10-Q: Surgery Partners Reports Q3 Revenue Growth, Higher Interest Costs

Surgery Partners, Inc. reported a 6.6% increase in third-quarter revenues to $821.5 million, alongside an improved net loss of $22.7 million, though interest expenses rose significantly.

Summary

• Revenues for the third quarter of 2025 increased by 6.6% to $821.5 million, up from $770.4 million in the prior year.
• Net loss attributable to Surgery Partners, Inc. improved to $22.7 million for Q3 2025, compared to a $31.7 million loss in Q3 2024.
• For the nine months ended September 30, 2025, revenues grew 7.7% to $2.42 billion, but net loss attributable to Surgery Partners, Inc. widened to $62.9 million from $59.6 million in the prior year period.
• Adjusted EBITDA increased by 6.1% to $136.4 million for Q3 2025 and by 7.2% to $369.3 million for the nine months ended September 30, 2025.
• Same-facility revenues increased by 6.3% in Q3 2025, driven by a 3.4% increase in case volumes and a 2.8% increase in revenue per case.
• The company completed a debt refinancing on August 13, 2025, introducing $1,383 million in 2025 Refinancing Term Loans maturing December 19, 2030.
• As of September 30, 2025, the company operated 165 surgical facilities (146 ASCs and 19 surgical hospitals) across 30 states.

Sentiment

Score: 6

Explanation: The company shows strong revenue and operating income growth, indicating solid operational performance. However, the widening net loss for the nine-month period, substantial increase in interest expense, and the full valuation allowance on deferred tax assets due to cumulative losses temper the overall positive sentiment. Liquidity appears adequate, but the high debt burden and its associated costs are a notable concern.

Positives

• Strong revenue growth: 6.6% for Q3 2025 and 7.7% for the nine months ended September 30, 2025.
• Improved net loss for Q3 2025, narrowing to $22.7 million from $31.7 million in Q3 2024.
• Significant increase in operating income: 73.6% for Q3 2025 ($105.7 million vs $60.9 million).
• Consistent Adjusted EBITDA growth: 6.1% for Q3 2025 and 7.2% for the nine months ended September 30, 2025.
• Robust same-facility revenue growth of 6.3% in Q3 2025, driven by both case volume (3.4%) and revenue per case (2.8%).
• Reduced transaction and integration costs for both the three-month and nine-month periods.
• Net cash used in investing activities significantly decreased by $256.3 million for the nine months ended September 30, 2025, primarily due to fewer large acquisitions and increased proceeds from asset sales.
• Adequate liquidity with $203.4 million in cash and cash equivalents and $405.9 million available on the Revolver as of September 30, 2025.

Negatives

• Net loss attributable to Surgery Partners, Inc. widened for the nine months ended September 30, 2025, to $62.9 million from $59.6 million in the prior year.
• Interest expense, net, increased substantially by 49.8% to $74.9 million for Q3 2025 and by 37.8% to $205.0 million for the nine months ended September 30, 2025, primarily due to increased borrowings and maturity of interest rate swaps.
• Net cash provided by operating activities decreased by $17.8 million (9.5%) for the nine months ended September 30, 2025, mainly due to higher cash interest payments and working capital changes.
• A full valuation allowance was recorded on deferred tax assets due to the company being in a cumulative three-year pre-tax loss position, indicating uncertainty about future tax asset realization.
• A loss on debt extinguishment of $1.3 million was recorded in connection with the debt refinancing.

Risks

• Reductions in payments from government health care programs and private insurance payors.
• Inability to contract with private insurance payors on favorable terms.
• Changes in payor mix or surgical case mix impacting profitability.
• Failure to maintain or develop relationships with physicians.
• Impact of payor controls designed to reduce the number of surgical procedures.
• Challenges in integrating operations of acquired businesses and surgical facilities.
• Supply chain issues, including shortages or quality control problems with medical products and equipment.
• Competition for physicians, nurses, strategic relationships, acquisitions, and managed care contracts.
• Inability to attract and retain qualified health care professionals.
• Material liabilities incurred from acquiring surgical facilities.
• Impact of current and future legislation and other health care public policy changes.
• Inability to comply with current health care laws and regulations.
• Adverse outcomes from legal and regulatory proceedings.
• Impact of cybersecurity attacks or intrusions.
• Changes in regulatory, economic, and other conditions in states where facilities are located.
• Federal government shutdowns and uncertainty regarding the federal government's debt limit or policy changes.
• High indebtedness.
• Social and economic impact of pandemics, epidemics, or contagious diseases.

Future Outlook

Management believes that cash flows from operations, available cash, available capacity on the Revolver, and continued anticipated access to capital markets will be adequate to meet both short-term (12 months) and long-term liquidity needs. The recently passed One Big Beautiful Bill Act (OBBBA) is not expected to materially impact the company's financial statements, despite projected reductions in overall healthcare spending and increased regulatory burdens.

Management Comments

• We continue to focus on improving our same-facility performance, selectively acquiring established facilities, developing new facilities and pursuing other portfolio management initiatives.
• Based on our current level of operations, we believe cash flows from operations, available cash, available capacity on our Revolver and continued anticipated access to capital markets, will be adequate to meet our short-term (i.e., 12 months) and long-term (beyond 12 months) liquidity needs.

Industry Context

The healthcare industry continues to face legislative changes, as evidenced by the 'One Big Beautiful Bill Act (OBBBA)' which aims to reduce overall healthcare spending and increase regulatory burdens. Despite these changes, Surgery Partners anticipates no material impact on its financial statements, suggesting a degree of resilience or adaptability to evolving policy landscapes. The company's strategy of acquiring and developing surgical facilities, particularly ASCs, aligns with a broader trend in healthcare towards outpatient settings for cost efficiency and patient convenience. However, the significant increase in interest expense reflects the impact of rising interest rates on highly leveraged companies within the sector.

Comparison to Industry Standards

• The filing does not provide specific comparisons to comparable companies, projects, or industry benchmarks beyond general statements about industry trends and legislative impacts. Therefore, a detailed assessment against global benchmarks cannot be made solely based on the provided content.

Management Changes

Corporate Governance

Legal Proceedings

• The company is subject to claims and legal actions in the ordinary course of business, including those related to patient treatment, employment practices, and personal injuries.
• Management believes no current proceedings would have a material adverse effect on the business, financial condition, or results of operations.
• Total professional, general, and workers' compensation claim liabilities were $23.0 million as of September 30, 2025.

Related Party Transactions

• The filing does not contain specific detailed information about related party transactions beyond the general statement that the company owns facilities in partnership with physicians and, in some cases, health care systems.

Stakeholder Impact

• Shareholders: Mixed financial results with revenue growth but increased net loss for the nine months and higher interest expenses could lead to volatility. The valuation allowance on deferred tax assets is a negative signal.
• Employees: Continued focus on cost management initiatives and integration of acquisitions may impact staffing or operational roles.
• Customers (Patients): Expansion through acquisitions of surgical facilities and physician practices aims to broaden service offerings and access.
• Creditors: The company completed a significant debt refinancing, and its high indebtedness and increased interest expense are relevant for credit risk assessment. Liquidity is deemed adequate for debt servicing.
• Physician Partners: The company continues to operate in partnership with physicians, acquiring controlling and non-controlling interests in facilities and practices.

Next Steps

• The Board of Directors will review the composition of its committees and overall membership following the passing of Dr. Patricia A. Maryland.
• The company plans to adopt ASU 2023-09, Income Taxes (Topic 740), Improvements to Income Tax Disclosures, during the year ended December 31, 2025.
• Continue focusing on improving same-facility performance, selectively acquiring established facilities, developing new facilities, and pursuing other portfolio management initiatives.

Key Dates

Recommendation

Surgery Partners demonstrates strong top-line growth with increasing revenues and operating income, driven by both same-facility performance and strategic acquisitions. This indicates a healthy underlying business model in the surgical facility sector. However, the widening net loss for the nine-month period, primarily due to a substantial increase in interest expense, and the establishment of a full valuation allowance on deferred tax assets due to cumulative losses, present significant concerns. While liquidity appears adequate for the foreseeable future, the high debt burden and its associated costs are a drag on profitability. The mixed financial signals suggest that while the company has operational strengths, the financial leverage and interest rate environment pose challenges. A 'hold' recommendation is appropriate as investors should monitor the company's ability to manage its debt, improve net profitability, and realize its deferred tax assets in future periods, balancing the operational positives against the financial negatives.

Keywords

Surgery Partners, SGRY, 10-Q, Quarterly Report, Healthcare, Surgical Facilities, Ambulatory Surgery Centers, ASCs, Surgical Hospitals, Financial Results, Revenue Growth, Net Loss, Adjusted EBITDA, Debt Refinancing, Interest Expense, Acquisitions, Divestitures, Cash Flow, Corporate Governance, Risk Factors