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Item 7. Management’s Discussion and Analysis

2025-03-07 compared with 2024-02-26 · 117 added, 160 removed, 225 unchanged (55% of the section changed)

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Total revenues for 2024 increased 13.5% to $3.1 billion from $2.7 billion in 2023.

The increase in revenues is attributable to same-facility revenue growth and acquisitions completed in 2023 and 2022.

The increase in revenues was attributable to same-facility revenue growth and acquisitions completed in 2024.

Days adjusted same-facility revenues for 2024 increased 8.0% from 2023, with a 4.0% increase in revenue per case and a 3.9% increase in same-facility cases.

Additionally, for 2024, Adjusted EBITDA increased 16.0% to $508.2 million compared to $438.1 million for 2023.

The increase in Adjusted EBITDA is primarily attributable to revenue growth, continued cost management initiatives and acquisitions completed in 2023 and 2022.

For 2023, the net loss attributable to common stockholders was $11.9 million compared to $54.6 million for 2022.

A reconciliation of non-GAAP financial measures appears below under "Certain Non-GAAP Measures."

We continue to focus on improving our same-facility performance, selectively acquiring established facilities, developing new facilities and other portfolio management initiatives.

During 2023 we completed the following:

• 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.

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.

The increase in Adjusted EBITDA was primarily attributable to revenue growth, continued cost management initiatives and acquisitions completed in 2024 and 2023.

For 2024, net loss attributable to Surgery Partners, Inc.

was $168.1 million compared to $11.9 million for 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 pursuing other portfolio management initiatives.

During 2024, we acquired a controlling interest in eight surgical facilities and several physician practices for aggregate cash consideration of $378.8 million, net of cash acquired, and non-cash consideration of $1.1 million.

We had cash and cash equivalents of $269.5 million and $501.5 million of borrowing capacity under the Revolver as of December 31, 2024.

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.

Patient service revenues consist of revenue from our Surgical Facilities reportable segment.

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.

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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Patient service revenues

Surgical facilities revenues 96.0 % 95.8 % 95.7 %

Ancillary services revenues 2.4 % 2.7 % 3.0 %

Total patient service revenues 98.4 % 98.5 % 98.7 %

98.1 % 98.4 % 98.5 %

Other service revenues 1.9 % 1.6 % 1.5 %

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Total 100.0 % 100.0 % 100.0 %

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

(1) Comprised of automobile liability, letters of protection and other payor types.

Surgical Case Mix

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Segment Information

Our business is comprised of two segments:

Surgical Facility Services and Ancillary Services.

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

Our business is comprised of one reportable segment, Surgical Facilities.

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

"Business-Operations" included elsewhere in this Annual Report.

The "All other" line item below primarily consists of amounts attributable to the Company's corporate general and administrative functions.

The following tables present financial information for each reportable segment (in millions):

The following tables present financial information for the reportable segment (in millions):

Year Ended December 31,

2024 2023 2022

Surgical Facility Services $ 2,675.8 $ 2,470.4 $ 2,157.8

Ancillary Services 67.5 68.9 67.3

Surgical Facilities

$ 3,114.3 $ 2,743.3 $ 2,539.3

Total revenues $ 3,114.3 $ 2,743.3 $ 2,539.3

Adjusted EBITDA:

Surgical Facility Services $ 544.0 $ 473.6 $ 422.0

Ancillary Services (3.9) (2.3) 1.7

All other (102.0) (91.1) (84.1)

Surgical Facilities

$ 610.0 $ 534.3 $ 461.9

(101.8) (96.2) (81.7)

Total Adjusted EBITDA (1)

$ 508.2 $ 438.1 $ 380.2

Depreciation and amortization:

Surgical Facilities $ 138.9 $ 110.8 $ 105.4

All other 13.7 7.3 9.4

Total depreciation and amortization expense $ 152.6 $ 118.1 $ 114.8

Supplemental Information:

Cash purchases of property and equipment, net:

Surgical Facility Services $ 87.9 $ 74.3 $ 55.0

Ancillary Services 0.8 1.1 0.5

All other 0.1 5.2 2.1

Surgical Facilities

$ 86.6 $ 88.7 $ 75.4

Total cash purchases of property and equipment, net $ 90.4 $ 88.8 $ 80.6

(1) For a reconciliation of Adjusted EBITDA to income before income taxes as reflected in the audited consolidated statements of operations see "Certain Non-GAAP Measures" below.

Surgical Facility Services $ 6,347.4 $ 6,001.1

Ancillary Services 36.3 41.7

All other 493.0 639.3

Surgical Facilities

$ 7,466.3 $ 6,383.7

Total assets $ 7,890.0 $ 6,876.7

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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.

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

Contractual allowances are recorded at the time of payment and the time of billing for surgical hospitals and ASCs, respectively.

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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Accounts Receivable

Our patient service revenues and other receivables from third-party payors are recorded net of estimated implicit price concessions, which are estimated based on the historical trend of our surgical hospitals’ cash collections and contractual write-offs, and for our surgical facilities in general, established fee schedules, relationships with payors and procedure statistics.

Our patient service revenues and other receivables from third-party payors are recorded net of contractual allowances and implicit price concessions, which are estimated based on established fee schedules, relationships with payors, procedure statistics and other objective information including the historical trend of cash collections and contractual write-offs.

Contractual allowances are recorded at the time of payment and the time of billing for surgical hospitals and ambulatory surgical centers, respectively.

While changes in estimated reimbursement from third-party payors remain a possibility, we expect that any such changes would be minimal and, therefore, would not have a material effect on our financial condition or results of operations.

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Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

If an NOL and/or interest limitation ("163(j)") carryforward exists, we make a determination as to whether that NOL and/or 163(j) carryforward will be utilized in the future.

A valuation allowance will be established for certain NOL and 163(j) carryforwards and other deferred tax assets where their recoverability is deemed to be uncertain.

The carrying value of the net deferred tax assets is based upon estimates and assumptions related to our ability to generate sufficient future taxable income in certain tax jurisdictions.

If these estimates and related assumptions change in the future, we will be required to adjust our deferred tax valuation allowances.

As of December 31, 2023, we had unused federal NOL carryforwards of approximately $533.6 million.

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 tax payable.

We assess the likelihood that deferred tax assets will be recovered from sources of future taxable income.

To the extent we believe that recovery is not probable, a valuation allowance is established.

To the extent we establish a valuation allowance or subsequently increase or decrease this allowance, we must include an adjustment as part of the income tax provision in our results of operations.

The first step in determining the deferred tax asset valuation allowance is identifying reporting jurisdictions where we have a history of tax and operating losses or are projected to have losses in future periods as a result of changes in operational performance.

We then determine if a valuation allowance should be established against the deferred tax assets for that reporting jurisdiction.

The second step is to determine the amount of the valuation allowance.

We will generally establish a valuation allowance equal to the net deferred tax asset (deferred tax assets less deferred tax liabilities) related to the jurisdiction identified in step one of the analysis.

In certain cases, we may not reduce the valuation allowance by the amount of the deferred tax liabilities depending on the nature and timing of future taxable income attributable to deferred tax liabilities.

We recorded a valuation allowance against our deferred tax assets at December 31, 2024 and 2023 totaling $284.7 million and $150.1 million, respectively.

The valuation allowance has been established for certain deferred tax assets for which we believe it is more likely than not that the tax benefits will not be realized, which are primarily Section 163(j) interest carryforwards and certain state net operating losses and state credit carryforwards.

If our expectations for future operating results on a consolidated basis or at the state jurisdiction level vary from actual results due to changes in health care regulations, general economic conditions, or other factors, we may need to adjust the valuation allowance, for all or a portion of our deferred tax assets.

The valuation allowance has been established for certain deferred tax assets for which we believe it is more likely than not that the tax benefits will not be realized.

Our income tax expense and/or other comprehensive income in future periods will be reduced or increased to the extent of offsetting decreases or increases, respectively, in our valuation allowance in the period when the change in circumstances occurs.

These changes could have a significant impact on our future earnings.

The Company made income tax payments of $1.6 million, $1.4 million and $1.8 million for the years ended December 31, 2024, 2023 and 2022, respectively.

In each of these periods the income tax payments related to states in which the Company does not have a NOL to

offset taxable income.

During the years ended December 31, 2024, 2023 and 2022, the Company made no federal income tax payments due to utilization of its NOL carryforwards.

Section 382 of the Internal Revenue Code of 1986 ("Section 382"), as amended (the "Code") imposes an annual limit on the ability of a corporation that undergoes an "ownership change" to use its NOLs to reduce its tax liability.

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 $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.

The acquisition of shares of the Company by Bain Capital in 2017 to become the controlling stockholder resulted in an ownership change as defined in Section 382.

As a result, approximately $408.6 million in NOL carryforwards are subject to an annual Section 382 base limitation of $14.2 million.

Approximately $404.0 million in NOL carryforwards are subject to annual Section 382 base limitations.

At this time, we do not believe this limitation, when combined with amounts allowable due to net unrecognized built in gains, will affect our ability to use any NOLs before they expire.

However, no such assurances can be provided.

If our ability to utilize our NOLs to offset taxable income generated in the future is subject to this limitation, it could have an adverse effect on our business, prospects, results of operations and financial condition.

There were no material impacts on our financial condition or results of operations due to changes in assumptions or conditions related to income taxes during the years ended December 31, 2023, 2022 and 2021.

In assessing tax contingencies, we apply the provisions of ASC 740, “Income Taxes”.

We apply the recognition threshold and measurement of a tax position taken or expected to be taken in a tax return and follow the guidance on various matters such as derecognition, interest, penalties and disclosure.

We classify interest and penalties as a component of income tax expense.

During each reporting period, we assess the facts and circumstances related to recorded tax contingencies, such as lapsing of applicable statutes of limitations, conclusion of tax audits, additional exposure based on current calculations, identification of new issues, release of administrative guidance, or rendering of a court decision affecting a particular tax issue.

If tax contingencies are no longer deemed probable based upon new facts and circumstances, the contingency is reflected as a reduction of the provision for income taxes in the current period.

Impairment of Goodwill

Goodwill represents the excess of the fair value of the consideration conveyed in the acquisition over the fair value of net assets acquired.

Goodwill is reviewed for impairment at the reporting unit level, which is defined as one level below an operating segment, on an annual basis or sooner if the indicators of impairment arise.

Goodwill is reviewed for impairment at the reporting unit level, which is defined as one level below an operating segment or at the operating segment level, on an annual basis or sooner if the indicators of impairment arise.

Our judgments regarding the existence of impairment indicators are based on market conditions and operational performance of each reporting unit.

During 2023, the Company had identified two reporting units, which include the following:

Surgical Facilities and Ancillary Services.

During 2024, the Company had identified two reporting units, American Group and National Group.

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

A detailed evaluation of potential impairment indicators was performed, which specifically considered recent increases in interest rates, inflation risk and market volatility.

As of October 1, 2023, all of the Company's goodwill was allocated to the Surgical Facilities reporting unit.

As of the October 1, 2023 valuation, the fair value for the Surgical Facilities reporting unit was substantially in excess of its carrying value.

As of the October 1, 2024 valuation, the estimated fair values of the reporting units were substantially in excess of their carrying values.

Subsequent to the date of our annual impairment test, the Company considered its operating results for the fourth quarter of 2024, macroeconomic, industry and market conditions, and other market indicators including its market capitalization.

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Results of Operations

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

Comparison of Operating Results for the Year Ended December 31, 2024 to the Year Ended December 31, 2023

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

Year Ended December 31,

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Transaction and integration costs 100.1 61.7 47.5

Grant funds (1.1) (2.4) (37.9)

Net loss on disposals, consolidations and deconsolidations 40.6 14.4 11.1

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Income before income taxes 147.1 135.0 110.3

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

Income tax (expense) benefit (134.6) 0.3 (23.3)

Net income 12.5 135.3 87.0

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$ (168.1) $ (11.9) $ (54.6)

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

Revenues for 2023 and 2022 were as follows (dollars in millions):

The following table sets forth revenues (in millions):

Year Ended December 31,

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Total revenues $ 3,114.3 $ 2,743.3

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

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.

Patient service revenues increased 13.1% to $3,054.4 million for the year ended December 31, 2024 compared to $2,700.4 million for the year ended December 31, 2023.

The increase was primarily driven by an 8.0% increase in days adjusted same-facility revenues and the net impact from acquisitions and divestitures completed during the year ended December 31, 2024.

The increase in days adjusted same-facility revenues was attributable to a 3.9% increase in same-facility case volumes and a 4.0% increase in same-facility revenue per case.

Cost of Revenues.

Cost of revenues was $2.1 billion in 2023 compared to $2.0 billion in 2022.

The increase was primarily driven by acquisitions completed in 2023 and 2022.

As a percentage of revenues, cost of revenues was 76.4% and 77.4% for 2023 and 2022, respectively.

Cost of revenues was $2,368.7 million for the year ended December 31, 2024 compared to $2,095.8 million for the year ended December 31, 2023.

The increase was primarily driven by increased performance of high acuity procedures and acquisitions completed during the year ended December 31, 2024.

As a percentage of revenues, cost of revenues was 76.1% and 76.4% for the years ended December 31, 2024 and 2023, respectively.

General and Administrative Expenses.

General and administrative expenses were $120.9 million and $102.2 million in 2023 and 2022, respectively.

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

General and administrative expenses were $138.7 million and $120.9 million for the years ended December 31, 2024 and 2023, respectively.

As a percentage of revenues, general and administrative expenses were 4.5% and 4.4% for the years ended December 31, 2024 and 2023, respectively.

Depreciation and Amortization.

Depreciation and amortization expenses were $118.1 million and $114.8 million in 2023 and 2022, respectively.

The increase is primarily due to acquisitions completed in 2023 and 2022.

As a percentage of revenues, depreciation and amortization expenses were 4.3% in 2023 and 4.5% in 2022.

Depreciation and amortization expenses were $152.6 million and $118.1 million for the years ended December 31, 2024 and 2023, respectively.

This increase was primarily due to accelerate depreciation recorded on certain long-lived assets as a result of the Company's portfolio management activities.

As a percentage of revenues, depreciation and amortization expenses were 4.9% and 4.3% for the years ended December 31, 2024 and 2023, respectively.

Transaction and Integration Costs.

We incurred $61.7 million of transaction and integration costs in 2023 compared to $47.5 million in 2022.

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

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.

We incurred $100.1 million of transaction and integration costs for the year ended December 31, 2024 compared to $61.7 million for the year ended December 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 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 net loss on disposals, consolidations and deconsolidations for the years ended December 31, 2024 and 2023 includes activity discussed in Note 2.

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

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

Litigation Settlements.

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.

Litigation settlements in 2023 were not material for individual disclosure.

Loss on Debt Extinguishment.

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 $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 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 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 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.

Interest expense, net was $201.7 million for the year ended December 31, 2024 compared to $193.0 million for the year ended December 31, 2023.

As a percentage of revenues, interest expense, net was 6.5% and 7.0% for the years ended December 31, 2024 and 2023, respectively.

Income Tax (Expense) Benefit .

Income tax expense was $134.6 million for the year ended December 31, 2024 compared to income tax benefit of $0.3 million for the year ended December 31, 2023.

The increase in income tax (expense) benefit was primarily driven by an increase in the valuation allowance as a result of the Company being in a cumulative three-year pre-tax loss position at December 31, 2024.

The effective tax rate was 91.5% and (0.2)% for the years ended December 31, 2024 and 2023, respectively.

"Income Taxes" for additional information related to the Company's effective tax rates for the years ended December 31, 2024 and December 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 5.4% in 2023 and 5.6% in 2022.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Our discussion regarding the comparison of the year ended December 31, 2022 compared to the year ended December 31, 2021 was previously disclosed beginning on page 44 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.

As a percentage of revenues, net income attributable to non-controlling interests was 5.8% and 5.4% for the years ended December 31, 2024 and 2023, respectively.

Comparison of Operating Results for the Year Ended December 31, 2023 to the Year Ended December 31, 2022

Our discussion regarding the comparison of the year ended December 31, 2023 compared to the year ended December 31, 2022 was previously disclosed beginning on page 42 in our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed on February 26, 2024, under "Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Year Ended December 31, 2023 Compared to Year Ended December 31, 2022 " and is hereby incorporated herein by reference.

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Cash and cash equivalents were $269.5 million at December 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 federal and state agencies (under the Medicare and Medicaid programs), private insurance companies and individuals.

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

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.

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:

• 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.

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 $300.1 million for the year ended December 31, 2024 compared to $293.8 million for the year ended December 31, 2023.

The $6.3 million increase was primarily driven by operational growth, partially offset by increased spend on acquisition and integration related costs and the timing of routine working capital.

Net cash used in investing activities for the year ended December 31, 2024 was $488.5 million compared to $225.6 million for the year ended December 31, 2023.

The $262.9 million increase was primarily driven by an aggregate net increase of $250.2 million in payments for acquisitions (net of cash acquired) and purchases of equity method investments and a $23.2 million decrease in proceeds from sales of facilities.

Net cash provided by financing activities for the year ended December 31, 2024 was $262.0 million compared to net cash used of $155.2 million for the year ended December 31, 2023.

The increase of $417.2 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 of 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 year ended December 31, 2024.

Discussion of the operating, investing and financing activities for the year ended December 31, 2023 was previously disclosed beginning on page 43 in our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed on February 26, 2024, under "Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and is hereby incorporated herein by reference.

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

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.

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.

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

We and certain of our subsidiaries have other debt consisting of outstanding bank indebtedness of $205.2 million, which is collateralized by the real estate and equipment owned by the surgical facilities to which the loans were made, and right-of-use finance lease obligations of $693.6 million for which we are liable to various vendors for several property and equipment leases classified as finance leases.

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 the Amendment to the Credit Agreement (as define below), to provide for a new tranche of term loans under the Credit Agreement in an aggregate principal amount of $1.4 billion.

The 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 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.

Voluntary prepayments of the 2024 Refinancing Term Loans are permitted, in whole or in part, with prior notice, without premium or penalty.

Capital Resources

Net working capital was approximately $495.0 million at December 31, 2024 compared to $372.0 million at December 31, 2023.

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.

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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, 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.

Broad economic factors, including recent changes 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.

If general economic conditions, including recent changes 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 (loss) before income taxes, the most directly comparable GAAP financial measure (in millions and unaudited):

Year Ended December 31,

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 before income taxes, the most directly comparable GAAP financial measure (in millions and unaudited):

Three Months Ended December 31,

2024 2023 2022

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Adjusted EBITDA $ 508.2 $ 438.1 $ 380.2

Impact of grant funds (5)

(1.1) (1.7) (25.3)

Adjusted EBITDA excluding grant funds $ 437.0 $ 378.5 $ 314.3

(1) This amount includes transaction and integration costs of $100.1 million, $61.7 million and $47.5 million for the years ended December 31, 2024, 2023 and 2022, respectively.

The $100.1 million for the year ended December 31, 2024, includes approximately $10.7 million of costs associated with evaluating strategic alternatives.

This amount further includes start-up costs related to de novo surgical facilities of $7.9 million, $3.2 million and $1.1 million for the years ended December 31, 2024, 2023 and 2022, respectively.

(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.

(2) This amount includes a net litigation settlements (gain) loss of $0.8 million, $10.6 million and $29.3 million for the years ended December 31, 2024, 2023 and 2022, respectively.

This amount also includes other litigation costs of $3.9 million, $2.5 million and $4.6 million for the years ended December 31, 2024, 2023 and 2022, respectively.

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(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 for the year ended December 31, 2022.

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.

This amount further includes fair value changes of undesignated derivatives for the years ended December 31, 2024, 2023 and 2022.

(4) For the year ended December 31, 2024, this amount includes hurricane-related impacts, net of insurance proceeds related to cyber event losses predominantly incurred in 2023.

For the year ended December 31, 2023, 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, 2022, this amount includes losses incurred, net of insurance proceeds received, related to certain surgical facilities that were closed following Hurricane Ian.

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

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

Year Ended December 31, 2023

Twelve Months Ended December 31, 2024

Cash flows from operating activities $ 300.1

10 unchanged sentences

Litigation settlements and other litigation costs 3.1

Undesignated derivative activity 0.6

Acquisitions and synergies (2)

5 unchanged sentences

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