What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-08 compared with 2022-08-02 · 76 added, 74 removed, 231 unchanged (39% of the section changed)

35 unchanged sentences

Executive Overview

Total revenues for the second quarter of 2022 increased 13.3% to $615.4 million from $543.3 million for the second quarter of 2021.

Days adjusted same-facility revenues for the second quarter of 2022 increased 6.9% from the same period last year, with a 4.9% increase in revenue per case and a 1.9% increase in same-facility cases.

For the second quarter of 2022, the Company’s net loss attributable to common stockholders and Adjusted EBITDA was $18.4 million and $86.1 million, respectively.

For the second quarter of 2021, the Company’s net loss attributable to common stockholders and Adjusted EBITDA was $26.9 million and $75.9 million, respectively.

Total revenues for the third quarter of 2022 increased 11.0% to $620.6 million from $559.2 million for the third quarter of 2021.

Same-facility revenues for the third quarter of 2022 increased 5.1% from the same period last year, with a 1.8% increase in revenue per case and a 3.3% increase in same-facility cases.

For the third quarter of 2022, the Company’s net loss attributable to common stockholders and Adjusted EBITDA was $25.0 million and $96.2 million, respectively.

For the third quarter of 2021, the Company’s net loss attributable to common stockholders and Adjusted EBITDA was $22.9 million and $76.4 million, respectively.

A reconciliation of non-GAAP financial measures appears below under "Certain Non-GAAP Measures."

We had cash and cash equivalents of $227.4 million and $203.0 million of borrowing capacity under our revolving credit facility at June 30, 2022.

Operating cash inflows were $42.1 million in the second quarter of 2022, an increase of $39.8 million compared to the prior year period.

Net operating cash flows, including operating cash flows less distributions to non-controlling interests, were an inflow of $3.1 million for the second quarter of 2022, compared to an outflow of $29.8 million for the second quarter of 2021.

The increase in operating cash flows and net operating cash flows compared to the same period in 2021 is primarily due to a DOJ settlement payment made in the 2021 period.

We had cash and cash equivalents of $154.8 million and $342.0 million of borrowing capacity under our revolving credit facility at September 30, 2022.

Operating cash inflows were $29.7 million in the third quarter of 2022, an increase of $14.8 million compared to the prior year period.

Net operating cash flows, including operating cash flows less distributions to non-controlling interests, were an outflow of $5.6 million for the third quarter of 2022, compared to an outflow of $19.2 million for the third quarter of 2021.

COVID-19 Pandemic

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Taking into account the pandemic and other factors, the United States economy has recently experienced general inflationary pressures, significant disruptions to global supply networks, and an extremely competitive labor market.

We have incurred, and may

continue to incur, certain increased expenses arising from the pandemic and these economic conditions, including additional labor, supply chain, capital and other expenditures.

We have incurred, and may continue to incur, certain increased expenses arising from the pandemic and these economic conditions, including additional labor, supply

chain, capital and other expenditures.

While we have implemented cost containment and other measures to try to counteract these developments, we may be unable to fully offset these increases in our costs and otherwise effectively respond to supply disruptions.

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The following table summarizes our revenues by service type as a percentage of total revenues for the periods indicated:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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The following table sets forth by type of payor the percentage of our patient service revenues generated at the surgical facilities which we consolidate for financial reporting purposes in the periods indicated:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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The following table sets forth the percentage of cases in each specialty performed at the surgical facilities which we consolidate for financial reporting purposes for the periods indicated:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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Results of Operations

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

The following table summarizes certain results from the statements of operations for the three months ended June 30, 2022 and 2021 (dollars in millions):

Three Months Ended June 30,

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

The following table summarizes certain results from the statements of operations for the three months ended September 30, 2022 and 2021 (dollars in millions):

Three Months Ended September 30,

Revenues $ 620.6 $ 559.2

7 unchanged sentences

Equity in earnings of unconsolidated affiliates (2.4) (2.9)

Loss on debt extinguishment — 9.6

Gain on debt extinguishment — (0.5)

Other income, net (2.4) (0.5)

2 unchanged sentences

Income before income taxes 13.4 9.4

Income tax (expense) benefit (4.3) 2.7

Income tax expense (7.8) (1.2)

Net income 5.6 8.2

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$ (25.0) $ (22.9)

During the three months ended June 30, 2022, our revenues increased 13.3% to $615.4 million compared to $543.3 million for the three months ended June 30, 2021.

During the three months ended September 30, 2022, our revenues increased 11.0% to $620.6 million compared to $559.2 million for the three months ended September 30, 2021.

Net loss attributable to Surgery Partners, Inc.

was $25.0 million for the 2022 period, compared to a net loss of $22.9 million for the 2021 period.

The increase in revenues was primarily attributable to a favorable shift in surgical case mix and acquisitions completed since the prior year period.

Revenues for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 were as follows (dollars in millions):

Three Months Ended June 30,

The increase in revenues was primarily attributable to an increase in surgical case volumes, favorable shift in surgical case mix and acquisitions completed since the prior year period.

Revenues for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 were as follows (dollars in millions):

Three Months Ended September 30,

Patient service revenues $ 610.1 $ 551.4

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Total revenues $ 620.6 $ 559.2

Patient service revenues increased 13.3% to $607.3 million for the 2022 period compared to $535.9 million for the 2021 period, primarily driven by a 4.9% increase in same-facility revenue per case, a 1.9% increase in days adjusted same-facility case volumes and acquisitions completed since the prior year period.

Patient service revenues increased 10.6% to $610.1 million for the 2022 period compared to $551.4 million for the 2021 period, primarily driven by a 1.8% increase in same-facility revenue per case, a 3.3% increase in same-facility case volumes and acquisitions completed since the prior year period.

Cost of Revenues.

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General and Administrative Expenses.

General and administrative expenses were $17.9 million for the 2022 period compared to $25.5 million for the 2021 period.

As a percentage of revenues, general and administrative expenses decreased to 2.9% for the 2022 period compared to 4.6% for the 2021 period.

The decrease is primarily driven by ongoing cost management initiatives.

Depreciation and Amortization.

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Transaction and Integration Costs.

We incurred $8.2 million of transaction and integration costs for the three months ended June 30, 2022 compared to $9.2 million for the three months ended June 30, 2021.

We incurred $12.5 million of transaction and integration costs for the three months ended September 30, 2022 compared to $10.2 million for the three months ended September 30, 2021.

The costs for both periods primarily relate to ongoing development initiatives and the integration of acquisitions.

Based on guidance from HHS and other authorities, the Company updated its estimate of the amount of grant funds received that qualified for recognition, resulting in the recognition of $0.1 million during the three months ended June 30, 2022.

Grant funds recognized in the three months ended June 30, 2021 were $4.9 million.

Based on guidance from the U.S.

Department of Health and Human Services ("HHS") and other authorities, the Company updated its estimate of the amount of grant funds received that qualified for recognition, resulting in the recognition of $0.5 million during the three months ended September 30, 2022.

For further discussion, see Note 1 to our condensed consolidated financial statements included elsewhere in this report.

Loss on Debt Extinguishment.

We incurred a loss on debt extinguishment of $9.6 million for the 2021 period related to an amendment to our credit agreement, which refinanced all of the then existing term loans during the three months ended June 30, 2021.

There was no comparable loss during the 2022 period.

Interest Expense, Net.

As a percentage of revenues, interest expense, net decreased to 9.2% for the 2022 period compared to 9.8% for the 2021 period.

Income Tax (Expense) Benefit.

The income tax expense was $4.3 million for the three months ended June 30, 2022 compared to a benefit of $2.7 million for the three months ended June 30, 2021.

The effective tax rate was 21.9% for the three months ended June 30, 2022 compared to (44.3)% for the three months ended June 30, 2021.

For the three months ended June 30, 2022, the effective tax rate differed from 21% primarily due to earnings attributable to non-controlling interests and an increase in the Company’s valuation allowance attributable to interest expense limitations.

For the three months ended June 30, 2021, the effective tax rate differed from 21% primarily due to tax benefits of $3.0 million related to entity divestitures.

As a percentage of revenues, interest expense, net increased to 9.8% for the 2022 period compared to 9.7% for the 2021 period.

Income Tax Expense.

The income tax expense was $7.8 million for the three months ended September 30, 2022 compared to an expense of $1.2 million for the three months ended September 30, 2021.

The effective tax rate was 58.2% for the three months ended September 30, 2022 compared to 12.8% for the three months ended September 30, 2021.

For the three months ended September 30, 2022, the effective tax rate differed from 21% primarily due to an increase in the Company’s valuation allowance attributable to interest expense limitations.

For the three months ended September 30, 2021, the effective tax rate differed from 21% primarily due to the reversal of the Company's earnings attributable to minority interest.

Based upon the application of interim accounting guidance, the tax rate as a percentage of net income after income attributable to non-controlling interests will vary based upon the relative net income from period to period.

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As a percentage of revenues, net income attributable to non-controlling interests was 4.9% for the 2022 period and 5.6% for the 2021 period.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

The following table summarizes certain results from the statements of operations for the six months ended June 30, 2022 and 2021 (dollars in millions):

Six Months Ended June 30,

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

The following table summarizes certain results from the statements of operations for the nine months ended September 30, 2022 and 2021 (dollars in millions):

Nine Months Ended September 30,

Revenues $ 1,832.2 $ 1,614.9

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$ (31.2) $ (70.8)

During the six months ended June 30, 2022, our revenues increased 14.8% to $1,211.6 million compared to $1,055.7 million for the six months ended June 30, 2021.

During the nine months ended September 30, 2022, our revenues increased 13.5% to $1,832.2 million compared to $1,614.9 million for the nine months ended September 30, 2021.

Net loss attributable to Surgery Partners, Inc.

1 unchanged sentence

The increase in revenues was primarily attributable to increases in surgical case volumes, a favorable shift in surgical case mix and acquisitions completed since the prior-year period.

Revenues for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 were as follows (dollars in millions):

Six Months Ended June 30,

Revenues for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 were as follows (dollars in millions):

Nine Months Ended September 30,

Patient service revenues $ 1,805.1 $ 1,593.0

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Cost of revenues were $1,441.6 million for the 2022 period compared to $1,270.6 million for the 2021 period, primarily driven by acquisitions completed since the prior year period.

As a percentage of revenues, cost of revenues decreased to 78.6% for the 2022 period compared to 79.0% for the 2021 period.

As a percentage of revenues, cost of revenues were 78.7% for both the 2022 and 2021 periods.

General and Administrative Expenses.

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Depreciation and Amortization.

As a percentage of revenues, depreciation and amortization expenses decreased to 4.6% for the 2022 period compared to 4.8% for the 2021 period.

As a percentage of revenues, depreciation and amortization expenses were 4.7% for both the 2022 and 2021 periods.

Transaction and Integration Costs.

We incurred $15.3 million of transaction and integration costs for the six months ended June 30, 2022 compared to $14.5 million for the six months ended June 30, 2021.

We incurred $27.8 million of transaction and integration costs for the nine months ended September 30, 2022 compared to $24.7 million for the nine months ended September 30, 2021.

The increase primarily relates to costs for ongoing development initiatives and the integration of acquisitions we completed in 2022 and 2021.

Based on guidance from HHS and other authorities, the Company updated its estimate of the amount of grant funds received that qualified for recognition, resulting in the recognition of $1.3 million during the six months ended June 30, 2022.

Grant funds recognized in the six months ended June 30, 2021 were $20.0 million.

Based on guidance from HHS and other authorities, the Company updated its estimate of the amount of grant funds received that qualified for recognition, resulting in the recognition of $1.8 million during the nine months ended September 30, 2022.

Grant funds recognized in the nine months ended September 30, 2021 were $20.0 million.

For further discussion, see Note 1 to our condensed consolidated financial statements included elsewhere in this report.

Litigation Settlement.

Gain on litigation settlement was $32.8 million for the six months ended June 30, 2022, related to the resolution of the stockholder litigation matter, as discussed in Note 8.

Gain on litigation settlement was $32.8 million for the nine months ended September 30, 2022, related to the resolution of the stockholder litigation matter, as discussed in Note 8.

"Commitments and Contingencies" to our condensed consolidated financial statements included elsewhere in this report.

1 unchanged sentence

Loss on Debt Extinguishment.

We incurred a loss on debt extinguishment of $9.1 million for the 2021 period related to an amendment to our credit agreement, which refinanced all of the then existing term loans during the nine months ended September 30, 2021.

There was no comparable loss during the 2022 period.

2 unchanged sentences

Income Tax (Expense) Benefit.

The income tax expense was $5.6 million for the six months ended June 30, 2022 compared to a benefit of $2.5 million for the six months ended June 30, 2021.

The effective tax rate was 8.8% for the six months ended June 30, 2022 compared to (14.6)% for the six months ended June 30, 2021.

For the six months ended June 30, 2022, the effective tax rate differed from 21% primarily due to earnings attributable to non-controlling interests, an increase in the Company’s valuation allowance attributable to interest expense limitations, and discrete tax benefits of (a) $4.6 million related to the vesting of restricted stock awards, (b) $1.8 million attributable to non-recurring earnings’ impact on the Company’s valuation allowance, and (c) $1.0 million related to entity divestitures.

For the six months ended June 30, 2021, the effective tax rate differed from 21% due to tax benefits of $4.1 million related to the vesting of restricted stock awards, as well as a $3.0 million tax benefit related to entity divestitures.

The income tax expense was $13.4 million for the nine months ended September 30, 2022 compared to a benefit of $1.3 million for the nine months ended September 30, 2021.

The effective tax rate was 17.4% for the nine months ended September 30, 2022 compared to (4.9)% for the nine months ended September 30, 2021.

For the nine months ended September 30, 2022, the effective tax rate differed from 21% primarily due to earnings attributable to non-controlling interests, an increase in the Company’s valuation allowance attributable to interest expense limitations, and discrete tax benefits of (a) $4.6 million related to the vesting of restricted stock awards, (b) $1.8 million attributable to non-recurring earnings’ impact on the Company’s valuation allowance, and (c) $1.0 million related to entity divestitures.

For the nine months ended September 30, 2021, the effective tax rate differed from 21% primarily due to tax benefits of (a) $4.4 million related to the vesting of restricted stock awards and (b) $3.0 million related to entity divestitures.

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The primary source of our operating cash flow is the collection of accounts receivable from federal and state agencies (under the Medicare and Medicaid programs), private insurance companies and individuals.

During the six months ended June 30, 2022, our cash flow provided by operating activities was $121.9 million compared to $52.5 million in the six months ended June 30, 2021.

The increase is primarily due to the receipt of stockholder litigation proceeds of $32.8 million in the 2022 period and a DOJ settlement payment of $32.2 million made during the 2021 period.

Net cash used in investing activities during the six months ended June 30, 2022, was $181.4 million compared to $40.7 million for the six months ended June 30, 2021.

The increase in cash used is primarily due to an increase of $12.6 million related to purchases of property and equipment, an increase of $59.7 million for acquisitions (net of cash acquired), an increase of $65.8 million for purchases of equity method investments, a decrease of $2.5 million in cash proceeds from divestitures and an increase in other investing activities of $11.6 million.

The increases in cash used in investing activities were partially offset by an increase of $11.5 million related to the sale of equity method investments.

Net cash used in financing activities during the six months ended June 30, 2022 was $103.0 million compared to cash provided by financing activities of $134.8 million for the six months ended June 30, 2021.

During the nine months ended September 30, 2022, our cash flow provided by operating activities was $151.6 million compared to $67.4 million in the nine months ended September 30, 2021.

The increase is primarily due to an increase in net income, the receipt of stockholder litigation proceeds of $32.8 million in the 2022 period and a DOJ settlement payment of $32.2 million made during the 2021 period.

Net cash used in investing activities during the nine months ended September 30, 2022, was $235.7 million compared to $141.7 million for the nine months ended September 30, 2021.

The increase in cash used is primarily due to an increase of $14.4 million related to purchases of property and equipment, an increase of $95.1 million for purchases of equity method investments, a decrease of $2.5 million in cash proceeds from divestitures and an increase in other investing activities of $11.9 million.

The increases in cash used in investing activities were partially offset by an increase of $11.5 million related to the sale of equity method investments and a decrease of $18.4 million for acquisitions (net of cash acquired).

Net cash used in financing activities during the nine months ended September 30, 2022 was $151.0 million compared to cash provided by financing activities of $86.5 million for the nine months ended September 30, 2021.

The decrease is primarily due to $248.2 million of proceeds received from an equity offering, net of related costs in the 2021 period, with no comparable activity in the 2022 period, an increase of $13.0 million for distributions to non-controlling interest holders and an increase of $6.3 million of net payments related to ownership transactions with consolidated affiliates.

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Capital Resources

Net working capital was approximately $266.7 million at June 30, 2022 compared to $409.3 million at December 31, 2021.

The decrease is due to a decrease in cash, primarily as a result of payments for acquisitions, a decrease in accounts receivable and an increase in accrued payroll and benefits, offset by a decrease in deferred Medicare accelerated payments.

Net working capital was approximately $114.0 million at September 30, 2022 compared to $409.3 million at December 31, 2021.

The decrease is due to a decrease in cash, primarily as a result of payments for acquisitions, an increase in other current liabilities and an increase in current maturities of long-term debt, offset by a decrease in deferred Medicare accelerated payments.

In addition to cash flows from operations and available cash, other sources of capital include amounts available on our Revolver as well as anticipated continued access to the capital markets.

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In addition to the cash requirements related to our long-term debt, operating lease obligations and the tax receivable agreement, pursuant to the CARES Act, repayment of certain advanced payments and other deferrals received as part of relief during 2020 will continue during 2022.

Further, at September 30, 2022, we had $100.4 million of deferred consideration payable and assumed debt due in October 2022 pursuant to a purchase agreement for a surgical hospital acquired in September 2022.

We received approximately $120 million of accelerated payments during the year ended December 31, 2020.

Through June 30, 2022, approximately $103 million has been repaid including approximately $25 million and $43 million during the three and six months ended June 30, 2022, respectively.

Through September 30, 2022, approximately $117 million has been repaid including approximately $13 million and $56 million during the three and nine months ended September 30, 2022, respectively.

In addition to the continued repayment of the advanced payments received under the CARES Act, we anticipate additional cash outflows during 2022 for the repayment of the remaining payroll taxes deferred in 2020 pursuant to the CARES Act.

There have been no material changes outside of the ordinary course of business to our upcoming cash obligations during the six months ended June 30, 2022 from those disclosed under “Material Cash Requirements” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Annual Report on Form 10-K.

There have been no material changes outside of the ordinary course of business to our upcoming cash obligations during the nine months ended September 30, 2022 from those disclosed under “Material Cash Requirements” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Annual Report on Form 10-K.

Broad economic factors resulting from the ongoing COVID-19 pandemic could negatively affect our payor mix, increase the relative proportion of lower margin services we provide and reduce patient volumes, as well as diminish our ability to collect outstanding receivables.

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The following table reconciles Adjusted EBITDA and Adjusted EBITDA excluding grant funds to income before income taxes, the most directly comparable GAAP financial measure (in millions and unaudited):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

11 unchanged sentences

1.5 2.5 (27.6) 4.3

Loss on debt extinguishment — 9.6 — 9.6

(Gain) loss on debt extinguishment — (0.5) — 9.1

Hurricane-related impacts (3)

1.1 0.5 1.1 0.5

Adjusted EBITDA $ 96.2 $ 76.4 $ 259.4 $ 225.2

2 unchanged sentences

Adjusted EBITDA excluding grant funds $ 95.9 $ 76.4 $ 258.0 $ 211.5

(1) This amount includes transaction and integration costs of $8.2 million and $9.2 million for the three months ended June 30, 2022 and 2021, respectively.

This amount further includes start-up costs related to a de novo surgical hospital of $2.2 million for the three months ended June 30, 2021.

This amount includes transaction and integration costs of $15.3 million and $14.5 million for the six months ended June 30, 2022 and 2021, respectively.

This amount further includes start-up costs related to a de novo surgical hospital of $6.3 million for the six months ended June 30, 2021.

(2) This amount includes other litigation costs of $1.7 million and $0.8 million for the three months ended June 30, 2022 and 2021, respectively.

This amount includes other litigation costs of $3.7 million and $1.8 million for the six months ended June 30, 2022 and 2021, respectively.

This amount also includes gain on litigation settlement of $32.8 million for the six months ended June 30, 2022.

(1) This amount includes transaction and integration costs of $12.5 million and $10.2 million for the three months ended September 30, 2022 and 2021, respectively.

This amount further includes start-up costs related to de novo surgical facilities of $0.6 million for the three months ended September 30, 2022.

This amount includes transaction and integration costs of $27.8 million and $24.7 million for the nine months ended September 30, 2022 and 2021, respectively.

This amount further includes start-up costs related to de novo surgical facilities of $0.6 million and $6.3 million for the nine months ended September 30, 2022 and 2021, respectively.

(2) This amount includes other litigation costs of $1.5 million and $2.5 million for the three months ended September 30, 2022 and 2021, respectively.

This amount includes other litigation costs of $5.2 million and $4.3 million for the nine months ended September 30, 2022 and 2021, respectively.

This amount also includes gain on litigation settlement of $32.8 million for the nine months ended September 30, 2022.

(3) Reflects losses incurred, net of insurance proceeds received at certain surgical facilities that were closed following Hurricane Ida in September 2021 and Hurricane Ian in September 2022.

(4) Represents the impact of grant funds recognized, net of amounts attributable to non-controlling interests.

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The following table reconciles Credit Agreement EBITDA to cash flows from operating activities, the most directly comparable GAAP financial measure (in millions and unaudited):

Twelve Months Ended June 30, 2022

Twelve Months Ended September 30, 2022

Cash flows from operating activities $ 171.3

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Credit Agreement EBITDA $ 465.0

(1) Reflects the impact of insurance proceeds received net of operating losses incurred in the six months ended December 31, 2021, at a surgical facility that was closed following Hurricane Ida.

(2) Represents impact of acquisitions as if each acquisition had occurred on July 1, 2021.

(1) Reflects the impact of operating losses incurred, net of insurance proceeds received at certain surgical facilities that were closed following Hurricane Ida in September 2021 and Hurricane Ian in September 2022.

(2) Represents impact of acquisitions as if each acquisition had occurred on October 1, 2021.

Further this includes revenue and cost synergies from other business initiatives and de novo facilities and an adjustment for the effects of adopting the new lease accounting standard, as defined in the credit agreement governing the Senior Secured Credit Facilities.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis