# Surgery Partners, Inc. (SGRY) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Surgery Partners, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1638833/000163883324000029/sgry-20231231.htm
Accession: 0001638833-24-000029
Filing date: 2024-02-26
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/SGRY/
All MD&A years: /company/SGRY/mda/
Previous year: /company/SGRY/mda/fy2022/ (FY 2022)
Next year: /company/SGRY/mda/fy2024/ (FY 2024)

Item 7. 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 our audited consolidated financial statements and related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. For additional information regarding certain of the risks and uncertainties that affect our business and the industry in which we operate, please see Item 1A. "Risk Factors" and Item 9A. "Controls and Procedures" found elsewhere in this Annual Report. Unless the context otherwise indicates, the terms "Surgery Partners," "we," "us," "our" or the "Company," as used herein, refer to Surgery Partners, Inc. and its subsidiaries. Unless the context implies otherwise, the term "affiliates" means direct and indirect subsidiaries of Surgery Partners, Inc. and partnerships and joint ventures in which such subsidiaries are partners. The terms "facilities" or "hospitals" refer to entities owned and operated by affiliates of Surgery Partners, Inc. and the term "employees" refers to employees of affiliates of Surgery Partners, Inc.

Executive Overview

As of December 31, 2023, we owned or operated, primarily in partnership with physicians, a portfolio of 162 surgical facilities comprised of 144 ASCs and 18 surgical hospitals across 33 states. We owned a majority interest in 90 of the surgical facilities and consolidated 123 of these facilities for financial reporting purposes.

Total revenues for 2023 increased 8.0% to $2.7 billion from $2.5 billion in 2022. The increase in revenues is attributable to same-facility revenue growth and acquisitions completed in 2023 and 2022. Days adjusted same-facility revenues for 2023 increased 11.3% from 2022, with a 7.1% increase in revenue per case and a 3.9% increase in same-facility cases. Additionally, for 2023, Adjusted EBITDA increased 15.2% to $438.1 million compared to $380.2 million for 2022. 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.

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,

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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:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","2022","","2021"],["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","%"],["Other service revenues","","1.6","%","","1.5","%","","1.3","%"],["Total revenues","","100.0","%","","100.0","%","","100.0","%"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","2022","","2021"],["Private insurance payors","","52.5","%","","51.5","%","","50.6","%"],["Government payors","","41.8","%","","42.3","%","","43.3","%"],["Self-pay payors","","2.5","%","","2.6","%","","2.8","%"],["Other payors (1)","","3.2","%","","3.6","%","","3.3","%"],["Total","","100.0","%","","100.0","%","","100.0","%"]]
[[/GREPCENT_TABLE]]

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

Surgical Case Mix

We primarily operate multi-specialty surgical facilities where physicians perform a variety of procedures in various specialties. We believe this diversification helps to protect us from adverse pricing and utilization trends in any individual procedure type and results in greater consistency in our case volume.

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:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","2022","","2021"],["Orthopedics and pain management","","36.1","%","","36.4","%","","35.7","%"],["Ophthalmology","","24.4","%","","24.3","%","","26.3","%"],["Gastrointestinal","","23.7","%","","22.9","%","","22.3","%"],["General surgery","","2.6","%","","3.0","%","","3.0","%"],["Other","","13.2","%","","13.4","%","","12.7","%"],["Total","","100.0","%","","100.0","%","","100.0","%"]]
[[/GREPCENT_TABLE]]

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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. "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):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","2022","","2021"],["Revenues:"],["Surgical Facility Services","","$","2,675.8","","","$","2,470.4","","","$","2,157.8"],["Ancillary Services","","67.5","","","68.9","","","67.3"],["Total revenues","","$","2,743.3","","","$","2,539.3","","","$","2,225.1"],["Adjusted EBITDA:"],["Surgical Facility Services","","$","544.0","","","$","473.6","","","$","422.0"],["Ancillary Services","","(3.9)","","","(2.3)","","","1.7"],["All other","","(102.0)","","","(91.1)","","","(84.1)"],["Total Adjusted EBITDA (1)","","$","438.1","","","$","380.2","","","$","339.6"],["Supplemental Information:"],["Cash purchases of property and equipment, net:"],["Surgical Facility Services","","$","87.9","","","$","74.3","","","$","55.0"],["Ancillary Services","","0.8","","","1.1","","","0.5"],["All other","","0.1","","","5.2","","","2.1"],["Total cash purchases of property and equipment, net","","$","88.8","","","$","80.6","","","$","57.6"]]
[[/GREPCENT_TABLE]]

(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.

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2023","","2022"],["Assets:"],["Surgical Facility Services","","$","6,347.4","","","$","6,001.1"],["Ancillary Services","","36.3","","","41.7"],["All other","","493.0","","","639.3"],["Total assets","","$","6,876.7","","","$","6,682.1"]]
[[/GREPCENT_TABLE]]

Critical Accounting Policies

In preparing our consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles ("GAAP"), we must use estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures and the reported amounts of revenue and expenses. In general, our estimates are based on historical experience and various other assumptions we believe are reasonable under the circumstances. We evaluate our estimates on an ongoing basis and make changes to the estimates and related disclosures as experience develops or new information becomes known. Actual results could differ from those estimates.

We consider our critical accounting policies to be those that involve significant judgments and uncertainties, and may potentially result in materially different results under different assumptions and conditions.

Revenue Recognition

Our patient service revenues are derived primarily from surgical procedures performed at our surgical facilities, patient visits to physician practices, anesthesia services provided to patients, pharmacy services and diagnostic screens ordered by our physicians. The fees for such services are billed either to the patient or a third-party payor, including Medicare and Medicaid. We recognize patient service

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

Other service revenues consist of management and administrative service fees derived from non-consolidated surgical facilities that we account for under the equity method, management of surgical facilities in which we do not own an interest and management services we provide to physician networks for which we are not required to provide capital or additional assets. The fees we derive from these management arrangements are based on a predetermined percentage of the revenues of each surgical facility and physician network. We recognize other service revenues in the period in which services are rendered.

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

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. 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.

Our collection policies and procedures are based on the type of payor, size of claim and estimated collection percentage for each patient account. The operating systems used to manage our patient accounts provide for an aging schedule in 30-day increments, by payor, physician and patient. We analyze accounts receivable at each of our surgical facilities to ensure the proper collection and aged category. The operating systems generate reports that assist in the collection efforts by prioritizing patient accounts. Collection efforts include direct contact with insurance carriers or patients, written correspondence and the use of legal or collection agency assistance, as required. Our average days sales outstanding was 60 and 64 days for the years ended December 31, 2023 and 2022, respectively.

We recognize that final reimbursement of outstanding accounts receivable is subject to final approval by each third-party payor. However, because we have contracts with our third-party payors and we verify the insurance coverage of the patient before services are rendered, the amounts that are pending approval from third-party payors are minimal. Amounts are classified outside of self-pay if we have an agreement with the third-party payor or we have verified a patient’s coverage prior to services rendered. It is our policy to collect co-payments and deductibles prior to providing services, where possible. It is also our policy to verify a patient’s insurance 72 hours prior to the patient’s procedure. Because our services are primarily non-emergency, our surgical facilities have the ability to control these procedures.

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

Income Taxes

We use the asset and liability method to account for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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 recorded a valuation allowance against our deferred tax assets at December 31, 2023 and 2022 totaling $150.1 million and $114.7 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. 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.

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

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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. 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.

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. 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.

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.

Subsequent to the date of our annual impairment test, the Company considered its operating results for the fourth quarter of 2023, macroeconomic, industry and market conditions, and other market indicators including its market capitalization. Based on its evaluation of all such factors, the Company concluded that no event had occurred and no circumstances had changed that would more likely than not reduce the fair value of its reporting units below their carrying values.

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

See Note 4. "Goodwill and Intangible Assets" to the consolidated financial statements elsewhere in this Annual Report for additional disclosure related to goodwill.

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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):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","2022","","2021"],["Revenues","","$","2,743.3","","","$","2,539.3","","","$","2,225.1"],["Operating expenses:"],["Cost of revenues","","2,095.8","","","1,964.4","","","1,733.7"],["General and administrative expenses","","120.9","","","102.2","","","104.0"],["Depreciation and amortization","","118.1","","","114.8","","","98.8"],["Transaction and integration costs","","61.7","","","47.5","","","39.8"],["Grant funds","","(1.1)","","","(2.4)","","","(37.9)"],["Net loss on disposals, consolidations and deconsolidations","","14.4","","","11.1","","","2.2"],["Equity in earnings of unconsolidated affiliates","","(14.2)","","","(12.5)","","","(11.3)"],["Litigation settlements","","10.6","","","(29.3)","","","\u2014"],["Loss on debt extinguishment","","15.5","","","14.9","","","9.1"],["Other income","","(6.4)","","","(16.6)","","","(15.5)"],["","","2,415.3","","","2,194.1","","","1,922.9"],["Operating income","","328.0","","","345.2","","","302.2"],["Interest expense, net","","(193.0)","","","(234.9)","","","(221.0)"],["Income before income taxes","","135.0","","","110.3","","","81.2"],["Income tax benefit (expense)","","0.3","","","(23.3)","","","(10.5)"],["Net income","","135.3","","","87.0","","","70.7"],["Less: Net income attributable to non-controlling interests","","(147.2)","","","(141.6)","","","(141.6)"],["Net loss attributable to Surgery Partners, Inc.","","$","(11.9)","","","$","(54.6)","","","$","(70.9)"]]
[[/GREPCENT_TABLE]]

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

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","2022"],["Patient service revenues","","$","2,700.4","","","$","2,502.1"],["Other service revenues","","42.9","","","37.2"],["Total revenues","","$","2,743.3","","","$","2,539.3"]]
[[/GREPCENT_TABLE]]

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. The increase in days adjusted same-facility revenues was attributable to a 3.9% increase in same-facility case volumes and a 7.1% increase in same-facility revenue per case.

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.

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.

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.

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.

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Grant Funds. 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.

Net Loss on Disposals, Consolidations and Deconsolidations. The net loss on disposals, consolidations and deconsolidations in 2023 and 2022 includes activity discussed in Note 2. "Acquisitions, Disposals and Deconsolidations" to our consolidated financial statements included elsewhere in this Annual Report. The remaining net loss in both periods was primarily attributable to sales and disposals of other assets.

Litigation Settlements. Litigation settlements in 2022 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.

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. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Year Ended December 31, 2022 Compared to Year Ended December 31, 2021" and is hereby incorporated herein by reference.

Liquidity and Capital Resources

Cash and cash equivalents were $195.9 million at December 31, 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 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;

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

Debt

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.

See Note 5. "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.

See Note 5. "Long-Term Debt" to our consolidated financial statements included elsewhere in this Annual Report for a further discussion of the senior unsecured notes.

Other Debt

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.

Capital Resources

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

The following table summarizes our material cash requirements by period as of December 31, 2023 (in millions):

[[GREPCENT_TABLE]]
[["","","Payments Due by Period"],["","","Total","","Less than 1 year","","1-3 years","","4-5 years","","More than 5 years"],["Long-term debt obligations, including interest (1)","","$","4,727.7","","","$","303.3","","","$","761.0","","","$","787.0","","","$","2,876.4"],["Operating lease obligations, including interest (2)","","409.7","","","59.1","","","105.2","","","75.7","","","169.7"],["Total contractual obligations","","$","5,137.4","","","$","362.4","","","$","866.2","","","$","862.7","","","$","3,046.1"]]
[[/GREPCENT_TABLE]]

(1)Included in long-term debt obligations are principal and interest owed on our outstanding debt obligations. These amounts exclude our unamortized fair value adjustments related non-cash amortization for the Term Loan. These obligations are explained further in Note 5. "Long-Term Debt" to our consolidated financial statements included elsewhere in this Annual Report. We used the applicable annual interest rate as of December 31, 2023 of 8.86%, based on SOFR plus the applicable margin, for our $1.4 billion outstanding Term Loan to estimate interest payments on this variable rate debt instrument.

(2)This reflects our future operating lease payments. We enter into operating leases in the normal course of business. Substantially all of our operating lease agreements have fixed payment terms based on the passage of time. Some lease agreements provide us with the option to renew the lease. Our future operating lease obligations would change if we exercised these renewal options and if we entered into additional operating lease agreements. These obligations are explained further in Note 6. "Leases" to our consolidated financial statements included elsewhere in this Annual Report. Operating lease obligations do not include common area maintenance, insurance or tax payments for which we are also obligated to pay.

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 and Adjusted EBITDA excluding grant funds are not measurements of financial performance under GAAP and should not be considered in isolation or as a substitute for net income, operating income or any other measure calculated in accordance with GAAP. The items excluded from these non-GAAP metrics are significant components in understanding and evaluating our financial performance. We believe such adjustments are appropriate, as the magnitude and frequency of such items can vary significantly and are not related to the assessment of normal operating performance. Our calculation of Adjusted EBITDA and Adjusted EBITDA excluding grant funds may not be comparable to similarly titled measures reported by other companies. We use Adjusted EBITDA and Adjusted EBITDA excluding grant funds as measures of financial performance. Adjusted EBITDA and Adjusted EBITDA excluding grant funds are key measures used by our management to assess operating performance, make business decisions and allocate resources.

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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):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","2022","","2021"],["Consolidated Statements of Operations Data:"],["Income before income taxes","","$","135.0","","","$","110.3","","","$","81.2"],["Plus (minus):"],["Net income attributable to non-controlling interests","","(147.2)","","","(141.6)","","","(141.6)"],["Depreciation and amortization","","118.1","","","114.8","","","98.8"],["Interest expense, net","","193.0","","","234.9","","","221.0"],["Equity-based compensation expense","","17.7","","","18.4","","","17.4"],["Transaction, integration and acquisition costs (1)","","64.9","","","48.6","","","46.1"],["Net loss on disposals, consolidations and deconsolidations","","14.4","","","11.1","","","2.2"],["Litigation settlements and regulatory change impact (2)","","17.5","","","(24.7)","","","5.6"],["Loss on debt extinguishment","","15.5","","","14.9","","","9.1"],["Undesignated derivative activity (3)","","0.6","","","(8.0)","","","\u2014"],["Other (4)","","8.6","","","1.5","","","(0.2)"],["Adjusted EBITDA","","$","438.1","","","$","380.2","","","$","339.6"],["Less: Impact of grant funds (5)","","(1.1)","","","(1.7)","","","(25.3)"],["Adjusted EBITDA excluding grant funds","","$","437.0","","","$","378.5","","","$","314.3"]]
[[/GREPCENT_TABLE]]

(1)This amount includes transaction and integration costs of $61.7 million, $47.5 million and $39.8 million for the years ended December 31, 2023, 2022 and 2021, respectively. This amount further includes start-up costs related to de novo surgical facilities of $3.2 million, $1.1 million and $6.3 million for the years ended December 31, 2023, 2022 and 2021, respectively.

(2)This amount includes a litigation settlements loss of $10.6 million and a net gain of $29.3 million for the years ended December 31, 2023 and 2022, respectively, with no comparable costs in 2021. This amount also includes other litigation costs of $2.5 million, $4.6 million and $5.6 million for the years ended December 31, 2023, 2022 and 2021, respectively. Additionally, the year ended December 31, 2023, includes $4.4 million related to the impact of recent changes in Florida law regarding the use of letters of protection.

(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.

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. 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.

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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):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2023"],["Cash flows from operating activities","","$","293.8"],["Plus (minus):"],["Non-cash interest expense, net","","(25.0)"],["Non-cash lease expense","","(35.2)"],["Deferred income taxes","","1.7"],["Equity in earnings of unconsolidated affiliates, net of distributions received","","2.2"],["Changes in operating assets and liabilities, net of acquisitions and divestitures","","63.5"],["Income tax expense","","(0.3)"],["Net income attributable to non-controlling interests","","(147.2)"],["Interest expense, net","","193.0"],["Transaction, integration and acquisition costs","","64.9"],["Litigation settlements and other litigation costs","","17.5"],["Undesignated derivative activity","","0.6"],["Other (1)","","8.6"],["Acquisitions and synergies (2)","","73.6"],["Credit Agreement EBITDA","","$","511.7"]]
[[/GREPCENT_TABLE]]

(1)This amount includes estimates for the impact of a cyber event, losses from divested business and hurricane-related impacts.

(2)Represents impact of acquisitions as if each acquisition had occurred on January 1, 2023. Further this includes revenue and cost synergies from other business initiatives and de novo facilities and an adjustment for the effects of adopting the new lease accounting standard, as defined in the credit agreement governing the New Credit Facilities.

Inflation

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