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Item 7. Management’s Discussion and Analysis

2024-02-26 compared with 2023-03-01 · 78 added, 112 removed, 307 unchanged (38% of the section changed)

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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.

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.

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During 2023 we completed the following:

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

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

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

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

• We acquired controlling interests in eleven surgical facilities, two in-development de novo surgical facilities, and four physician practices for aggregate cash consideration of $80.0 million, net of cash acquired, and non-cash consideration of $1.3 million.

Seven 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 facilities for an aggregate cash purchase price of $50.3 million.

• 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 $195.9 million and $694.3 million of borrowing capacity under our Revolver at December 31, 2023.

Operating cash flows were $293.8 million in 2023, an increase of $135.0 million compared to the prior year.

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

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

Impact of COVID-19

The 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.

Executive Order

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

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

We cannot predict how, if at all, the

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

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

See "Liquidity and Capital Resources" below for further discussion.

Net operating cash inflows, including operating cash flows less distributions to non-controlling interests, were $147.7 million for 2023 compared to $12.0 million for 2022.

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

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Specifically, patient service revenues include fees for surgical or diagnostic procedures performed at surgical facilities that we consolidate for financial reporting purposes, as well as for patient visits to our physician practices, anesthesia services, pharmacy services and diagnostic screens ordered by our physicians.

Other service revenues include management and administrative service fees derived from our non-consolidated facilities that we account for under the equity method, management of surgical facilities and physician practices in which we do not own an interest, management services we provide to physician practices for which we are not required to provide capital or additional assets and other non-patient services.

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

Other service revenues include management and administrative service fees derived from our non-consolidated facilities that we account for under the equity method,

management of surgical facilities and physician practices in which we do not own an interest, management services we provide to physician practices for which we are not required to provide capital or additional assets and other non-patient services.

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

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Segment Information

Our business is currently comprised of two segments:

Our business is comprised of two segments:

Surgical Facility Services and Ancillary Services.

On December 31, 2020, we sold the remaining assets of the Optical Services segment.

For more information about the components of each segment, please see Part I, Item 1.

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Ancillary Services 67.5 68.9 67.3

Optical Services — — 3.1

Total revenues $ 2,743.3 $ 2,539.3 $ 2,225.1

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Ancillary Services (3.9) (2.3) 1.7

Optical Services — — 1.4

All other (102.0) (91.1) (84.1)

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Revenue Recognition

Our patient service revenues are derived primarily from surgical procedures performed at our ASCs and surgical hospitals, patient visits to physician practices, anesthesia services provided to patients, pharmacy services and diagnostic screens ordered by our physicians.

Our patient service revenues are derived primarily from surgical procedures performed at our surgical facilities, patient visits to physician practices, anesthesia services provided to patients, pharmacy services and diagnostic screens ordered by our physicians.

The fees for such services are billed either to the patient or a third-party payor, including Medicare and Medicaid.

We recognize patient service revenues, net of contractual allowances, which we estimate based on existing contracts or the historical trend of our cash collections and contractual write-offs.

Prior to its sale on December 31, 2020, our optical products purchasing organization negotiated volume buying discounts with optical product manufacturers.

The buying discounts and any handling charges billed to the members of the purchasing organization represented the revenues recognized for financial reporting purposes.

Revenue is recognized as orders are shipped to members.

We recognize patient service

revenues, net of contractual allowances, which we estimate based on existing contracts or the historical trend of our cash collections and contractual write-offs.

Other service revenues consist of management and administrative service fees derived from non-consolidated surgical facilities that we account for under the equity method, management of surgical facilities in which we do not own an interest and management services we provide to physician networks for which we are not required to provide capital or additional assets.

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Such losses expire in various amounts at varying times beginning in 2030.

Unless they expire, these NOL carryforwards may be used to offset future taxable income and thereby reduce our income taxes otherwise payable.

Unless they expire, these NOL carryforwards may be used to offset future taxable income and thereby reduce our income tax payable.

We recorded a valuation allowance against our deferred tax assets at December 31, 2023 and 2022 totaling $150.1 million and $114.7 million, respectively.

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An "ownership change" is generally defined as any change in ownership of more than 50.0% of a corporation’s "stock" by its "5-percent shareholders" (as defined in Section 382) over a rolling three-year period based upon each of those shareholder’s lowest percentage of stock owned during such period.

As a result of the Symbion acquisition in 2014, approximately $116.7 million in NOL carryforwards are subject to an annual Section 382 base limitation of $4.9 million, and, as a result of the NovaMed acquisition in 2011, approximately $9.2 million in NOL carryforwards are subject to an annual Section 382 base limitation of $4.9 million.

As a result of the

Symbion acquisition in 2014, approximately $111.8 million in NOL carryforwards are subject to an annual Section 382 base limitation of $4.9 million, and, as a result of the NovaMed acquisition in 2011, approximately $6.8 million in NOL carryforwards are subject to an annual Section 382 base limitation of $4.9 million.

As a result of the acquisition of NSH, approximately $24.7 million in NOL carryforwards are subject to an annual Section 382 base limitation of $2.8 million.

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Surgical Facilities and Ancillary Services.

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

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

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In 2023, 2022 and 2021, there were no non-cash impairment charges.

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

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

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Grant funds (1.1) (2.4) (37.9)

Loss on disposals and deconsolidations, net 11.1 2.2 5.7

Net loss on disposals, consolidations and deconsolidations 14.4 11.1 2.2

Equity in earnings of unconsolidated affiliates (14.2) (12.5) (11.3)

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Loss on debt extinguishment 15.5 14.9 9.1

Impairment charges — — 33.5

Other income (6.4) (16.6) (15.5)

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Interest expense, net (193.0) (234.9) (221.0)

Income (loss) before income taxes 110.3 81.2 (18.8)

Income tax (expense) benefit (23.3) (10.5) 20.1

Income before income taxes 135.0 110.3 81.2

Income tax benefit (expense) 0.3 (23.3) (10.5)

Net income 135.3 87.0 70.7

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Patient service revenues increased 7.9% to $2.7 billion in 2023 compared to $2.5 billion in 2022.

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

The increase was primarily driven by an 11.3% increase in days adjusted same-facility revenues, which includes variable consideration recognized associated with supplemental reimbursement programs, 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 a 3.9% increase in same-facility case volumes and a 7.1% increase in same-facility revenue per case.

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As a percentage of revenues, general and administrative expenses were 4.4% in 2023 compared to 4.0% in 2022.

The decrease was primarily driven by ongoing cost management initiatives.

Depreciation and Amortization.

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The costs for both periods primarily relate to ongoing development initiatives and the integration of acquisitions we completed in 2023 and 2022.

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

Grant funds recognized were $37.9 million in 2021.

Grant funds recognized in 2023 and 2022 were $1.1 million and $2.4 million, respectively.

For further discussion, see Note 1.

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

Loss on Disposals and Deconsolidations, Net.

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

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

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

Net Loss on Disposals, Consolidations and Deconsolidations.

The net loss on disposals, consolidations and deconsolidations in 2023 and 2022 includes activity discussed in Note 2.

"Acquisitions, Disposals and Deconsolidations" to our consolidated financial statements included elsewhere in this Annual Report.

The remaining net loss in both periods was primarily attributable to sales and disposals of other assets.

Litigation Settlements.

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

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

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

There was no comparable activity for the 2021 period.

Litigation settlements in 2023 were not material for individual disclosure.

Loss on Debt Extinguishment.

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

The loss on debt extinguishment in 2023 is attributable to the debt transactions on December 19, 2023, as discussed in Note 5.

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

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

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

Interest Expense, Net.

Interest expense, net was $193.0 million in 2023 compared to $234.9 million in 2022.

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

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

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

As a percentage of revenues, interest expense, net was 7.0% in 2023 compared to 9.3% in 2022.

Income Tax (Expense) Benefit .

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

Income Tax Benefit (Expense) .

Income tax benefit was $0.3 million for 2023 and expense was $23.3 million for 2022.

The effective tax rate was (0.2)% for 2023 compared to 21.0% in 2022.

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

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

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

The 2023 decrease relates to increased losses attributable to entity divestitures and less valuation allowance recorded in the current year on the interest limitation under IRC Sec.

163(j) due to a decrease in book interest expense in 2023 compared to 2022.

For 2023, the effective tax rate is primarily impacted by income tax expense related to the valuation allowance on the interest limitation under IRC Sec.

163(j) and income tax benefits related to net income attributable to non-controlling interests and losses on entity divestitures.

Net Income Attributable to Non-Controlling Interests.

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Our cash flows provided by operating activities was $293.8 million in 2023 compared to $158.8 million in 2022.

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

The $135.0 million increase was primarily driven by reductions of $49.1 million of interest paid, net of interest income received, and $18.8 million of payments under the tax receivable agreement, operating cash flows in 2022 that did not repeat in the current year, including repayments of approximately $57.2 million of Medicare advanced payments provided through the CARES Act, partially offset by the receipt of stockholder litigation proceeds of $32.8 million, an increase in net income and the timing of routine transactions involving working capital and accrued payroll and benefits.

Net cash used in investing activities in 2023 was $225.6 million compared to $307.9 million in 2022.

Key factors contributing to the change include:

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

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

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

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

The $82.3 million decrease was primarily driven by:

• An aggregate decrease of $90.2 million in payments for acquisitions (net of cash acquired) and purchases of equity method investments, including consideration paid to acquire management rights from the prior management service provider, which is included as a component of the increase in other investing activities;

• An increase in purchases of property and equipment of $8.2 million.

Net cash used in financing activities in 2023 was $155.2 million compared to net cash provided of $42.1 million in 2022.

Key factors contributing to the change include:

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

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

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

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

• The 2022 period included equity offering proceeds, net of related costs, of $857.7 million that did not repeat in the current year;

• An increase of $650.7 million in borrowings of long term debt, net of payments, including payments related to debt issuance costs and a premium on debt extinguishment in the 2022 period.

The increase is primarily driven by a voluntary prepayment on the term loan and redemption of senior unsecured notes of $560 million in the 2022 period, with no comparable activity in 2023;

• An increase in payments related to ownership transactions with non-controlling interest holders of $11.6 million.

Discussion of the operating, investing and financing activities for the year ended December 31, 2022 was previously disclosed beginning on page 45 in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed on March 1, 2023, under "Item 7.

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As of December 31, 2023, the carrying value of our total indebtedness was $2.775 billion, which includes unamortized fair value discount of $1.6 million and unamortized deferred financing costs and issuance discount of $27.1 million.

Term Loan and Revolving Credit Facility

As of December 31, 2022, we had term loan borrowings with a carrying value of $1.370 billion, consisting of outstanding aggregate principal of $1.372 billion and unamortized fair value discount of $2.1 million (the "Term Loan").

The Term Loan matures on August 31, 2026.

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

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

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

The Term Loan bears interest at a rate per annum equal to (x) LIBOR plus a margin of 3.75% per annum (LIBOR shall be subject to a floor of 0.75%) or (y) an alternate base rate (which will be the highest of (i) the prime rate, (ii) 0.5% per annum above the federal funds effective rate and (iii) one-month LIBOR plus 1.00% per annum (the alternate base rate shall be subject to a floor of 1.75%)) plus a margin of 2.75% per annum.

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

The Revolver will mature on February 1, 2026.

Term Loan and Revolver

On December 19, 2023, the Company entered into a Credit Agreement (the “Credit Agreement”), which provided for a $1.4 billion senior secured term loan (the "Term Loan") and a $703.8 million revolving credit facility (the "Revolver" and, together with the Term Loan, the "New Credit Facilities").

The Term Loan was fully drawn on December 19, 2023, and the proceeds were used to repay in full the amounts outstanding under the then existing senior secured term loan due 2026 and revolving credit facilities and pay fees and expenses in connection with the New Credit Facilities.

Subject to certain conditions and requirements set forth in the Credit Agreement, we may request one or more additional incremental term loan facilities or one or more increases in the commitments under the Revolver.

In connection with entering the New Credit Facilities, we terminated the then-existing senior secured credit facilities, originally dated as of August 31, 2017 and, as amended thereafter.

As of December 31, 2023, we had Term Loan borrowings with a carrying value of $1.398 billion, consisting of outstanding aggregate principal of $1.400 billion and unamortized fair value discount of $1.6 million.

The Term Loan matures on December 19, 2030 and amortizes in equal quarterly installments of 0.25% of the aggregate original principal amount of the Term Loan, beginning on or around the last business day of the fiscal quarter ending June 30, 2024.

The Term Loan bears interest at a rate per annum equal to (x) the forward-looking term rate based on Secured Overnight Financing Rate (“Term SOFR”) plus 3.50% per annum or (y) an alternate base rate, which will be the highest of (i) the prime rate plus, (ii) 0.5% per annum above the federal funds effective rate and (ii) Term SOFR plus 1.00% per annum, subject to a 1.00% floor) (the “Base Rate”) plus 2.50% per annum.

As of December 31, 2023, our availability on the Revolver was $694.3 million (including outstanding letters of credit of $9.5 million).

The Revolver bears interest at a non-default rate per annum equal to (x) SOFR (plus a customary SOFR adjustment) plus a margin of up to 3.25% per annum or (y) an alternate base rate (which will be the highest of (i) the prime rate, (ii) 0.5% per annum above the federal funds effective rate and (iii) one-month SOFR (plus a customary SOFR adjustment) plus 1.00% per annum) plus a margin of up to 2.25% per annum.

In addition, we are required to pay a commitment fee of 0.50% per annum in respect of unused commitments under the Revolver.

The Revolver may be utilized for working capital, capital expenditures and general corporate purposes.

Subject to certain conditions and requirements set forth in the credit agreement, we may request one or more additional incremental term loan facilities or one or more increases in the commitments on the Revolver.

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

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

The Revolver matures on December 19, 2028.

Interest on any loans drawn under the Revolver shall bear interest at a rate per annum equal to (x) Term SOFR plus 3.25% per annum or (y) the Base Rate plus 2.25% per annum.

In addition, we are required to pay a commitment fee ranging from 0.50% to 0.25% per annum, depending on our first lien net leverage ratio, in respect of unused commitments under the Revolver.

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

Senior Unsecured Notes

As of December 31, 2023, we have $320.0 million aggregate principal amount of senior unsecured notes due April 15, 2027 (the "2027 Unsecured Notes"), which bear interest at the rate of 10.000% per year, payable semi-annually on April 15 and October 15 of each year.

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

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

As of December 31, 2023, we have $185.0 million aggregate principal amount of senior unsecured notes due July 1, 2025 (the "2025 Unsecured Notes"), which bear interest at the rate of 6.750% per year, payable semi-annually on January 1 and July 1 of each year.

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

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

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

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Net working capital was approximately $372.0 million at December 31, 2023 compared to $427.6 million at December 31, 2022.

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

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

The decrease is primarily due to a decrease in cash, as discussed above, and increases in accounts payable and current maturities of long-term debt.

These were partially offset by increases in accounts receivable and other current assets.

In addition to cash flows from operations and available cash, other sources of capital include amounts available on our Revolver as well as anticipated continued access to the capital markets.

As noted in Note 8.

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

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

"Long-Term Debt" for further discussion).

Material Cash Requirements

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

We used the applicable annual interest rate as of December 31, 2022 of 7.63%, based on LIBOR plus the applicable margin, for our $1.4 billion outstanding Term Loan to estimate interest payments on this variable rate debt instrument.

We used the applicable annual interest rate as of December 31, 2023 of 8.86%, based on SOFR plus the applicable margin, for our $1.4 billion outstanding Term Loan to estimate interest payments on this variable rate debt instrument.

(2) This reflects our future operating lease payments.

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

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.

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.

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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.

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.

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Consolidated Statements of Operations Data:

Income (loss) before income taxes $ 110.3 $ 81.2 $ (18.8)

Income before income taxes $ 135.0 $ 110.3 $ 81.2

Plus (minus):

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64.9 48.6 46.1

Loss on disposals and deconsolidations, net 11.1 2.2 5.7

Litigation settlements and other litigation costs (2)

Net loss on disposals, consolidations and deconsolidations 14.4 11.1 2.2

Litigation settlements and regulatory change impact (2)

17.5 (24.7) 5.6

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Undesignated derivative activity (3)

Hurricane-related impacts (4)

Impairment charges — — 33.5

Gain on escrow release (5)

8.6 1.5 (0.2)

Adjusted EBITDA $ 438.1 $ 380.2 $ 339.6

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This amount further includes start-up costs related to de novo surgical facilities of $3.2 million, $1.1 million and $6.3 million for the years ended December 31, 2023, 2022 and 2021, respectively.

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

(2) This amount includes a litigation settlements loss of $10.6 million and a net gain of $29.3 million for the years ended December 31, 2023 and 2022, respectively, with no comparable costs in 2021.

This amount also includes other litigation costs of $2.5 million, $4.6 million and $5.6 million for the years ended December 31, 2023, 2022 and 2021, respectively.

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

This amount further includes fair value changes of undesignated derivatives.

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

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

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

This amount further includes fair value changes of undesignated derivatives for the years ended December 31, 2023 and 2022, with no comparable activity in 2021.

(4) This amount includes estimates for the net impact of the May 2023 cyber event and losses from a divested business for the year ended December 31, 2023.

Amounts presented for the years ended December 31, 2022 and 2021 reflect losses incurred, net of insurance proceeds received, related to certain surgical facilities that were closed following Hurricane Ian and Hurricane Ida, respectively.

(5) 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 Senior Secured Credit Facilities.

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

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

13 unchanged sentences

Equity in earnings of unconsolidated affiliates, net of distributions received 2.2

Other non-cash income 7.5

Changes in operating assets and liabilities, net of acquisitions and divestitures 63.5

5 unchanged sentences

Undesignated derivative activity 0.6

Hurricane-related impacts 1.5

Acquisitions and synergies (2)

Credit Agreement EBITDA $ 511.7

(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 January 1, 2023.

Further this includes revenue and cost synergies from other business initiatives and de novo facilities and an adjustment for the effects of adopting the new lease accounting standard, as defined in the credit agreement governing the Senior Secured Credit Facilities.

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

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis