Surgical Care Affiliates, Inc. (NASDAQ:SCAI) Files An 8-K Announces Third Quarter 2016 Results

Surgical Care Affiliates, Inc. (NASDAQ:SCAI), a leading provider of surgical services, today announced results for the third quarter and nine-months ended September 30, 2016.

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For the three-months ended September 30, 2016, SCA’s net operating revenue was $322.8 million, an increase of 25.2% over the prior year third quarter. For the third quarter of 2016, net income attributable to SCA was $13.3 million down 88.8% from $118.6 million in the third quarter of 2015.  During the third quarter of 2015, the Company recognized a one-time, non-cash tax valuation allowance release which totaled $106.1 million.  Excluding the one-time tax valuation allowance release in the third quarter of 2015, net income attributable to SCA in the third quarter of 2016 would have grown 6.3%. Adjusted EBITDA less NCI grew to $47.9 million in the third quarter of 2016, a 13.4% increase from the prior year period.

The Company reiterates the 2016 adjusted EBITDA less NCI growth guidance range of 13% to 16% provided in January 2016.  The “Use of Non-GAAP Financial Measures” section of this press release provides important disclosures regarding the Company’s adjusted EBITDA less NCI growth guidance.

“We are pleased with our clinical, strategic and financial performance. Patient care is our first priority, and our success is driven by our outstanding physicians and teammates, who continue to achieve strong clinical quality and patient satisfaction results,” said Andrew Hayek, Chairman and Chief Executive Officer. “From a strategic standpoint, we continue to partner with health plans, medical groups and health systems, and our development pipeline remains strong. We are grateful to our physicians and teammates across the country who are dedicated to outstanding patient care and to building our SCA community.”

Transactions Update

During the third quarter of 2016, the Company acquired six new facilities, four of which are consolidated and two of which are nonconsolidated.  In addition, the Company closed one consolidated facility and sold one equity method facility. Also, during the same period, seven of the Company’s existing facilities converted from nonconsolidated to consolidated. These conversions did not impact total facility count. Since the end of the third quarter, the Company acquired one new consolidated facility that was absorbed into an existing facility.  SCA’s total facility count as of November 1, 2016 is 205.

Strategy Update

SCA continues to partner with health plans, medical groups and health systems to improve surgical delivery.  SCA’s health plan relationships are designed to optimize surgical services, improving both the quality of care and the patient experience, while reducing the total cost of care.  In the third quarter of 2016, the Company entered into two additional agreements with Blue Cross plans that include value-based payments tied to quality, patient experience and cost, similar to the programs we described in our last two earnings calls. One of these agreements enabled us to add a new surgery center partnership in the third quarter, and we are building a pipeline of additional opportunities in both markets.

In addition, the Company is pleased to announce that it has entered into the first phase of a national value-based agreement with a leading health plan. This partnership is focused on improving the quality of care, improving the patient experience and reducing the total cost of care. The agreement is structured in phases over a multi-year implementation period, and it includes multiple specialties, including high acuity case types.  The agreement includes value-based incentives that are tied to quality and patient experience, and the partnership is the culmination of two years of investment in designing measures, structures and engagement models.

SCA’s health system relationships continue to present opportunities to co-invest in surgical networks. In the third quarter, the Company added its ninth facility in partnership with Virtua Health, one of New Jersey’s largest health systems.

The Company also continues to expand its new service offerings, such as total joint replacements and complex spine surgeries. Total joint replacements have more than doubled this year compared to the first nine months of 2015 and we are now performing these high acuity procedures in 37 of our facilities. The migration of these high acuity cases to our facilities results in improved quality, improved patient experience, and lower cost of care.

Third Quarter 2016 Results

GAAP net operating revenues, which excludes revenues from facilities in which SCA owns a noncontrolling interest, increased 25.2% in the third quarter of 2016 to $322.8 million from $257.8 million in the prior year period. This increase was driven both organically, mainly through higher acuity case mix and increased volumes, and inorganically through the addition of new facilities. In addition, the GAAP net operating revenue growth rate for the third quarter was favorably impacted by the conversion of seven facilities from nonconsolidated to consolidated. On a same site basis, GAAP net patient revenue for the third quarter of 2016 increased 2.4% compared to the prior year period.

Systemwide net operating revenues, which includes revenues from all facilities in which SCA has an ownership interest and management fee revenues from managed-only facilities, increased 14.2% in the third quarter of 2016 compared to the prior year period. This increase was driven both organically, mainly through higher acuity case mix and increased volumes, and inorganically through the addition of new facilities. On a same site basis, systemwide net patient revenue for the third quarter of 2016 increased 4.5% compared to the prior year period. Same site systemwide case volume for the third quarter increased 0.8% compared to the prior year period. Management believes systemwide growth metrics are important to understand the true financial performance of the Company because they include all facilities in the Company’s portfolio.

Net income attributable to SCA, which includes non-cash and non-recurring expenses, was $13.3 million for the third quarter of 2016, down 88.8% from $118.6 million in the third quarter of 2015.  During the third quarter of 2015, the Company recognized a one-time, non-cash tax valuation allowance release which totaled $106.1 million.  Excluding the one-time tax valuation allowance release in the third quarter of 2015, net income attributable to SCA in the third quarter of 2016 would have grown 6.3%.

Adjusted EBITDA less NCI, which adds back certain non-cash and non-recurring expenses, increased 13.4% for the third quarter of 2016 to $47.9 million from $42.2 million in the same period of the prior year.

Adjusted net income, which adjusts for certain items that are non-cash or non-recurring in nature, was $16.7 million for the third quarter of 2016, compared to $18.5 million for the same period of the prior year. The decrease in adjusted net income was driven by increased interest and depreciation expense related to an acquisition and additional interest expense related to borrowings under our revolving credit facility.

SCA’s net cash provided by operating activities was $78.2 million for the third quarter of 2016, slightly up from $77.4 million, or 1.0%, in the third quarter of 2015.  For the first nine months of 2016, net cash provided by operating activities was $217.1 million, up 11.8% from the prior year period. Adjusted operating cash flow less distributions to noncontrolling interests was $33.3 million for the third quarter, down 14.3% from $38.9 million in the third quarter of 2015.  For the first nine months of 2016, adjusted operating cash flow less distributions to noncontrolling interests was $96.1 million, up 9.1% from the same period of the prior year.

Full Year 2016 Guidance

For 2016, the Company reiterates the guidance it initially provided in January 2016. The Company continues to expect adjusted EBITDA less NCI growth in 2016 to be in the range of 13% to 16%.

Conference Call Information

SCA will hold a webcast conference call to discuss this release today at 8:00 a.m. Eastern Time. The live webcast of the conference call will be available by accessing http://investor.scasurgery.com.  Following the call, an archived replay of the webcast will be available on the Company’s website for 30 days.

About Surgical Care Affiliates

SCA (NASDAQ:SCAI), a leader in the outpatient surgery industry, strategically partners with health plans, medical groups and health systems across the country to develop and optimize surgical facilities.  As of September 30, 2016, SCA operated 205 surgical facilities, including ambulatory surgery centers and surgical hospitals, in partnership with approximately 3,000 physicians.  For more information on SCA, visit www.scasurgery.com

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