What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-02 compared with 2022-05-03 · 145 added, 101 removed, 160 unchanged (61% of the section changed)

16 unchanged sentences

the impact to the state and local economies of restrictive orders, vaccine and other mandates and the pandemic generally;

our ability to respond nimbly to challenging economic conditions;

our ability to respond nimbly to challenging economic conditions, including recent inflationary pressures;

the unpredictability of our case volume in the current environment;

16 unchanged sentences

Executive Overview

Total revenues for the first quarter of 2022 increased 16.4% to $596.2 million from $512.4 million for the first quarter of 2021.

Days adjusted same-facility revenues for the first quarter of 2022 increased 8.2% from the same period last year, with a 1.7% increase in revenue per case and a 6.3% increase in same-facility cases.

For the first quarter of 2022, the Company’s net income attributable to common stockholders and Adjusted EBITDA was $12.2 million and $77.1 million, respectively.

For the first quarter of 2021, the Company’s net loss attributable to common stockholders and Adjusted EBITDA was $31.3 million and $72.9 million, respectively.

Total revenues for the second quarter of 2022 increased 13.3% to $615.4 million from $543.3 million for the second quarter of 2021.

Days adjusted same-facility revenues for the second quarter of 2022 increased 6.9% from the same period last year, with a 4.9% increase in revenue per case and a 1.9% increase in same-facility cases.

For the second quarter of 2022, the Company’s net loss attributable to common stockholders and Adjusted EBITDA was $18.4 million and $86.1 million, respectively.

For the second quarter of 2021, the Company’s net loss attributable to common stockholders and Adjusted EBITDA was $26.9 million and $75.9 million, respectively.

A reconciliation of non-GAAP financial measures appears below under "Certain Non-GAAP Measures."

We had cash and cash equivalents of $378.9 million and $203.0 million of borrowing capacity under our revolving credit facility at March 31, 2022.

Operating cash inflows were $79.8 million in the first quarter of 2022, an increase of $29.6 million compared to the prior-year period.

Net operating cash flows, including operating cash flows less distributions to non-controlling interests, were an inflow of $43.6 million and $18.9 million for the first quarter of 2022 and 2021, respectively.

The increase in operating cash flows and net operating cash flows compared to the same period in 2021 is primarily due to proceeds received in the first quarter of 2022 from the settlement of a stockholder litigation matter.

Impact of COVID-19

The COVID-19 pandemic has significantly affected our facilities, employees, patients, communities, business operations and financial performance, as well as the U.S.

We had cash and cash equivalents of $227.4 million and $203.0 million of borrowing capacity under our revolving credit facility at June 30, 2022.

Operating cash inflows were $42.1 million in the second quarter of 2022, an increase of $39.8 million compared to the prior year period.

Net operating cash flows, including operating cash flows less distributions to non-controlling interests, were an inflow of $3.1 million for the second quarter of 2022, compared to an outflow of $29.8 million for the second quarter of 2021.

The increase in operating cash flows and net operating cash flows compared to the same period in 2021 is primarily due to a DOJ settlement payment made in the 2021 period.

COVID-19 Pandemic

The public health and economic effects of the COVID-19 pandemic have significantly affected our facilities, employees, patients, communities, business operations and financial performance, as well as the U.S.

economy and financial markets.

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We cannot provide any certainty regarding the length and severity of the impact of the COVID-19 pandemic, which is difficult to predict and is dependent on factors beyond our control.

Taking into account the pandemic and other factors, the United States economy has recently experienced general inflationary pressures, significant disruptions to global supply networks, and an extremely competitive labor market.

We have incurred, and may

continue to incur, certain increased expenses arising from the pandemic and these economic conditions, including additional labor, supply chain, capital and other expenditures.

While we have implemented cost containment and other measures to try to counteract these developments, we may be unable to fully offset these increases in our costs and otherwise effectively respond to supply disruptions.

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

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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,

2022 2021 2022 2021

Patient service revenues:

5 unchanged sentences

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,

2022 2021 2022 2021

Private insurance payors 51.0 % 50.9 % 50.9 % 49.8 %

2 unchanged sentences

Other payors (1)

3.8 % 3.6 % 3.9 % 3.7 %

Total 100.0 % 100.0 % 100.0 % 100.0 %

4 unchanged sentences

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,

2022 2021 2022 2021

Orthopedic and pain management 35.6 % 35.2 % 36.2 % 36.3 %

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Results of Operations

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

The following table summarizes certain results from the statements of operations for the three months ended March 31, 2022 and 2021 (dollars in millions):

Three Months Ended March 31,

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

The following table summarizes certain results from the statements of operations for the three months ended June 30, 2022 and 2021 (dollars in millions):

Three Months Ended June 30,

Revenues $ 615.4 $ 543.3

5 unchanged sentences

Grant funds (0.1) (4.9)

Gain on disposals and deconsolidations, net (0.1) (0.9)

Income from equity investments (3.1) (2.6)

Loss on disposals and deconsolidations, net 1.1 1.0

Equity in earnings of unconsolidated affiliates (2.6) (3.0)

Loss on debt extinguishment — 9.6

Other income, net (2.6) (2.8)

Operating income 76.5 59.5

Interest expense, net (56.9) (53.4)

Income before income taxes 19.6 6.1

Income tax (expense) benefit (4.3) 2.7

Net income 15.3 8.8

Net income attributable to non-controlling interests (33.7) (35.7)

Net loss attributable to Surgery Partners, Inc.

$ (18.4) $ (26.9)

During the three months ended June 30, 2022, our revenues increased 13.3% to $615.4 million compared to $543.3 million for the three months ended June 30, 2021.

Net loss attributable to Surgery Partners, Inc.

was $18.4 million for the 2022 period, compared to a net loss of $26.9 million for the 2021 period.

The increase in revenues was primarily attributable to a favorable shift in surgical case mix and acquisitions completed since the prior year period.

Revenues for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 were as follows (dollars in millions):

Three Months Ended June 30,

Patient service revenues $ 607.3 $ 535.9

Other service revenues 8.1 7.4

Total revenues $ 615.4 $ 543.3

Patient service revenues increased 13.3% to $607.3 million for the 2022 period compared to $535.9 million for the 2021 period, primarily driven by a 4.9% increase in same-facility revenue per case, a 1.9% increase in days adjusted same-facility case volumes and acquisitions completed since the prior year period.

Cost of Revenues.

Cost of revenues increased to $480.8 million for the 2022 period compared to $425.0 million for the 2021 period, primarily driven by acquisitions completed since the prior year period.

As a percentage of revenues, cost of revenues were 78.1% for the 2022 period compared to 78.2% for the 2021 period.

General and Administrative Expenses.

As a percentage of revenues, general and administrative expenses decreased to 4.2% for the 2022 period compared to 4.5% for the 2021 period.

Depreciation and Amortization.

As a percentage of revenues, depreciation and amortization expenses were 4.5% for the 2022 period compared to 4.6% for the 2021 period.

Transaction and Integration Costs.

We incurred $8.2 million of transaction and integration costs for the three months ended June 30, 2022 compared to $9.2 million for the three months ended June 30, 2021.

The costs for both periods primarily relate to ongoing development initiatives and the integration of acquisitions.

Based on guidance from HHS and other authorities, the Company updated its estimate of the amount of grant funds received that qualified for recognition, resulting in the recognition of $0.1 million during the three months ended June 30, 2022.

Grant funds recognized in the three months ended June 30, 2021 were $4.9 million.

For further discussion, see Note 1 to our condensed consolidated financial statements included elsewhere in this report.

Loss on Debt Extinguishment.

We incurred a loss on debt extinguishment of $9.6 million for the 2021 period related to an amendment to our credit agreement, which refinanced all of the then existing term loans during the three months ended June 30, 2021.

There was no comparable loss during the 2022 period.

Interest Expense, Net.

As a percentage of revenues, interest expense, net decreased to 9.2% for the 2022 period compared to 9.8% for the 2021 period.

Income Tax (Expense) Benefit.

The income tax expense was $4.3 million for the three months ended June 30, 2022 compared to a benefit of $2.7 million for the three months ended June 30, 2021.

The effective tax rate was 21.9% for the three months ended June 30, 2022 compared to (44.3)% for the three months ended June 30, 2021.

For the three months ended June 30, 2022, the effective tax rate differed from 21% primarily due to earnings attributable to non-controlling interests and an increase in the Company’s valuation allowance attributable to interest expense limitations.

For the three months ended June 30, 2021, the effective tax rate differed from 21% primarily due to tax benefits of $3.0 million related to entity divestitures.

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.

As a percentage of revenues, net income attributable to non-controlling interests was 5.5% for the 2022 period and 6.6% for the 2021 period.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

The following table summarizes certain results from the statements of operations for the six months ended June 30, 2022 and 2021 (dollars in millions):

Six Months Ended June 30,

Revenues $ 1,211.6 $ 1,055.7

Operating expenses:

Cost of revenues 952.2 833.9

General and administrative expenses 55.6 51.3

Depreciation and amortization 55.4 50.9

Transaction and integration costs 15.3 14.5

Grant funds (1.3) (20.0)

Loss on disposals and deconsolidations, net 1.0 0.1

Equity in earnings of unconsolidated affiliates (5.7) (5.6)

Litigation settlement (32.8) —

Other income (2.4) —

Loss on debt extinguishment — 9.6

Other income, net (5.0) (2.8)

1,034.7 931.9

Operating income 176.9 123.8

1 unchanged sentence

Income before income taxes 63.7 17.1

Income tax expense (1.3) (0.2)

Income tax (expense) benefit (5.6) 2.5

Net income 58.1 19.6

Net income attributable to non-controlling interests (64.3) (67.5)

Net income (loss) attributable to Surgery Partners, Inc.

Net loss attributable to Surgery Partners, Inc.

$ (6.2) $ (47.9)

During the three months ended March 31, 2022, our revenues increased 16.4% to $596.2 million compared to $512.4 million for the three months ended March 31, 2021.

Net income attributable to Surgery Partners, Inc.

During the six months ended June 30, 2022, our revenues increased 14.8% to $1,211.6 million compared to $1,055.7 million for the six months ended June 30, 2021.

Net loss attributable to Surgery Partners, Inc.

was $6.2 million for the 2022 period, compared to a net loss of $47.9 million for the 2021 period.

The increase in revenues was primarily attributable to increases in surgical case volumes and acquisitions completed since the prior-year period.

Revenues for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 were as follows (dollars in millions):

Three Months Ended March 31,

The increase in revenues was primarily attributable to increases in surgical case volumes, a favorable shift in surgical case mix and acquisitions completed since the prior-year period.

Revenues for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 were as follows (dollars in millions):

Six Months Ended June 30,

Patient service revenues $ 1,195.0 $ 1,041.6

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Total revenues $ 1,211.6 $ 1,055.7

Patient service revenues increased 16.2% to $587.7 million for the three months ended March 31, 2022 compared to $505.7 million for the three months ended March 31, 2021.

The increase of 16.2% was driven by a 6.3% increase in days adjusted same-facility case volume, a 1.7% increase in same-facility revenue per case and acquisitions completed since the prior-year period.

Patient service revenues increased 14.7% to $1,195.0 million for the 2022 period compared to $1,041.6 million for the 2021 period, primarily driven by a 4.0% increase in days adjusted same-facility case volume, a 3.2% increase in same-facility revenue per case and acquisitions completed since the prior year period.

Cost of Revenues.

Cost of revenues were $471.4 million for the three months ended March 31, 2022 compared to $408.9 million for the three months ended March 31, 2021.

The increase was primarily driven by continued case count recovery and acquisitions completed

since the prior-year period.

Cost of revenues were $952.2 million for the 2022 period compared to $833.9 million for the 2021 period, primarily driven by acquisitions completed since the prior year period.

As a percentage of revenues, cost of revenues decreased to 78.6% for the 2022 period compared to 79.0% for the 2021 period.

General and Administrative Expenses.

General and administrative expenses were $29.5 million for the three months ended March 31, 2022 compared to $26.8 million for the three months ended March 31, 2021.

As a percentage of revenues, general and administrative expenses decreased to 4.6% for the 2022 period compared to 4.9% for the 2021 period.

Depreciation and Amortization.

Depreciation and amortization was $27.4 million and $25.7 million for the three months ended March 31, 2022 and 2021, respectively.

As a percentage of revenues, depreciation and amortization expenses decreased to 4.6% for the 2022 period compared to 4.8% for the 2021 period.

Transaction and Integration Costs.

We incurred $7.1 million of transaction and integration costs for the three months ended March 31, 2022 compared to $5.3 million for the three months ended March 31, 2021.

We incurred $15.3 million of transaction and integration costs for the six months ended June 30, 2022 compared to $14.5 million for the six months ended June 30, 2021.

The increase primarily relates to costs for ongoing development initiatives and the integration of acquisitions we completed in 2022 and 2021.

During the three months ended March 31, 2022, the Company received approximately $1 million of additional grants from HHS.

Based on guidance from HHS and other authorities, the Company updated its estimate of the amount of grant funds received that qualified for recognition, resulting in the recognition of $1.2 million during the three months ended March 31, 2022.

Grant funds recognized in the three months ended March 31, 2021 were $15.1 million.

For further discussion, see Note 1.

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

Based on guidance from HHS and other authorities, the Company updated its estimate of the amount of grant funds received that qualified for recognition, resulting in the recognition of $1.3 million during the six months ended June 30, 2022.

Grant funds recognized in the six months ended June 30, 2021 were $20.0 million.

For further discussion, see Note 1 to our condensed consolidated financial statements included elsewhere in this report.

Litigation Settlement.

Gain on litigation settlement was $32.8 million for the three months ended March 31, 2022, related to the resolution of the stockholder litigation matter, as discussed in Note 9.

Gain on litigation settlement was $32.8 million for the six months ended June 30, 2022, related to the resolution of the stockholder litigation matter, as discussed in Note 8.

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

There was no comparable activity for the 2021 period.

Loss on Debt Extinguishment.

There was no comparable loss during the 2022 period.

Interest Expense, Net.

Interest expense, net, increased to $56.3 million for the three months ended March 31, 2022 compared to $53.3 million for the three months ended March 31, 2021.

As a percentage of revenues, interest expense, net decreased to 9.3% for the 2022 period compared to 10.1% for the 2021 period.

Income Tax Expense.

The income tax expense was $1.3 million and $0.2 million for the three months ended March 31, 2022 and 2021, respectively.

The effective tax rate was 2.9% for the three months ended March 31, 2022 compared to 1.8% for the three months ended March 31, 2021.

For the three months ended March 31, 2022, the effective tax rate differed from 21% primarily due to earnings attributable to non-controlling interests, an increase in the Company’s valuation allowance attributable to interest expense limitations, and discrete tax benefits of (a) $4.6 million related to the vesting of restricted stock awards, (b) $1.8 million attributable to non-recurring earnings’ impact on the Company’s valuation allowance, and (c) $1.0 million related to entity divestitures.

For the three months ended March 31, 2021, the effective tax rate differed from 21% due to tax benefits of $2.2 million related to the vesting of restricted stock awards.

Income Tax (Expense) Benefit.

The income tax expense was $5.6 million for the six months ended June 30, 2022 compared to a benefit of $2.5 million for the six months ended June 30, 2021.

The effective tax rate was 8.8% for the six months ended June 30, 2022 compared to (14.6)% for the six months ended June 30, 2021.

For the six months ended June 30, 2022, the effective tax rate differed from 21% primarily due to earnings attributable to non-controlling interests, an increase in the Company’s valuation allowance attributable to interest expense limitations, and discrete tax benefits of (a) $4.6 million related to the vesting of restricted stock awards, (b) $1.8 million attributable to non-recurring earnings’ impact on the Company’s valuation allowance, and (c) $1.0 million related to entity divestitures.

For the six months ended June 30, 2021, the effective tax rate differed from 21% due to tax benefits of $4.1 million related to the vesting of restricted stock awards, as well as a $3.0 million tax benefit related to entity divestitures.

Net Income Attributable to Non-Controlling Interests.

Net income attributable to non-controlling interests was $30.6 million for the three months ended March 31, 2022 compared to $31.8 million for the three months ended March 31, 2021.

As a percentage of revenues, net income attributable to non-controlling interests was 5.3% for the 2022 period and 6.4% for the 2021 period.

Liquidity and Capital Resources

Operating Activities

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, 2022, our cash flow provided by operating activities was $79.8 million compared to $50.2 million in the three months ended March 31, 2021.

The increase is primarily due to settlement proceeds related to the resolution of a stockholder litigation matter.

Investing Activities

Net cash used in investing activities during the three months ended March 31, 2022, was $47.1 million, which included $18.2 million related to purchases of property and equipment.

We paid $31.1 million in cash for acquisitions (net of cash acquired), which included controlling interests in two surgical facilities, one of which was merged into an existing surgical facility.

Additionally, we received cash proceeds of $11.5 million related to the sale of interests in a surgical facility, which was previously accounted for as an equity method investment.

Net cash used in investing activities during the three months ended March 31, 2021, was $14.3 million, which included $14.5 million related to purchases of property and equipment.

We paid $2.1 million in cash for acquisitions (net of cash acquired), which included controlling interests in two surgical facilities in existing markets that were merged into existing facilities.

Additionally, we received cash proceeds of $2.3 million related to the disposal of certain long-lived assets.

Financing Activities

Net cash used in financing activities during the three months ended March 31, 2022 was $43.7 million.

During this period, we made distributions to non-controlling interest holders of $36.2 million and made payments related to ownership transactions with consolidated affiliates of $3.1 million.

We repaid $17.0 million of our long-term debt and had borrowings on long-term debt of $11.9 million.

Net cash provided by financing activities during the three months ended March 31, 2021 was $187.8 million.

During this period, we received gross proceeds of $260.9 million from an equity offering which was partially offset by equity offering costs paid of $12.6 million.

We made distributions to non-controlling interest holders of $31.3 million and received proceeds related to ownership transactions with consolidated affiliates of $1.0 million.

We repaid $16.6 million of our long-term debt, which was offset by borrowings of $0.6 million.

We also paid a cash dividend of $5.1 million related to the Series A preferred stock.

As of March 31, 2022, the carrying value of our total indebtedness was $3.093 billion, which includes unamortized fair value discount of $2.8 million and unamortized deferred financing costs and issuance discount of $15.8 million.

Term Loan and Revolving Credit Facility

As of March 31, 2022, we had term loan borrowings with a carrying value of $1.527 billion, consisting of outstanding aggregate principal of $1.530 billion and unamortized fair value discount of $2.8 million (the "Term Loan").

The Term Loan matures on August 31, 2026 (or, if at least $185 million of the Borrower’s 6.750% senior unsecured notes due 2025 shall have not either been repaid, repurchased or redeemed or refinanced with indebtedness having a maturity date not earlier than 91 days after August 31, 2026 by no later than April 1, 2025, then April 1, 2025) and amortizes in equal quarterly installments of 0.25% of the aggregate original principal amount.

We have a revolving credit facility providing for revolving borrowings of up to $210.0 million ("the Revolver" and, together with the Term Loan, the "Senior Secured Credit Facilities").

The Revolver will mature on February 1, 2026.

As of March 31, 2022, our availability on the Revolver was $203.0 million (including outstanding letters of credit of $7.0 million).

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

Subject to certain conditions and requirements set forth in the credit agreement, we may request one or more additional incremental term loan facilities or one or more increases in the commitments on the Revolver.

The Senior Secured Credit Facilities bear interest at a rate per annum equal to (x) LIBOR plus a margin of 3.75% per annum (LIBOR with respect to the Term Loan shall be subject to a floor of 0.75%) or (y) an alternate base rate (which will be the highest of (i) the prime rate, (ii) 0.5% per annum above the federal funds effective rate and (iii) one-month LIBOR plus 1.00% per annum (the alternate base rate with respect to the Term Loan shall be subject to a floor of 1.75%)) plus a margin of 2.75% per annum.

In addition, we are required to pay a commitment fee of 0.50% per annum in respect of unused commitments under the Revolver.

Senior Unsecured Notes

We have $545.0 million aggregate principal amount of senior unsecured notes due April 15, 2027, which bear interest at the rate of 10.000% per year, payable semi-annually on April 15 and October 15 of each year.

We have $370.0 million aggregate principal amount of senior unsecured notes due July 1, 2025, which bear interest at the rate of 6.750% per year, payable semi-annually on January 1 and July 1 of each year.

We and certain of our subsidiaries have other debt consisting of outstanding bank indebtedness of $159.3 million, which is collateralized by the real estate and equipment owned by the surgical facilities to which the loans were made, and right-of-use finance lease obligations of $507.7 million for which we are liable to various vendors for several property and equipment leases classified as finance leases.

During the six months ended June 30, 2022, our cash flow provided by operating activities was $121.9 million compared to $52.5 million in the six months ended June 30, 2021.

The increase is primarily due to the receipt of stockholder litigation proceeds of $32.8 million in the 2022 period and a DOJ settlement payment of $32.2 million made during the 2021 period.

Net cash used in investing activities during the six months ended June 30, 2022, was $181.4 million compared to $40.7 million for the six months ended June 30, 2021.

The increase in cash used is primarily due to an increase of $12.6 million related to purchases of property and equipment, an increase of $59.7 million for acquisitions (net of cash acquired), an increase of $65.8 million for purchases of equity method investments, a decrease of $2.5 million in cash proceeds from divestitures and an increase in other investing activities of $11.6 million.

The increases in cash used in investing activities were partially offset by an increase of $11.5 million related to the sale of equity method investments.

Net cash used in financing activities during the six months ended June 30, 2022 was $103.0 million compared to cash provided by financing activities of $134.8 million for the six months ended June 30, 2021.

The decrease is primarily due to $248.2 million of proceeds received from an equity offering, net of related costs in the 2021 period, with no comparable activity in the 2022 period, an increase of $11.8 million for distributions to non-controlling interest holders and an increase of $7.4 million of net payments related to ownership transactions with consolidated affiliates.

The increases in cash used in financing activities were partially offset by a decrease of $5.4 million in repayments of long-term debt, net of borrowings, a decrease of $11.1 million related to payments of deferred financing costs and a prepayment premium related to the modification of the term loan in the 2021 period, a decrease of $5.1 million for preferred dividends and a decrease in other financing activities of $8.0 million.

Capital Resources

Net working capital was approximately $266.7 million at June 30, 2022 compared to $409.3 million at December 31, 2021.

The decrease is due to a decrease in cash, primarily as a result of payments for acquisitions, a decrease in accounts receivable and an increase in accrued payroll and benefits, offset by a decrease in deferred Medicare accelerated payments.

In addition to cash flows from operations and available cash, other sources of capital include amounts available on our Revolver as well as anticipated continued access to the capital markets.

Material Cash Requirements

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We received approximately $120 million of accelerated payments during the year ended December 31, 2020.

Through March 31, 2022, approximately $78 million has been repaid including approximately $18 million during the three months ended March 31, 2022.

Through June 30, 2022, approximately $103 million has been repaid including approximately $25 million and $43 million during the three and six months ended June 30, 2022, respectively.

In addition to the continued repayment of the advanced payments received under the CARES Act, we anticipate additional cash outflows during 2022 for the repayment of the remaining payroll taxes deferred in 2020 pursuant to the CARES Act.

"Organization and Summary of Accounting Policies" for a further discussion of the accelerated payments and payroll tax deferral.

Capital Resources

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.

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.

There have been no material changes outside of the ordinary course of business to our upcoming cash obligations during the six months ended June 30, 2022 from those disclosed under “Material Cash Requirements” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Annual Report on Form 10-K.

Broad economic factors resulting from the ongoing COVID-19 pandemic 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.

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 re-opened and allowed for non-emergent procedures, broad economic factors resulting from the ongoing COVID-19 pandemic 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.

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 payors to pay for services as rendered.

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 flows from operations, available cash, available capacity on our Revolver, funds we have received under the CARES Act, funds we may receive in the future and continued access to capital markets, will be adequate to meet our short-term (i.e., 12 months) and long-term (beyond 12 months) liquidity needs.

If general economic conditions, including recent increases in interest rates, inflation risk and market volatility continue to deteriorate or remain uncertain for an extended period of time, our ability to access capital could be harmed, which could negatively affect our liquidity and ability to repay our outstanding debt.

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.

Certain Non-GAAP Measures

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The following table reconciles Adjusted EBITDA and Adjusted EBITDA excluding grant funds to 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,

2022 2021 2022 2021

Condensed Consolidated Statements of Operations Data:

6 unchanged sentences

Transaction, integration and acquisition costs (1)

Gain on disposals and deconsolidations, net (0.1) (0.9)

(Gain) loss on litigation settlement and other litigation costs (2)

8.2 11.4 15.3 20.8

Loss on disposals and deconsolidations, net 1.1 1.0 1.0 0.1

Loss (gain) on litigation settlement and other litigation costs (2)

1.7 0.8 (29.1) 1.8

Loss on debt extinguishment — 9.6 — 9.6

Adjusted EBITDA $ 86.1 $ 75.9 $ 163.2 $ 148.8

Impact of grant funds (3)

(0.1) (2.9) (1.1) (13.7)

Adjusted EBITDA excluding grant funds $ 86.0 $ 73.0 $ 162.1 $ 135.1

(1) This amount includes transaction and integration costs of $7.1 million and $5.3 million for the three months ended March 31, 2022 and 2021, respectively.

This amount further includes start-up costs related to a de novo surgical hospital of $4.1 million for the three months ended March 31, 2021.

(2) This amount includes other litigation costs of $2.0 million and $1.0 million for the three months ended March 31, 2022 and 2021, respectively.

This amount also includes a litigation settlement gain of $32.8 million for the three months ended March 31, 2022, with no comparable activity in the 2021 period.

(1) This amount includes transaction and integration costs of $8.2 million and $9.2 million for the three months ended June 30, 2022 and 2021, respectively.

This amount further includes start-up costs related to a de novo surgical hospital of $2.2 million for the three months ended June 30, 2021.

This amount includes transaction and integration costs of $15.3 million and $14.5 million for the six months ended June 30, 2022 and 2021, respectively.

This amount further includes start-up costs related to a de novo surgical hospital of $6.3 million for the six months ended June 30, 2021.

(2) This amount includes other litigation costs of $1.7 million and $0.8 million for the three months ended June 30, 2022 and 2021, respectively.

This amount includes other litigation costs of $3.7 million and $1.8 million for the six months ended June 30, 2022 and 2021, respectively.

This amount also includes gain on litigation settlement of $32.8 million for the six months ended June 30, 2022.

(3) Represents the impact of grant funds recognized, net of amounts attributable to non-controlling interests.

1 unchanged sentence

Credit Agreement EBITDA is determined on a trailing twelve-month basis.

We have included it because we believe that it

provides investors with additional information about our ability to incur and service debt and make capital expenditures.

We have included it because we believe that it provides investors with additional information about our ability to incur and service debt and make capital expenditures.

Credit Agreement EBITDA is not a measurement of liquidity under GAAP and should not be considered in isolation or as a substitute for any other measure calculated in accordance with GAAP.

4 unchanged sentences

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, 2022

Twelve Months Ended June 30, 2022

Cash flows from operating activities $ 156.5

14 unchanged sentences

(1) Reflects the impact of insurance proceeds received net of operating losses incurred in the six months ended December 31, 2021, at a surgical facility that was closed following Hurricane Ida.

(2) Represents impact of acquisitions as if each acquisition had occurred on April 1, 2021.

(2) Represents impact of acquisitions as if each acquisition had occurred on July 1, 2021.

Further this includes revenue and cost synergies from other business initiatives and 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.

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