Surgery Partners, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this report and our 2021 Annual Report on Form 10-K. Unless the context otherwise indicates, the terms "Surgery Partners," "we," "us," "our" or the "Company," as used herein, refer to Surgery Partners, Inc. and its subsidiaries. Unless the context implies otherwise, the term “affiliates” means direct and indirect subsidiaries of Surgery Partners, Inc. and partnerships and joint ventures in which such subsidiaries are partners. The terms “facilities” or “hospitals” refer to entities owned and operated by affiliates of Surgery Partners, Inc. and the term “employees” refers to employees of affiliates of Surgery Partners, Inc. Cautionary Note Regarding Forward-Looking Statements This report contains forward-looking statements, which are based on our current expectations, estimates and assumptions about future events. All statements other than statements of current or historical fact contained in this report are forward-looking statements. These statements include, but are not limited to, statements regarding our future financial position, business strategy, budgets, effective tax rate, projected costs and plans and objectives of management for future operations. The words "projections," "believe," "continue," "drive," "estimate," "expect," "intend," "may," "plan," "will," "could," "would" and similar expressions are generally intended to identify forward-looking statements. These statements involve risks, uncertainties and other factors that may cause actual results to differ from the expectations expressed in the statements. Many of these factors are beyond our ability to control or predict. These factors include, without limitation, the effects of the ongoing COVID-19 pandemic in the United States and the regions in which we operate; 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, including recent inflationary pressures; the unpredictability of our case volume in the current environment; our ability to preserve or raise sufficient funds to continue operations throughout this period of uncertainty; the impact of our cost-cutting measures on our future performance; our ability to cause distributions from our subsidiaries; the responsiveness of our payors, including Medicaid and Medicare, to the challenging operating conditions, including their willingness and ability to continue paying in a timely manner and to advance payments in a timely manner, if at all; the impact of COVID-19 related stimulus programs, including the CARES Act, and uncertainty in how these programs may be administered, monitored and modified in the future; our ability to execute on our operational and strategic initiatives; the timing and impact of our portfolio optimization efforts; our ability to continue to improve same-facility volume and revenue growth on the timeline anticipated, if at all; our ability to successfully integrate acquisitions; the anticipated impact and timing of our ongoing efficiency efforts; 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 our 2021 Annual Report on Form 10-K 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. When you consider these forward-looking statements, you should keep in mind these risk factors and other cautionary statements in this report. These forward-looking statements speak only as of the date made. Other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise. Executive Overview 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 $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. The impact of the COVID-19 pandemic on our surgical facilities varies based on the market in which the facility operates, the type of surgical facility and the procedures typically performed. 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 21 Table of Contents 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. Revenues Our revenues consist of patient service revenues and other service revenues. Patient service revenues consist of revenue from our surgical facility services and ancillary services segments. Specifically, patient service revenues include fees for surgical or diagnostic procedures performed at surgical facilities that we consolidate for financial reporting purposes, as well as for patient visits to our physician practices, anesthesia services, pharmacy services and diagnostic screens ordered by our physicians. Other service revenues include management and administrative service fees derived from our non-consolidated facilities that we account for under the equity method, management of surgical facilities and physician practices in which we do not own an interest and management services we provide to physician practices for which we are not required to provide capital or additional assets. The following table summarizes our revenues by service type as a percentage of total revenues for the periods indicated: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Patient service revenues: Surgical facilities revenues 95.9 % 95.5 % 95.8 % 95.5 % Ancillary services revenues 2.8 % 3.2 % 2.8 % 3.2 % Total patient service revenues 98.7 % 98.7 % 98.6 % 98.7 % Other service revenues 1.3 % 1.3 % 1.4 % 1.3 % Total revenues 100.0 % 100.0 % 100.0 % 100.0 % Payor Mix 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 June 30, Six Months Ended June 30, 2022 2021 2022 2021 Private insurance payors 51.0 % 50.9 % 50.9 % 49.8 % Government payors 42.5 % 42.2 % 42.4 % 43.5 % Self-pay payors 2.7 % 3.3 % 2.8 % 3.0 % Other payors (1) 3.8 % 3.6 % 3.9 % 3.7 % 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. Surgical Case Mix We primarily operate multi-specialty surgical facilities where physicians perform a variety of procedures in various specialties. We believe this diversification helps to protect us from adverse pricing and utilization trends in any individual procedure type and results in greater consistency in our case volume. 22 Table of Contents 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 June 30, Six Months Ended June 30, 2022 2021 2022 2021 Orthopedic and pain management 35.6 % 35.2 % 36.2 % 36.3 % Ophthalmology 24.5 % 26.9 % 24.5 % 26.2 % Gastrointestinal 23.2 % 22.3 % 23.0 % 21.9 % General surgery 3.0 % 2.9 % 3.0 % 3.0 % Other 13.7 % 12.7 % 13.3 % 12.6 % Total 100.0 % 100.0 % 100.0 % 100.0 % Critical Accounting Policies A summary of significant accounting policies is disclosed in our 2021 Annual Report on Form 10-K under the caption “Critical Accounting Policies” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section. There have been no material changes in the nature of our critical accounting policies or the application of those policies since December 31, 2021. Results of Operations 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, 2022 2021 Revenues $ 615.4 $ 543.3 Operating expenses: Cost of revenues 480.8 425.0 General and administrative expenses 26.1 24.5 Depreciation and amortization 28.0 25.2 Transaction and integration costs 8.2 9.2 Grant funds (0.1) (4.9) 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) 538.9 483.8 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 Less: Net income attributable to non-controlling interests (33.7) (35.7) Net loss attributable to Surgery Partners, Inc. $ (18.4) $ (26.9) Overview. 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. 23 Table of Contents Revenues. 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, 2022 2021 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. Grant Funds. 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. 24 Table of Contents 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, 2022 2021 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) — Loss on debt extinguishment — 9.6 Other income, net (5.0) (2.8) 1,034.7 931.9 Operating income 176.9 123.8 Interest expense, net (113.2) (106.7) Income before income taxes 63.7 17.1 Income tax (expense) benefit (5.6) 2.5 Net income 58.1 19.6 Less: Net income attributable to non-controlling interests (64.3) (67.5) Net loss attributable to Surgery Partners, Inc. $ (6.2) $ (47.9) Overview. 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, a favorable shift in surgical case mix and acquisitions completed since the prior-year period. Revenues. 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, 2022 2021 Patient service revenues $ 1,195.0 $ 1,041.6 Other service revenues 16.6 14.1 Total revenues $ 1,211.6 $ 1,055.7 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 $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. 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. 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. 25 Table of Contents Transaction and Integration Costs. 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. Grant Funds. 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 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. 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 six 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 9.3% for the 2022 period compared to 10.1% for the 2021 period. 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. 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 5.3% for the 2022 period and 6.4% for the 2021 period. Liquidity and Capital Resources 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 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. 26 Table of Contents Material Cash Requirements In addition to the cash requirements related to our long-term debt, operating lease obligations and the tax receivable agreement, pursuant to the CARES Act, repayment of certain advanced payments and other deferrals received as part of relief during 2020 will continue during 2022. We received approximately $120 million of accelerated payments during the year ended December 31, 2020. 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. 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. Summary 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. 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, 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 Adjusted EBITDA and Adjusted EBITDA excluding grant funds are not measurements of financial performance under GAAP and should not be considered in isolation or as a substitute for net income, operating income or any other measure calculated in accordance with GAAP. The items excluded from these non-GAAP metrics are significant components in understanding and evaluating our financial performance. We believe such adjustments are appropriate, as the magnitude and frequency of such items can vary significantly and are not related to the assessment of normal operating performance. Our calculation of Adjusted EBITDA and Adjusted EBITDA excluding grant funds may not be comparable to similarly titled measures reported by other companies. We use Adjusted EBITDA and Adjusted EBITDA excluding grant funds as measures of financial performance. Adjusted EBITDA and Adjusted EBITDA excluding grant funds are key measures used by our management to assess operating performance, make business decisions and allocate resources. 27 Table of Contents 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 June 30, Six Months Ended June 30, 2022 2021 2022 2021 Condensed Consolidated Statements of Operations Data: Income before income taxes $ 19.6 $ 6.1 $ 63.7 $ 17.1 Plus (minus): Net income attributable to non-controlling interests (33.7) (35.7) (64.3) (67.5) Depreciation and amortization 28.0 25.2 55.4 50.9 Interest expense, net 56.9 53.4 113.2 106.7 Equity-based compensation expense 4.3 4.1 8.0 9.3 Transaction, integration and acquisition costs (1) 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 Less: 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 $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. We use Credit Agreement EBITDA as a measure of liquidity and to determine our compliance under certain covenants pursuant to our credit facilities. 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. 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. The items excluded from Credit Agreement EBITDA are significant components in understanding and evaluating our liquidity. Our calculation of Credit Agreement EBITDA may not be comparable to similarly titled measures reported by other companies. When we use the term “Credit Agreement EBITDA,” we are referring to Adjusted EBITDA, as defined above, further adjusted for acquisitions and synergies. These adjustments do not relate to our historical financial performance and instead relate to estimates compiled by our management and calculated in conformance with the definition of “Consolidated EBITDA” used in the credit agreements governing our credit facilities. 28 Table of Contents 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 June 30, 2022 Cash flows from operating activities $ 156.5 Plus (minus): Non-cash interest expense, net (28.7) Non-cash lease expense (36.2) Deferred income taxes (17.0) Equity in earnings of unconsolidated affiliates, net of distributions received (0.2) Changes in operating assets and liabilities, net of acquisitions and divestitures 156.8 Income tax expense 18.6 Net income attributable to non-controlling interests (138.4) Interest expense, net 227.5 Transaction, integration and acquisition costs 40.6 Litigation settlement and other litigation costs (25.3) Hurricane-related impacts (1) (0.2) Acquisitions and synergies (2) 84.7 Credit Agreement EBITDA $ 438.7 (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 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.