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Item 2. Management’s Discussion and Analysis

2024-05-07 compared with 2023-11-07 · 94 added, 188 removed, 125 unchanged (69% of the section changed)

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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 its subsidiaries, and the term "affiliates" means direct and indirect subsidiaries of Surgery Partners, Inc.

and partnerships and joint ventures in which such subsidiaries are partners.

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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.

By their nature, forward-looking 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.

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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."

As of March 31, 2024, we owned or operated, primarily in partnership with physicians, a portfolio of 165 surgical facilities comprised of 147 ASCs and 18 surgical hospitals across 33 states.

We owned a majority interest in 92 of the surgical facilities and consolidated 124 of these facilities for financial reporting purposes.

Total revenues for the first quarter of 2024 increased 7.7% to $717.4 million from $666.2 million for the first quarter of 2023.

The increase in revenues was attributable to same-facility revenue growth and the net impact from acquisitions and divestitures completed during the last twelve months ended March 31, 2024.

Days adjusted same-facility revenues for the first quarter of 2024 increased 10.2% from the first quarter of 2023, with an 8.8% increase in revenue per case and a 1.3% increase in same-facility cases.

Additionally, for the first quarter of 2024, Adjusted EBITDA increased 8.2% to $97.5 million compared to $90.1 million for the same period in 2023.

The increase in Adjusted EBITDA was primarily attributable to revenue growth, continued cost management initiatives and acquisitions completed since the prior year period.

For the first quarter of 2024, net loss attributable to common stockholders was $12.4 million compared to $24.9 million for the same period in 2023.

A reconciliation of non-GAAP financial measures appears below under the heading "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.

• 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.

During the first quarter of 2024 we completed the following:

• We acquired a controlling interest in two surgical facilities and several physician practices for aggregate cash consideration of $66.0 million, net of cash acquired, and non-cash consideration of $1.1 million.

As of March 31, 2024, $11.4 million of the cash consideration was deferred and included as a component of current liabilities in the condensed consolidated balance sheets.

• We sold a portion of our interests in a surgical facility for net cash proceeds of $1.5 million.

As a result of the transaction, we no longer control the previously controlled surgical facility but retain a non-controlling interest, resulting in the deconsolidation of the previously consolidated entity.

We had cash and cash equivalents of $185.2 million and $607.3 million of borrowing capacity under our Revolver as of March 31, 2024.

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 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

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:

Three Months Ended March 31,

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 %

Surgical Facility Services 94.9 % 96.0 %

Ancillary Services 3.4 % 2.5 %

Total patient service revenues 98.3 % 98.5 %

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Total revenues 100.0 % 100.0 %

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

The following table sets forth by type of payor the percentage of our patient service revenues generated at the surgical facilities that we consolidate for financial reporting purposes:

Three Months Ended March 31,

Private insurance payors 51.2 % 51.1 %

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Other payors (1)

4.0 % 3.7 % 3.3 % 3.9 %

Total 100.0 % 100.0 %

(1) Other is comprised of anesthesia service agreements, automobile liability, letters of protection and other payor types.

(1) Other is comprised of automobile liability, letters of protection and other payor types.

Surgical Case Mix

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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.

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 %

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

Three Months Ended March 31,

Orthopedics and pain management 40.0 % 35.7 %

Ophthalmology 23.5 % 24.1 %

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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,

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)

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

Net income attributable to non-controlling interests (34.6) (30.6)

Net loss attributable to Surgery Partners, Inc.

$ (4.9) $ (25.0)

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,

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.

"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.

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,

Comparison of Operating Results for the Three Months Ended March 31,2024 to the Three Months Ended March 31, 2023

The following tables summarize certain results from the statements of operations for the periods indicated (in millions):

Three Months Ended March 31,

Revenues $ 717.4 $ 666.2

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Transaction and integration costs 17.4 12.5

Grant funds (1.1) (1.8)

Net loss on disposals, consolidations and deconsolidations 1.5 10.5

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Litigation settlements (1.8) 3.0

Other income, net (2.1) (7.4)

1,781.3 1,581.2

Other income (2.0) (0.8)

Operating income 76.0 46.4

Interest expense, net (47.3) (46.8)

Income before income taxes 82.3 77.1

Income tax benefit (expense) 6.3 (13.4)

Income (loss) before income taxes 28.7 (0.4)

Income tax (expense) benefit (4.4) 1.6

Net income 24.3 1.2

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$ (12.4) $ (24.9)

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,

The following table sets forth patient service revenues (in millions):

Three Months Ended March 31,

Patient service revenues $ 705.3 $ 656.4

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Total revenues $ 717.4 $ 666.2

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.

Patient service revenues increased 7.4% to $705.3 million for the three months ended March 31, 2024 compared to $656.4 million for the three months ended March 31, 2023.

The increase was primarily driven by a 10.2% increase in days adjusted same-facility revenues and the net impact from acquisitions and divestitures completed during the last twelve months ended March 31, 2024.

The increase in days adjusted same-facility revenues was attributable to a 1.3% increase in same-facility case volumes and a 8.8% increase in same-facility revenue per case.

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.

Cost of revenues was $562.1 million for the three months ended March 31, 2024 compared to $532.2 million for the three months ended March 31, 2023.

The increase was primarily driven by increased performance of high acuity procedures and acquisitions completed during the last twelve months ended March 31, 2024.

As a percentage of revenues, cost of revenues was 78.4% and 79.9% for the three months ended March 31, 2024 and 2023, respectively.

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.

General and administrative expenses were $33.2 million and $32.0 million for the three months ended March 31, 2024 and 2023, respectively.

As a percentage of revenues, general and administrative expenses were 4.6% in the first quarter of 2024 compared to 4.8% in the first quarter of 2023.

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.

Depreciation and amortization expenses were $33.7 million for each of the three months ended March 31, 2024 and 2023.

As a percentage of revenues, depreciation and amortization expenses were 4.7% and 5.1% for the three months ended March 31, 2024 and 2023, respectively

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.

We incurred $17.4 million of transaction and integration costs for the three months ended March 31, 2024 compared to $12.5 million for the three months ended March 31, 2023.

The costs for both periods primarily related 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 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 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.

The net loss on disposals, consolidations and deconsolidations for the three months ended March 31, 2024 and 2023 includes activity discussed in Note 2.

"Acquisitions, Disposals and Deconsolidations" of the accompanying notes to the condensed consolidated financial statements.

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

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.

Interest expense, net was $47.3 million for the three months ended March 31, 2024 compared to $46.8 million for the three months ended March 31, 2023.

As a percentage of revenues, interest expense, net was 6.6% and 7.0% for the three months ended March 31, 2024 and 2023, respectively.

Income Tax (Expense) Benefit .

Income tax expense was $4.4 million for the three months ended March 31, 2024 as compared to income tax benefit of $1.6 million for the three months ended March 31, 2023.

The effective tax rate was 15.3% and 400.0% for the three months ended March 31, 2024 and 2023, respectively.

"Organization and Summary of Accounting Policies" under the heading Income Taxes for additional information related to the Company's effective tax rates for the three months ended March 31, 2024 and March 31, 2023, including why these rates differed from the U.S.

federal statutory rate of 21%.

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.

As a percentage of revenues, net income attributable to non-controlling interests was 5.1% and 3.9% for the three months ended March 31, 2024 and 2023, respectively.

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.

Cash and cash equivalents were $185.2 million at March 31, 2024 compared to $195.9 million at December 31, 2023.

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

Our cash flows provided by operating activities was $40.7 million for the three months ended March 31, 2024 compared to $74.5 million for the three months ended March 31, 2023.

The $33.8 million decrease was primarily driven by the timing of routine transactions involving working capital and accrued payroll and benefits.

Net cash used in investing activities for the three months ended March 31, 2024 was $83.1 million compared to $70.7 million for the three months ended March 31, 2023.

The $12.4 million increase was primarily driven by an aggregate net increase of $6.3 million in payments for acquisitions (net of cash acquired) and purchases of equity method investments and a $6.5 million decrease in proceeds from sales of facilities.

Net cash provided by financing activities for the three months ended March 31, 2024 was $31.7 million compared to net cash used of $41.2 million for the three months ended March 31, 2023.

The increase of $72.3 million was primarily driven by net borrowings on the Revolver due to the timing of acquisitions completed during the first quarter of 2024.

On April 10, 2024, we completed the issuance and sale of $800.0 million in aggregate principal amount of 2032 Notes.

The 2032 Notes bear interest at an annual rate of 7.250% per year, payable semi-annually on April 15 and October 15 of each year, beginning on October 15, 2024.

Proceeds from sale of the 2032 Notes were used (i) to redeem all of the outstanding 2025 Notes and 2027 Notes, (ii) to pay accrued interest on the Existing Notes through, but not including, April 25, 2024, (iii) to pay related fees and expenses in connection with the offering of the 2032 Notes and redemption of the Existing Notes and (iv) for general corporate purposes, including to fund future acquisitions.

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.

Net working capital was approximately $372.5 million at March 31, 2024 compared to $372.0 million at December 31, 2023.

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 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.

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, 2024 from those disclosed under “Material Cash Requirements” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2023 Annual Report on Form 10-K.

Broad economic factors, including recent increases in interest rates, inflation and supply chain risks and market volatility, could negatively affect our payor mix, increase the relative proportion of lower margin services we provide and reduce patient volumes, as well as diminish our ability to collect outstanding receivables.

Any increase in the amount or deterioration in the collectability of patient accounts receivable will adversely affect our cash flows and results of operations, requiring an increased level of working capital.

If general economic conditions continue to deteriorate or remain uncertain for an extended period of time, our ability to access capital could be harmed, which could negatively affect our liquidity and ability to repay our outstanding debt.

If general economic conditions, including recent increases in interest rates, inflation risk and market volatility, continue to deteriorate or remain uncertain for an extended period of time, our ability to access capital could be harmed, which could negatively affect our liquidity and ability to repay our outstanding debt.

Based on our current level of operations, we believe cash flows from operations, available cash, available capacity on our Revolver and continued anticipated access to capital markets, will be adequate to meet our short-term (i.e., 12 months) and long-term (beyond 12 months) liquidity needs.

Certain Non-GAAP Measures

Adjusted EBITDA 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.

Adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered in isolation or as a substitute for net income, operating income or any other measure calculated in accordance with GAAP.

The items excluded from this non-GAAP metric are significant components in understanding and evaluating our financial performance.

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

Our calculation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.

We use Adjusted EBITDA as a measure of financial performance.

Adjusted EBITDA is a key measure used by our management to assess operating performance, make business decisions and allocate resources.

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

Three Months Ended March 31,

Condensed Consolidated Statements of Operations Data:

Income before income taxes $ 32.8 $ 13.4 $ 82.3 $ 77.1

Income (loss) before income taxes $ 28.7 $ (0.4)

Plus (minus):

Net income attributable to non-controlling interests (36.7) (26.1)

Interest expense, net 49.8 60.7 144.3 173.9

Depreciation and amortization 33.7 33.7

Interest expense, net 47.3 46.8

Equity-based compensation expense 4.9 4.2

Transaction, integration and acquisition costs (1)

13.0 13.1 38.8 28.4

Net loss on disposals, consolidations and deconsolidations 1.5 10.5

Litigation settlements and regulatory change impact (2)

4.2 1.5 13.9 (27.6)

Undesignated derivative activity — 0.6

1.2 1.1 7.7 1.1

Adjusted EBITDA $ 97.5 $ 90.1

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.

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.

(1) This amount includes transaction and integration costs of $17.4 million and $12.5 million for the three months ended March 31, 2024 and 2023, respectively.

This amount further includes start-up costs related to de novo surgical facilities of $1.5 million and $0.3 million for the three months ended March 31, 2024 and 2023, respectively.

(2) This amount includes a litigation settlements gain of $1.8 million and a loss of $3.0 million for the three months ended March 31, 2024 and 2023, respectively.

This amount also includes other litigation costs of $0.6 million and $0.6 million for the three months ended March 31, 2024 and 2023, 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.

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.

4 unchanged sentences

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.

These adjustments do not relate to our historical financial performance and instead relate to estimates compiled by 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

Twelve Months Ended March 31, 2024

Cash flows from operating activities $ 260.0

4 unchanged sentences

Equity in earnings of unconsolidated affiliates, net of distributions received 1.0

Other non-cash income 7.5

Changes in operating assets and liabilities, net of acquisitions and divestitures 112.6

3 unchanged sentences

Transaction, integration and acquisition costs 71.0

Litigation settlements and regulatory change impact 16.8

Undesignated derivative activity (7.4)

Litigation settlements and other litigation costs 8.3

Acquisitions and synergies (2)

Credit Agreement EBITDA $ 513.6

(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.

(1) This amount includes estimates for the impact of a cyber event and losses from divested business that occurred in 2023.

(2) Represents impact of acquisitions as if each acquisition had occurred on April 1, 2023.

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