What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-01 compared with 2023-05-02 · 134 added, 59 removed, 175 unchanged (52% of the section changed)

37 unchanged sentences

Executive Overview

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.

As of June 30, 2023, we owned or operated, primarily in partnership with physicians, a portfolio of 152 surgical facilities comprised of 134 ASCs and 18 surgical hospitals across 32 states.

We owned a majority interest in 92 of these surgical facilities and consolidated 119 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.

Total revenues for the second quarter of 2023 increased 8.5% to $667.6 million from $615.4 million for the second quarter of 2022.

Days adjusted same-facility revenues for the second quarter of 2023 increased 8.3% from the same period last year, with a 5.8% increase in revenue per case and a 2.3% increase in same-facility cases.

Additionally, for the second quarter of 2023, Adjusted EBITDA increased 16.4% to $100.2 million compared to $86.1 million for the same period last year.

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

was $18.9 million compared to net loss of $18.4 million for the second quarter of 2022.

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, 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.

During the six months ended June 30, 2023, we completed the following:

• We acquired controlling interests in three surgical facilities, an in-development de novo surgical facility, and a physician practice for aggregate cash consideration of $44.8 million, net of cash acquired and non-cash consideration of $1.3 million.

Three of the acquired surgical facilities were previously accounted for as equity method investments.

The Company also amended the operating agreement of a previously non-controlled surgical facility resulting in the Company obtaining a controlling interest in the facility.

• We acquired non-controlling interests in four surgical facilities and two in-development de novo surgical facility for aggregate cash consideration of $48.4 million.

In connection with the acquisition of three of the aforementioned surgical facilities, we paid cash consideration of $20.0 million to acquire management rights.

• We sold our interests in four surgical facilities for aggregate net cash proceeds of $30.4 million, a portion of which will be held in escrow pursuant to the purchase agreements for such transactions.

We had cash and cash equivalents of $177.4 million and $545.9 million of borrowing capacity under our revolving credit facility at June 30, 2023.

Operating cash inflows were $52.1 million in the second quarter of 2023, compared to $42.1 million in the prior year period.

Net operating cash inflows, including operating cash flows less distributions to non-controlling interests, were $17.1 million for the second quarter of 2023, compared to $3.1 million for the second 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 March 31,

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

2023 2022 2023 2022

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 March 31,

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

2023 2022 2023 2022

Private insurance payors 51.9 % 51.0 % 51.5 % 50.9 %

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Other payors (1)

3.2 % 3.8 % 2.9 % 3.9 %

Total 100.0 % 100.0 % 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 March 31,

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

2023 2022 2023 2022

Orthopedic and pain management 34.7 % 35.6 % 35.2 % 36.2 %

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Results of Operations

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,

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

The following table summarizes certain results from the statements of operations for the three months ended June 30, 2023 and 2022 (dollars in millions):

Three Months Ended June 30,

Revenues $ 667.6 $ 615.4

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Grant funds — (0.1)

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

Net (gain) loss on disposals, consolidations and deconsolidations (8.8) 1.1

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

Litigation settlements 1.5 —

Other expense (income), net 0.3 (2.4)

Other income, net (1.2) (2.6)

Operating income 97.6 76.5

Interest expense, net (47.7) (56.9)

(Loss) income before income taxes (0.4) 44.1

Income before income taxes 49.9 19.6

Income tax benefit (expense) 7.8 (4.3)

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Net income attributable to non-controlling interests (38.8) (33.7)

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

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

$ 18.9 $ (18.4)

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,

Revenues for the three months ended June 30, 2023 compared to the three months ended June 30, 2022 were as follows (dollars in millions):

Three Months Ended June 30,

Patient service revenues $ 658.0 $ 607.3

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Total revenues $ 667.6 $ 615.4

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.

Patient service revenues increased 8.3% to $658.0 million for the second quarter of 2023 compared to $607.3 million for the second quarter of 2022.

The increase was driven by an 8.3% increase in days adjusted same-facility revenues and acquisitions completed in 2023 and 2022.

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Cost of Revenues.

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

Cost of revenues was $513.5 million for the second quarter of 2023 compared to $480.8 million for the second 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 76.9% for the 2023 period compared to 78.1% for the 2022 period.

General and Administrative Expenses.

General and administrative expenses were $31.2 million for the second quarter of 2023 compared to $26.1 million for the second quarter of 2022.

As a percentage of revenues, general and administrative expenses were 4.7% for the 2023 period and 4.2% for the 2022 period.

Depreciation and Amortization.

Depreciation and amortization expenses were $24.4 million for the second quarter of 2023 compared to $28.0 million for the second quarter of 2022.

As a percentage of revenues, depreciation and amortization expenses were 3.7% for the 2023 period compared to 4.5% for the 2022 period.

Transaction and Integration Costs.

We incurred $12.0 million of transaction and integration costs for the second quarter of 2023 compared to $8.2 million for the second quarter of 2022.

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

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

The net gain on disposals, consolidations and deconsolidations in the second quarter of 2023 was primarily 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 other asset disposals.

Interest Expense, Net.

As a percentage of revenues, interest expense, net decreased to 7.1% for the 2023 period compared to 9.2% for the 2022 period.

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 $7.8 million for the three months ended June 30, 2023 compared to income tax expense of $4.3 million for the three months ended June 30, 2022.

The effective tax rate was (15.6)% for the three months ended June 30, 2023 compared to 21.9% for the three months ended June 30, 2022.

For the three months ended June 30, 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 $16.6 million related to entity divestitures.

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

Net Income Attributable to Non-Controlling Interests.

As a percentage of revenues, net income attributable to non-controlling interests was 5.8% for the 2023 period and 5.5% for the 2022 period.

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

The following table summarizes certain results from the statements of operations for the six months ended June 30, 2023 and 2022 (dollars in millions):

Six Months Ended June 30,

Revenues $ 1,333.8 $ 1,211.6

Operating expenses:

Cost of revenues 1,045.7 952.2

General and administrative expenses 63.2 55.6

Depreciation and amortization 58.1 55.4

Transaction and integration costs 24.5 15.3

Grant funds (1.1) (1.3)

Net loss on disposals, consolidations and deconsolidations 1.7 1.0

Equity in earnings of unconsolidated affiliates (5.9) (5.7)

Litigation settlements 4.5 (32.8)

Other income, net (0.9) (5.0)

1,189.8 1,034.7

Operating income 144.0 176.9

Interest expense, net (94.5) (113.2)

Income before income taxes 49.5 63.7

Income tax benefit (expense) 9.4 (5.6)

Net income 58.9 58.1

Net income attributable to non-controlling interests (64.9) (64.3)

Net loss attributable to Surgery Partners, Inc.

$ (6.0) $ (6.2)

Revenues for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 were as follows (dollars in millions):

Six Months Ended June 30,

Patient service revenues $ 1,314.4 $ 1,195.0

Other service revenues 19.4 16.6

Total revenues $ 1,333.8 $ 1,211.6

Patient service revenues increased 10.0% to $1,314.4 million for the 2023 period compared to $1,195.0 million for the 2022 period.

The increase was driven by an 9.3% 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 5.2% increase in same-facility revenue per case and a 3.9% increase in same-facility case volumes.

Cost of Revenues.

Cost of revenues was $1,045.7 million for the 2023 period compared to $952.2 million for the 2022 period.

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

As a percentage of revenues, cost of revenues were 78.4% for the 2023 period and 78.6% for the 2022 period.

General and Administrative Expenses.

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.

General and administrative expenses were $63.2 million for the 2023 period compared to $55.6 million for the 2022 period.

As a percentage of revenues, general and administrative expenses were 4.7% for the 2023 period and 4.6% 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.

Depreciation and amortization expenses were $58.1 million for the 2023 period compared to $55.4 million for the 2022 period.

As a percentage of revenues, depreciation and amortization expenses were 4.4% 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 first quarter of 2023 compared to $7.1 million for the first quarter of 2022.

We incurred $24.5 million of transaction and integration costs for the 2023 period compared to $15.3 million for the 2022 period.

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

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.

The net loss on disposals, consolidations and deconsolidations in the 2023 period was primarily 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.

The remaining net loss was attributable to other asset disposals.

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.

Litigation settlements in the 2022 period 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.

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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.

The income tax benefit was $9.4 million for the six months ended June 30, 2023 compared to income tax expense of $5.6 million for the six months ended June 30, 2022.

The effective tax rate was (19.0)% for the six months ended June 30, 2023 compared to 8.8% for the six months ended June 30, 2022.

For the six months ended June 30, 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 discrete tax benefits of (i) $1.8 million related to the vesting of restricted stock awards, and (ii) $15.9 million related to entity divestitures.

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

Based upon the application of interim accounting guidance, the tax rate as a percentage of net income after income attributable to non-controlling interests will vary based upon the relative net income from period to period.

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Liquidity and Capital Resources

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

Cash and cash equivalents were $177.4 million at June 30, 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.

Our cash flows provided by operating activities was $126.6 million for the six months ended June 30, 2023 compared to $121.9 million for the six months ended June 30, 2022.

The $4.7 million increase was primarily driven by operating cash flows in the first quarter of 2022 that did not repeat in the current year, including repayments of $40.2 million of Medicare advanced payments provided through the CARES Act, partially offset by the receipt of stockholder litigation proceeds of $32.8 million.

Net cash used in investing activities during the six months ended June 30, 2023 was $141.9 million compared to $181.4 million for the six months ended June 30, 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 aggregate decrease in payments for acquisitions (net of cash acquired) and purchases of equity method investments of $48.8 million;

• An aggregate increase of $14.6 million in proceeds from sales of facilities and equity method investments;

• An increase in purchases of property and equipment of $9.5 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.

• An increase in cash used of $14.4 million related to other investing activities, including $20.0 million to acquire management rights related to certain acquisitions in the 2023 period.

Net cash used in financing activities during the six months ended June 30, 2023 was $90.2 million compared to cash used in financing activities of $103.0 million during the six months ended June 30, 2022.

Key factors contributing to the change include:

• An increase of $14.1 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;

• A decrease in payments related to ownership transactions with non-controlling interest holders of $4.6 million, partially offset by an increase in distributions to non-controlling interest holders of $1.7 million;

• An increase in cash used of $4.6 million related to other financing activities.

Capital Resources

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.

Net working capital was approximately $351.6 million at June 30, 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 and other current liabilities.

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

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.

There have been no material changes outside of the ordinary course of business to our upcoming cash obligations during the six months ended June 30, 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.

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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,

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

2023 2022 2023 2022

Condensed Consolidated Statements of Operations Data:

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

Income before income taxes $ 49.9 $ 19.6 $ 49.5 $ 63.7

Plus (minus):

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Transaction, integration and acquisition costs (1)

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

13.0 8.2 25.8 15.3

Net (gain) loss on disposals, consolidations and deconsolidations (8.8) 1.1 1.7 1.0

Litigation settlements and regulatory change impact (2)

1.7 1.7 9.7 (29.1)

Undesignated derivative activity — — 0.6 —

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Impact of grant funds (4)

— (0.1) (1.1) (1.1)

Adjusted EBITDA excluding grant funds $ 100.2 $ 86.0 $ 189.2 $ 162.1

(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.

(1) This amount includes transaction and integration costs of $12.0 million and $8.2 million for the three months ended June 30, 2023 and 2022, respectively.

This amount further includes start-up costs related to de novo surgical facilities of $1.0 million for the three months ended June 30, 2023, with no comparable costs for the three months ended June 30, 2022.

This amount includes transaction and integration costs of $24.5 million and $15.3 million for the six months ended June 30, 2023 and 2022, respectively.

This amount further includes start-up costs related to de novo surgical facilities of $1.3 million for the six months ended June 30, 2023, with no comparable costs for the six months ended June 30, 2022.

(2) This amount includes a litigation settlement loss of $1.5 million for the three months ended June 30, 2023, with no comparable costs for the three months ended June 30, 2022.

This amount also includes other litigation costs of $0.2 million and $1.7 million for the three months ended June 30, 2023 and 2022, respectively.

This amount includes a litigation settlement loss of $4.5 million and a gain of $32.8 million for the six months ended June 30, 2023 and 2022, respectively.

This amount also includes other litigation costs of $0.8 million and $3.7 million for the six months ended June 30, 2023 and 2022, respectively.

Additionally, the six months ended June 30, 2023, includes $4.4 million related to the impact of recent changes in Florida law regarding the use of letters of protection.

(3) This amount includes estimates for the net impact of a cyber event and losses from divested business.

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

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The following table reconciles Credit Agreement EBITDA to cash flows from operating activities, the most directly comparable GAAP financial measure (in millions and unaudited):

Twelve Months Ended March 31, 2023

Twelve Months Ended June 30, 2023

Cash flows from operating activities $ 163.5

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Credit Agreement EBITDA $ 496.5

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

(1) This amount includes estimates for the impact of a cyber event and losses from divested business.

(2) Represents impact of acquisitions as if each acquisition had occurred on July 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