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Why Surgery Partners Inc. Is Plunging Today

What happened

In response to the company preannouncing disappointing earnings, shares of Surgery Partners (NASDAQ: SGRY), a business focused on surgical services, fell 15% as of 3:30 p.m. EDT on Wednesday.

So what

Here's a review of the preannounced numbers:

  • Revenue is expected to grow 8% to approximately $306.3 million. Wall Street had expected revenue of $303 million.
  • Net loss is expected to be $21.9 million, a sharp reversal from the $12.6 million in net income that was reported in the year-ago period. By contrast, market-watchers were projecting a net loss of roughly $1 million.

Management blamed the poor results on Hurricanes Harvey and Irma. In total, management estimates that the two hurricanes will cost the company $7 million to $9 million in lost revenue and $4 million to $6 million in adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). The majority of these expenses will take place in the third quarter.

What's more, the company also stated that it incurred nonrecurring adjustments to revenue of $15.6 million and to adjusted EBITDA of $14.9 million, attributable to "an increase in reserves for certain accounts receivable."

Given the updates, it isn't surprising to see that shares took a hit today.

Image source: Getty Images.

Now what

Management also provided investors with some normalized numbers in the release that were more upbeat. Same facility revenue is expected to grow 2.9% year over year. Also, adjusted EBITDA excluding the hurricanes and charges is expected to be approximately $43.1 million. While that's down 3% when compared to the year-ago period, it does show that the business is still making money.

Turning to guidance, full-year revenue is expected to be in the range of $1.30 billion to $1.33 billion, while adjusted EBITDA is expected to land between $178 million and $185 million. These figures include normalization for the impact of hurricanes and the reserve adjustment.

Interim CEO Clifford Adlerz likely knew that the market wasn't going to take this update well, so he did his best to put a positive spin on the challenges facing the company:

While we experienced some unique challenges in the quarter, our normalized same facility revenue growth demonstrates the underlying market demand for outpatient surgical procedures at our facilities. ... Additionally, the integration of NSH is going well and we are focused on achieving synergies and the scale benefits of a larger organization. Our leadership is dedicated to quickly addressing and resolving any near-term issues that have impacted the Company's performance and have launched specific initiatives to accelerate same facility cases, act on accretive surgical facility tuck-in acquisitions, and implement procurement optimization initiatives to improve margins. We are moving forward with a stronger, more diversified platform to support our short stay surgical procedure growth objectives, and delivering significant value to patients, providers, and payors.

That all sounds great, but the company is currently searching for a new CEO, is in the middle of digesting an acquisition, and has a balance sheet loaded with $1.8 billion in debt and only $57 million in cash. That's far too much risk for this Fool, so I plan on avoiding this stock like the plague.

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Brian Feroldi has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.