Executive Summary / Key Takeaways

• Surgery Partners continues to execute on its growth algorithm, reporting an 8.2% increase in Q1 2025 revenue to $776 million and a 6.6% rise in Adjusted EBITDA to $103.9 million, driven by strong organic growth and strategic acquisitions.
• Organic growth is fueled by robust case volume increases (6.5% same-facility cases in Q1 2025) and a strategic shift towards higher-acuity procedures, particularly in orthopedics (22% growth in total joints in Q1 2025) and emerging cardiology procedures, supported by targeted physician recruitment and technology investments.
• The company is actively deploying capital through accretive acquisitions (five facilities acquired for $55 million year-to-date 2025 at <8x EBITDA) and de novo developments (10 under construction), enhancing its portfolio and market presence in high-growth areas.
• Management reaffirmed full-year 2025 guidance, projecting revenue between $3.3 billion and $3.45 billion and Adjusted EBITDA between $555 million and $565 million, implying continued double-digit growth and margin expansion through operational efficiencies and integration synergies.
• Despite increased transaction costs and interest expense impacting Q1 net loss ($37.7 million), the company maintains a strong liquidity position ($229.3 million cash, $388.9 million revolver capacity) and is targeting a reduction in Credit Agreement leverage to around 3x by the end of 2025, with sufficient capital to fund its growth strategy internally over the next five years.

Setting the Stage: A Focused Approach to Surgical Care

Surgery Partners, Inc. operates a national network of surgical facilities, primarily focusing on ambulatory surgery centers (ASCs) and surgical hospitals that provide non-emergency procedures. Founded in 2004, the company's core strategy revolves around a physician partnership model, which management highlights as a key differentiator, fostering efficiency and high-quality, convenient care that is preferred by patients, physicians, and payers alike. This model positions Surgery Partners to capitalize on the significant macro tailwinds driving surgical procedures out of traditional, higher-cost inpatient settings into outpatient environments.

The U.S. market for short-stay surgical facilities is vast and fragmented, with an estimated $150 billion total addressable market. Surgery Partners, with its portfolio of 164 facilities across 30 states as of March 31, 2025, holds a notable position within this landscape. The company's focus on elective procedures across specialties like orthopedics, pain management, gastroenterology, and ophthalmology, coupled with ancillary services, allows it to navigate the market with a distinct operational profile compared to large, integrated hospital systems like HCA Healthcare (HCA) or Tenet Healthcare (THC). While these larger competitors possess greater scale and potentially lower operating costs per unit due to integrated supply chains, Surgery Partners emphasizes agility, physician alignment, and targeted expansion in high-growth, high-acuity segments. Community Health Systems (CYH), focusing more on rural hospitals, presents a less direct competitive overlap in the high-acuity ASC space where Surgery Partners is concentrating its efforts.

The Technological Edge: Enabling High-Acuity Procedures

A critical component of Surgery Partners' strategy and competitive positioning is its investment in technology that enables the shift towards higher-acuity procedures in its facilities. While not developing proprietary medical devices or software in the traditional sense, the company strategically deploys advanced surgical technology within its network.

A prime example is the investment in surgical robots. As of the Q4 2024 call, the company had added 14 robots in 2024, bringing the total to 68. These robots are instrumental in allowing physician partners to perform increasingly complex procedures, particularly in orthopedics and spine, within the ASC or surgical hospital setting. This capability is a tangible benefit, supporting the recruitment of high-acuity focused surgeons and enhancing the types of cases that can be performed. Furthermore, over 70% of Surgery Partners' facilities are equipped with fluoroscopy, a foundational technology enabling minimally invasive procedures, including a growing number of cardiology cases like EP and cardiac rhythm management.

The strategic intent behind these technology investments is clear: to expand the clinical capabilities of the facilities, attract and retain skilled physicians who demand access to modern tools, and ultimately capture a larger share of the high-acuity market transitioning to outpatient settings. While specific quantitative metrics on the direct impact of robotics on efficiency or cost savings per case were not provided, the correlation between these investments and the significant growth in high-acuity procedures like total joints (22% growth in Q1 2025) and MSK (3.4% growth in Q1 2025 orthopedic cases) is a key part of the investment narrative. These technologies contribute to the company's competitive moat by enhancing its ability to perform complex procedures safely and effectively outside the traditional hospital environment, differentiating it from less technologically equipped outpatient centers.

Performance Reflecting Strategic Execution

Surgery Partners' recent financial performance underscores the effectiveness of its growth strategy. In the first quarter of 2025, total revenues grew 8.2% year-over-year to $776.0 million. This increase was a result of both strong organic growth and contributions from recent acquisitions. Same-facility revenues increased by 5.2%, driven by a robust 6.5% increase in case volumes. While same-facility revenue per case saw a 1.2% decrease, management attributed this primarily to a favorable mix shift towards higher-volume, lower-acuity procedures like GI, particularly from recently opened de novos, rather than underlying rate pressure.

Adjusted EBITDA grew 6.6% to $103.9 million in Q1 2025, demonstrating continued profitability expansion, albeit with a slight margin contraction in the quarter compared to the prior year (13.4% vs. 13.6%). This margin performance reflects revenue growth, ongoing cost management initiatives, and the impact of acquisitions. However, the company reported a net loss attributable to Surgery Partners, Inc. of $37.7 million in Q1 2025, compared to a $12.4 million loss in the prior year. This wider loss was influenced by increased operating expenses, notably a rise in transaction and integration costs to $24.7 million (from $17.4 million) related to ongoing development and integration efforts, and a significant increase in net interest expense to $62.2 million (from $47.3 million), driven by 2024 financing activities and increased revolver borrowings.

Looking back at 2024 performance provides further context. Full-year 2024 revenue grew 13.5% to $3.1 billion, with Adjusted EBITDA reaching $508.2 million, a 16% increase over 2023, resulting in a 30 basis point margin expansion to 16.3%. Same-facility revenue growth for the full year was 8%, exceeding the company's long-term target and showing a more balanced contribution from both volume and rate. This historical performance validates the company's ability to consistently deliver growth and improve profitability through its core operational and strategic levers.

Operational details highlight the drivers of this performance. The company performed over 160,000 consolidated surgical cases in Q1 2025, a 4.5% increase. Growth was seen across all core specialties, with notable strength in GI and MSK volumes. The strategic focus on high-acuity orthopedics continues to yield results, with total joint procedures growing 22% in Q1 2025. Physician recruitment remains a key organic growth engine, with nearly 150 new physicians added in Q1 2025, many focused on orthopedics and bringing higher-acuity cases compared to prior cohorts. The compounding impact of these recruiting classes is expected to contribute meaningfully to future growth.

Capital Deployment and Financial Health

Surgery Partners is actively deploying capital to fuel its expansion. In Q1 2025, the company acquired a controlling interest in four surgical facilities and one physician practice for $44.0 million net cash, and non-controlling interests in one facility for $3.8 million. Year-to-date in 2025, the company has deployed $55 million on five surgical facilities at an effective multiple under 8x Adjusted EBITDA, consistent with its target of deploying at least $200 million annually on M&A at attractive valuations. The pipeline for acquisitions is described as robust and supportive of future growth.

De novo development is another significant capital allocation strategy. Since 2022, the company has opened 20 de novo facilities, with 10 currently under construction. These facilities, often syndicated with physician partners and weighted towards high-acuity specialties, represent a low-cost entry point for expansion, with effective multiples significantly lower than traditional acquisitions. While they take time to ramp up, they are expected to provide meaningful long-term organic growth.

Financially, Surgery Partners ended Q1 2025 with $229.3 million in cash and cash equivalents and $388.9 million available on its revolving credit facility, providing over $615 million in total liquidity. The increase in revolver borrowings was primarily due to the timing of Q1 acquisitions.

The company's corporate debt structure includes $2.2 billion outstanding with no maturities until 2030. The effective interest rate on corporate debt was fixed at approximately 6% through March 31, 2025, and is now protected by interest rate caps limiting the variable rate component of the $1.4 billion term loan to 5%. While this cap is higher than the prior swap, resulting in a cash flow headwind compared to the past, management is confident in its ability to manage interest expense within its financial framework.

Operating cash flow in Q1 2025 was $6.0 million, down from $40.7 million in Q1 2024, primarily due to lower net income and changes in working capital. Investing activities used $76.4 million, mainly for acquisitions and capital expenditures ($22.7 million). Financing activities provided $30.2 million, driven by debt borrowings offsetting distributions to non-controlling interests. Despite the Q1 cash flow dynamics, which can be impacted by timing and specific costs, management asserts that cash flows from operations, available cash, and revolver capacity are adequate to meet both short-term and long-term liquidity needs and fund future growth without needing external capital markets over the next five years. The company is focused on reducing its leverage, reporting a Credit Agreement net debt-to-EBITDA ratio of 4.1x at Q1 2025, with a target to reach around 3x by the end of 2025 and continue deleveraging thereafter.

Outlook and Risks

Management reaffirmed its full-year 2025 guidance, projecting net revenue in the range of $3.3 billion to $3.45 billion and Adjusted EBITDA in the range of $555 million to $565 million. This guidance implies continued double-digit growth over 2024 and further margin expansion, consistent with the company's long-term growth algorithm. Key assumptions supporting this outlook include same-facility growth at or above the high end of the 6% target, driven by a more balanced contribution from volume and rate as the year progresses, and the expected abatement of higher transaction and integration costs in the second half of 2025 as 2024 acquisitions are fully integrated.

While the outlook is positive, several risks warrant consideration. Broad economic factors such as interest rates, inflation, and market volatility could impact patient volumes, payor mix, and the collectability of receivables. The increase in interest expense is a notable financial headwind. Operational risks include potential supply chain disruptions, although the company has demonstrated an ability to mitigate these in the past. Payer dynamics, including increased denials and aggressive policies, are an ongoing challenge, but the company's focus on preservice work and revenue cycle standardization aims to counter these.

Regulatory risks, such as potential changes to Medicaid or site neutrality policies, are frequently discussed in the healthcare sector. However, Surgery Partners emphasizes its limited exposure to Medicaid (less than 5% of revenue) and believes its business model, focused on cost-effective outpatient care, positions it favorably relative to site neutrality discussions. Management's analysis suggests a worst-case scenario impact from current site neutrality frameworks would be limited to 1% of net revenue, and that the company is more likely to be a net beneficiary as procedures shift from acute care settings. Costs related to the ongoing strategic process initiated by Bain Capital's non-binding acquisition proposal are also expected to continue in 2025, adding a layer of variability to cash flows.

Conclusion

Surgery Partners is executing a clear strategy focused on capturing the accelerating shift of surgical procedures to outpatient settings, particularly higher-acuity cases. The company's physician partnership model, coupled with targeted investments in technology and a disciplined approach to M&A and de novo development, provides a strong foundation for continued growth. Despite a net loss in Q1 2025 influenced by higher transaction costs and interest expense, the underlying operational performance, reflected in robust revenue and Adjusted EBITDA growth and strong same-facility case volumes, remains compelling. With a solid liquidity position and a clear path towards deleveraging, Surgery Partners is well-positioned to fund its growth initiatives internally. The reaffirmed 2025 guidance signals confidence in sustained double-digit growth and margin expansion, driven by organic momentum, integration synergies, and operational efficiencies. While macroeconomic and regulatory risks persist, management's analysis suggests the company's specific business model provides a degree of insulation, reinforcing the investment thesis centered on capitalizing on the long-term trend towards high-value, outpatient surgical care.