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 2023 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, and 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. 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. 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 2023 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 June 30, 2024, we owned or operated, primarily in partnership with physicians, a portfolio of 167 surgical facilities comprised of 148 ASCs and 19 surgical hospitals across 33 states. We owned a majority interest in 92 of the surgical facilities and consolidated 127 of these facilities for financial reporting purposes. Total revenues for the second quarter of 2024 increased 14.2% to $762.1 million from $667.6 million for the second 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 twelve months ended June 30, 2024. Days adjusted same-facility revenues for the second quarter of 2024 increased 9.9% from the second quarter of 2023, with an 5.7% increase in revenue per case and a 3.9% increase in same-facility cases. Additionally, for the second quarter of 2024, Adjusted EBITDA increased 18.1% to $118.3 million compared to $100.2 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 second quarter of 2024, net loss attributable to common stockholders was $15.5 million compared to net income attributable to common stockholders of $18.9 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 second quarter of 2024, we completed the following: • We acquired a controlling interest in six surgical facilities and several physician practices for aggregate cash consideration of $264.6 million, net of cash acquired, and non-cash consideration of $1.1 million. • We sold a non-controlling interest in a surgical facility for net cash proceeds of $2.0 million. 20 Table of Contents • We sold a portion of our interests in a surgical facility for net cash proceeds of $2.5 million. In connection with this transaction, we no longer hold a controlling interest in the surgical facility but did retain a non-controlling interest, which resulted in the deconsolidation of the previously consolidated entity. We had cash and cash equivalents of $213.5 million and $647.8 million of borrowing capacity under the Revolver as of June 30, 2024. 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, 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 June 30, Six Months Ended June 30, 2024 2023 2024 2023 Patient service revenues: Surgical Facility Services 94.0 % 96.0 % 94.5 % 96.0 % Ancillary Services 4.1 % 2.6 % 3.8 % 2.5 % Total patient service revenues 98.1 % 98.6 % 98.3 % 98.5 % Other service revenues 1.9 % 1.4 % 1.7 % 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 that we consolidate for financial reporting purposes: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Private insurance payors 53.2 % 51.9 % 52.2 % 51.5 % Government payors 41.5 % 42.3 % 42.2 % 43.1 % Self-pay payors 2.8 % 2.6 % 2.8 % 2.5 % Other payors (1) 2.5 % 3.2 % 2.8 % 2.9 % Total 100.0 % 100.0 % 100.0 % 100.0 % (1) Other is comprised of automobile liability, letters of protection and other payor types. 21 Table of Contents 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. 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 June 30, Six Months Ended June 30, 2024 2023 2024 2023 Orthopedics and pain management 39.9 % 34.7 % 40.0 % 35.2 % Ophthalmology 23.4 % 24.7 % 23.4 % 24.4 % Gastrointestinal 22.6 % 24.9 % 22.3 % 24.2 % General surgery 2.3 % 2.6 % 2.3 % 2.8 % Other 11.8 % 13.1 % 12.0 % 13.4 % Total 100.0 % 100.0 % 100.0 % 100.0 % Critical Accounting Policies A summary of significant accounting policies is disclosed in our 2023 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, 2023. 22 Table of Contents Results of Operations Comparison of Operating Results for the Three Months Ended June 30, 2024 to the Three Months Ended June 30, 2023 The following tables summarize certain results from the statements of operations for the periods indicated (in millions): Three Months Ended June 30, 2024 2023 Revenues $ 762.1 $ 667.6 Operating expenses: Cost of revenues 582.9 513.5 General and administrative expenses 40.3 31.2 Depreciation and amortization 34.8 24.4 Transaction and integration costs 19.3 12.0 Net loss (gain) on disposals, consolidations and deconsolidations 5.3 (8.8) Equity in earnings of unconsolidated affiliates (4.4) (2.6) Litigation settlements 0.5 1.5 Loss on debt extinguishment 5.1 — Other income, net (6.5) (1.2) 677.3 570.0 Operating income 84.8 97.6 Interest expense, net (51.5) (47.7) Income before income taxes 33.3 49.9 Income tax (expense) benefit (4.9) 7.8 Net income 28.4 57.7 Less: Net income attributable to non-controlling interests (43.9) (38.8) Net (loss) income attributable to Surgery Partners, Inc. $ (15.5) $ 18.9 Revenues. The following table sets forth patient service revenues (in millions): Three Months Ended June 30, 2024 2023 Patient service revenues $ 748.1 $ 658.0 Other service revenues 14.0 9.6 Total revenues $ 762.1 $ 667.6 Patient service revenues increased 13.7% to $748.1 million for the three months ended June 30, 2024 compared to $658.0 million for the three months ended June 30, 2023. The increase was primarily driven by a 9.9% increase in days adjusted same-facility revenues and the net impact from acquisitions and divestitures completed during the twelve months ended June 30, 2024. The increase in days adjusted same-facility revenues was attributable to a 3.9% increase in same-facility case volumes and a 5.7% increase in same-facility revenue per case. Cost of Revenues. Cost of revenues was $582.9 million for the three months ended June 30, 2024 compared to $513.5 million for the three months ended June 30, 2023. The increase was primarily driven by increased performance of high acuity procedures and acquisitions completed during the twelve months ended June 30, 2024. As a percentage of revenues, cost of revenues was 76.5% and 76.9% for the three months ended June 30, 2024 and 2023, respectively. General and Administrative Expenses. General and administrative expenses were $40.3 million and $31.2 million for the three months ended June 30, 2024 and 2023, respectively. As a percentage of revenues, general and administrative expenses were 5.3% and 4.7% for the three months ended June 30, 2024 and 2023, respectively. Depreciation and Amortization. Depreciation and amortization expenses were $34.8 million and $24.4 million for the three months ended June 30, 2024 and 2023, respectively. As a percentage of revenues, depreciation and amortization expenses were 4.6% and 3.7% for the three months ended June 30, 2024 and 2023, respectively. Transaction and Integration Costs. The Company incurred $19.3 million of transaction and integration costs for the three months ended June 30, 2024 compared to $12.0 million for the three months ended June 30, 2023. The costs for both periods primarily related to ongoing development initiatives and the integration of acquisitions. 23 Table of Contents Net Loss (Gain) on Disposals, Consolidations and Deconsolidations. The net loss (gain) on disposals, consolidations and deconsolidations for the three months ended June 30, 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 (gain) in both periods was primarily attributable to sales and disposals of other assets. Interest Expense, Net. Interest expense, net was $51.5 million for the three months ended June 30, 2024 compared to $47.7 million for the three months ended June 30, 2023. As a percentage of revenues, interest expense, net was 6.8% and 7.1% for the three months ended June 30, 2024 and 2023, respectively. Income Tax (Expense) Benefit . Income tax expense was $4.9 million for the three months ended June 30, 2024 compared to income tax benefit of $7.8 million for the three months ended June 30, 2023. The effective tax rate was 14.7% and (15.6)% for the three months ended June 30, 2024 and 2023, respectively. See Note 1. "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 June 30, 2024 and June 30, 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 5.8% for each of the three months ended June 30, 2024 and 2023. Comparison of Operating Results for the Six Months Ended June 30, 2024 to the Six Months Ended June 30, 2023 The following tables summarize certain results from the statements of operations for the periods indicated (dollars in millions): Six Months Ended June 30, 2024 2023 Revenues $ 1,479.5 $ 1,333.8 Operating expenses: Cost of revenues 1,145.0 1,045.7 General and administrative expenses 73.5 63.2 Depreciation and amortization 68.5 58.1 Transaction and integration costs 36.7 24.5 Net loss on disposals, consolidations and deconsolidations 6.8 1.7 Equity in earnings of unconsolidated affiliates (7.1) (5.9) Litigation settlements (1.3) 4.5 Loss on debt extinguishment 5.1 — Other income, net (8.5) (2.0) 1,318.7 1,189.8 Operating income 160.8 144.0 Interest expense, net (98.8) (94.5) Income before income taxes 62.0 49.5 Income tax (expense) benefit (9.3) 9.4 Net income 52.7 58.9 Less: Net income attributable to non-controlling interests (80.6) (64.9) Net loss attributable to Surgery Partners, Inc. $ (27.9) $ (6.0) Revenues. The following table sets forth patient service revenues (in millions): Six Months Ended June 30, 2024 2023 Patient service revenues $ 1,453.4 $ 1,314.4 Other service revenues 26.1 19.4 Total revenues $ 1,479.5 $ 1,333.8 24 Table of Contents Patient service revenues increased 10.6% to $1.5 billion for the six months ended June 30, 2024 compared to $1.3 billion for the six months ended June 30, 2023. The increase was primarily driven by a 10.0% increase in days adjusted same-facility revenues and the net impact from acquisitions and divestitures completed in 2024. The increase in days adjusted same-facility revenues was attributable to a 2.7% increase in same-facility case volumes and a 7.1% increase in same-facility revenue per case. Cost of Revenues. Cost of revenues was $1.1 billion for the six months ended June 30, 2024 compared to $1.0 billion for the six months ended June 30, 2023. The increase was primarily driven by increased performance of high acuity procedures and acquisitions completed in 2024. As a percentage of revenues, cost of revenues was 77.4% and 78.4% for the six months ended June 30, 2024 and 2023, respectively. General and Administrative Expenses. General and administrative expenses were $73.5 million and $63.2 million for the six months ended June 30, 2024 and 2023, respectively. As a percentage of revenues, general and administrative expenses were 5.0% and 4.7% for the six months ended June 30, 2024 and 2023, respectively. Depreciation and Amortization. Depreciation and amortization expenses were $68.5 million and $58.1 million for the six months ended June 30, 2024 and 2023, respectively. As a percentage of revenues, depreciation and amortization expenses were 4.6% and 4.4% for the six months ended June 30, 2024 and 2023, respectively. Transaction and Integration Costs. The Company incurred $36.7 million of transaction and integration costs for the six months ended June 30, 2024 compared to $24.5 million for the six months ended June 30, 2023. The costs for both periods primarily related to ongoing development initiatives and the integration of acquisitions. Net Loss (Gain) on Disposals, Consolidations and Deconsolidations. The net loss (gain) on disposals, consolidations and deconsolidations for the six months ended June 30, 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 (gain) in both periods was primarily attributable to sales and disposals of other assets. Interest Expense, Net. Interest expense, net was $98.8 million for the six months ended June 30, 2024 compared to $94.5 million for the six months ended June 30, 2023. As a percentage of revenues, interest expense, net was 6.7% and 7.1% for the six months ended June 30, 2024 and 2023, respectively. Income Tax (Expense) Benefit . Income tax expense was $9.3 million for the six months ended June 30, 2024 compared to income tax benefit of $9.4 million for the six months ended June 30, 2023. The effective tax rate was 15.0% and (19.0)% for the six months ended June 30, 2024 and 2023, respectively. See Note 1. "Organization and Summary of Accounting Policies" under the heading Income Taxes for additional information related to the Company's effective tax rates for the six months ended June 30, 2024 and 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 5.4% and 4.9% for the six months ended June 30, 2024 and 2023, respectively. Liquidity and Capital Resources Cash and cash equivalents were $213.5 million at June 30, 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 $123.5 million for the six months ended June 30, 2024 compared to $126.6 million for the six months ended June 30, 2023. The $3.1 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 six months ended June 30, 2024 was $327.2 million compared to $141.9 million for the six months ended June 30, 2023. The $185.3 million increase was primarily driven by an aggregate net increase of $174.4 million in payments for acquisitions (net of cash acquired) and purchases of equity method investments and a $24.6 million decrease in proceeds from sales of facilities. Net cash provided by financing activities for the six months ended June 30, 2024 was $221.3 million compared to net cash used of $90.2 million for the six months ended June 30, 2023. The increase of $311.5 million was primarily driven by net proceeds received from the issuance and sale of $800.0 million in senior unsecured notes, partially offset by the redemption all the Existing Notes (as discussed in the following section). The remaining increase was due to net borrowings on the Revolver used to fund acquisitions completed during the six months ended June 30, 2024. 25 Table of Contents Debt On April 10, 2024, we completed the issuance and sale of $800.0 million in aggregate principal amount of senior unsecured notes due 2032 (the "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. On June 20, 2024, the Company entered into a first amendment to its credit agreement, dated as of December 19, 2023, by and among Surgery Center Holdings, Inc., the Borrower, Jefferies Finance LLC, as administrative agent and collateral agent, and the other financial institutions party thereto from time to time to provide for a new tranche of term loans under the Credit Agreement in an aggregate principal amount of $1.4 billion, which 2024 Refinancing Term Loans replace or refinance in full all of the existing term loans outstanding under the Credit Agreement (as in effect immediately prior to the Amendment), all as further set forth in the Amendment. The 2024 Refinancing Term Loans mature on December 19, 2030. The 2024 Refinancing Term Loans shall bear interest at a rate per annum equal to (x) the forward-looking term rate based on Secured Overnight Financing Rate (“Term SOFR”) plus 2.75% per annum or (y) an alternate base rate (which will be the highest of (i) the prime rate plus 0.5% per annum above the federal funds effective rate and (ii) Term SOFR plus 1.00% per annum (which shall not be less than 1.00%) plus 1.75% per annum. The 2024 Refinancing Term Loans amortize in equal quarterly installments of 0.25% of the aggregate original principal amount of the 2024 Refinancing Term Loans (such amortization payments will commence on or around the last business day of the fiscal quarter ending June 30, 2024). Voluntary prepayments of the 2024 Refinancing Term Loans are permitted, in whole or in part, with prior notice, without premium or penalty (except a 1.00% call premium in the case of certain repricing events occurring prior to the sixth month anniversary of the Amendment Effective Date). Capital Resources Net working capital was approximately $460.7 million at June 30, 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 six months ended June 30, 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. 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, 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 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 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. 26 Table of Contents The following table reconciles Adjusted EBITDA to income before income taxes, the most directly comparable GAAP financial measure (in millions and unaudited): Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Condensed Consolidated Statements of Operations Data: Income before income taxes $ 33.3 $ 49.9 $ 62.0 $ 49.5 Plus (minus): Net income attributable to non-controlling interests (43.9) (38.8) (80.6) (64.9) Depreciation and amortization 34.8 24.4 68.5 58.1 Interest expense, net 51.5 47.7 98.8 94.5 Equity-based compensation expense 15.1 4.6 20.0 8.8 Transaction, integration and acquisition costs (1) 20.8 13.0 39.7 25.8 Net loss (gain) on disposals, consolidations and deconsolidations 5.3 (8.8) 6.8 1.7 Litigation settlements and regulatory change impact (2) 1.1 1.7 (0.1) 9.7 Loss on debt extinguishment 5.1 — 5.1 — Undesignated derivative activity — — — 0.6 Other (3) (4.8) 6.5 (4.4) 6.5 Adjusted EBITDA 118.3 100.2 215.8 190.3 (1) This amount includes transaction and integration costs of $19.3 million and $12.0 million for the three months ended June 30, 2024 and 2023, respectively. This amount further includes start-up costs related to de novo surgical facilities of $1.5 million and $1.0 million for the three months ended June 30, 2024 and 2023, respectively. This amount includes transaction and integration costs of $36.7 million and $24.5 million for the six months ended June 30, 2024 and 2023, respectively. This amount further includes start-up costs related to de novo surgical facilities of $3.0 million and $1.3 million for the six months ended June 30, 2024 and 2023, respectively. (2) This amount includes a litigation settlement loss of $0.5 million and $1.5 million for the three months ended June 30, 2024 and 2023, respectively. This amount also includes other litigation costs of $0.6 million and $0.2 million for the three months ended June 30, 2024 and 2023, respectively. This amount includes a litigation settlements gain of $1.3 million and a loss of $4.5 million for the six months ended June 30, 2024 and 2023, respectively. This amount also includes other litigation costs of $1.2 million and $0.8 million for the six months ended June 30, 2024 and 2023, respectively. Additionally, the six months ended June 30, 2023 includes $4.4 million related to the impact of recent changes in Florida law regarding the use of letters of protection. (3) For the three and six months ended June 30, 2024, this amount includes insurance proceeds related to cyber event losses predominantly incurred in 2023. For the three and six months ended June 30, 2023, this amount includes estimates for the net impact of the same cyber event and losses from a divested business. We use Credit Agreement EBITDA as a measure of liquidity and to determine our compliance under certain covenants pursuant to our Credit Agreement, as amended. 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 management and calculated in conformance with the definition of "Consolidated EBITDA" used in the credit agreements governing our credit facilities. 27 Table of Contents 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 June 30, 2024 Cash flows from operating activities $ 290.7 Plus (minus): Non-cash interest expense, net (15.0) Non-cash lease expense (36.0) Deferred income taxes (17.4) Equity in earnings of unconsolidated affiliates, net of distributions received 1.2 Changes in operating assets and liabilities, net of acquisitions and divestitures 103.1 Income tax expense 18.4 Net income attributable to non-controlling interests (162.9) Interest expense, net 197.3 Transaction, integration and acquisition costs 78.8 Litigation settlements and other litigation costs 7.7 Other (1) (2.3) Acquisitions and synergies (2) 73.6 Credit Agreement EBITDA $ 537.2 (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 July 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 Credit Agreement, as amended.