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 13, 2019
 
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 13, 2019, Surgery Partners, Inc. issued a press release announcing results for the fourth quarter and full year ended December 31, 2018. 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 measures in the attached press release and a reconciliation of such non-GAAP financial measures to the most directly comparable GAAP financial measures is provided therein.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits.
Exhibit No.
 
Description
 
 
 
99.1

 





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/ Thomas F. Cowhey
Thomas F. Cowhey
Executive Vice President and Chief Financial Officer
Date: March 13, 2019


Exhibit
Exhibit 99.1

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12775061&doc=3
SURGERY PARTNERS, INC. ANNOUNCES FOURTH QUARTER AND FULL YEAR 2018 RESULTS
Same Store Volume and Revenue Growth, Along with Expanding Margins, Highlight Progress of Strategic Growth Initiatives
BRENTWOOD, Tenn., March 13, 2019 (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, 2018.
Highlights for the Fourth Quarter 2018:
Revenues increased 6.7% to $491.2 million and adjusted revenues increased 8.5% to $499.7 million
Same-facility revenues increased 7.4% to $513.3 million
Net loss attributable to common shareholders of $156.2 million in the fourth quarter 2018, inclusive of non-cash goodwill impairment and litigation charges of $74.4 million and $46.0 million, respectively, resulting in a net loss per share of $3.25
Adjusted EBITDA increased 14.7% to $73.3 million

Highlights for 2018:
Revenues increased 32.1% to $1.8 billion and adjusted revenues increased 34.6% to $1.8 billion
Same-facility revenues increased 5.0% over 2017 to $1.8 billion
Net loss attributable to common shareholders of $238.1 million inclusive of non-cash goodwill impairment and litigation charges of $74.4 million and $46.0 million, respectively, resulting in a net loss per share of $4.96
Adjusted EBITDA increased 42.9% to $234.8 million

2019 Outlook:
Revenues projected to grow low single digit percentage; when normalized for revenues divested in 2018, growth is projected to be mid-to-high single digits
Adjusted EBITDA to grow low double digit percentage
Outlook does not include impact of unidentified merger and acquisition activity
Adjusted revenues and Adjusted EBITDA are non-GAAP financial measures. A definition and reconciliation of these measures appears beginning on page 7.
Wayne DeVeydt, Chief Executive Officer of Surgery Partners, stated, “Our fourth quarter results were highlighted by strong Adjusted EBITDA growth, as well as our second consecutive quarter of same store volume growth. We continue to advance our agenda both operationally and strategically, as we remain focused on repositioning our portfolio for growth, investing in our platforms and processes, and deploying capital to continue to execute on organic and inorganic growth opportunities.”
Mr. DeVeydt continued, “Looking ahead to 2019, we are excited to provide investors an outlook for double-digit Adjusted EBITDA growth. As our growth strategy continues to gain traction, our goal is to make 2019 the first of many years of double-digit Adjusted EBITDA growth.”
Tom Cowhey, Chief Financial Officer of Surgery Partners, commented, “Fourth quarter results demonstrated good progress as we reposition the company for growth in 2019. We are quite pleased to close 2018 at the high end or above our revised guidance ranges for Adjusted EBITDA and Adjusted Revenues, respectively, and in a sound liquidity position. Further, with the charge we took today on our outstanding investigation by the federal government, we are excited to continue to reduce distractions and focus additional management time on our core short-stay surgical facilities business.”

1


Fourth Quarter 2018 Results
Revenues increased 6.7% to $491.2 million and adjusted revenues (refer to footnote 3 on page 7) for the fourth quarter of 2018 increased 8.5% to $499.7 million from $460.3 million for the fourth quarter of 2017. Same-facility revenues for the fourth quarter of 2018 increased 7.4% from the same period last year as a result of a 1.1% increase in same facility cases and a 6.3% increase in revenue per case. For the fourth quarter of 2018, the Company’s net loss attributable to common shareholders was $156.2 million compared to a net loss attributable to common shareholders of $40.0 million for the same period last year. For the fourth quarter of 2018, the Company’s Adjusted EBITDA increased 14.7% to $73.3 million compared to $63.9 million for the same period last year, primarily as a result of executing against our strategic growth initiatives.
Results for the fourth quarter of 2018 include a non-cash goodwill impairment charge of $74.4 million related to the Company's Ancillary and Optical reporting units and a litigation charge of $46.0 million related to the civil investigative demand letter received from the federal government in October 2017, as disclosed in our previous SEC filings.
Full Year 2018 Results
Total revenues for 2018 increased 32.1% to $1.8 billion and adjusted revenues for 2018 increased 34.6% to $1.8 billion from $1.3 billion for 2017. Same-facility revenues for 2018 increased 5.0% from 2017. The increase was driven by a 5.8% increase in revenue per case offset by a decline in case growth of 0.8%. For the full year 2018, the Company’s net loss attributable to common shareholders was $238.1 million compared to a net loss attributable to common shareholders of $79.0 million for the same period last year. For 2018, the Company’s Adjusted EBITDA increased 42.9% to $234.8 million compared to $164.3 million for 2017.
Net loss attributable to common shareholders for 2018 includes the non-cash goodwill impairment and litigation related charges as described above.
Liquidity
Surgery Partners had cash and cash equivalents of $184.3 million and availability of approximately $71.2 million under its revolving credit facility at December 31, 2018. Net operating cash flow, including operating cash flow less distributions to non-controlling interests, was $16.6 million for the fourth quarter of 2018. For the full year, net operating cash flow was $35.6 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 2018, was 7.7x. During 2018, the Company acquired a controlling interest in five surgical facilities in new markets, two surgical facilities in existing markets (one of which was merged into an existing facility) and multiple physician practices for a combined cash purchase price of $106.8 million, net of cash acquired.
2019 Outlook
The Company projects that it will be able to grow revenues at a low single-digit percentage rate in 2019; when the 2018 baseline is adjusted for divested revenues, 2019 revenue growth is projected to be high single digits. The Company also projects that it will be able to grow Adjusted EBITDA at a double-digit percentage rate in 2019, which is expected to be weighted more towards the back half of the year. The Company’s outlook does not incorporate the impact of unidentified merger and acquisition activity.
Conference Call Information
Surgery Partners will hold a conference call today, March 13, 2019 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 13688435. The replay will be available until March 27, 2019.
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.

2


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 31 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, our anticipated operating results for 2019, our expectations regarding resolving the previously disclosed government investigation into our practices 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, our ability to execute on our operational and strategic initiatives, the timing and impact of our portfolio optimization efforts, our ability to continue to improve same store volume and revenue growth on the timeline anticipated, if at all, our ability to successfully integrate acquisitions, the anticipated impact and timing of our ongoing efficiency efforts, including insurance consolidations and completed headcount actions, as well as our ongoing procurement and revenue cycle efforts, the impact of adverse weather conditions and other events outside of our control, whether or not a settlement is reached with the government relating to the previously disclosed investigation, the terms of any such settlement and the ongoing cost of complying with the terms of any such settlement, as well as the risks identified and discussed from time to time in the Company’s reports filed with the SEC, including in Item 1A under the heading “Risk Factors” in the Company’s most recent Annual Report on Form 10-K. 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: Adjusted Revenues 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 revenue, 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,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Revenues
 
$
491,168

 
$
460,346

 
$
1,771,456

 
$
1,341,219

Operating expenses:
 
 
 
 
 
 
 
 
Salaries and benefits
 
139,544

 
133,619

 
534,740

 
416,552

Supplies
 
134,550

 
125,987

 
490,251

 
354,337

Professional and medical fees
 
38,167

 
33,807

 
145,461

 
102,992

Lease expense
 
21,763

 
21,010

 
86,673

 
64,371

Other operating expenses
 
25,716

 
24,281

 
104,306

 
75,548

Cost of revenues
 
359,740

 
338,704

 
1,361,431

 
1,013,800

General and administrative expenses
 
23,829

 
21,376

 
93,558

 
75,950

Depreciation and amortization
 
18,061

 
18,474

 
67,440

 
51,928

Provision for doubtful accounts
 

 
8,765

 

 
28,752

Income from equity investments
 
(2,615
)
 
(2,607
)
 
(8,898
)
 
(6,467
)
Loss (gain) on disposal and deconsolidations, net
 
15,947

 
(328
)
 
31,822

 
1,720

Transaction and integration costs
 
7,894

 
4,487

 
31,665

 
13,054

Impairment charges
 
74,359

 

 
74,359

 

Loss on debt refinancing
 

 

 

 
18,211

Loss (gain) on litigation settlements
 
46,009

 
(8,740
)
 
46,009

 
(12,534
)
Gain on acquisition escrow release
 

 
(167
)
 

 
(1,167
)
Other (income) expense
 
(167
)
 
38

 
(3,768
)
 
(262
)
Total operating expenses
 
543,057

 
380,002

 
1,693,618

 
1,182,985

Operating (loss) income
 
(51,889
)
 
80,344

 
77,838

 
158,234

Gain on amendment to tax receivable agreement
 

 

 

 
16,392

Tax receivable agreement benefit
 

 
25,329

 

 
25,329

Interest expense, net
 
(39,635
)
 
(32,857
)
 
(147,003
)
 
(117,669
)
(Loss) income before income taxes
 
(91,524
)
 
72,816

 
(69,165
)
 
82,286

Income tax expense (benefit)
 
15,556

 
71,850

 
26,461

 
53,550

Net (loss) income
 
(107,080
)
 
966

 
(95,626
)
 
28,736

Less: Net income attributable to non-controlling interests
 
(40,662
)
 
(33,142
)
 
(110,080
)
 
(81,721
)
Net loss attributable to Surgery Partners, Inc.
 
(147,742
)
 
(32,176
)
 
(205,706
)
 
(52,985
)
Less: Amounts attributable to participating securities
 
(8,453
)
 
(7,848
)
 
(32,426
)
 
(26,047
)
Net loss attributable to common stockholders
 
$
(156,195
)
 
$
(40,024
)
 
$
(238,132
)
 
$
(79,032
)
 
 
 
 
 
 
 
 
 
Net loss per share attributable to common stockholders
 
 
 
 
 
 
 
 
Basic
 
$
(3.25
)
 
$
(0.83
)
 
$
(4.96
)
 
$
(1.64
)
Diluted (1)
 
$
(3.25
)
 
$
(0.83
)
 
$
(4.96
)
 
$
(1.64
)
Weighted average common shares outstanding
 
 
 
 
 
 
 
 
Basic
 
48,047,192

 
48,319,851

 
48,027,875

 
48,187,844

Diluted (1)
 
48,047,192

 
48,319,851

 
48,027,875

 
48,187,844

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

4


SURGERY PARTNERS, INC.
Selected Financial and Operating Data
(Amounts in thousands, except shares and per share amounts)
 
 
December 31,
2018
 
December 31,
2017
 
 
 
 
 
Balance Sheet Data (at period end):
 
 
 
 
Cash and cash equivalents
 
$
184,308

 
$
174,914

Total current assets
 
588,322

 
563,225

Total assets
 
4,676,267

 
4,622,773

 
 
 
 
 
Current maturities of long-term debt
 
55,552

 
58,726

Total current liabilities
 
349,299

 
303,005

Long-term debt, less current maturities
 
2,270,898

 
2,130,556

Total liabilities
 
2,891,384

 
2,656,041

 
 
 
 
 
Total Surgery Partners, Inc. stockholders' equity
 
404,640

 
654,731

Non-controlling interests—non-redeemable
 
694,305

 
681,879

Total stockholders' equity
 
1,098,945

 
1,336,610

 
 
Three Months Ended
December 31,
 
Year Ended
December 31,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Cash Flow Data:
 
 
 
 
 
 
 
 
Net cash provided by (used in):
 
 
 
 
 
 
 
 
Operating activities
 
$
45,546

 
$
54,447

 
$
144,600

 
$
120,943

Investing activities
 
(62,251
)
 
(35,890
)
 
(128,862
)
 
(783,449
)
Purchases of property and equipment, net
 
(13,187
)
 
(8,987
)
 
(39,805
)
 
(29,600
)
Payments for acquisitions, net of cash acquired
 
(51,559
)
 
(28,086
)
 
(106,772
)
 
(755,102
)
Financing activities
 
121,890

 
(43,344
)
 
(6,344
)
 
767,721

Distributions to non-controlling interest holders
 
(28,933
)
 
(27,046
)
 
(109,024
)
 
(83,833
)
 
 
Three Months Ended
December 31,
 
Year Ended
December 31,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Other Data:
 
 
 
 
 
 
 
 
Number of surgical facilities at the end of period
 
123

 
124

 
123

 
124

Number of consolidated surgical facilities as of the end of period
 
106

 
108

 
106

 
108

 
 
 
 
 
 
 
 
 
Cases
 
137,028

 
136,108

 
520,741

 
468,443

Revenue per case
 
$
3,584

 
$
3,382

 
$
3,402

 
$
2,863

Adjusted EBITDA
 
$
73,303

 
$
63,895

 
$
234,768

 
$
164,301

Adjusted EBITDA as a % of revenues
 
14.9
%
 
13.9
%
 
13.3
%
 
12.3
%

5


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


 
Three Months Ended
December 31,
 
Year Ended
December 31,

 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Same-facility Information:
 
 
 
 
 
 
 
 
Cases
 
143,007

 
141,444

 
542,335

 
546,719

Case growth
 
1.1
%
 
N/A

 
(0.8
)%
 
N/A

Revenue per case (2)
 
$
3,589

 
$
3,378

 
$
3,408

 
$
3,220

Revenue per case growth
 
6.3
%
 
N/A

 
5.8
 %
 
N/A


(2) Same-facility revenue per case reflects 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
December 31,
 
Year Ended
December 31,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Segment Revenues:
 
 
 
 
 
 
 
 
Surgical facility services
 
$
470,816

 
$
438,863

 
$
1,682,278

 
$
1,253,183

Ancillary services
 
19,321

 
18,885

 
79,633

 
76,921

Optical services
 
1,031

 
2,598

 
9,545

 
11,115

Total revenues
 
$
491,168

 
$
460,346

 
$
1,771,456

 
$
1,341,219


 
 
Three Months Ended
December 31,
 
Year Ended
December 31,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Adjusted EBITDA:
 
 
 
 
 
 
 
 
Surgical facility services
 
$
92,974

 
$
82,813

 
$
309,513

 
$
229,672

Ancillary services
 
83

 
(990
)
 
3,008

 
(8,781
)
Optical services
 
413

 
543

 
2,500

 
2,950

All other
 
(20,167
)
 
(18,471
)
 
(80,253
)
 
(59,540
)
Total
 
$
73,303

 
$
63,895

 
$
234,768

 
$
164,301


6


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

The following table reconciles adjusted revenues to revenues in the selected consolidated financial information, the most directly comparable U.S. GAAP measure:
 
 
2018
 
 
Q1
 
Q2
 
Q3
 
Q4
 
Full-Year
Adjusted Revenues (3):
 
 
 
 
 
 
 
 
 
 
Revenues prior to provision for doubtful accounts reclassification
 
$
411,332

 
$
436,579

 
$
432,377

 
$
491,168

 
$
1,771,456

Add: provision for doubtful accounts
 
6,037

 
8,196

 
11,555

 
8,482

 
34,270

Total adjusted revenues
 
$
417,369

 
$
444,775

 
$
443,932

 
$
499,650

 
$
1,805,726


(3) In accordance with a new accounting standard that was effective prospectively beginning January 1, 2018, we reflected our estimated provision for doubtful accounts net of revenues rather than as an operating expense, as it had historically been presented. Adjusted revenues add back the estimated provision for doubtful accounts. We believe such an adjustment is appropriate, as the new standard did not affect prior year results, which impacts comparability. Our calculation of adjusted revenues may not be comparable to similarly titled measures reported by other companies. Further, we are presenting a comparative reconciliation of each quarter in 2018, as prior quarterly presentation did not classify our provision for doubtful accounts as a component of revenues.

The following table reconciles Adjusted EBITDA to (loss) income before income taxes in the reported consolidated financial information, the most directly comparable U.S. GAAP financial measure:
 
 
Three Months Ended
December 31,
 
Year Ended
December 31,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Adjusted EBITDA (4)
 
73,303

 
63,895

 
234,768

 
164,301

 
 
 
 
 
 
 
 
 
Net income attributable to non-controlling interests
 
40,662

 
33,142

 
110,080

 
81,721

Depreciation and amortization
 
(18,061
)
 
(18,474
)
 
(67,440
)
 
(51,928
)
Interest expense, net
 
(39,635
)
 
(32,857
)
 
(147,003
)
 
(117,669
)
Non-cash stock compensation expense
 
(3,041
)
 
(204
)
 
(9,344
)
 
(5,584
)
Contingent acquisition compensation expense
 

 
(1,377
)
 
(1,510
)
 
(7,039
)
Transaction, integration and practice acquisition costs (5)
 
(8,437
)
 
(5,873
)
 
(33,856
)
 
(17,007
)
(Loss) gain on litigation settlement
 
(46,009
)
 
8,740

 
(46,009
)
 
12,534

Gain on acquisition escrow
 

 
167

 

 
1,167

(Loss) gain on disposal or impairment of long-lived assets, net
 
(15,947
)
 
328

 
(31,822
)
 
(1,720
)
Reserve adjustments
 

 

 
(2,670
)
 

Impairment charges
 
(74,359
)
 

 
(74,359
)
 

Gain on amendment to tax receivable agreement
 

 

 

 
16,392

Tax receivable agreement benefit
 

 
25,329

 

 
25,329

Loss on debt refinancing
 

 

 

 
(18,211
)
(Loss) income before income taxes
 
$
(91,524
)
 
$
72,816

 
$
(69,165
)
 
$
82,286

(4) 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 believe 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. Surgery Partners is not able to project the items excluded from Adjusted EBITDA and therefore cannot reconcile projected Adjusted EBITDA to projected net income for 2019.
(5) This amount includes merger transaction and integration costs of $7.9 million and $4.5 million for the three months ended December 31, 2018 and 2017, respectively, and practice acquisition costs of $0.5 million and $1.4 million for the three months ended December 31, 2018 and 2017, respectively.
This amount includes merger transaction and integration costs of $31.7 million and $13.1 million for the years ended December 31, 2018 and 2017, respectively, and practice acquisition costs of $2.2 million and $3.9 million for the years ended December 31, 2018 and 2017, respectively.

7


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 no later than March 18, 2019, 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 (6)
 
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
)
Loss on disposals and deconsolidations, net
 
5

 
 
 
1,715

Transaction and integration costs
 
7,470

 
 
 
5,584

Loss on debt refinancing
 

 
 
 
18,211

Gain on litigation settlements
 
(8,740
)
 
 
 
(3,794
)
Gain on acquisition escrow release
 
(167
)
 
 
 
(1,000
)
Other expense (income)
 
45

 
 
 
(307
)
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 expense (benefit)
 
71,639

 
 
 
(18,089
)
Net (loss) 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 (7)
 
(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 (8)
 
$
(1.39
)
 
 
 
$
(0.24
)
Weighted average common shares outstanding
 
 
 
 
 
 
Basic
 
48,319,193

 
 
 
48,121,404

Diluted (8)
 
48,319,193

 
 
 
48,121,404

(6) Includes contingent acquisition compensation expense of $1.9 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).

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(7) Includes accrued dividends of $10.4 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.
(8) 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



9


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
)
Transaction, integration and practice acquisition costs (9)
 
(9,330
)
 
 
 
(7,677
)
Gain on litigation settlement
 
8,740

 
 
 
3,794

Gain on acquisition escrow release
 
167

 
 
 
1,000

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

(9) 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 $1.8 million for the four months ended December 31, 2017 (Successor) and $2.1 million for the eight months ended August 31, 2017 (Predecessor).


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

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