What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-01 compared with 2022-03-01 · 133 added, 147 removed, 286 unchanged (49% of the section changed)

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"Risk Factors" and Item 9A.

"Controls and Procedures" found elsewhere in this report.

"Controls and Procedures" found elsewhere in this Annual Report.

Unless the context otherwise indicates, the terms "Surgery Partners," "we," "us," "our" or the "Company," as used herein, refer to Surgery Partners, Inc.

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Total revenues for 2022 increased 14.1% to $2.5 billion from $2.2 billion in 2021.

The increase in revenues is attributable to same-facility revenue growth and acquisitions completed in 2022 and 2021.

Days adjusted same-facility revenues for 2022 increased 7.7% from 2021, with a 3.6% increase in revenue per case and a 3.9% increase in same-facility cases.

Additionally, for 2022, Adjusted EBITDA increased 12.0% to $380.2 million compared to $339.6 million for 2021.

The increase in days adjusted same-facility revenues and Adjusted EBITDA is primarily attributable to the Company's recovery from the negative impacts of the COVID-19 pandemic that the Company began experiencing in the first quarter of 2020 and acquisitions completed in 2021 and 2020.

The increase in Adjusted EBITDA is primarily attributable to revenue growth, continued cost management initiatives and acquisitions completed in 2022 and 2021.

For 2022, the net loss attributable to common stockholders was $54.6 million compared to $81.2 million for 2021.

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

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

During 2021, we acquired controlling interests in eight surgical facilities, including a surgical hospital, and two physician practices for aggregate cash consideration of $285.8 million, net of cash acquired.

Two of the surgical facilities were in existing markets and were merged into existing facilities.

The cash consideration was funded through available resources.

During 2021, we sold our interests in three surgery centers, one physician practice and certain other assets for combined net cash proceeds of $6.0 million.

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

During 2022 we completed the following:

• We acquired controlling interests in seven surgical facilities, two of which were merged into existing facilities, and a physician practice for aggregate cash consideration of $146.4 million, net of cash acquired, non-cash consideration of $5.6 million and assumed debt of $39.4 million.

• We acquired non-controlling interests in seven surgical facilities and seven in-development de novo surgical facilities for an aggregate cash purchase price of $95.1 million.

• We sold our interests in two surgery centers, one of which was previously accounted for as an equity method investment, for net cash proceeds of $25.7 million.

We had cash and cash equivalents of $282.9 million and $342.0 million of borrowing capacity under our revolving credit facility at December 31, 2022.

Operating cash flows were $87.1 million in 2021, a decrease of $159.8 million compared to the prior year, primarily attributable to Medicare accelerated payments and other funds received under the CARES Act and actions taken to significantly reduce operating expenses and defer non-essential capital expenditures during 2020 and the repayment of Medicare accelerated payments in 2021.

Net operating cash outflows, including operating cash flows less distributions to non-controlling interests, were $43.9 million for 2021.

Operating cash flows were $158.8 million in 2022, an increase of $71.7 million compared to the prior year.

The increase was primarily attributable to the receipt of stockholder litigation proceeds of $32.8 million in the 2022 period and a DOJ settlement payment of $32.2 million, including interest, made during the 2021 period.

Net operating cash inflows, including operating cash flows less distributions to non-controlling interests, were $12.0 million for 2022.

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.

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 COVID-19 pandemic materially impacted our financial performance for the year ended December 31, 2020, and continued to impact our financial performance during the year ended December, 31, 2021.

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.

Although 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, we saw improvement in surgical case volumes as states re-opened and allowed for non-emergent procedures.

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

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.

Executive Order

On July 9, 2021, President Biden issued an executive order that is intended to promote competition in the U.S.

Among other things, the executive order encourages the Federal Trade Commission (“FTC”) to ban or limit non-compete agreements, encourages the DOJ and the FTC to review and revise their merger guidelines to ensure that patients are not harmed by healthcare mergers, and instructs HHS to support existing price transparency rules and implement the legislation that was recently adopted to address surprise billing.

We cannot predict how, if at all, the various initiatives set forth in the executive order will be implemented by the regulatory agencies involved or the impact that the executive order will have on operations.

Among other things, the executive order encourages the FTC to ban or limit non-compete agreements, encourages the DOJ and the FTC to review and revise their merger guidelines to ensure that patients are not harmed by healthcare mergers, and instructs HHS to support existing price transparency rules and implement the legislation that was recently adopted to address surprise billing.

We cannot predict how, if at all, the

various initiatives set forth in the executive order will be implemented by the regulatory agencies involved or the impact that the executive order will have on operations.

For example, the FTC recently published a proposed rule that would prohibit employers from entering into non-compete agreements and nullify existing non-competes.

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.

For the years ended December 31, 2020 and 2019, other service revenues also includes optical service revenues, which consisted of handling charges billed to the members of our optical products purchasing organization, which was sold on December 31, 2020.

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, management services we provide to physician practices for which we are not required to provide capital or additional assets and other non-patient services.

For the year ended December 31, 2020, other service revenues also includes optical service revenues, which consisted of handling charges billed to the members of our optical products purchasing organization, which was sold on December 31, 2020.

The following table summarizes revenues by service type as a percentage of total revenues:

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Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

If a NOL and/or interest limitation ("163(j)") carryforward exists, we make a determination as to whether that NOL and/or 163(j) carryforward will be utilized in the future.

If an NOL and/or interest limitation ("163(j)") carryforward exists, we make a determination as to whether that NOL and/or 163(j) carryforward will be utilized in the future.

A valuation allowance will be established for certain NOL and 163(j) carryforwards and other deferred tax assets where their recoverability is deemed to be uncertain.

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The valuation allowance has been established for certain deferred tax assets for which we believe it is more likely than not that the tax benefits will not be realized, which are primarily Section 163(j) interest carryforwards and certain state net operating losses and state credit carryforwards.

If our expectations for future operating results on a consolidated basis or at the state jurisdiction level

vary from actual results due to changes in health care regulations, general economic conditions, or other factors, we may need to adjust the valuation allowance, for all or a portion of our deferred tax assets.

Our income tax expense in future periods will be reduced or increased to the extent of offsetting decreases or increases, respectively, in our valuation allowance in the period when the change in circumstances occurs.

If our expectations for future operating results on a consolidated basis or at the state jurisdiction level vary from actual results due to changes in health care regulations, general economic conditions, or other factors, we may need to adjust the valuation allowance, for all or a portion of our deferred tax assets.

Our income tax expense and/or other comprehensive income in future periods will be reduced or increased to the extent of offsetting decreases or increases, respectively, in our valuation allowance in the period when the change in circumstances occurs.

These changes could have a significant impact on our future earnings.

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Prior to 2021, the Company had a third reporting unit, Alliance, which was a component of the Optical Services operating segment.

The Company tests its goodwill and indefinite-lived intangible assets for impairment at least annually, as of October 1, or more frequently if certain indicators arise.

A detailed evaluation of potential impairment indicators was performed, which specifically considered the volatility observed in the prices of the Company’s outstanding debt securities and common stock, as well as the decline in surgical case volumes following the emergence of the COVID-19 pandemic, all of which improved in the second half of 2020 and throughout 2021 as states re-opened and allowed for non-emergent procedures.

The Company tests its goodwill for impairment at least annually, as of October 1, or more frequently if certain indicators arise.

A detailed evaluation of potential impairment indicators was performed, which specifically considered recent increases in interest rates, inflation risk and market volatility.

As of October 1, 2022, all of the Company's goodwill was allocated to the Surgical Facilities reporting unit.

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Subsequent to the date of our annual impairment test, the Company considered its operating results for the fourth quarter of 2022, macroeconomic, industry and market conditions, and other market indicators including its market capitalization.

Based on its evaluation of all such factors, the Company concluded that an event had not occurred or circumstances had not changed that would more likely than not reduce the fair value of its reporting units below their carrying values.

In 2021 there were no non-cash impairment charges.

Based on its evaluation of all such factors, the Company concluded that no event had occurred and no circumstances had changed that would more likely than not reduce the fair value of its reporting units below their carrying values.

In 2022 and 2021 there were no non-cash impairment charges.

During the year ended December 31, 2020, as a result of its impairment testing, the Company recorded non-cash impairment charges of $28.6 million and $4.9 million related to the Ancillary Services and Alliance reporting units, respectively.

During the year ended December 31, 2019, as a result of its impairment testing, the Company recorded non-cash impairment charges of $2.5 million related to the Alliance reporting unit.

"Goodwill and Intangible Assets" to the consolidated financial statements elsewhere in this Annual Report for additional disclosure related to goodwill.

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Depreciation and amortization 114.8 98.8 94.8

Income from equity investments (11.3) (10.8) (10.2)

Loss (gain) on disposals, net 2.2 5.7 (4.4)

Transaction and integration costs 47.5 39.8 23.2

Impairment charges — 33.5 7.9

Grant funds (2.4) (37.9) (46.2)

Loss on disposals and deconsolidations, net 11.1 2.2 5.7

Equity in earnings of unconsolidated affiliates (12.5) (11.3) (10.8)

Litigation settlements (29.3) — 1.2

Loss on debt extinguishment 14.9 9.1 —

Litigation settlement — 1.2 0.2

Impairment charges — — 33.5

Other income (16.6) (15.5) (1.7)

Total operating expenses 1,922.9 1,677.1 1,595.5

2,194.1 1,922.9 1,677.1

Operating income 345.2 302.2 183.0

Tax receivable agreement expense — — (2.4)

Interest expense, net (234.9) (221.0) (201.8)

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Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

During 2021, our revenues increased 19.6% to $2.2 billion compared to $1.9 billion in 2020.

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

of $70.9 million in 2021, compared to $116.1 million in 2020.

The increase in revenues was primarily attributable to increases in surgical case volumes as the Company recovered from the COVID-19 pandemic that began in the first quarter of 2020 and acquisitions completed in 2021 and 2020.

Revenues for 2022 and 2021 were as follows (dollars in millions):

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Patient service revenues increased 14.0% to $2.5 billion in 2022 compared to $2.2 billion in 2021.

The increase was driven by a 17.6% increase in days adjusted same-facility case volume, a 0.5% increase in same-facility revenue per case and acquisitions completed in 2021 and 2020.

The increase in same-facility revenues was primarily driven by case count recovery from the impacts of the COVID-19 pandemic that the Company began experiencing in the first quarter of 2020.

The increase was driven by a 7.7% increase in days adjusted same-facility revenues and acquisitions completed in 2022 and 2021.

The increase in days adjusted same-facility revenues was attributable to a 3.9% increase in same-facility case volumes and a 3.6% increase in same-facility revenue per case.

Cost of Revenues.

Cost of revenues were $1.7 billion in 2021 compared to $1.5 billion in 2020.

The increase was primarily driven by case count recovery from the impacts of the COVID-19 pandemic that the Company began experiencing in the first quarter of 2020 and acquisitions completed in 2021 and 2020.

As a percentage of revenues, cost of revenues was 77.9% and 79.6% for 2021 and 2020, respectively, as lower acuity procedures with lower cost of sales returned from COVID-19 pandemic-related lows experienced in 2020.

Cost of revenues was $2.0 billion in 2022 compared to $1.7 billion in 2021.

The increase was primarily driven by acquisitions completed in 2022 and 2021.

As a percentage of revenues, cost of revenues was 77.4% and 77.9% for 2022 and 2021, respectively.

General and Administrative Expenses.

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As a percentage of revenues, general and administrative expenses were 4.0% in 2022 compared to 4.7% in 2021.

as a percentage of revenues is primarily the result of increased revenues driven by the recovery in surgical case volume from the impacts of the COVID-19 pandemic that the Company began experiencing in the first quarter of 2020.

The decrease was primarily driven by ongoing cost management initiatives.

Depreciation and Amortization.

Depreciation and amortization was $98.8 million and $94.8 million in 2021 and 2020, respectively.

Depreciation and amortization expenses were $114.8 million and $98.8 million in 2022 and 2021, respectively.

The increase is primarily due to acquisitions completed in 2022 and 2021.

As a percentage of revenues, depreciation and amortization expenses were 4.5% in 2022 and 4.4% in 2021.

Loss (gain) on Disposals, Net.

The net loss on disposals was $2.2 million in 2021, including a $4.0 million net gain on the sale of three surgery centers, a physician practice and certain other assets, offset by a net loss of $6.2 million related to disposals of other long-lived assets.

The net loss on disposals was $5.7 million in 2020, including a $2.5 million net gain on the sale of three surgical facilities, certain assets related to the Company's anesthesia business, certain imaging assets, the Company's optical products purchasing organization and the closure of a diagnostic laboratory, offset by a net loss of $8.2 million primarily related to disposals of other long-lived assets.

Transaction and Integration Costs.

We incurred $47.5 million of transaction and integration costs in 2022 compared to $39.8 million in 2021.

The increase primarily relates to costs for ongoing development initiatives and the integration of acquisitions we completed in 2021 and 2020.

Impairment Charges.

In 2020 we recorded non-cash impairment charges of $28.6 million and $4.9 million for goodwill assigned to the Ancillary Services and Alliance reporting units, respectively.

"Goodwill and Intangibles" to our consolidated financial statements included elsewhere in this report for further discussion.

There were no impairment charges in 2021.

During 2021, the Company received approximately $27.0 million of additional grants from HHS.

The costs for both periods primarily relate to ongoing development initiatives and the integration of acquisitions we completed in 2022 and 2021.

Based on guidance from HHS and other authorities, the Company updated its estimate of the amount of grant funds received that qualify for recognition, resulting in the recognition of $2.4 million during 2022.

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For further discussion, see Note 1.

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

"Organization and Summary of Accounting Polices - Medicare Accelerated Payments and Deferred Governmental Grants" to our consolidated financial statements included elsewhere in this Annual Report.

Loss on Disposals and Deconsolidations, Net.

The $11.1 million loss on disposals and deconsolidations, net in 2022 was primarily attributable to our disposal and deconsolidation activity in the period (See Note 2.

"Acquisitions and Dispositions" to our consolidated financial statements included elsewhere in this Annual Report).

The loss on disposals and deconsolidation, net was $2.2 million in 2021, including a $4.0 million net gain on the sale of three surgical facilities, a physician practice and certain other assets, offset by a net loss of $6.2 million related to disposals of other long-lived assets.

Litigation Settlements.

Litigation settlements in 2022 was primarily attributable to the resolution of the stockholder litigation matter, as discussed in Note 13.

"Commitments and Contingencies" to our consolidated financial statements included elsewhere in this Annual Report.

There was no comparable activity for the 2021 period.

Loss on Debt Extinguishment.

The net loss on debt extinguishment was $9.1 million for 2021.

"Long-Term Debt" to our consolidated financial statements included elsewhere in this report.

We incurred a loss on debt extinguishment of $14.9 million for the 2022 period related to the partial redemption of our 10.000% Senior Unsecured Notes due 2027 and the voluntary prepayment on our senior unsecured term loan (See Note 5.

"Long-Term Debt" to our consolidated financial statements included elsewhere in this Annual Report).

We incurred a loss on debt extinguishment of $9.1 million for the 2021 period related to an amendment to our credit agreement, which refinanced all of the then existing term loans.

Interest Expense, Net.

Interest expense, net was $234.9 million in 2022 compared to $221.0 million in 2021.

The increase primarily relates to the 2020 Incremental Term Loans, which were fully drawn on April 22, 2020 and the issuance of additional 2027 Unsecured Notes in the amount of $115.0 million effective July 30, 2020.

The increase primarily relates to an increase in finance lease obligations as a result of the modification of certain existing facility real estate leases that were previously classified as operating leases (See Note 6.

"Leases" to our consolidated financial statements included elsewhere in this Annual Report).

As a percentage of revenues, interest expense, net was 9.3% in 2022 compared to 9.9% in 2021.

Income Tax (Expense) Benefit .

The income tax expense was $10.5 million and income tax benefit was $20.1 million in 2021 and 2020, respectively.

Income tax expense was $23.3 million and $10.5 million for 2022 and 2021, respectively.

The effective tax rate was 21.2% for 2022 compared to 12.9% in 2021.

The decrease from 2020 primarily relates to discrete items occurring in 2020.

In 2020, the Company's effective tax rate was impacted by (i) the release of federal and state valuation allowances on the Company’s Internal Revenue Code Section 163(j) interest carryforwards as a result of the increase in deductible interest expense allowed under the CARES Act;

(ii) the release of federal and state valuation allowances on the Company’s deferred tax assets related to debt financing costs as a result of the finalization of the Internal Revenue Code Section 163(j) interest regulations, for which the deductions of such debt financing costs that are incurred in years 2021 and forward are not considered interest expense for income tax purposes;

and (iii) the Settlement Agreement, as discussed in Note 14.

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

For 2021, the effective tax rate is primarily impacted by income tax benefits related to (i) the 2021 vesting of certain restricted stock awards, and (ii) certain 2021 entity divestitures.

The 2022 increase primarily relates to a reduced impact from income attributable to non-controlling interests on the Company’s effective tax rate when compared to 2021.

For 2022, the effective tax rate is primarily impacted by income tax expense related to (i) the valuation allowance on the interest limitation under IRC Sec.

163(j), and income tax benefits related to (ii) vesting of certain restricted stock awards, (iii) net income attributable to non-controlling interests, and (iv) certain 2022 entity divestitures.

Net Income Attributable to Non-Controlling Interests.

Net income attributable to non-controlling interests was $141.6 million and $117.4 million in 2021 and 2020, respectively.

As a percentage of revenues, net income attributable to non-controlling interests was 6.4% in 2021 and 6.3% for 2020.

As a percentage of revenues, net income attributable to non-controlling interests was 5.6% in 2022 and 6.4% in 2021.

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

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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.

Cash flow provided by operating activities was $87.1 million and $246.9 million in 2021 and 2020, respectively.

The decrease is primarily due to the final DOJ settlement payment in the second quarter of 2021, receipts of government grants and Medicare advance payments provided through the CARES Act, as well as actions taken

to significantly reduce cash operating expenses and defer non-essential expenditures during 2020 and the repayment of Medicare advance payments during 2021.

Investing Activities

Net cash used in investing activities in 2021 was $331.7 million, which included $57.6 million related to purchases of property and equipment.

We paid $285.8 million in cash for acquisitions (net of cash acquired) which included a controlling interest in eight surgical facilities, including a surgical hospital, and two physician practices.

Additionally, we received cash proceeds of $6.0 million related to the sale of interests in three surgery centers, a physician practice and certain other assets.

Further, we received cash proceeds of $5.4 million related to the sale of interests in a non-consolidated surgical facility accounted for as an equity method investment.

Net cash used in investing activities in 2020 was $88.4 million, which included $42.9 million related to purchases of property and equipment.

We paid $104.6 million in cash for acquisitions (net of cash acquired), which included a controlling interest in three surgical facilities, including a surgical hospital, a controlling interest in five surgical facilities in existing markets that were merged into existing facilities and a physician practice.

Additionally, we received cash proceeds of $58.5 million related to the sale of interests in three surgery centers, certain assets related to our anesthesia business, certain imaging assets and an optical products purchasing organization

Financing Activities

Net cash provided by financing activities in 2021 was $316.3 million.

During the year ended December 31, 2021, we made distributions to non-controlling interest holders of $131.0 million and payments related to ownership transactions with consolidated affiliates of $28.4 million.

Further, we made repayments on our long-term debt of $343.2 million and paid debt issuance costs of $11.7 million, which were partially offset by borrowings of $299.4 million.

We also received net proceeds of $554.2 million from two equity offerings during the year and paid a cash dividend of $5.1 million related to the Series A Preferred Stock.

On May 17, 2021, we issued 22.609 million shares of our common stock, $0.01 par value per share, to Bain Capital, as a result of the conversion of all outstanding shares of our Series A Preferred Stock at a conversion price of $19.00 per share.

As a result of such conversion, we currently have no shares of Series A Preferred Stock issued or outstanding.

Net cash provided by financing activities in 2020 was $66.7 million.

During the year ended December 31, 2020, we made distributions to non-controlling interest holders of $109.6 million and payments related to ownership transactions with consolidated affiliates of $27.4 million.

Further, we made repayments on our long-term debt of $216.3 million, which was offset by borrowings of $429.4 million.

In connection with the 2020 Incremental Term Loans, which were fully drawn on April 22, 2020, and the issuance of additional 2027 Unsecured Notes in the amount of $115.0 million effective July 30, 2020, we paid debt issuance costs of $8.5 million.

Cash and cash equivalents were $282.9 million at December 31, 2022 compared to $389.9 million at December 31, 2021.

The primary source of our operating cash flows is the collection of accounts receivable from federal and state agencies (under the Medicare and Medicaid programs), private insurance companies and individuals.

Our cash flows provided by operating activities was $158.8 million in 2022 compared to $87.1 million in 2021.

The increase is primarily attributable 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 in 2022 was $307.9 million compared to $331.7 million in 2021.

Key factors contributing to the change include:

• A decrease in payments for acquisitions (net of cash acquired) of $139.4 million, partially offset by an increase in purchases of equity method investments of $95.1 million;

• An increase in proceeds of $6.9 million from disposals of facilities and $7.4 million from sales of equity method investments;

• An increase in purchases of property and equipment of $23.0 million and other investing activities of $11.8 million.

Net cash provided by financing activities in 2022 was $42.1 million compared to $316.3 million in 2021.

Key factors contributing to the change include:

• An increase of $518.8 million in repayments of long-term debt, payment of a premium on debt extinguishment of $11.3 million and a decrease in borrowings of $81.6 million;

• An increase in equity offering proceeds, net of related costs of $303.5 million;

• A decrease in payments related to ownership transactions with non-controlling interest holders of $25.0 million, partially offset by an increase in distributions to non-controlling interest holders of $15.8 million;

• Decreased payments of $11.7 million for debt issuance costs, $5.1 million for preferred dividends and $8.0 million related to other financing activities.

Discussion of the operating, investing and financing activities for the year ended December 31, 2021 was previously disclosed beginning on page 46 in our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed on March 1, 2022, under "Item 7.

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As of December 31, 2022, we had term loan borrowings with a carrying value of $1.370 billion, consisting of outstanding aggregate principal of $1.372 billion and unamortized fair value discount of $2.1 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 Term Loan matures on August 31, 2026.

In connection with 2025 Notes Redemption (defined below), the Term Loan is no longer subject to accelerated maturity.

In December 2022, we made a voluntary prepayment of $150.0 million without premium or penalty.

As a result of the prepayment, the Term Loan is no longer subject to quarterly amortization payments prior to maturity.

The Term Loan bears interest at a rate per annum equal to (x) LIBOR plus a margin of 3.75% per annum (LIBOR 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 shall be subject to a floor of 1.75%)) plus a margin of 2.75% per annum.

As of December 31, 2022, we have a revolving credit facility providing for revolving borrowings of up to $350.0 million (the "Revolver" and, together with the Term Loan, the "Senior Secured Credit Facilities").

The Revolver will mature on February 1, 2026.

As of December 31, 2022, our availability on the Revolver was $342.0 million (including outstanding letters of credit of $8.0 million).

The Revolver bears interest at a non-default rate per annum equal to (x) SOFR (plus a customary SOFR adjustment) plus a margin of up to 3.25% per annum 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 SOFR (plus a customary SOFR adjustment) plus 1.00% per annum) plus a margin of up to 2.25% 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.

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.

"Long-Term Debt" to our consolidated financial statements included elsewhere in this report for a further discussion of the Senior Secured Credit Facilities.

On January 13, 2023, the Company entered into an amendment to the credit agreement governing the Revolver, to provide a $203.8 million increase in the outstanding commitments under the Revolver.

"Long-Term Debt" to our consolidated financial statements included elsewhere in this Annual Report for a further discussion of the Senior Secured Credit Facilities.

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.

"Long-Term Debt" to our consolidated financial statements included elsewhere in this report for a further discussion of the senior unsecured notes.

As of December 31, 2022, we have $320.0 million aggregate principal amount of senior unsecured notes due April 15, 2027 (the "2027 Unsecured Notes"), which bear interest at the rate of 10.000% per year, payable semi-annually on April 15 and October 15 of each year.

In December 2022, we redeemed $225.0 million of the 2027 Unsecured Notes.

The redemption price was equal to 105.000% of the principal amount redeemed plus accrued and unpaid interest.

As of December 31, 2022, we have $185.0 million aggregate principal amount of senior unsecured notes due July 1, 2025 (the "2025 Unsecured Notes"), which bear interest at the rate of 6.750% per year, payable semi-annually on January 1 and July 1 of each year.

In December 2022, the Company redeemed $185.0 million of the 2025 Unsecured Notes (the "2025 Notes Redemption").

The redemption price was equal to 100.000% of the principal amount redeemed plus accrued and unpaid interest.

"Long-Term Debt" to our consolidated financial statements included elsewhere in this Annual Report for a further discussion of the senior unsecured notes.

We and certain of our subsidiaries have other debt consisting of outstanding bank indebtedness of $171.3 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 $585.7 million for which we are liable to various vendors for several property and equipment leases classified as finance leases.

Capital Resources

Net working capital was approximately $427.6 million at December 31, 2022 compared to $409.3 million at December 31, 2021.

The increase is primarily due to increases in accounts receivable, inventories and other current assets as well as a decrease in deferred Medicare accelerated payments.

These were partially offset by a decrease in cash primarily as a result of repayments of long-term debt.

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.

As noted in Note 8.

"Earning Per Share" to our consolidated financial statements included elsewhere in this Annual Report, in 2022, we completed a public offering and concurrent private placement pursuant to which the Company sold 36,038,469 shares of common stock, resulting in net proceeds of $857.7 million.

We used a portion of the proceeds to repay $560.0 million of outstanding long-term debt in December 2022 (see Note 5.

"Long-Term Debt" for further discussion).

Material Cash Requirements

6 unchanged sentences

456.1 61.9 111.7 90.4 192.1

Tax receivable agreement (3)

22.0 20.2 1.8 — —

Total contractual obligations $ 4,509.7 $ 328.5 $ 789.1 $ 2,053.5 $ 1,338.6

12 unchanged sentences

Operating lease obligations do not include common area maintenance, insurance or tax payments for which we are also obligated to pay.

(3) This reflects payments made pursuant to the terms of the TRA, as described further in Note 14 to the consolidated financial statements included elsewhere in this report.

In addition to the cash requirements above, pursuant to the CARES Act, repayment of certain advanced payments and other deferrals received as part of relief during 2020 began in 2021.

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

During the year ended December 31, 2021, approximately $60 million was repaid.

"Organization and Summary of Accounting Policies" to our consolidated financial statements included elsewhere in this report, for further discussion on the repayment terms related to certain relief previously received by us.

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 (see Note 1.

"Organization and Summary of Accounting Policies" for further discussion of the amounts deferred and repayment terms).

Capital Resources

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

As previously noted in Note 9.

"Earning Per Share" to our consolidated financial statements included elsewhere in this report, in 2021, we completed two public offerings pursuant to which the Company sold 15,525,000 shares of common stock, resulting in net proceeds of $554.2 million.

As noted in Note 1.

"Organization and Summary of Accounting Policies" to our consolidated financial statements included elsewhere in this report, the Company received approximately $27 million of the grant funds distributed under the CARES Act and other governmental assistance programs during the year ended December 31, 2021, which are not required to be repaid, subject to certain terms and conditions.

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 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 current COVID-19 pandemic, including increased 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.

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.

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.

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

Adjusted EBITDA is not a measurement 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 this non-GAAP metric are significant components in understanding and evaluating our financial performance.

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 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.

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.

9 unchanged sentences

Equity-based compensation expense 18.4 17.4 13.2

Transaction and integration related costs (1)

Transaction, integration and acquisition costs (1)

48.6 46.1 38.2

Impairment charges — 33.5 7.9

Loss (gain) on disposals, net 2.2 5.7 (4.4)

Litigation settlement and other litigation costs (2)

Gain on escrow release (3)

Loss on disposals and deconsolidations, net 11.1 2.2 5.7

Litigation settlements and other litigation costs (2)

(24.7) 5.6 6.4

Loss on debt extinguishment 14.9 9.1 —

Undesignated derivative activity (3)

Hurricane-related impacts (4)

Tax receivable agreement expense — — 2.4

Impairment charges — — 33.5

Gain on escrow release (5)

Adjusted EBITDA $ 380.2 $ 339.6 $ 256.6

2 unchanged sentences

Adjusted EBITDA excluding grant funds $ 378.5 $ 314.3 $ 225.5

(1) For the year ended December 31, 2021, this amount includes transaction and integration costs of $39.8 million and start-up costs related to a de novo surgical hospital of $6.3 million.

For the year ended December 31, 2020, this amount includes transaction and integration costs of $23.2 million and start-up costs related to a de novo surgical hospital of $15.0 million.

For the year ended December 31, 2019, this amount includes transaction and integration costs of $19.0 million and other acquisition costs and start-up costs related to a de novo surgical hospital of $17.1 million.

(2) This amount includes litigation settlement costs of $1.2 million and $0.2 million for the years ended December 31, 2020 and 2019, respectively, with no comparable costs in 2021.

(1) This amount includes transaction and integration costs of $47.5 million, $39.8 million and $23.2 million for the years ended December 31, 2022, 2021 and 2020, respectively.

This amount further includes start-up costs related to de novo surgical facilities of $1.1 million, $6.3 million and $15.0 million for the years ended December 31, 2022, 2021 and 2020, respectively.

(2) This amount includes a net litigation settlements gain of $29.3 million and a loss of $1.2 million for the years ended December 31, 2022 and 2020, respectively, with no comparable costs in 2021.

This amount also includes other litigation costs of $4.6 million, $5.6 million and $5.2 million for the years ended December 31, 2022, 2021 and 2020, respectively.

(3) This amount includes the reclassification of $7.5 million of unrealized gains out of accumulated OCI into income related to the de-designation of a portion of one of the Company's interest rate caps.

This amount further includes fair value changes of undesignated derivatives.

(4) Reflects losses incurred, net of insurance proceeds received at certain surgical facilities that were closed following Hurricane Ian in September 2022 and Hurricane Ida in September 2021.

(5) Included in other income in the consolidated statement of operations for the year ended December 31, 2020, with no comparable gain in 2022 and 2021.

(4) 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.

(6) 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.

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

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

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Plus (minus):

Non-cash interest income, net (22.0)

Non-cash interest expense, net (25.9)

Non-cash lease expense (34.8)

Deferred income taxes (21.9)

Income from equity investments, net of distributions received (0.2)

Equity in earnings of unconsolidated affiliates, net of distributions received 1.8

Other non-cash income 7.5

Changes in operating assets and liabilities, net of acquisitions and divestitures 160.7

Medicare accelerated payments and deferred governmental grants 73.6

Income tax benefit 10.5

Income tax expense 23.3

Net income attributable to non-controlling interests (141.6)

Interest expense, net 234.9

Transaction and integration related costs 46.1

Litigation settlement and other litigation costs 5.6

DOJ settlement payment 32.2

Transaction, integration and acquisition costs 48.6

Litigation settlements and other litigation costs (24.7)

Undesignated derivative activity (8.0)

Hurricane-related impacts 1.5

2 unchanged sentences

(1) Represents impact of acquisitions as if each acquisition had occurred on January 1, 2022.

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.

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.

Inflation and changing prices have not significantly affected our operating results or the markets in which we operate.

Recent Accounting Pronouncements

Please refer to Note 1.

"Organization and Summary of Accounting Policies - Recent Accounting Pronouncements" to our consolidated financial statements included elsewhere in this Annual Report for a discussion of the impact of the adoption of recently issued accounting standards and accounting standards not yet adopted.

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-K

Item 7. Management’s Discussion and Analysis