What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-05 compared with 2020-05-11 · 200 added, 93 removed, 204 unchanged (59% of the section changed)

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the impact of adverse weather conditions and other events outside of our control;

and the risks and uncertainties set forth under the heading "Risk Factors" in this report and in our 2019 Annual Report on Form 10-K and discussed from time to time in our reports filed with the SEC.

and the risks and uncertainties set forth under the heading "Risk Factors" in this report, our 2019 Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the three months ended March 31, 2020, and discussed from time to time in our reports filed with the SEC.

Considering these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur, and actual results could differ materially from those anticipated or implied in the forward-looking statements.

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Executive Overview

Total revenues for the first quarter of 2020 increased 5.8% to $441.0 million from $416.8 million for the first quarter of 2019.

Same-facility revenues for the first quarter of 2020 increased 2.5% from the same period last year, with a 11.4% increase in revenue per case and a 8.0% decrease in same-facility cases.

When adjusted for business days that we operated in the first quarter 2020, same-facility revenues increased 0.9% with a 9.4% decrease in same-facility cases attributable to the impacts of COVID-19 that the Company began experiencing in mid-March, which is described in further detail below in the section titled "Impact of COVID-19." Same-facility revenue per case growth was driven by a favorable surgical case mix as lower acuity cases were some of the first to decline as the COVID-19 crisis developed.

For the first quarter of 2020 , the Company’s net loss attributable to common stockholders and Adjusted EBITDA was $37.0 million and $46.5 million , respectively, compared to $28.6 million and $50.7 million for the same period last year.

Total revenues for the second quarter of 2020 decreased 15.9% to $374.7 million from $445.4 million for the second quarter of 2019.

Same-facility revenues for the second quarter of 2020 decreased 18.6% from the same period last year, with a 32.4% increase in revenue per case offset by a 38.6% decrease in same-facility cases (there were the same number of business days in both periods).

The overall decrease in revenues is attributable to the impacts of COVID-19 that the Company began experiencing in mid-March, which is described in further detail below in the section titled "Impact of COVID-19." Same-facility revenue per case growth was driven by a favorable surgical case mix as lower acuity cases were some of the first to decline as the COVID-19 crisis developed.

For the second quarter of 2020, the Company’s net loss attributable to common stockholders and Adjusted EBITDA was $42.2 million and $58.2 million, respectively, compared to $28.6 million and $61.2 million for the same period last year.

A reconciliation of non-GAAP financial measures appears below under "Certain Non-GAAP Metrics." The increase in net loss attributable to common stockholders and the decrease in Adjusted EBITDA are attributable to the decline in surgical cases due to the impacts of COVID-19 as discussed further below.

On March 18, 2020, the Company drew down its available capacity under the senior secured revolving credit facility, as a precautionary measure in order to increase liquidity and preserve financial flexibility in light of current uncertainty resulting from the COVID-19 pandemic.

We had cash and cash equivalents of $194.6 million at March 31, 2020.

Net operating cash inflows, including operating cash flows less distributions to non-controlling interests, were $5.2 million for the first quarter of 2020 .

We continue to focus on improving our same-facility performance, selectively acquiring established facilities and developing new facilities.

During the three months ended March 31, 2020, we completed the acquisitions of a surgical facility in a new market and a surgical facility in an existing market that was merged into an existing facility for an aggregate cash investment of $6.1 million .

We had cash and cash equivalents of $326.3 million and $113.2 million of borrowing capacity under our revolving credit facility at June 30, 2020.

Net operating cash inflows, including operating cash flows less distributions to non-controlling interests, were $154.2 million for the second quarter of 2020.

Impact of COVID-19

The COVID-19 global pandemic is significantly affecting our facilities, employees, patients, communities, business operations and financial performance, as well as the United States economy and financial markets.

Beginning mid-March, the COVID-19 pandemic began

to negatively affect our net revenue and business operations.

On March 18, 2020, we reported that we had withdrawn our previously announced full-year 2020 outlook and on April 15, 2020, we filed a Current Report on Form 8-K providing additional disclosure about the impact of the pandemic on our operations.

The COVID-19 crisis is still rapidly evolving and much of its impact remains unknown and difficult to predict;

however, due in part to local, state and federal guidelines as well as recommendations from major medical societies, social distancing and self-quarantines in response to the COVID-19 pandemic, most of our surgical facilities are experiencing significantly lower surgical case volume.

The impact of COVID-19 on our surgical facilities varies based on the market in which the facility operates, the type of surgical facility and the procedures that are typically performed.

It is difficult to predict the duration of this lower surgical case volume and the volume and timing of any potential recapture of backlogged cases once restrictions are eased.

Although we cannot provide any certainty regarding the length and severity of the impact of the COVID-19 pandemic, we currently project that our net revenue will continue to be negatively affected into the second quarter of 2020.

Our operating structure naturally enables some flexibility in the cost structure according to the volume of surgical procedures performed, including much of our cost of revenues.

In addition to the natural variability of these costs, we and our partners in the surgical facilities are undertaking additional steps to preserve financial flexibility.

In mid-March we took actions that remain underway including:

furloughing employees, converting salaried employees to an hourly pay rate, negotiating with the our vendors and lessors for revised payment terms and reducing corporate payroll costs.

For further discussion, see Item 1A “Risk Factors” elsewhere in this report.

On March 18, 2020, the Company drew down its available capacity under the Revolver, as a precautionary measure in order to increase liquidity and preserve financial flexibility in light of current uncertainty resulting from the COVID-19 pandemic.

In addition, on April 22, 2020, we entered into a second incremental term loan amendment, which amended and supplemented the existing credit agreement, to provide for an incremental borrowing of $120.0 million.

The COVID-19 crisis is still rapidly evolving and much of its impact

remains unknown and difficult to predict;

however, it materially impacted our financial performance for the second quarter of 2020, and potentially could negatively impact our financial performance for the year ending December 31, 2020 or longer.

We are taking or supporting measures to try to slow the spread and minimize the impact of the virus.

Many of these measures are adversely impacting our business and likely will have an adverse impact on our financial results that we currently are not able to quantify.

For example, due in part to local, state and federal guidelines as well as recommendations from major medical societies, social distancing and self-quarantines in response to the COVID-19 pandemic, we cancelled or postponed a substantial percentage of the elective procedures scheduled at our facilities and reduced operating hours at a significant number of our facilities.

As a result, our facilities experienced lower surgical case volume, which was more significant at the beginning of the second quarter and has improved gradually as states re-open and allow for non-emergent procedures.

The impact on our surgical facilities varies based on the market in which the facility operates, the type of surgical facility and the procedures that are typically performed.

It is difficult to predict the duration of this lower surgical case volume and, while restrictions are starting to be eased, we cannot predict the timing of the potential recapture of cancelled or postponed procedures, if any.

The Company's operating structure naturally enables some flexibility in the cost structure according to the volume of surgical procedures performed, including much of its cost of revenues.

In addition to the natural variability of these costs, the Company and its partners in the surgical facilities have undertaken additional steps to preserve financial flexibility.

Beginning in mid-March, and into the second quarter, the Company took actions that included significantly reducing cash operating expenses and deferring non-essential expenditures at the height of the crisis.

These measures were gradually reduced throughout the second quarter as surgical case volumes improved.

Even after taking into account our actions intended to increase financial flexibility (including actions that management estimates have lowered cash operating expenses), the volume reductions we are experiencing have resulted in materially higher losses and material decreases in Adjusted EBITDA during the second quarter of 2020 and may potentially continue to do so for subsequent quarters.

We cannot predict if or when utilization may return to pre-pandemic levels.

On March 18, 2020, we drew down our available capacity under the Revolver, as a precautionary measure in order to increase liquidity and preserve financial flexibility in light of uncertainty resulting from the COVID-19 pandemic.

During the second quarter, we fully repaid the outstanding balance.

On April 22, 2020, we entered into a second incremental term loan amendment, which amended and supplemented the existing credit agreement, to provide for an incremental borrowing of $120.0 million.

The incremental amounts were fully drawn on April 22, 2020.

"Subsequent Events" to our condensed consolidated financial statements included elsewhere in this report for a further discussion of the second incremental term loan amendment.

Additionally, please see "Capital Resources" and "Summary" under the heading "Liquidity and Capital Resources" below for more information about the impact of the COVID-19 pandemic on the Company.

The Company is closely monitoring legislative actions at federal and state levels including the impact of the CARES Act and other governmental assistance that might be available.

"Subsequent Events" to our condensed consolidated financial statements included elsewhere in this report for a further discussion of the CARES Act and relief we have received.

"Long-Term Debt" to our condensed consolidated financial statements included elsewhere in this report for a further discussion of the second incremental term loan amendment.

Also, on July 30, 2020, we issued an additional $115.0 million aggregate principal amount of 10.000% senior unsecured notes due 2027 at 100.75% of the principal amount.

The notes were issued as part of the same series as the 2027 Unsecured Notes originally issued in April 2019.

"Subsequent Events" to our condensed consolidated financial statements included elsewhere in this report for a further discussion of the senior unsecured notes.

Additionally, as a result of the CARES Act and other governmental assistance programs, during the six months ended June 30, 2020, the Company received approximately $48 million in direct grant funding and approximately $120 million in accelerated Medicare payments, each of which is described in more detail in Note 1.

“Organization and Summary of Accounting Polices - COVID-19 Pandemic” to our condensed consolidated financial statements included elsewhere in this report.

The Company is continuing to monitor legislative actions at federal and state levels including the impact of the CARES Act and other governmental assistance that might be available.

Furthermore, please see "Capital Resources" and "Summary" under the heading "Liquidity and Capital Resources" below for more information about the impact of the COVID-19 pandemic on the Company.

Regulatory Developments in Response to COVID-19

Numerous recent legislative and regulatory actions have been taken in an attempt to provide businesses, including health care providers, with relief from the negative impacts of the COVID-19 pandemic.

The legislative and regulatory responses to COVID-19 generally impact many of the statutes, regulations and policies summarized or discussed throughout this report and in our 2019 Annual Report on Form 10-K.

Unless otherwise noted, such summaries or discussions have not been updated to reflect the impact of the COVID-19 legislative and regulatory developments since the end of the first quarter.

The legislative and regulatory responses to the COVID-19 pandemic generally impact many of the statutes, regulations and policies summarized or discussed throughout this report and in our 2019 Annual Report on Form 10-K.

On March 27, 2020, the CARES Act was signed into law.

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Paycheck Protection Program and Health Care Enhancement Act

On April 24, 2020, the New PPP Act was signed into law.

On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the "New PPP Act") was signed into law.

Among other things, the New PPP Act allocates $75 billion to Medicare and Medicaid participating hospitals and other health care providers to help offset COVID-19 related losses and expenses.

The $75 billion allocated under the New PPP Act is in addition to the $100 billion allocated to health care providers for the same purposes in the CARES Act.

The New PPP Act will likely be disbursed to providers under terms and conditions that are similar to the CARES Act funds.

The New PPP Act funds were disbursed to providers under terms and conditions that are similar to the CARES Act funds.

Waivers or Temporary Suspension of Certain Regulatory Requirements

health care facility licensure, certification, and reimbursement requirements in order to provide hospitals, ambulatory surgery centers, physicians, and other health care providers with increased flexibility to meet the challenges presented by the COVID-19 public health emergency.

In addition to the financial and other relief that has been provided by the federal government through the CARES Act and other legislation that has been passed by Congress, CMS and many state governments have also issued a number of waivers and temporary suspensions of health care facility licensure, certification, and reimbursement requirements in order to provide hospitals, ambulatory surgery centers, physicians, and other health care providers with increased flexibility to meet the challenges presented by the COVID-19 public health emergency.

For example, CMS has temporarily waived the enforcement of certain requirements of the Medicare conditions of participation and implemented a "hospitals without walls" program that would enable hospitals to treat patients in temporary locations and enable ASCs to temporarily enroll in Medicare as hospitals.

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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 March 31,

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

2020 2019 2020 2019

Patient service revenues:

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Ancillary services revenues 3.5 % 4.6 % 3.7 % 4.7 %

98.5 % 98.7 % 98.5 % 98.7 %

Other service revenues:

Optical services revenues 0.1 % 0.2 % 0.2 % 0.2 %

Other 1.4 % 1.1 % 1.3 % 1.1 %

1.5 % 1.3 % 1.5 % 1.3 %

Total revenues 100.0 % 100.0 % 100.0 % 100.0 %

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 March 31,

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

2020 2019 2020 2019

Private insurance payors 54.0 % 52.4 % 52.9 % 52.4 %

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Other payors (1)

4.9 % 4.9 % 4.7 % 4.9 %

Total 100.0 % 100.0 % 100.0 % 100.0 %

(1) Other is comprised of anesthesia service agreements, automobile liability, letters of protection and other payor types.

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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 March 31,

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

2020 2019 2020 2019

Orthopedic and pain management 44.0 % 36.9 % 40.9 % 37.2 %

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General surgery 3.5 % 2.9 % 3.3 % 3.0 %

Other 13.6 % 14.2 % 12.9 % 14.4 %

Total 100.0 % 100.0 % 100.0 % 100.0 %

Critical Accounting Policies

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Results of Operations

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

The following table summarizes certain results from the statements of operations for the three months ended March 31, 2020 and 2019 (dollars in millions):

Three Months Ended March 31,

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

The following table summarizes certain results from the statements of operations for the three months ended June 30, 2020 and 2019 (dollars in millions):

Three Months Ended June 30,

Revenues $ 374.7 $ 445.4

Operating expenses:

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Income from equity investments (2.5) (2.2)

Loss on disposals and deconsolidations, net

Loss (gain) on disposals and deconsolidations, net 2.9 (8.2)

Transaction and integration costs 4.9 6.2

Grant funds (43.1) —

Loss on debt extinguishment — 11.7

Other income (0.2) (0.4)

Total operating expenses 330.0 389.9

Operating income 44.7 55.5

Interest expense, net (49.2) (46.4)

(Loss) income before income taxes (4.5) 9.1

Income tax (benefit) expense (0.6) 1.0

Net (loss) income (3.9) 8.1

Net income attributable to non-controlling interests (28.6) (27.9)

Net loss attributable to Surgery Partners, Inc.

$ (32.5) $ (19.8)

During the three months ended June 30, 2020, our revenues decreased 15.9% to $374.7 million compared to $445.4 million for the three months ended June 30, 2019.

We incurred a net loss attributable to Surgery Partners, Inc.

of $32.5 million for the 2020 period, compared to $19.8 million for the 2019 period, primarily attributable to the decline in surgical case volume that began in mid-March due to the COVID-19 pandemic.

Revenues for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 were as follows (dollars in millions):

Three Months Ended June 30,

Patient service revenues $ 369.1 $ 439.5

Optical service revenues 0.5 1.0

Other service revenues 5.1 4.9

Total revenues $ 374.7 $ 445.4

Patient service revenues decreased 16.0% to $369.1 million for the three months ended June 30, 2020 compared to $439.5 million for the three months ended June 30, 2019.

The decrease of 16.0% was driven by a 38.6% decrease in same-facility case volume primarily due to the impacts of COVID-19 that began in mid-March, partially offset by a 32.4% increase in revenue per case.

Same-facility revenue per case growth was driven by a favorable surgical case mix as lower acuity cases were some of the first to decline as the COVID-19 crisis developed.

Cost of Revenues.

Cost of revenues were $319.3 million for the three months ended June 30, 2020 compared to $340.4 million for the three months ended June 30, 2019.

The decrease in costs were primarily attributable to the impacts of the COVID-19 pandemic.

As a percentage of revenues, cost of revenues increased to 85.2% for the 2020 period compared to 76.4% for the 2019 period.

General and Administrative Expenses.

General and administrative expenses were $25.3 million for the three months ended June 30, 2020 compared to $23.3 million for the three months ended June 30, 2019.

As a percentage of revenues, general and administrative

expenses increased to 6.8% for the 2020 period compared to 5.2% for the 2019 period.

The increase as a percentage of revenues is primarily the result of the decline in revenues driven by the decline in surgical case volume that began in mid-March due to the COVID-19 pandemic.

Depreciation and Amortization.

Depreciation and amortization was $23.4 million and $19.1 million for the three months ended June 30, 2020 and 2019, respectively.

As a percentage of revenues, depreciation and amortization expenses was 6.2% for the 2020 period compared to 4.3% for the 2019 period.

The increase is primarily due to increased capital investments and integration of acquisitions and a de novo hospital completed in 2019.

Loss (Gain) on Disposals and Deconsolidations, Net.

The net loss on disposals and deconsolidations was $2.9 million for the 2020 period, related to disposals of other long-lived assets.

The net gain on disposals and deconsolidations was $8.2 million for the 2019 period, including a $10.9 million gain on the sale of previously owned real property associated with one of our non-consolidated surgical facility equity method investments, offset by a loss of $2.7 million on disposals of other long-lived assets.

Transaction and Integration Costs.

We incurred $4.9 million of transaction and integration costs for the three months ended June 30, 2020 compared to $6.2 million for the three months ended June 30, 2019.

Grant funds were $43.1 million for the three months ended June 30, 2020.

The funds were received based on relief available to eligible health care providers under the provisions of the CARES Act, which is described in further detail above in the section titled "Impact of COVID-19” and in Note 1.

“Organization and Summary of Accounting Polices - COVID-19 Pandemic” to our condensed consolidated financial statements included elsewhere in this report.

There were no grant funds received for the 2019 period.

Loss on Debt Extinguishment.

We incurred a debt extinguishment loss of $11.7 million in connection with issuance of the 2027 Unsecured Notes during the three months ended June 30, 2019.

There was no similar loss during the three months ended June 30, 2020.

The loss includes the redemption premium paid to redeem the 2021 Unsecured Notes partially offset by the write-off of the unamortized fair value premium as of the redemption date.

Interest Expense, Net.

Interest expense, net, increased to $49.2 million for the three months ended June 30, 2020 compared to $46.4 million for the three months ended June 30, 2019.

The increase primarily relates to the 2020 Incremental Term Loans, which were fully drawn on April 22, 2020 as well as interest on the Revolver during the period it was fully drawn.

As a percentage of revenues, interest expense, net was 13.1% for the 2020 period compared to 10.4% for the 2019 period.

Income Tax (Benefit) Expense.

The income tax benefit was $0.6 million for the three months ended June 30, 2020 compared to expense of $1.0 million for the 2019 period.

The effective tax rate was 13.3% for the three months ended June 30, 2020 compared to 11.0% for the three months ended June 30, 2019.

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.

Net Income Attributable to Non-Controlling Interests.

Net income attributable to non-controlling interests was $28.6 million for the three months ended June 30, 2020 compared to $27.9 million for the three months ended June 30, 2019.

As a percentage of revenues, net income attributable to non-controlling interests was 7.6% in the 2020 period and 6.3% for the 2019 period.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

The following table summarizes certain results from the statements of operations for the six months ended June 30, 2020 and 2019 (dollars in millions):

Six Months Ended June 30,

Revenues $ 815.7 $ 862.2

Operating expenses:

Cost of revenues 685.5 666.5

General and administrative expenses 48.1 45.0

Depreciation and amortization 45.2 37.9

Income from equity investments (4.5) (4.2)

Loss (gain) on disposals and deconsolidations, net 6.4 (7.6)

Transaction and integration costs 10.4 8.2

Grant funds (43.1) —

Litigation settlement 1.2 —

Loss on debt extinguishment — 11.7

Other income (1.7) (0.4)

Total operating expenses 747.5 757.1

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Net loss attributable to Surgery Partners, Inc.

During the three months ended March 31, 2020 , our revenues increased 5.8% to $441.0 million compared to $416.8 million for the three months ended March 31, 2019 .

$ (60.0) $ (39.9)

During the six months ended June 30, 2020, our revenues decreased 5.4% to $815.7 million compared to $862.2 million for the six months ended June 30, 2019.

We incurred a net loss attributable to Surgery Partners, Inc.

of $27.5 million for the 2020 period, compared to $20.1 million for the 2019 period, primarily attributable to the decline in surgical case volume that began in mid-March due to COVID-19.

Revenues for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 were as follows (dollars in millions):

Three Months Ended March 31,

of $60.0 million for the 2020 period, compared to $39.9 million for the 2019 period, primarily attributable to the decline in surgical case volume that began in mid-March due to the COVID-19 pandemic.

Revenues for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 were as follows (dollars in millions):

Six Months Ended June 30,

Patient service revenues $ 803.7 $ 850.3

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Total revenues $ 815.7 $ 862.2

Patient service revenues increased 5.8% to $434.6 million for the three months ended March 31, 2020 compared to $410.8 million for the three months ended March 31, 2019 .

The growth of 5.8% was primarily driven by same-facility revenue per case growth of 11.4% and was partially offset by a decrease in same-facility case volume primarily due to the impacts of COVID-19 that began in mid-March.

Patient service revenues decreased 5.5% to $803.7 million for the six months ended June 30, 2020 compared to $850.3 million for the six months ended June 30, 2019.

The decrease of 5.5% was driven by a 23.7% decrease in same-facility case volume primarily due to the impacts of COVID-19 that began in mid-March, partially offset by a 32.4% increase in revenue per case.

Same-facility revenue per case growth was driven by a favorable surgical case mix as lower acuity cases were some of the first to decline as the COVID-19 crisis developed.

Cost of Revenues.

Cost of revenues were $366.2 million for the three months ended March 31, 2020 compared to $326.1 million for the three months ended March 31, 2019 .

Cost of revenues were $685.5 million for the six months ended June 30, 2020 compared to $666.5 million for the six months ended June 30, 2019.

The increase in costs were primarily attributable to our 2020 and 2019 acquisitions and an increase in supply costs associated with higher acuity surgical case volumes.

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General and Administrative Expenses.

General and administrative expenses were $22.8 million for the three months ended March 31, 2020 compared to $21.7 million for the three months ended March 31, 2019 .

As a percentage of revenues, general and administrative expenses was 5.2% for both the 2020 period and the 2019 period.

General and administrative expenses were $48.1 million for the six months ended June 30, 2020 compared to $45.0 million for the six months ended June 30, 2019.

As a percentage of revenues, general and administrative expenses was 5.9% for the 2020 period compared to 5.2% for the 2019 period.

Depreciation and Amortization.

Depreciation and amortization was $21.8 million and $18.8 million for the three months ended March 31, 2020 and 2019 , respectively.

Depreciation and amortization was $45.2 million and $37.9 million for the six months ended June 30, 2020 and 2019, respectively.

As a percentage of revenues, depreciation and amortization expenses was 5.5% for the 2020 period compared to 4.4% for the 2019 period.

The increase is primarily due to increased capital investments and integration of acquisitions and a de novo hospital completed in 2019.

Loss on Disposals and Deconsolidations, Net.

The net loss on disposals and deconsolidations was $3.5 million for the 2020 period, including a net loss of $3.1 million on the sale of interests in surgical facilities and $0.4 million on disposals of other long-lived assets.

The net loss on disposals and deconsolidations was $0.6 million for the 2019 period, related to disposals of other long-lived assets.

Loss (Gain) on Disposals and Deconsolidations, Net.

The net loss on disposals and deconsolidations was $6.4 million for the 2020 period, including a net loss of $3.1 million on the sale of interests in surgical facilities and $3.3 million related to disposals of other long-lived assets.

The net gain on disposals and deconsolidations was $7.6 million for the 2019 period, related to disposals of other long-lived assets.

Transaction and Integration Costs.

We incurred $5.5 million of transaction and integration costs for the three months ended March 31, 2020 compared to $2.0 million for the three months ended March 31, 2019 .

We incurred $10.4 million of transaction and integration costs for the six months ended June 30, 2020 compared to $8.2 million for the six months ended June 30, 2019.

The increase primarily relates to costs for ongoing development initiatives, divestitures completed in 2020 and the integration of acquisitions we completed in 2020 and 2019.

Grant funds were $43.1 million for the six months ended June 30, 2020.

“Organization and Summary of Accounting Polices - COVID-19 Pandemic” to our condensed consolidated financial statements included elsewhere in this report.

There were no grant funds received for the 2019 period.

Litigation settlement.

Litigation settlement costs were $1.2 million for the three months ended March 31, 2020 related to the resolution of the government investigation, as discussed in Note 10.

"Subsequent Events" to our condensed consolidated financial statements included elsewhere in this report.

Litigation settlement costs were $1.2 million for the six months ended June 30, 2020, related to the resolution of the government investigation, as discussed in Note 9.

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

There were no litigation costs for the 2019 period.

Loss on Debt Extinguishment.

We incurred a debt extinguishment loss of $11.7 million in connection with issuance of the 2027 Unsecured Notes during the six months ended June 30, 2019.

There was no debt extinguishment loss during the three months ended June 30, 2020.

The loss includes the redemption premium paid to redeem the 2021 Unsecured Notes partially offset by the write-off of the unamortized fair value premium as of the redemption date.

Interest Expense, Net.

Interest expense, net, increased to $47.1 million for the three months ended March 31, 2020 compared to $42.0 million for the three months ended March 31, 2019 .

Interest expense, net, increased to $96.3 million for the six months ended June 30, 2020, compared to $88.4 million for the six months ended June 30, 2019.

The increase primarily relates to the issuance of $430.0 million in senior unsecured notes effective April 11, 2019.

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Income Tax (Benefit) Expense.

The income tax benefit was $15.2 million and expense was $1.7 million for the three months ended March 31, 2020 and 2019 , respectively.

The effective tax rate was 64.4% for the three months ended March 31, 2020 compared to 32.7% for the three months ended March 31, 2019 .

The income tax benefit was $15.8 million and expense was $2.7 million for the six months ended June 30, 2020 and 2019, respectively.

The effective tax rate was 56.2% for the six months ended June 30, 2020 compared to 18.9% for the six months ended June 30, 2019.

The higher effective tax rate for the 2020 period was primarily due to discrete tax benefits of approximately $11.9 million attributable to (a) the release of federal and state valuation allowances on the Company’s IRC Section 163(j) interest carryforwards as a result of the increase in deductible interest expense allowed under the CARES Act;

and (b) the Settlement Agreement, as discussed in Note 9.

"Subsequent Events" to our condensed consolidated financial statements included elsewhere in this report, which provided that a portion of the final settlement amount was "restitution" for income tax purposes.

"Commitments and Contingencies" to our condensed consolidated financial statements included elsewhere in this report, which provided that a portion of the final settlement amount was "restitution" for income tax purposes.

Net Income Attributable to Non-Controlling Interests.

Net income attributable to non-controlling interests was $19.1 million for the three months ended March 31, 2020 compared to $23.6 million for the three months ended March 31, 2019 .

Net income attributable to non-controlling interests was $47.7 million for the six months ended June 30, 2020 compared to $51.5 million for the six months ended June 30, 2019.

As a percentage of revenues, net income attributable to non-controlling interests was 5.8% in the 2020 period and 6.0% for the 2019 period.

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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 three months ended March 31, 2020 , our cash flow provided by operating activities was $29.2 million compared to $20.5 million in the three months ended March 31, 2019 primarily due to the timing of certain payroll and trade payable payments.

During the six months ended June 30, 2020, our cash flow provided by operating activities was $211.1 million compared to $47.2 million in the six months ended June 30, 2019 primarily attributable to stimulus funds received under the CARES Act as well as actions taken to significantly reduce cash operating expenses and defer non-essential expenditures at the height of the crisis.

Investing Activities

Net cash used in investing activities during the three months ended March 31, 2020 was $7.7 million , which included $11.8 million related to purchases of property and equipment.

We paid $5.5 million in cash for acquisitions (net of cash acquired), which included a surgical facility in a new market and a surgical facility that was merged into an existing facility.

Net cash used in investing activities during the six months ended June 30, 2020, was $22.5 million, which included $19.9 million related to purchases of property and equipment.

We paid $12.4 million in cash for acquisitions (net of cash acquired), which included a surgical facility in a new market and three surgical facilities in existing markets that were merged into existing facilities.

Additionally, we received cash proceeds of $9.4 million related to the sale of our interests in two surgery centers, one of which was previously accounted for as an equity method investment.

Net cash used in investing activities during the three months ended March 31, 2019 was $18.4 million, which included $11.8 million related to purchases of property and equipment.

We additionally paid $7.6 million in cash for acquisitions, which primarily included a physician practice.

Net cash used in investing activities during the six months ended June 30, 2019 was $42.9 million, which included $31.8 million related to purchases of property and equipment.

We paid $13.2 million in cash for acquisitions (net of cash acquired), which primarily included a surgical facility and physician practice.

Further, we paid $15.2 million in cash for a non-controlling interest in four surgical facilities accounted for as equity method investments and we received cash proceeds of $17.6 million related to the sale of previously owned real property associated with one of our non-consolidated equity method investments

Financing Activities

Net cash provided by financing activities during the three months ended March 31, 2020 was $80.4 million .

Net cash provided by financing activities during the six months ended June 30, 2020 was $45.0 million.

During this period, we made distributions to non-controlling interest holders of $51.7 million and payments related to ownership transactions with consolidated affiliates of $1.9 million.

Additionally, we made repayments on our long-term debt of $182.8 million, which was offset by borrowings of $288.2 million.

Net cash used in financing activities during the three months ended March 31, 2019 was $43.9 million.

Net cash used in financing activities during the six months ended June 30, 2019 was $71.2 million.

During this period, we made distributions to non-controlling interest holders of $60.9 million and received cash related to ownership transactions with consolidated affiliates of $1.2 million.

Additionally, we made repayments on our long-term debt of $12.9 million, which was offset by borrowings of $2.4 million.

As of March 31, 2020 , the carrying value of our total indebtedness was $2.687 billion , which includes unamortized fair value discount of $4.4 million and unamortized deferred financing costs of $10.5 million .

Further, we made repayments on our long-term debt of $422.8 million, which was offset by borrowings of $438.9 million.

In connection with the issuance of the 2027 Unsecured Notes and redemption of the existing 2021 Unsecured Notes, we paid debt issuance costs of $8.8 million and paid a redemption premium of $17.8 million.

As of June 30, 2020, the carrying value of our total indebtedness was $2.686 billion, which includes unamortized fair value discount of $4.1 million and unamortized deferred financing costs of $16.6 million.

Term Loan and Revolving Credit Facility

As of March 31, 2020, we had term loan borrowings with a carrying value of $1.431 billion , consisting of outstanding aggregate principal of $1.435 billion and unamortized fair value discount of $4.4 million (the "Term Loan").

As of June 30, 2020, we had term loan borrowings with a carrying value of $1.547 billion, consisting of outstanding aggregate principal of $1.551 billion and unamortized fair value discount of $4.1 million (the "Term Loan").

The Term Loan matures on August 31, 2024.

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The Revolver will mature on August 31, 2022.

As of March 31, 2020 , outstanding borrowing on the Revolver was $112.9 million and our availability on the Revolver was $0.1 million (including outstanding letters of credit of $7.0 million ) .

As of June 30, 2020, our availability on the Revolver was $113.2 million (including outstanding letters of credit of $6.8 million) .

The Revolver may be utilized for working capital, capital expenditures and general corporate purposes.

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On April 22, 2020, we entered into a second incremental term loan amendment, which amended and supplemented the existing credit agreement, to provide for an incremental borrowing of $120.0 million.

The incremental amounts were fully drawn on April 22, 2020.

"Subsequent Events" to our condensed consolidated financial statements included elsewhere in this report for a further discussion of the second incremental term loan amendment.

The incremental amounts were fully drawn on April 22, 2020, and are included in the term loan borrowings discussed above.

On April 16, 2020, we entered into a third amendment to our credit agreement, which amended and supplemented financial covenants applicable to the Revolver under the credit agreement.

Pursuant to the third amendment, the Company's requirement to comply with a maximum consolidated total net leverage ratio will be waived for the remainder of 2020.

Additionally, for the first three quarters of 2021, the third amendment provides for an alternative calculation for the maximum consolidated total net leverage ratio where the trailing four quarter basis may be negatively impacted by the impacts of COVID-19.

The third amendment became effective concurrently with the funding of the incremental term loans on April 22, 2020, discussed above.

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The 2027 Unsecured Notes bear interest at the rate of 10.000% per year, payable semi-annually on April 15 and October 15 of each year.

On July 30, 2020, we issued an additional $115.0 million aggregate principal amount of 10.000% senior unsecured notes due 2027 at 100.75% of the principal amount.

The notes were issued as part of the same series as the 2027 Unsecured Notes originally issued in April 2019.

"Subsequent Events" to our condensed consolidated financial statements included elsewhere in this report for a further discussion of the senior unsecured notes.

We have $370.0 million aggregate principal amount of senior unsecured notes due July 1, 2025 outstanding (the "2025 Unsecured Notes").

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Capital Resources

In addition to cash flows from operations and available cash, other sources of capital include funds we have received under the CARES Act as well as continued access to the capital markets.

In addition to cash flows from operations, available cash and capacity on our Revolver, other sources of capital include funds we have received under the CARES Act as well as continued access to the capital markets.

As previously noted in Note 1.

"Subsequent Events" to our condensed consolidated financial statements included elsewhere in this report, as of the date of this filing, we received relief via the CARES Act, including approximately $45 million in direct grant payments and approximately $120 million of accelerated payments pursuant to the Medicare Accelerated and Advance Payment Program.

"Organization and Summary of Accounting Policies" to our condensed consolidated financial statements included elsewhere in this report, as of June 30, 2020, we received relief via the CARES Act, including approximately $48 million in direct grant payments and approximately $120 million of accelerated payments pursuant to the Medicare Accelerated and Advance Payment Program.

The direct grant payments are not required to be repaid, subject to certain terms and conditions, while payments received under the Medicare Accelerated and Advance Payment Program are required to be repaid.

Additionally, the CARES Act permits the deferral of payment of the social security payroll tax match for the remainder of 2020, with half of the deferred amount due December 2021 and the other half due December 2022.

We believe that deferral of the social security payroll tax match, which we began doing in April 2020, along with the funds received under the CARES Act provisions noted above, will positively impact our cash flows from operations during 2020.

As of June 30, 2020, the Company has deferred approximately $4.3 million, included as a component of accrued payroll and benefits in the condensed consolidated balance sheets as of June 30, 2020.

We believe that deferral of the social security payroll tax match, which we began doing in April 2020, along with the funds received under the CARES Act as noted above, have positively impacted our cash flows from operations during 2020.

The COVID-19 pandemic has resulted in, and may continue to result in, significant disruptions of financial and capital markets, which could reduce our ability to access capital and negatively affect our liquidity in the future.

Additionally, while we have received grants and accelerated payments under the CARES Act, and we may receive additional amounts in the future under the CARES Act and the New PPP Act, as noted above, there is no assurance regarding the extent to which anticipated negative impacts on us arising from the COVID-19 pandemic will be offset by amounts and benefits received under the CARES Act, and which we may receive in the future under the CARES Act and the New PPP Act, or other legislation.

Broad economic factors resulting from the current COVID-19 pandemic, including increasing unemployment rates and reduced consumer spending, could also 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.

Business closings and layoffs in the areas in which we operate may lead to increases in the uninsured and underinsured populations and adversely affect demand for our services, as well as the ability of patients and other payors to pay for services as rendered.

Additionally, while we have received grants and accelerated payments under the CARES Act and other government assistance programs and may receive additional amounts in the future, there is no assurance regarding the extent to which anticipated negative impacts arising from the COVID-19 pandemic will be offset by amounts and benefits received under the CARES Act or future legislation.

Although we have seen continued improvement in surgical case volumes as states begin to re-open and allow for non-emergent procedures, broad economic factors resulting from the current COVID-19 pandemic, including increasing unemployment rates and reduced consumer spending, 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.

Any increase in the amount or deterioration in the collectability of patient accounts receivable will adversely affect our cash flows and results of operations, requiring an increased level of working capital.

If general economic conditions continue to deteriorate or remain uncertain for an extended period of time, our liquidity and ability to repay our outstanding debt may be harmed.

Based on our current level of operations, we believe cash flow from operations, available cash, the incremental term loan borrowings discussed above, funds we have received under the CARES Act, funds we may receive in the future and continued access to capital markets, together with the cost cutting steps taken in response to the impact of COVID-19, as discussed in Item 1A.

Based on our current level of operations, we believe cash flow from operations, available cash, available capacity on our Revolver, the incremental term loan borrowings and recent issuance of new notes discussed above, funds we have received under the CARES Act, funds we may receive in the future and continued access to capital markets, together with the cost cutting steps taken in response to the impact of COVID-19, as discussed in Item 1A.

"Risk Factors" elsewhere in this report, will be adequate to meet our short-term (i.e., 12 months) liquidity needs.

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Our calculation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.

When we use the term "Adjusted EBITDA," we are referring to income before income taxes, adjusted for net income attributable to non-controlling interests, depreciation and amortization, interest expense, net, equity-based compensation expense, transaction, integration and acquisition costs, net loss on disposals and deconsolidations, litigation settlement and other litigation costs, gain on escrow release and tax receivable agreement expense.

We use Adjusted EBITDA as a measure of financial performance.

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

Three Months Ended March 31,

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

2020 2019 2020 2019

Condensed Consolidated Statements of Operations Data:

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Transaction, integration and acquisition costs (1)

Loss on disposals and deconsolidations, net

10.1 8.0 22.7 11.5

Loss (gain) on disposals and deconsolidations, net 2.9 (8.2) 6.4 (7.6)

Litigation settlement and other litigation costs (2)

Gain on escrow release (3)

Loss on debt extinguishment — 11.7 — 11.7

Tax receivable agreement expense — — — 2.4

Adjusted EBITDA $ 58.2 $ 61.2 $ 104.7 $ 112.0

This amount includes transaction and integration costs of $5.5 million and $2.0 million for the three months ended March 31, 2020 and 2019 , respectively.

This amount further includes other acquisition costs and start-up costs related to a de novo surgical hospital of $7.1 million and $1.4 million for the three months ended March 31, 2020 and 2019 , respectively.

This amount includes litigation settlements of $1.2 million and other litigation costs of $0.3 million for the three months ended March 31, 2020, with no comparable costs in the same 2019 period.

Included in other income in the condensed consolidated statement of operations for the three months ended March 31, 2020, with no comparable gain in the same 2019 period.

(1) For the three months ended June 30, 2020 and 2019, this amount includes transaction and integration costs of $4.9 million and $6.2 million, respectively, and acquisition and start-up costs related to a de novo surgical hospital of $5.2 million and $1.8 million, respectively.

For the six months ended June 30, 2020 and 2019, this amount includes transaction and integration costs of $10.4 million and $8.2 million, respectively, and acquisition and start-up costs related to a de novo surgical hospital of $12.3 million and $3.3 million, respectively.

(2) For the three months ended June 30, 2020, this amount includes other litigation costs of $2.3 million, with no comparable costs in the same 2019 period.

For the six months ended June 30, 2020, this amount includes litigation settlements of $1.2 million and other litigation costs of $2.6 million, with no comparable costs in the same 2019 period.

(3) Included in other income in the condensed consolidated statement of operations for the six months ended June 30, 2020, with no comparable gain in the same 2019 period.

We use Credit Agreement EBITDA as a measure of liquidity and to determine our compliance under certain covenants pursuant to our credit facilities.

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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 March 31, 2020

Twelve Months Ended June 30, 2020

Cash flows from operating activities $ 293.4

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Deferred income taxes 9.9

Income from equity investments, net of distributions received

Changes in operating assets and liabilities, net of acquisitions and divestitures (123.5)

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Credit Agreement EBITDA $ 323.8

Represents impact of acquisitions as if each acquisition had occurred on April 1, 2019.

(1) Represents impact of acquisitions as if each acquisition had occurred on July 1, 2019.

Further this includes revenue synergies from other business initiatives, 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.

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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