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Item 2. Management’s Discussion and Analysis

2023-05-02 compared with 2022-11-08 · 105 added, 178 removed, 129 unchanged (69% of the section changed)

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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;

These factors include, without limitation, reductions in payments from government health care programs and private insurance payors, such as health maintenance organizations, preferred provider organizations, and other managed care organizations and employers;

our ability to contract with private insurance payors;

changes in our payor mix or surgical case mix;

failure to maintain or develop relationships with physicians on beneficial or favorable terms, or at all;

the impact of payor controls designed to reduce the number of surgical procedures;

our efforts to integrate operations of acquired businesses and surgical facilities, attract new physician partners, or acquire additional surgical facilities;

supply chain issues, including shortages or quality control issues with surgery-related products, equipment and medical supplies;

competition for physicians, nurses, strategic relationships, acquisitions and managed care contracts;

our ability to attract and retain qualified health care professionals;

our ability to enforce non-compete restrictions against our physicians;

our ability to manage material liabilities whether known or unknown incurred as a result of acquiring surgical facilities;

the impact of future legislation and other health care regulatory reform actions, and the effect of that legislation and other regulatory actions on our business;

our ability to comply with current health care laws and regulations;

the outcome of legal and regulatory proceedings that have been or may be brought against us;

changes in the regulatory, economic and other conditions of the states where our surgical facilities are located;

our indebtedness;

the social and economic impact of a pandemic, epidemic or outbreak of a contagious disease, such as COVID-19, on our business;

and the risks and uncertainties set forth under the heading "Risk Factors" in our 2022 Annual Report on Form 10-K and discussed from time to time in our reports filed with the SEC.

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Executive Overview

Total revenues for the third quarter of 2022 increased 11.0% to $620.6 million from $559.2 million for the third quarter of 2021.

Same-facility revenues for the third quarter of 2022 increased 5.1% from the same period last year, with a 1.8% increase in revenue per case and a 3.3% increase in same-facility cases.

For the third quarter of 2022, the Company’s net loss attributable to common stockholders and Adjusted EBITDA was $25.0 million and $96.2 million, respectively.

For the third quarter of 2021, the Company’s net loss attributable to common stockholders and Adjusted EBITDA was $22.9 million and $76.4 million, respectively.

As of March 31, 2023, we owned or operated, primarily in partnership with physicians, a portfolio of 145 surgical facilities comprised of 127 ASCs and 18 surgical hospitals across 31 states.

We owned a majority interest in 92 of these surgical facilities and consolidated 118 of these facilities for financial reporting purposes.

Total revenues for the first quarter of 2023 increased 11.7% to $666.2 million from $596.2 million for the first quarter of 2022.

Days adjusted same-facility revenues for the first quarter of 2023 increased 10.3% from the same period last year, with a 4.8% increase in revenue per case and a 5.3% increase in same-facility cases.

Additionally, for the first quarter of 2023, Adjusted EBITDA increased 16.9% to $90.1 million compared to $77.1 million for the same period last year.

For the first quarter of 2023, the Company’s net loss attributable to Surgery Partners, Inc.

was $24.9 million compared to net income of $12.2 million for the first quarter of 2022.

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

We had cash and cash equivalents of $154.8 million and $342.0 million of borrowing capacity under our revolving credit facility at September 30, 2022.

Operating cash inflows were $29.7 million in the third quarter of 2022, an increase of $14.8 million compared to the prior year period.

Net operating cash flows, including operating cash flows less distributions to non-controlling interests, were an outflow of $5.6 million for the third quarter of 2022, compared to an outflow of $19.2 million for the third quarter of 2021.

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 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.

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

During the first quarter of 2023 we completed the following:

• We acquired controlling interests in three surgical facilities, two of which were previously accounted for as equity method investments, and a physician practice for aggregate cash consideration of $40.7 million, net of cash acquired and non-cash consideration of $1.3 million.

• We acquired non-controlling interests in an existing surgical facility and an in-development de novo surgical facility for an aggregate cash purchase price of $12.4 million, of which $2.8 million was deferred and was paid in April 2023.

• We sold our interests in a surgical facility for net cash proceeds of $8.8 million, a portion of which will be held in escrow pursuant to the purchase agreement.

We had cash and cash equivalents of $245.5 million and $545.9 million of borrowing capacity under our revolving credit facility at March 31, 2023.

Operating cash inflows were $74.5 million in the first quarter of 2023, compared to $79.8 million in the prior year period.

Net operating cash inflows, including operating cash flows less distributions to non-controlling interests, were $32.6 million for the first quarter of 2023, compared to $43.6 million for the first quarter of 2022.

Our revenues consist of patient service revenues and other service revenues.

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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 September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Three Months Ended March 31,

Patient service revenues:

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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 September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Three Months Ended March 31,

Private insurance payors 51.1 % 51.1 %

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Other payors (1)

3.7 % 2.9 % 3.9 % 3.5 %

Total 100.0 % 100.0 %

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The following table sets forth the percentage of cases in each specialty performed at the surgical facilities which we consolidate for financial reporting purposes for the periods indicated:

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Three Months Ended March 31,

Orthopedic and pain management 35.7 % 36.8 %

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Results of Operations

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

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

Three Months Ended September 30,

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

The following table summarizes certain results from the statements of operations for the three months ended March 31, 2023 and 2022 (dollars in millions):

Three Months Ended March 31,

Revenues $ 666.2 $ 596.2

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Grant funds (1.1) (1.2)

Loss on disposals and deconsolidations, net 2.2 1.9

Net loss (gain) on disposals, consolidations and deconsolidations 10.5 (0.1)

Equity in earnings of unconsolidated affiliates (3.3) (3.1)

Gain on debt extinguishment — (0.5)

Other income, net (2.4) (0.5)

Litigation settlements 3.0 (32.8)

Other expense (income), net 0.3 (2.4)

Operating income 46.4 100.4

Interest expense, net (46.8) (56.3)

Income before income taxes 13.4 9.4

Income tax expense (7.8) (1.2)

(Loss) income before income taxes (0.4) 44.1

Income tax benefit (expense) 1.6 (1.3)

Net income 1.2 42.8

Net income attributable to non-controlling interests (26.1) (30.6)

Net loss attributable to Surgery Partners, Inc.

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

$ (24.9) $ 12.2

During the three months ended September 30, 2022, our revenues increased 11.0% to $620.6 million compared to $559.2 million for the three months ended September 30, 2021.

Net loss attributable to Surgery Partners, Inc.

was $25.0 million for the 2022 period, compared to a net loss of $22.9 million for the 2021 period.

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

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

Three Months Ended September 30,

Revenues for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 were as follows (dollars in millions):

Three Months Ended March 31,

Patient service revenues $ 656.4 $ 587.7

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Total revenues $ 666.2 $ 596.2

Patient service revenues increased 10.6% to $610.1 million for the 2022 period compared to $551.4 million for the 2021 period, primarily driven by a 1.8% increase in same-facility revenue per case, a 3.3% increase in same-facility case volumes and acquisitions completed since the prior year period.

Patient service revenues increased 11.7% to $656.4 million for the first quarter of 2023 compared to $587.7 million for the first quarter of 2022.

The increase was driven by an 10.3% increase in days adjusted same-facility revenues and acquisitions completed in 2023 and 2022.

The increase in days adjusted same-facility revenues was attributable to a 4.8% increase in same-facility revenue per case and a 5.3% increase in same-facility case volumes.

Cost of Revenues.

Cost of revenues increased to $489.4 million for the 2022 period compared to $436.7 million for the 2021 period, primarily driven by acquisitions completed since the prior year period.

As a percentage of revenues, cost of revenues were 78.9% for the 2022 period compared to 78.1% for the 2021 period.

Cost of revenues was $532.2 million for the first quarter of 2023 compared to $471.4 million for the first quarter of 2022.

The increase was primarily driven by acquisitions completed since the prior year period.

As a percentage of revenues, cost of revenues were 79.9% for the 2023 period and 79.1% for the 2022 period.

General and Administrative Expenses.

General and administrative expenses were $17.9 million for the 2022 period compared to $25.5 million for the 2021 period.

As a percentage of revenues, general and administrative expenses decreased to 2.9% for the 2022 period compared to 4.6% for the 2021 period.

The decrease is primarily driven by ongoing cost management initiatives.

General and administrative expenses were $32.0 million for the first quarter of 2023 compared to $29.5 million for the first quarter of 2022.

As a percentage of revenues, general and administrative expenses were 4.8% for the 2023 period and 4.9% for the 2022 period.

Depreciation and Amortization.

Depreciation and amortization expenses were $33.7 million for the first quarter of 2023 compared to $27.4 million for the first quarter of 2022.

As a percentage of revenues, depreciation and amortization expenses were 5.1% for the 2023 period compared to 4.6% for the 2022 period.

Transaction and Integration Costs.

We incurred $12.5 million of transaction and integration costs for the three months ended September 30, 2022 compared to $10.2 million for the three months ended September 30, 2021.

We incurred $12.5 million of transaction and integration costs for the first quarter of 2023 compared to $7.1 million for the first quarter of 2022.

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

Based on guidance from the U.S.

Department of Health and Human Services ("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 $0.5 million during the three months ended September 30, 2022.

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

Interest Expense, Net.

As a percentage of revenues, interest expense, net increased to 9.8% for the 2022 period compared to 9.7% for the 2021 period.

Income Tax Expense.

The income tax expense was $7.8 million for the three months ended September 30, 2022 compared to an expense of $1.2 million for the three months ended September 30, 2021.

The effective tax rate was 58.2% for the three months ended September 30, 2022 compared to 12.8% for the three months ended September 30, 2021.

For the three months ended September 30, 2022, the effective tax rate differed from 21% primarily due to an increase in the Company’s valuation allowance attributable to interest expense limitations.

For the three months ended September 30, 2021, the effective tax rate differed from 21% primarily due to the reversal of the Company's earnings attributable to minority interest.

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 4.9% for the 2022 period and 5.6% for the 2021 period.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

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

Nine Months Ended September 30,

Revenues $ 1,832.2 $ 1,614.9

Operating expenses:

Cost of revenues 1,441.6 1,270.6

General and administrative expenses 73.5 76.8

Depreciation and amortization 85.2 76.1

Transaction and integration costs 27.8 24.7

Grant funds (1.8) (20.0)

Loss on disposals and deconsolidations, net 3.2 2.0

Equity in earnings of unconsolidated affiliates (8.1) (8.5)

Litigation settlement (32.8) —

Loss on debt extinguishment — 9.1

Other income, net (7.4) (3.3)

1,581.2 1,427.5

Operating income 251.0 187.4

Interest expense, net (173.9) (160.9)

Income before income taxes 77.1 26.5

Income tax (expense) benefit (13.4) 1.3

Net income 63.7 27.8

Net income attributable to non-controlling interests (94.9) (98.6)

Net loss attributable to Surgery Partners, Inc.

$ (31.2) $ (70.8)

During the nine months ended September 30, 2022, our revenues increased 13.5% to $1,832.2 million compared to $1,614.9 million for the nine months ended September 30, 2021.

Net loss attributable to Surgery Partners, Inc.

was $31.2 million for the 2022 period, compared to a net loss of $70.8 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 for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 were as follows (dollars in millions):

Nine Months Ended September 30,

Patient service revenues $ 1,805.1 $ 1,593.0

Other service revenues 27.1 21.9

Total revenues $ 1,832.2 $ 1,614.9

Patient service revenues increased 13.3% to $1,805.1 million for the 2022 period compared to $1,593.0 million for the 2021 period, primarily driven by a 3.8% increase in days adjusted same-facility case volume, a 2.7% increase in same-facility revenue per case and acquisitions completed since the prior year period.

Cost of Revenues.

Cost of revenues were $1,441.6 million for the 2022 period compared to $1,270.6 million for the 2021 period, primarily driven by acquisitions completed since the prior year period.

As a percentage of revenues, cost of revenues were 78.7% for both the 2022 and 2021 periods.

General and Administrative Expenses.

As a percentage of revenues, general and administrative expenses decreased to 4.0% for the 2022 period compared to 4.8% for the 2021 period.

Depreciation and Amortization.

As a percentage of revenues, depreciation and amortization expenses were 4.7% for both the 2022 and 2021 periods.

Transaction and Integration Costs.

We incurred $27.8 million of transaction and integration costs for the nine months ended September 30, 2022 compared to $24.7 million for the nine months ended September 30, 2021.

The increase primarily relates to costs for 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 qualified for recognition, resulting in the recognition of $1.8 million during the nine months ended September 30, 2022.

Grant funds recognized in the nine months ended September 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 nine months ended September 30, 2022, related to the resolution of the stockholder litigation matter, as discussed in Note 8.

Net Loss (Gain) on Disposals, Consolidations and Deconsolidations.

The net loss on disposals, consolidations and deconsolidations in the first quarter of 2023 was partially attributable to activity discussed in Note.

"Acquisitions and Disposals" to our condensed consolidated financial statements included elsewhere in this report.

The remaining net loss was attributable to disposals of other long-lived assets.

Litigation Settlements.

Litigation settlements in first quarter of 2022 was primarily attributable 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 $9.1 million for the 2021 period related to an amendment to our credit agreement, which refinanced all of the then existing term loans during the nine months ended September 30, 2021.

There was no comparable loss during the 2022 period.

Interest Expense, Net.

As a percentage of revenues, interest expense, net decreased to 7.0% for the 2023 period compared to 9.4% for the 2022 period.

Income Tax (Expense) Benefit.

The income tax expense was $13.4 million for the nine months ended September 30, 2022 compared to a benefit of $1.3 million for the nine months ended September 30, 2021.

The effective tax rate was 17.4% for the nine months ended September 30, 2022 compared to (4.9)% for the nine months ended September 30, 2021.

For the nine months ended September 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 nine months ended September 30, 2021, the effective tax rate differed from 21% primarily due to tax benefits of (a) $4.4 million related to the vesting of restricted stock awards and (b) $3.0 million related to entity divestitures.

The decrease is attributable to the pay down of certain long-term debt in the fourth quarter of 2022.

Income Tax Benefit (Expense).

The income tax benefit was $1.6 million for the three months ended March 31, 2023 compared to income tax expense of $1.3 million for the three months ended March 31, 2022.

The effective tax rate was 400.0% for the three months ended March 31, 2023 compared to 2.9% for the three months ended March 31, 2022.

For the three months ended March 31, 2023, 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 a discrete tax benefit of $1.8 million related to the vesting of restricted stock awards.

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.

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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 nine months ended September 30, 2022, our cash flow provided by operating activities was $151.6 million compared to $67.4 million in the nine months ended September 30, 2021.

The increase is primarily due to an increase in net income, 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 nine months ended September 30, 2022, was $235.7 million compared to $141.7 million for the nine months ended September 30, 2021.

The increase in cash used is primarily due to an increase of $14.4 million related to purchases of property and equipment, an increase of $95.1 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 $11.9 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 and a decrease of $18.4 million for acquisitions (net of cash acquired).

Net cash used in financing activities during the nine months ended September 30, 2022 was $151.0 million compared to cash provided by financing activities of $86.5 million for the nine months ended September 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 $13.0 million for distributions to non-controlling interest holders and an increase of $6.3 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 $5.1 million in repayments of long-term debt, net of borrowings, a decrease of $11.7 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 $8.1 million.

Cash and cash equivalents were $245.5 million at March 31, 2023 compared to $282.9 million at December 31, 2022.

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 $74.5 million for the first quarter of 2023 compared to $79.8 million in the first quarter of 2022.

The $5.3 million decrease was primarily driven by operating cash flows in the first quarter of 2022 that did not repeat in the current year, including the receipt of stockholder litigation proceeds of $32.8 million partially offset by repayments of $18.0 million of Medicare advanced payments provided through the CARES Act.

Net cash used in investing activities during the first quarter of 2023 was $70.7 million compared to $47.1 million for the first quarter of 2022.

Key factors contributing to the change include:

• An aggregate increase in payments for acquisitions (net of cash acquired) and purchases of equity method investments of $19.2 million;

• An aggregate decrease of $3.5 million in proceeds from sales of facilities and equity method investments;

• An increase in purchases of property and equipment of $6.1 million;

• A decrease in cash used of $5.2 million related to other investing activities.

Net cash used in financing activities during the first quarter of 2023 was $41.2 million compared to cash used in financing activities of $43.7 million for the first quarter of 2022.

Key factors contributing to the change include:

• An increase of $4.0 million in borrowings of long-term debt;

• An increase in proceeds related to ownership transactions with non-controlling interest holders of $8.2 million, partially offset by an increase in distributions to non-controlling interest holders of an $5.7 million;

• An increase in cash used of $3.8 million related to other financing activities.

Capital Resources

Net working capital was approximately $114.0 million at September 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, an increase in other current liabilities and an increase in current maturities of long-term debt, offset by a decrease in deferred Medicare accelerated payments.

Net working capital was approximately $393.8 million at March 31, 2023 compared to $427.6 million at December 31, 2022.

The decrease is primarily due to a decrease in cash, as discussed above, partially offset by a decrease in accounts payable.

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

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.

Further, at September 30, 2022, we had $100.4 million of deferred consideration payable and assumed debt due in October 2022 pursuant to a purchase agreement for a surgical hospital acquired in September 2022.

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

Through September 30, 2022, approximately $117 million has been repaid including approximately $13 million and $56 million during the three and nine months ended September 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 nine months ended September 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.

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.

There have been no material changes outside of the ordinary course of business to our upcoming cash obligations during the three months ended March 31, 2023 from those disclosed under “Material Cash Requirements” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Annual Report on Form 10-K.

Broad economic factors, including recent increases in interest rates, inflation and supply chain risks and market volatility, 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, 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.

If general economic conditions 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.

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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.

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 September 30, Nine Months Ended September 30,

2022 2021 2022 2021

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

Three Months Ended March 31,

Condensed Consolidated Statements of Operations Data:

Income before income taxes $ 13.4 $ 9.4 $ 77.1 $ 26.5

(Loss) income before income taxes $ (0.4) $ 44.1

Plus (minus):

Net income attributable to non-controlling interests (26.1) (30.6)

Depreciation and amortization 29.8 25.2 85.2 76.1

Interest expense, net 46.8 56.3

Depreciation and amortization 33.7 27.4

Equity-based compensation expense 4.2 3.7

Transaction, integration and acquisition costs (1)

13.1 10.2 28.4 31.0

Loss on disposals and deconsolidations, net 2.2 1.9 3.2 2.0

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

1.5 2.5 (27.6) 4.3

(Gain) loss on debt extinguishment — (0.5) — 9.1

Hurricane-related impacts (3)

1.1 0.5 1.1 0.5

Net loss (gain) on disposals, consolidations and deconsolidations 10.5 (0.1)

Litigation settlements and regulatory change impact (2)

Undesignated derivative activity 0.6 —

Adjusted EBITDA $ 90.1 $ 77.1

Impact of grant funds (3)

(0.3) — (1.4) (13.7)

Adjusted EBITDA excluding grant funds $ 89.0 $ 76.1

(1) This amount includes transaction and integration costs of $12.5 million and $10.2 million for the three months ended September 30, 2022 and 2021, respectively.

This amount further includes start-up costs related to de novo surgical facilities of $0.6 million for the three months ended September 30, 2022.

This amount includes transaction and integration costs of $27.8 million and $24.7 million for the nine months ended September 30, 2022 and 2021, respectively.

This amount further includes start-up costs related to de novo surgical facilities of $0.6 million and $6.3 million for the nine months ended September 30, 2022 and 2021, respectively.

(2) This amount includes other litigation costs of $1.5 million and $2.5 million for the three months ended September 30, 2022 and 2021, respectively.

This amount includes other litigation costs of $5.2 million and $4.3 million for the nine months ended September 30, 2022 and 2021, respectively.

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

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

(1) This amount includes transaction and integration costs of $12.5 million and $7.1 million for the three months ended March 31, 2023 and 2022, respectively.

This amount further includes start-up costs related to de novo surgical facilities of $0.3 million for the three months ended March 31, 2023, with no comparable costs for the three months ended March 31, 2022.

(2) This amount includes a litigation settlement loss of $3.0 million and a gain of $32.8 million for the three months ended March 31, 2023 and 2022, respectively.

This amount also includes other litigation costs of $0.6 million and $2.0 million for the three months ended March 31, 2023 and 2022, respectively.

Additionally, the three months ended March 31, 2023, includes $4.4 million related to the impact of recent changes in Florida law regarding the use of letters of protection.

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

8 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 September 30, 2022

Twelve Months Ended March 31, 2023

Cash flows from operating activities $ 153.5

4 unchanged sentences

Equity in earnings of unconsolidated affiliates, net of distributions received 1.1

Other non-cash income 7.5

Changes in operating assets and liabilities, net of acquisitions and divestitures 140.5

3 unchanged sentences

Transaction, integration and acquisition costs 54.3

Litigation settlement and other litigation costs (26.3)

Litigation settlements and regulatory change impact 14.1

Hurricane-related impacts 1.5

Undesignated derivative activity (7.4)

Acquisitions and synergies (1)

Credit Agreement EBITDA $ 485.5

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

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

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

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