Income before income taxes
 
69,957

 
 
 
12,329

Income tax (benefit) expense
 
71,639

 
 
 
(18,089
)
Net income
 
(1,682
)
 
 
 
30,418

Less: Net income attributable to non-controlling interests
 
(39,634
)
 
 
 
(42,087
)
Net loss attributable to Surgery Partners, Inc.
 
(41,316
)
 
 
 
(11,669
)
Less: Amounts attributable to participating securities (9)
 
(26,047
)
 
 
 

Net loss attributable to common stockholders
 
$
(67,363
)
 
 
 
$
(11,669
)
 
 
 
 
 
 
 
Net loss per share attributable to common stockholders
 
 
 
 
 
 
Basic
 
$
(1.39
)
 
 
 
$
(0.24
)
Diluted (10)
 
$
(1.39
)
 
 
 
$
(0.24
)
Weighted average common shares outstanding
 
 
 
 
 
 
Basic
 
48,319,193

 
 
 
48,121,404

Diluted (10)
 
48,319,193

 
 
 
48,121,404

(8) Includes contingent acquisition compensation expense of $2.0 million for the four months ended December 31, 2017 (Successor), and contingent acquisition compensation expense of $5.1 million for the eight months ended August 31, 2017 (Predecessor).

10


(9) Includes accrued dividends of $10.5 million and the mark to redemption adjustment of $15.6 million for the Series A Preferred Stock for the four months ended December 31, 2017 (Successor). There were no participating securities during the Predecessor period.
(10) The impact of potentially dilutive securities for both periods presented was not considered because the effect would be anti-dilutive.

The following table reconciles the selected cash flow data for the year ended December 31, 2017 as presented above to the Successor and Predecessor periods:
 
 
Successor
 
 
 
Predecessor
 
 
September 1 to
December 31,
 
 
 
January 1 to
August 31,
 
 
2017
 
 
 
2017
 
 
 
 
 
 
 
Cash Flow Data:
 
 
 
 
 
 
Net cash provided by (used in):
 
 
 
 
 
 
Operating activities
 
$
53,225

 
 
 
$
67,718

Investing activities
 
(38,893
)
 
 
 
(744,556
)
Capital expenditures
 
(10,827
)
 
 
 
(18,773
)
Investments in new businesses
 
(29,249
)
 
 
 
(725,853
)
Financing activities
 
(53,624
)
 
 
 
821,345

Distributions to non-controlling interests
 
(33,490
)
 
 
 
(50,343
)

The following table reconciles the revenues by segment for the year ended December 31, 2017 as presented above to the Successor and Predecessor periods:
 
 
Successor
 
 
 
Predecessor
 
 
September 1 to
December 31,
 
 
 
January 1 to
August 31,
 
 
2017
 
 
 
2017
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
Surgical facility services
 
$
564,458

 
 
 
$
688,725

Ancillary services
 
24,660

 
 
 
52,261

Optical services
 
3,486

 
 
 
7,629

Total revenues
 
$
592,604

 
 
 
$
748,615



11


The following table reconciles the Adjusted EBITDA tables for the year ended December 31, 2017 as presented above to the Successor and Predecessor periods:
 
 
Successor
 
 
 
Predecessor
 
 
September 1 to
December 31,
 
 
 
January 1 to
August 31,
 
 
2017
 
 
 
2017
 
 
 
 
 
 
 
Adjusted EBITDA:
 
 
 
 
 
 
Surgical facility services
 
$
103,760

 
 
 
$
125,912

Ancillary services
 
(2,255
)
 
 
 
(6,526
)
Optical services
 
736

 
 
 
2,214

All other
 
(23,504
)
 
 
 
(36,036
)
Total Adjusted EBITDA
 
78,737

 
 
 
85,564

 
 
 
 
 
 
 
Net income attributable to non-controlling interests
 
39,634

 
 
 
42,087

Depreciation and amortization
 
(21,804
)
 
 
 
(30,124
)
Interest expense, net
 
(48,740
)
 
 
 
(68,929
)
Non-cash stock compensation expense
 
(1,887
)
 
 
 
(3,697
)
Contingent acquisition compensation expense
 
(1,982
)
 
 
 
(5,057
)
Merger transaction, integration and practice acquisition costs (11)
 
(9,330
)
 
 
 
(7,677
)
Gain on litigation settlement
 
8,740

 
 
 
3,794

Gain on acquisition escrow release
 
167

 
 
 
1,000

Gain (loss) on disposal or impairment of long-lived assets, net
 
(5
)
 
 
 
(1,715
)
Gain on amendment to tax receivable agreement
 
1,098

 
 
 
15,294

Tax receivable agreement benefit
 
25,329

 
 
 

Loss on debt refinancing
 

 
 
 
(18,211
)
Income before income taxes
 
$
69,957

 
 
 
$
12,329

(11) This amount includes merger transaction and integration costs of $7.5 million for the four months ended December 31, 2017 (Successor) and $5.6 million for the eight months ended August 31, 2017 (Predecessor).
This amount includes practice acquisition costs of $1.9 million for the four months ended December 31, 2017 (Successor) and $2.1 million for the eight months ended August 31, 2017 (Predecessor).


Contact
 
R. David Kretschmer, CSTO and Interim CFO
Surgery Partners, Inc.
(615) 234-8940
IR@surgerypartners.com

12