Surgery Partners, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this report and our 2022 Annual Report on Form 10-K. Unless the context otherwise indicates, the terms "Surgery Partners," "we," "us," "our" or the "Company," as used herein, refer to Surgery Partners, Inc. and its subsidiaries. Unless the context implies otherwise, the term “affiliates” means direct and indirect subsidiaries of Surgery Partners, Inc. and partnerships and joint ventures in which such subsidiaries are partners. The terms “facilities” or “hospitals” refer to entities owned and operated by affiliates of Surgery Partners, Inc. and the term “employees” refers to employees of affiliates of Surgery Partners, Inc. Cautionary Note Regarding Forward-Looking Statements This report contains forward-looking statements, which are based on our current expectations, estimates and assumptions about future events. All statements other than statements of current or historical fact contained in this report are forward-looking statements. These statements include, but are not limited to, statements regarding our future financial position, business strategy, budgets, effective tax rate, projected costs and plans and objectives of management for future operations. The words "projections," "believe," "continue," "drive," "estimate," "expect," "intend," "may," "plan," "will," "could," "would" and similar expressions are generally intended to identify forward-looking statements. These statements involve risks, uncertainties and other factors that may cause actual results to differ from the expectations expressed in the statements. Many of these factors are beyond our ability to control or predict. These factors include, without limitation, 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; the impact of cybersecurity attacks or intrusions; 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. Considering these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur, and actual results could differ materially from those anticipated or implied in the forward-looking statements. When you consider these forward-looking statements, you should keep in mind these risk factors and other cautionary statements in this report. These forward-looking statements speak only as of the date made. Other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise. Executive Overview As of September 30, 2023, we owned or operated, primarily in partnership with physicians, a portfolio of 154 surgical facilities comprised of 136 ASCs and 18 surgical hospitals across 31 states. We owned a majority interest in 90 of these surgical facilities and consolidated 117 of these facilities for financial reporting purposes. Total revenues for the third quarter of 2023 increased 8.6% to $674.1 million from $620.6 million for the third quarter of 2022. Days adjusted same-facility revenues for the third quarter of 2023 increased 14.2% from the same period last year, with a 11.0% increase in revenue per case and a 2.9% increase in same-facility cases. Additionally, for the third quarter of 2023, Adjusted EBITDA increased 9.7% to $105.5 million compared to $96.2 million for the same period last year. For the third quarter of 2023, the Company’s net loss attributable to Surgery Partners, Inc. was $4.9 million compared to net loss of $25.0 million for the third 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 nine months ended September 30, 2023, we completed the following: • We acquired controlling interests in five surgical facilities, an in-development de novo surgical facility, and a physician practice for aggregate cash consideration of $50.0 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 five surgical facilities and two in-development de novo surgical facility for aggregate cash consideration of $50.2 million. In connection with the acquisition of four of the aforementioned surgical facilities, we paid cash consideration of $21.0 million to acquire management rights. 20 Table of Contents • We sold our interests in six 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 $236.0 million and $544.9 million of borrowing capacity under our revolving credit facility at September 30, 2023. Operating cash inflows were $104.6 million in the third quarter of 2023, compared to $29.7 million in the prior year period. Net operating cash inflows, including operating cash flows less distributions to non-controlling interests, were $70.5 million for the third quarter of 2023, compared to an outflow $5.6 million for the third quarter of 2022. Revenues Our revenues consist of patient service revenues and other service revenues. Patient service revenues consist of revenue from our surgical facility services and ancillary services segments. Specifically, patient service revenues include fees for surgical or diagnostic procedures performed at surgical facilities that we consolidate for financial reporting purposes, as well as for patient visits to our physician practices, anesthesia services, pharmacy services and diagnostic screens ordered by our physicians. Other service revenues include management and administrative service fees derived from our non-consolidated facilities that we account for under the equity method, management of surgical facilities and physician practices in which we do not own an interest and management services we provide to physician practices for which we are not required to provide capital or additional assets. The following table summarizes our revenues by service type as a percentage of total revenues for the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Patient service revenues: Surgical facilities revenues 95.8 % 95.6 % 95.9 % 95.7 % Ancillary services revenues 2.4 % 2.7 % 2.5 % 2.8 % Total patient service revenues 98.2 % 98.3 % 98.4 % 98.5 % Other service revenues 1.8 % 1.7 % 1.6 % 1.5 % Total revenues 100.0 % 100.0 % 100.0 % 100.0 % Payor Mix The following table sets forth by type of payor the percentage of our patient service revenues generated at the surgical facilities which we consolidate for financial reporting purposes in the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Private insurance payors 52.4 % 49.5 % 51.8 % 50.4 % Government payors 41.0 % 44.2 % 42.4 % 43.0 % Self-pay payors 2.6 % 2.6 % 2.5 % 2.7 % Other payors (1) 4.0 % 3.7 % 3.3 % 3.9 % Total 100.0 % 100.0 % 100.0 % 100.0 % (1) Other is comprised of anesthesia service agreements, automobile liability, letters of protection and other payor types. Surgical Case Mix We primarily operate multi-specialty surgical facilities where physicians perform a variety of procedures in various specialties. We believe this diversification helps to protect us from adverse pricing and utilization trends in any individual procedure type and results in greater consistency in our case volume. 21 Table of Contents The following table sets forth the percentage of cases in each specialty performed at the surgical facilities which we consolidate for financial reporting purposes for the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Orthopedic and pain management 35.7 % 35.7 % 35.4 % 36.0 % Ophthalmology 24.8 % 24.4 % 24.5 % 24.5 % Gastrointestinal 23.6 % 23.4 % 24.0 % 23.1 % General surgery 2.5 % 3.0 % 2.7 % 3.0 % Other 13.4 % 13.5 % 13.4 % 13.4 % Total 100.0 % 100.0 % 100.0 % 100.0 % Critical Accounting Policies A summary of significant accounting policies is disclosed in our 2022 Annual Report on Form 10-K under the caption “Critical Accounting Policies” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section. There have been no material changes in the nature of our critical accounting policies or the application of those policies since December 31, 2022. Results of Operations Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022 The following table summarizes certain results from the statements of operations for the three months ended September 30, 2023 and 2022 (dollars in millions): Three Months Ended September 30, 2023 2022 Revenues $ 674.1 $ 620.6 Operating expenses: Cost of revenues 508.3 489.4 General and administrative expenses 36.8 17.9 Depreciation and amortization 28.9 29.8 Transaction and integration costs 12.8 12.5 Grant funds — (0.5) Net loss on disposals, consolidations and deconsolidations 5.8 2.2 Equity in earnings of unconsolidated affiliates (3.5) (2.4) Litigation settlements 3.6 — Other income, net (1.2) (2.4) 591.5 546.5 Operating income 82.6 74.1 Interest expense, net (49.8) (60.7) Income before income taxes 32.8 13.4 Income tax expense (3.1) (7.8) Net income 29.7 5.6 Less: Net income attributable to non-controlling interests (34.6) (30.6) Net loss attributable to Surgery Partners, Inc. $ (4.9) $ (25.0) 22 Table of Contents Revenues. Revenues for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 were as follows (dollars in millions): Three Months Ended September 30, 2023 2022 Patient service revenues $ 662.3 $ 610.1 Other service revenues 11.8 10.5 Total revenues $ 674.1 $ 620.6 Patient service revenues increased 8.6% to $662.3 million for the third quarter of 2023 compared to $610.1 million for the third quarter of 2022. The increase was driven by a 14.2% increase in days adjusted same-facility revenues and acquisitions completed in 2023 and 2022, partially offset by divestitures completed in 2023. The increase in days adjusted same-facility revenues was attributable to an 11.0% increase in same-facility revenue per case and a 2.9% increase in days adjusted same-facility case volumes. Cost of Revenues. Cost of revenues was $508.3 million for the third quarter of 2023 compared to $489.4 million for the third 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 75.4% for the 2023 period compared to 78.9% for the 2022 period. General and Administrative Expenses. General and administrative expenses were $36.8 million for the third quarter of 2023 compared to $17.9 million for the third quarter of 2022. As a percentage of revenues, general and administrative expenses were 5.5% for the 2023 period and 2.9% for the 2022 period. Depreciation and Amortization. Depreciation and amortization expenses were $28.9 million for the third quarter of 2023 compared to $29.8 million for the third quarter of 2022. As a percentage of revenues, depreciation and amortization expenses were 4.3% for the 2023 period compared to 4.8% for the 2022 period. Transaction and Integration Costs. We incurred $12.8 million of transaction and integration costs for the third quarter of 2023 compared to $12.5 million for the third quarter of 2022. The costs for both periods primarily relate to ongoing development initiatives and the integration of acquisitions. Net Loss on Disposals, Consolidations and Deconsolidations. The net loss on disposals, consolidations and deconsolidations in the third quarter of 2023 was primarily attributable to activity discussed in Note. 2. "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 7.4% for the 2023 period compared to 9.8% for the 2022 period. The decrease is primarily attributable to the pay down of certain long-term debt in the fourth quarter of 2022. Income Tax Expense. The income tax expense was $3.1 million and $7.8 million for the three months ended September 30, 2023 and 2022, respectively. The effective tax rate was 9.5% for the three months ended September 30, 2023 compared to 58.2% for the three months ended September 30, 2022. For the three months ended September 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. 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. Net Income Attributable to Non-Controlling Interests. As a percentage of revenues, net income attributable to non-controlling interests was 5.1% for the 2023 period and 4.9% for the 2022 period. 23 Table of Contents Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022 The following table summarizes certain results from the statements of operations for the nine months ended September 30, 2023 and 2022 (dollars in millions): Nine Months Ended September 30, 2023 2022 Revenues $ 2,007.9 $ 1,832.2 Operating expenses: Cost of revenues 1,554.0 1,441.6 General and administrative expenses 100.0 73.5 Depreciation and amortization 87.0 85.2 Transaction and integration costs 37.3 27.8 Grant funds (1.1) (1.8) Net loss on disposals, consolidations and deconsolidations 7.5 3.2 Equity in earnings of unconsolidated affiliates (9.4) (8.1) Litigation settlements 8.1 (32.8) Other income, net (2.1) (7.4) 1,781.3 1,581.2 Operating income 226.6 251.0 Interest expense, net (144.3) (173.9) Income before income taxes 82.3 77.1 Income tax benefit (expense) 6.3 (13.4) Net income 88.6 63.7 Less: Net income attributable to non-controlling interests (99.5) (94.9) Net loss attributable to Surgery Partners, Inc. $ (10.9) $ (31.2) Revenues. Revenues for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 were as follows (dollars in millions): Nine Months Ended September 30, 2023 2022 Patient service revenues $ 1,976.7 $ 1,805.1 Other service revenues 31.2 27.1 Total revenues $ 2,007.9 $ 1,832.2 Patient service revenues increased 9.5% to $1,976.7 million for the 2023 period compared to $1,805.1 million for the 2022 period. The increase was driven by a 10.6% 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 6.9% increase in same-facility revenue per case and a 3.5% increase in days adjusted same-facility case volumes. Cost of Revenues. Cost of revenues was $1,554.0 million for the 2023 period compared to $1,441.6 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 77.4% for the 2023 period and 78.7% for the 2022 period. General and Administrative Expenses. General and administrative expenses were $100.0 million for the 2023 period compared to $73.5 million for the 2022 period. As a percentage of revenues, general and administrative expenses were 5.0% for the 2023 period and 4.0% for the 2022 period. Depreciation and Amortization. Depreciation and amortization expenses were $87.0 million for the 2023 period compared to $85.2 million for the 2022 period. As a percentage of revenues, depreciation and amortization expenses were 4.3% for the 2023 period compared to 4.7% for the 2022 period. Transaction and Integration Costs. We incurred $37.3 million of transaction and integration costs for the 2023 period compared to $27.8 million for the 2022 period. The costs for both periods primarily relate to ongoing development initiatives and the integration of acquisitions. 24 Table of Contents Net Loss on Disposals, Consolidations and Deconsolidations. The net loss on disposals, consolidations and deconsolidations in the 2023 period was primarily attributable to activity discussed in Note. 2. "Acquisitions and Disposals" to our condensed consolidated financial statements included elsewhere in this report. The remaining net loss was primarily attributable to other asset disposals. Litigation Settlements. The amount of the litigation settlement 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. Interest Expense, Net. As a percentage of revenues, interest expense, net decreased to 7.2% for the 2023 period compared to 9.5% for the 2022 period. The decrease is primarily 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 $6.3 million for the nine months ended September 30, 2023 compared to income tax expense of $13.4 million for the nine months ended September 30, 2022. The effective tax rate was (7.7)% for the nine months ended September 30, 2023 compared to 17.4% for the nine months ended September 30, 2022. For the nine months ended September 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) $1.6 million related to the vesting of restricted stock awards, and (ii) $15.8 million related to entity divestitures. 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 (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. Net Income Attributable to Non-Controlling Interests. As a percentage of revenues, net income attributable to non-controlling interests was 5.0% for the 2023 period and 5.2% for the 2022 period. Liquidity and Capital Resources Cash and cash equivalents were $236.0 million at September 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 were $231.2 million for the nine months ended September 30, 2023 compared to $151.6 million for the nine months ended September 30, 2022. The $79.6 million increase was primarily driven by operating cash flows in 2022 that did not repeat in the current year, including repayments of approximately $56 million of Medicare advanced payments provided through the CARES Act, partially offset by the receipt of stockholder litigation proceeds of $32.8 million, a $25.2 million reduction of interest paid, net of interest income received, and the timing of routine transactions involving working capital and accrued payroll and benefits. Net cash used in investing activities during the nine months ended September 30, 2023 was $167.5 million compared to $235.7 million for the nine months ended September 30, 2022. Key factors contributing to the change include: • An aggregate decrease in payments for acquisitions (net of cash acquired) and purchases of equity method investments of $78.7 million; • An aggregate increase of $15.3 million in proceeds from sales of facilities and equity method investments; • An increase in purchases of property and equipment of $11.1 million; • An increase in cash used of $14.7 million related to other investing activities, including $21.0 million to acquire management rights related to certain acquisitions in the 2023 period. Net cash used in financing activities during the nine months ended September 30, 2023 was $110.6 million compared to $151.0 million during the nine months ended September 30, 2022. Key factors contributing to the change include: • An increase of $42.6 million in borrowings of long-term debt, net of payments; • 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 $0.5 million; • An increase in the payment of debt issuance costs of $1.5 million; • An increase in cash used of $4.8 million related to other financing activities. Capital Resources Net working capital was approximately $374.8 million at September 30, 2023 compared to $427.6 million at December 31, 2022. The decrease is primarily due to a decrease in cash, as discussed above. 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. 25 Table of Contents Material Cash Requirements 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, 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. Summary 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 continue to deteriorate or remain uncertain for an extended period of time, our ability to access capital could be harmed, which could negatively affect our liquidity and ability to repay our outstanding debt. Based on our current level of operations, we believe cash flows from operations, available cash, available capacity on our Revolver and continued anticipated access to capital markets, will be adequate to meet our short-term (i.e., 12 months) and long-term (beyond 12 months) liquidity needs. Certain Non-GAAP Measures Adjusted EBITDA and Adjusted EBITDA excluding grant funds are not measurements of financial performance under GAAP and should not be considered in isolation or as a substitute for net income, operating income or any other measure calculated in accordance with GAAP. The items excluded from these non-GAAP metrics are significant components in understanding and evaluating our financial performance. We believe such adjustments are appropriate, as the magnitude and frequency of such items can vary significantly and are not related to the assessment of normal operating performance. Our calculation of Adjusted EBITDA and Adjusted EBITDA excluding grant funds may not be comparable to similarly titled measures reported by other companies. We use Adjusted EBITDA and Adjusted EBITDA excluding grant funds as measures of financial performance. Adjusted EBITDA and Adjusted EBITDA excluding grant funds are key measures used by our management to assess operating performance, make business decisions and allocate resources. 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, 2023 2022 2023 2022 Condensed Consolidated Statements of Operations Data: Income before income taxes $ 32.8 $ 13.4 $ 82.3 $ 77.1 Plus (minus): Net income attributable to non-controlling interests (34.6) (30.6) (99.5) (94.9) Interest expense, net 49.8 60.7 144.3 173.9 Depreciation and amortization 28.9 29.8 87.0 85.2 Equity-based compensation expense 4.4 5.0 13.2 13.0 Transaction, integration and acquisition costs (1) 13.0 13.1 38.8 28.4 Net loss on disposals, consolidations and deconsolidations 5.8 2.2 7.5 3.2 Litigation settlements and regulatory change impact (2) 4.2 1.5 13.9 (27.6) Undesignated derivative activity — — 0.6 — Other (3) 1.2 1.1 7.7 1.1 Adjusted EBITDA 105.5 96.2 295.8 259.4 Less: Impact of grant funds (4) — (0.3) (1.1) (1.4) Adjusted EBITDA excluding grant funds $ 105.5 $ 95.9 $ 294.7 $ 258.0 (1) This amount includes transaction and integration costs of $12.8 million and $12.5 million for the three months ended September 30, 2023 and 2022, respectively. This amount further includes start-up costs related to de novo surgical facilities of $0.2 million and $0.6 million for the three months ended September 30, 2023 and 2022, respectively. This amount includes transaction and integration costs of $37.3 million and $27.8 million for the nine months ended September 30, 2023 and 2022, respectively. This amount further includes start-up costs related to de novo surgical facilities of $1.5 million and $0.6 million for the nine months ended September 30, 2023 and 2022, respectively. (2) This amount includes a litigation settlement loss of $3.6 million for the three months ended September 30, 2023. This amount also includes other litigation costs of $0.6 million and $1.5 million for the three months ended September 30, 2023 and 2022, respectively. 26 Table of Contents This amount includes a litigation settlement loss of $8.1 million and a gain of $32.8 million for the nine months ended September 30, 2023 and 2022, respectively. This amount also includes other litigation costs of $1.4 million and $5.2 million for the nine months ended September 30, 2023 and 2022, respectively. Additionally, the nine months ended September 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 the May 2023 cyber event for the three months ended September 30, 2023. This amount includes estimates for the net impact of a May 2023 cyber event as well as losses from a divested business for the three and nine months ended September 30, 2023. Amounts presented for the three and nine months ended September 30, 2022 reflect losses incurred, net of insurance proceeds received, related to certain surgical facilities that were closed following Hurricane Ian. (4) Represents the impact of grant funds recognized, net of amounts attributable to non-controlling interests. We use Credit Agreement EBITDA as a measure of liquidity and to determine our compliance under certain covenants pursuant to our credit facilities. Credit Agreement EBITDA is determined on a trailing twelve-month basis. We have included it because we believe that it provides investors with additional information about our ability to incur and service debt and make capital expenditures. Credit Agreement EBITDA is not a measurement of liquidity under GAAP and should not be considered in isolation or as a substitute for any other measure calculated in accordance with GAAP. The items excluded from Credit Agreement EBITDA are significant components in understanding and evaluating our liquidity. Our calculation of Credit Agreement EBITDA may not be comparable to similarly titled measures reported by other companies. When we use the term “Credit Agreement EBITDA,” we are referring to Adjusted EBITDA, as defined above, further adjusted for acquisitions and synergies. These adjustments do not relate to our historical financial performance and instead relate to estimates compiled by our management and calculated in conformance with the definition of “Consolidated EBITDA” used in the credit agreements governing our credit facilities. 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, 2023 Cash flows from operating activities $ 238.4 Plus (minus): Non-cash interest expense, net (26.7) Non-cash lease expense (34.4) Deferred income taxes 1.3 Equity in earnings of unconsolidated affiliates, net of distributions received 4.0 Other non-cash income 7.5 Changes in operating assets and liabilities, net of acquisitions and divestitures 87.3 Income tax expense 3.6 Net income attributable to non-controlling interests (146.2) Interest expense, net 205.3 Transaction, integration and acquisition costs 59.0 Litigation settlements and regulatory change impact 16.8 Undesignated derivative activity (7.4) Other (1) 8.1 Acquisitions and synergies (2) 106.7 Credit Agreement EBITDA $ 523.3 (1) This amount includes estimates for the impact of a cyber event, losses from divested business and hurricane-related impacts. (2) Represents impact of acquisitions as if each acquisition had occurred on October 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.