Surgery Partners, Inc. (SGRY) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
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, 2024, we owned or operated, primarily in partnership with physicians, a portfolio of 161 surgical facilities comprised of 142 ASCs and 19 surgical hospitals across 31 states. We owned a majority interest in 83 of the surgical facilities and consolidated 118 of these facilities for financial reporting purposes.
Total revenues for 2024 increased 13.5% to $3.1 billion from $2.7 billion in 2023. 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 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.
Revenues
Our revenues consist of patient service revenues and other service revenues. 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.
The following table summarizes revenues by service type as a percentage of total revenues:
| Year Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | |||||||||||
| Patient service revenues | 98.1 | % | 98.4 | % | 98.5 | % | |||||||
| Other service revenues | 1.9 | % | 1.6 | % | 1.5 | % | |||||||
| Total revenues | 100.0 | % | 100.0 | % | 100.0 | % |
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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:
| Year Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | |||||||||||
| Private insurance payors | 53.5 | % | 52.5 | % | 51.5 | % | |||||||
| Government payors | 41.1 | % | 41.8 | % | 42.3 | % | |||||||
| Self-pay payors | 2.7 | % | 2.5 | % | 2.6 | % | |||||||
| Other payors (1) | 2.7 | % | 3.2 | % | 3.6 | % | |||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % |
(1)Comprised of automobile 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:
| Year Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | |||||||||||
| Orthopedics and pain management | 40.2 | % | 36.1 | % | 36.4 | % | |||||||
| Ophthalmology | 23.3 | % | 24.4 | % | 24.3 | % | |||||||
| Gastrointestinal | 22.6 | % | 23.7 | % | 22.9 | % | |||||||
| General surgery | 2.3 | % | 2.6 | % | 3.0 | % | |||||||
| Other | 11.6 | % | 13.2 | % | 13.4 | % | |||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % |
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Segment Information
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 the reportable segment (in millions):
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | |||||||||
| Revenues: | |||||||||||
| 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 Facilities | $ | 610.0 | $ | 534.3 | $ | 461.9 | |||||
| All Other | (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 Facilities | $ | 86.6 | $ | 88.7 | $ | 75.4 | |||||
| All Other | 3.8 | 0.1 | 5.2 | ||||||||
| 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.
| December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2024 | 2023 | ||||||
| Assets: | |||||||
| Surgical Facilities | $ | 7,466.3 | $ | 6,383.7 | |||
| All Other | 423.7 | 493.0 | |||||
| Total assets | $ | 7,890.0 | $ | 6,876.7 |
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 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. 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, 2024, 2023 and 2022.
Accounts Receivable
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.
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 61 and 60 days for the years ended December 31, 2024 and 2023, 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, 2024, 2023 and 2022.
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. 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. 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
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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. 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.
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 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 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 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. 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 2024, 2023 and 2022, 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
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, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | |||||||||
| Revenues | $ | 3,114.3 | $ | 2,743.3 | $ | 2,539.3 | |||||
| Operating expenses: | |||||||||||
| Cost of revenues | 2,368.7 | 2,095.8 | 1,964.4 | ||||||||
| General and administrative expenses | 138.7 | 120.9 | 102.2 | ||||||||
| Depreciation and amortization | 152.6 | 118.1 | 114.8 | ||||||||
| Transaction and integration costs | 100.1 | 61.7 | 47.5 | ||||||||
| Net loss on disposals, consolidations and deconsolidations | 40.6 | 14.4 | 11.1 | ||||||||
| Equity in earnings of unconsolidated affiliates | (19.5) | (14.2) | (12.5) | ||||||||
| Litigation settlements | (0.8) | 10.6 | (29.3) | ||||||||
| Loss on debt extinguishment | 5.1 | 15.5 | 14.9 | ||||||||
| Other income | (20.0) | (7.5) | (19.0) | ||||||||
| 2,765.5 | 2,415.3 | 2,194.1 | |||||||||
| Operating income | 348.8 | 328.0 | 345.2 | ||||||||
| Interest expense, net | (201.7) | (193.0) | (234.9) | ||||||||
| Income before income taxes | 147.1 | 135.0 | 110.3 | ||||||||
| Income tax (expense) benefit | (134.6) | 0.3 | (23.3) | ||||||||
| Net income | 12.5 | 135.3 | 87.0 | ||||||||
| Less: Net income attributable to non-controlling interests | (180.6) | (147.2) | (141.6) | ||||||||
| Net loss attributable to Surgery Partners, Inc. | $ | (168.1) | $ | (11.9) | $ | (54.6) |
Revenues. The following table sets forth revenues (in millions):
| Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2024 | 2023 | ||||||
| Patient service revenues | $ | 3,054.4 | $ | 2,700.4 | |||
| Other service revenues | 59.9 | 42.9 | |||||
| Total revenues | $ | 3,114.3 | $ | 2,743.3 |
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 $2,368.7 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 $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 $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.
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Transaction and Integration Costs. 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 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.
Interest Expense, Net. 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. See Note 9. "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 5.8% 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.
Liquidity and Capital Resources
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 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.
Debt
On April 10, 2024, we completed the issuance and sale of $800.0 million in aggregate principal amount of senior unsecured notes due 2032 (the "2032 Notes"). The 2032 Notes bear interest at an annual rate of 7.250% per year, payable semi-annually on April 15 and October 15 of each year, beginning on October 15, 2024. Proceeds from sale of the 2032 Notes were used (i) to redeem all of the outstanding 2025 Notes and 2027 Notes, (ii) to pay accrued interest on the Existing Notes through, but not including, April 25, 2024, (iii) to pay related fees and expenses in connection with the offering of the 2032 Notes and redemption of the Existing Notes, and (iv) for general corporate purposes, including to fund future acquisitions.
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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.
In addition to cash flows from operations and available cash, other sources of capital include amounts available on our Revolver as well as anticipated continued access to the capital markets.
Material Cash Requirements
The following table summarizes our material cash requirements by period as of December 31, 2024 (in millions):
| 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) | $ | 5,208.2 | $ | 327.2 | $ | 592.1 | $ | 546.8 | $ | 3,742.1 | |||||||||
| Operating lease obligations, including interest (2) | 409.7 | 59.1 | 105.2 | 75.7 | 169.7 | ||||||||||||||
| Total contractual obligations | $ | 5,617.9 | $ | 386.3 | $ | 697.3 | $ | 622.5 | $ | 3,911.8 |
(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, 2024 of 7.09%, 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 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 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 is not a measurement of financial performance under GAAP and should not be considered in isolation or as a substitute for net income, operating income or any other measure calculated in accordance with GAAP. The items excluded from this non-GAAP metric are significant components in understanding and evaluating our financial performance. We believe such adjustments are appropriate, as the magnitude and frequency of such items can vary significantly and are not related to the assessment of normal operating performance. Our calculation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. We use Adjusted EBITDA as a measure of financial performance. Adjusted EBITDA is a key measure used by our management to assess operating performance, make business decisions and allocate resources.
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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 | |||||||||
| Consolidated Statements of Operations Data: | |||||||||||
| Income before income taxes | $ | 147.1 | $ | 135.0 | $ | 110.3 | |||||
| Plus (minus): | |||||||||||
| Net income attributable to non-controlling interests | (180.6) | (147.2) | (141.6) | ||||||||
| Depreciation and amortization | 152.6 | 118.1 | 114.8 | ||||||||
| Interest expense, net | 201.7 | 193.0 | 234.9 | ||||||||
| Equity-based compensation expense | 33.3 | 17.7 | 18.4 | ||||||||
| Transaction, integration and acquisition costs (1) | 108.0 | 64.9 | 48.6 | ||||||||
| Net loss on disposals, consolidations and deconsolidations | 40.6 | 14.4 | 11.1 | ||||||||
| Litigation settlements and regulatory change impact (2) | 3.1 | 17.5 | (24.7) | ||||||||
| Loss on debt extinguishment | 5.1 | 15.5 | 14.9 | ||||||||
| Undesignated derivative activity (3) | — | 0.6 | (8.0) | ||||||||
| Other (4) | (2.7) | 8.6 | 1.5 | ||||||||
| Adjusted EBITDA | $ | 508.2 | $ | 438.1 | $ | 380.2 |
(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 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. 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, 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. 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):
| Twelve Months Ended December 31, 2024 | |||
|---|---|---|---|
| Cash flows from operating activities | $ | 300.1 | |
| Plus (minus): | |||
| Non-cash interest expense, net | (6.5) | ||
| Non-cash lease expense | (38.9) | ||
| Deferred income taxes | (131.5) | ||
| Equity in earnings of unconsolidated affiliates, net of distributions received | 2.0 | ||
| Changes in operating assets and liabilities, net of acquisitions and divestitures | 118.9 | ||
| Income tax expense | 134.6 | ||
| Net income attributable to non-controlling interests | (180.6) | ||
| Interest expense, net | 201.7 | ||
| Transaction, integration and acquisition costs | 108.0 | ||
| Litigation settlements and other litigation costs | 3.1 | ||
| Other (1) | (2.7) | ||
| Acquisitions and synergies (2) | 58.4 | ||
| Credit Agreement EBITDA | $ | 566.6 |
(1)This amount includes estimates for the impact of a cyber event, losses from divested business and hurricane-related impacts.
(2)Represents impact of acquisitions as if each acquisition had occurred on January 1, 2024. 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.