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Dynamic quotes 
OFFON

SURGERY PARTNERS, INC.

(SGRY)
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SURGERY PARTNERS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/04/2021 | 04:23pm EDT
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the condensed consolidated
financial statements and related notes included elsewhere in this report and our
2020 Annual Report on Form 10-K. Unless the context otherwise indicates, the
terms "Surgery Partners," "we," "us," "our" or the "Company," as used herein,
refer to Surgery Partners, Inc. and its subsidiaries. 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.
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements, which are based on our current
expectations, estimates and assumptions about future events. All statements
other than statements of current or historical fact contained in this report are
forward-looking statements. These statements include, but are not limited to,
statements regarding our future financial position, business strategy, budgets,
effective tax rate, projected costs and plans and objectives of management for
future operations. The words "projections," "believe," "continue," "drive,"
"estimate," "expect," "intend," "may," "plan," "will," "could," "would" and
similar expressions are generally intended to identify forward-looking
statements. These statements involve risks, uncertainties and other factors that
may cause actual results to differ from the expectations expressed in the
statements. Many of these factors are beyond our ability to control or predict.
These factors include, without limitation, the continuing effects of the
COVID-19 outbreak in the United States and the regions in which we operate; the
impact to the state and local economies of re-instituted restrictive orders and
the pandemic generally; our ability to respond nimbly to challenging economic
conditions; the unpredictability of our case volume in the current environment;
our ability to preserve or raise sufficient funds to continue operations
throughout this period of uncertainty; the impact of our cost-cutting measures
on our future performance; our ability to cause distributions from our
subsidiaries; the responsiveness of our payors, including Medicaid and Medicare,
to the challenging operating conditions, including their willingness and ability
to continue paying in a timely manner and to advance payments in a timely
manner, if at all; the impact of COVID-19 related stimulus programs, including
the CARES Act, and uncertainty in how these programs may be administered,
monitored and modified in the future; our ability to execute on our operational
and strategic initiatives; the timing and impact of our portfolio optimization
efforts; our ability to continue to improve same-facility volume and revenue
growth on the timeline anticipated, if at all; our ability to successfully
integrate acquisitions; the anticipated impact and timing of our ongoing
efficiency efforts; the impact of adverse weather conditions and other events
outside of our control; and the risks and uncertainties set forth under the
heading "Risk Factors" in our 2020 Annual Report on Form 10-K and discussed from
time to time in our reports filed with the SEC.
Considering these risks, uncertainties and assumptions, the forward-looking
events and circumstances discussed in this report may not occur, and actual
results could differ materially from those anticipated or implied in the
forward-looking statements. When you consider these forward-looking statements,
you should keep in mind these risk factors and other cautionary statements in
this report.
These forward-looking statements speak only as of the date made. Other than as
required by law, we undertake no obligation to publicly update or revise any
forward-looking statements, whether because of new information, future events or
otherwise.
Executive Overview
Total revenues for the second quarter of 2021 increased 45.0% to $543.3
million from $374.7 million for the second quarter of 2020. Same-facility
revenues for the second quarter of 2021 increased 44.8% from the same period
last year, with a 14.0% decrease in revenue per case and a 68.3% increase in
same-facility cases. The increase in same-facility revenues is attributable to
the Company's recovery from the negative impacts of the COVID-19 pandemic in the
second quarter of 2020. For the second quarter of 2021, the Company's net loss
attributable to common stockholders and Adjusted EBITDA was $26.9 million and
$75.9 million, respectively, compared to $42.2 million and $58.2 million for the
same period last year. A reconciliation of non-GAAP financial measures appears
below under "Certain Non-GAAP Metrics." The increase in Adjusted EBITDA was
primarily attributable to the Company's recovery from the negative impacts of
the COVID-19 pandemic in the second quarter of 2020.
We had cash and cash equivalents of $464.8 million and $163.7 million of
borrowing capacity under our revolving credit facility at June 30, 2021.
Operating cash inflows were $2.3 million in the second quarter of 2021, a
decrease of $179.6 million compared to the prior year period. Net operating cash
flows, including operating cash flows less distributions to non-controlling
interests, were an outflow of $29.8 million for the second quarter of 2021,
compared to an inflow of $154.2 million for the second quarter of 2020. The
decrease in operating cash flows and net operating cash flows compared to the
same period in 2020 is primarily due to the final DOJ settlement payment in the
second quarter of 2021, receipts of government grants and Medicare advance
payments provided through the CARES Act as well as actions taken to
significantly reduce cash operating expenses and defer non-essential
expenditures during the second quarter of 2020.
Impact of COVID-19
The COVID-19 global pandemic has significantly affected our facilities,
employees, patients, communities, business operations and financial performance,
as well as the U.S. economy and financial markets. The COVID-19 pandemic
materially impacted our financial performance for the year ended December 31,
2020, and has continued to impact our financial performance during the six
months ended June 30, 2021. The length and severity of the pandemic continues to
be difficult to predict and is dependent on factors beyond our control. The
impact of the COVID-19 pandemic on our surgical facilities varies based on the
market in which the facility operates, the type of

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surgical facility and the procedures typically performed. Although we cannot
provide any certainty regarding the length and severity of the impact of the
COVID-19 pandemic, surgical case volumes continue to improve as states re-open
and allow for non-emergent procedures. We cannot predict if or when utilization
may return to pre-pandemic levels.
The Company is continuing to monitor legislative actions at federal and state
levels, including the impact of the CARES Act and other governmental assistance
that might be available.
Executive Order
On July 9, 2021, President Biden issued an executive order that is intended to
promote competition in the American economy. Among other things, the executive
order encourages the Federal Trade Commission ("FTC") to ban or limit
non-compete agreements, encourages the DOJ and the FTC to review and revise
their merger guidelines to ensure that patients are not harmed by healthcare
mergers, and instructs HHS to support existing price transparency rules and
implement the legislation that was recently adopted to address surprise billing.
We cannot predict how, if at all, the various initiatives set forth in the
executive order will be implemented by the regulatory agencies involved or the
impact that the executive order will have on operations.
Revenues
Our revenues consist of patient service revenues and other service revenues.
Patient service revenues consist of revenue from our surgical facility services
and ancillary services segments. Specifically, patient service revenues include
fees for surgical or diagnostic procedures performed at surgical facilities that
we consolidate for financial reporting purposes, as well as for patient visits
to our physician practices, anesthesia services, pharmacy services and
diagnostic screens ordered by our physicians. Other service revenues include
management and administrative service fees derived from our non-consolidated
facilities that we account for under the equity method, management of surgical
facilities and physician practices in which we do not own an interest and
management services we provide to physician practices for which we are not
required to provide capital or additional assets. For the three and six months
ended June 30, 2020, other service revenues also includes optical service
revenues, which consisted of handling charges billed to the members of our
optical products purchasing organization, which was sold on December 31, 2020.
The following table summarizes our revenues by service type as a percentage of
total revenues for the periods indicated:
                                                    Three Months Ended June 30,                    Six Months Ended June 30,
                                                    2021                   2020                   2021                   2020
Patient service revenues:
Surgical facilities revenues                           95.5  %                95.0  %                95.5  %                94.8  %
Ancillary services revenues                             3.2  %                 3.5  %                 3.2  %                 3.7  %
Total patient service revenues                         98.7  %                98.5  %                98.7  %                98.5  %
Other service revenues                                  1.3  %                 1.5  %                 1.3  %                 1.5  %
Total revenues                                        100.0  %               100.0  %               100.0  %               100.0  %


Payor Mix
The following table sets forth by type of payor the percentage of our patient
service revenues generated at the surgical facilities which we consolidate for
financial reporting purposes in the periods indicated:
                                                             Three Months Ended June 30,                    Six Months Ended June 30,
                                                             2021                   2020                   2021                   2020

Private insurance payors                                        50.9  %                54.0  %                49.8  %                52.9  %
Government payors                                               42.2  %                38.1  %                43.5  %                39.4  %
Self-pay payors                                                  3.3  %                 3.0  %                 3.0  %                 3.0  %
Other payors (1)                                                 3.6  %                 4.9  %                 3.7  %                 4.7  %
Total                                                          100.0  %               100.0  %               100.0  %               100.0  %


(1)Other is comprised of anesthesia service agreements, 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.

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

                                                           Three Months Ended June 30,                    Six Months Ended June 30,
                                                           2021                   2020                   2021                   2020

Orthopedic and pain management                                35.2  %                44.0  %                36.3  %                40.9  %
Ophthalmology                                                 26.9  %                23.1  %                26.2  %                24.7  %
Gastrointestinal                                              22.3  %                15.8  %                21.9  %                18.2  %
General surgery                                                2.9  %                 3.5  %                 3.0  %                 3.3  %
Other                                                         12.7  %                13.6  %                12.6  %                12.9  %
Total                                                        100.0  %               100.0  %               100.0  %               100.0  %


Critical Accounting Policies
A summary of significant accounting policies is disclosed in our 2020 Annual
Report on Form 10-K under the caption "Critical Accounting Policies" in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations section. There have been no material changes in the nature of our
critical accounting policies or the application of those policies since December
31, 2020.
Results of Operations
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
The following table summarizes certain results from the statements of operations
for the three months ended June 30, 2021 and 2020 (dollars in millions):
                                                                            

Three Months Ended June 30,

                                                                               2021                  2020

Revenues                                                                 $        543.3          $   374.7
Operating expenses:
Cost of revenues                                                                  425.0              319.3
General and administrative expenses                                                24.5               25.3
Depreciation and amortization                                                      25.2               23.4
Income from equity investments                                                     (3.0)              (2.5)
Loss on disposals and deconsolidations, net                                         1.0                2.9
Transaction and integration costs                                                   9.2                4.9
Grant funds                                                                        (4.9)             (43.1)
Loss on debt extinguishment                                                         9.6                  -
Other income                                                                       (2.8)              (0.2)
Total operating expenses                                                          483.8              330.0
Operating income                                                                   59.5               44.7
Interest expense, net                                                             (53.4)             (49.2)
Income (loss) before income taxes                                                   6.1               (4.5)
Income tax benefit                                                                 (2.7)              (0.6)
Net income (loss)                                                                   8.8               (3.9)
Less: Net income attributable to non-controlling interests                        (35.7)             (28.6)
Net loss attributable to Surgery Partners, Inc.                          $  

(26.9) $ (32.5)



Overview. During the three months ended June 30, 2021, our revenues increased
45.0% to $543.3 million compared to $374.7 million for the three months ended
June 30, 2020. We incurred a net loss attributable to Surgery Partners, Inc. of
$26.9 million for the 2021 period, compared to $32.5 million for the 2020
period. The increase in revenues was primarily attributable to increases in
surgical case volumes as the Company continues to recover from the COVID-19
pandemic that began in the first quarter of 2020 and acquisitions completed in
2020.

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Revenues. Revenues for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 were as follows (dollars in millions):

                                                Three Months Ended June 30,
                                                     2021                   2020

           Patient service revenues      $        535.9                   $ 369.1
           Other service revenues                   7.4                       5.6
           Total revenues                $        543.3                   $ 374.7


Patient service revenues increased 45.2% to $535.9 million for the three months
ended June 30, 2021 compared to $369.1 million for the three months ended
June 30, 2020. The increase of 45.2% was driven by a 68.3% increase in
same-facility case volume primarily resulting from case count and case mix
recovery from the impacts of the COVID-19 pandemic that the Company began
experiencing in the first quarter of 2020, offset by a 14.0% decrease in
same-facility revenue per case.
Cost of Revenues. Cost of revenues were $425.0 million for the three months
ended June 30, 2021 compared to $319.3 million for the three months ended
June 30, 2020. The increase was primarily driven by case count and case mix
recovery from the impacts of the COVID-19 pandemic that the Company began
experiencing in the first quarter of 2020. As a percentage of revenues, cost of
revenues decreased to 78.2% for the 2021 period compared to 85.2% for the 2020
period, as lower acuity procedures with lower cost of sales returned from
COVID-19 related lows experienced in the second quarter of 2020.
General and Administrative Expenses. General and administrative expenses were
$24.5 million for the three months ended June 30, 2021 compared to $25.3 million
for the three months ended June 30, 2020. As a percentage of revenues, general
and administrative expenses decreased to 4.5% for the 2021 period compared to
6.8% for the 2020 period.
Depreciation and Amortization. Depreciation and amortization was $25.2 million
and $23.4 million for the three months ended June 30, 2021 and 2020,
respectively. The increase is primarily due to acquisitions completed in 2021
and 2020. As a percentage of revenues, depreciation and amortization expenses
was 4.6% for the 2021 period compared to 6.2% for the 2020 period.
Transaction and Integration Costs. We incurred $9.2 million of transaction and
integration costs for the three months ended June 30, 2021 compared to $4.9
million for the three months ended June 30, 2020. The increase primarily relates
to costs for ongoing development initiatives and the integration of acquisitions
we completed in 2021 and 2020.
Grant Funds. During the three months ended June 30, 2021, the Company received
approximately $1 million of additional grants from HHS. Based on guidance from
HHS and other authorities, the Company updated its estimate of the amount of
grant funds received that qualify for recognition, resulting in the recognition
of $4.9 million during the three months ended June 30, 2021. Grant funds were
$43.1 million for the three months ended June 30, 2020. For further discussion,
see Note 1. "Organization and Summary of Accounting Polices - COVID-19 Pandemic"
to our condensed consolidated financial statements included elsewhere in this
report.
Loss on Debt Extinguishment. We incurred a loss on debt extinguishment of
$9.6 million for the 2021 period. See Note 3. "Long-Term Debt" to our condensed
consolidated financial statements included elsewhere in this report for further
discussion.
Interest Expense, Net. Interest expense, net, increased to $53.4 million for the
three months ended June 30, 2021 compared to $49.2 million for the three months
ended June 30, 2020. The increase primarily relates to the 2020 Incremental Term
Loans, which were fully drawn on April 22, 2020 and the issuance of additional
2027 Unsecured Notes in the amount of $115.0 million effective July 30, 2020. As
a percentage of revenues, interest expense, net was 9.8% for the 2021 period
compared to 13.1% for the 2020 period.
Income Tax Benefit.  The income tax benefit was $2.7 million and $0.6 million
for the three months ended June 30, 2021 and 2020, respectively. The effective
tax rate was (44.3)% for the three months ended June 30, 2021 compared to 13.3%
for the three months ended June 30, 2020. For the three months ended June 30,
2021, the effective tax rate differed from 21% primarily due to tax benefits of
$3.0 million related to entity divestitures. For the three months ended June 30,
2020, the effective tax rate differed from 21% primarily due to the reversal of
the Company's earnings attributable to minority interest. Based upon the
application of interim accounting guidance, the tax rate as a percentage of net
income after income attributable to non-controlling interests will vary based
upon the relative net income from period to period.
Net Income Attributable to Non-Controlling Interests. Net income attributable to
non-controlling interests was $35.7 million for the three months ended June 30,
2021 compared to $28.6 million for the three months ended June 30, 2020. As a
percentage of revenues, net income attributable to non-controlling interests was
6.6% for the 2021 period and 7.6% for the 2020 period.

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Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020 The following table summarizes certain results from the statements of operations for the six months ended June 30, 2021 and 2020 (dollars in millions):

                                                                               Six Months Ended June 30,
                                                                                2021                  2020

Revenues                                                                 $       1,055.7          $   815.7
Operating expenses:
Cost of revenues                                                                   833.9              685.5
General and administrative expenses                                                 51.3               48.1
Depreciation and amortization                                                       50.9               45.2
Income from equity investments                                                      (5.6)              (4.5)
Loss on disposals and deconsolidations, net                                          0.1                6.4
Transaction and integration costs                                                   14.5               10.4
Grant funds                                                                        (20.0)             (43.1)
Loss on debt extinguishment                                                          9.6                  -
Litigation settlement                                                                  -                1.2
Other income                                                                        (2.8)              (1.7)
Total operating expenses                                                           931.9              747.5
Operating income                                                                   123.8               68.2
Interest expense, net                                                             (106.7)             (96.3)
Income (loss) before income taxes                                                   17.1              (28.1)
Income tax benefit                                                                  (2.5)             (15.8)
Net income (loss)                                                                   19.6              (12.3)
Less: Net income attributable to non-controlling interests                         (67.5)             (47.7)
Net loss attributable to Surgery Partners, Inc.                          $  

(47.9) $ (60.0)



Overview. During the six months ended June 30, 2021, our revenues increased
29.4% to $1,055.7 million compared to $815.7 million for the six months ended
June 30, 2020. We incurred a net loss attributable to Surgery Partners, Inc. of
$47.9 million for the 2021 period, compared to $60.0 million for the 2020
period. The increase in revenues was primarily attributable to increases in
surgical case volumes as the Company continues to recover from the COVID-19
pandemic that began in the first quarter of 2020 and acquisitions completed in
2020.
Revenues. Revenues for the six months ended June 30, 2021 compared to the six
months ended June 30, 2020 were as follows (dollars in millions):
                                                 Six Months Ended June 30,
                                                     2021                 2020

            Patient service revenues      $       1,041.6               $ 803.7
            Other service revenues                   14.1                  12.0
            Total revenues                $       1,055.7               $ 815.7


Patient service revenues increased 29.6% to $1,041.6 million for the six months
ended June 30, 2021 compared to $803.7 million for the six months ended June 30,
2020. The increase of 29.6% was driven by a 32.7% increase in same-facility case
volume partially offset by a 2.9% decrease in same-facility revenue per case.
The increase was primarily driven by case count and case mix recovery from the
impacts of the COVID-19 pandemic that the Company began experiencing in the
first quarter of 2020.
Cost of Revenues. Cost of revenues were $833.9 million for the six months ended
June 30, 2021 compared to $685.5 million for the six months ended June 30, 2020.
The increase was primarily driven by case count and case mix recovery from the
impacts of the COVID-19 pandemic that the Company began experiencing in the
first quarter of 2020. As a percentage of revenues, cost of revenues decreased
to 79.0% for the 2021 period compared to 84.0% for the 2020 period, as lower
acuity procedures with lower cost of sales returned from COVID-19 related lows
experienced in the second quarter of 2020.

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General and Administrative Expenses. General and administrative expenses were
$51.3 million for the six months ended June 30, 2021 compared to $48.1 million
for the six months ended June 30, 2020. As a percentage of revenues, general and
administrative expenses decreased to 4.9% for the 2021 period compared to 5.9%
for the 2020 period.
Depreciation and Amortization. Depreciation and amortization was $50.9 million
and $45.2 million for the six months ended June 30, 2021 and 2020, respectively.
The increase is primarily due to acquisitions completed in 2021 and 2020. As a
percentage of revenues, depreciation and amortization expenses was 4.8% for the
2021 period compared to 5.5% for the 2020 period.
Loss on Disposals and Deconsolidations, Net. The net loss on disposals and
deconsolidations was $0.1 million for the 2021 period, related to disposals of
other long-lived assets. The net loss on disposals and deconsolidations was $6.4
million for the 2020 period, including a net loss of $3.1 million on the sale of
interests in surgical facilities and $3.3 million related to disposals of other
long-lived assets.
Transaction and Integration Costs. We incurred $14.5 million of transaction and
integration costs for the six months ended June 30, 2021 compared to $10.4
million for the six months ended June 30, 2020. The increase primarily relates
to costs for ongoing development initiatives and the integration of acquisitions
we completed in 2021 and 2020.
Grant Funds. During the six months ended June 30, 2021, the Company received
approximately $8 million of additional grants from HHS. Based on guidance from
HHS and other authorities, the Company updated its estimate of the amount of
grant funds received that qualify for recognition, resulting in the recognition
of $20.0 million during the six months ended June 30, 2021. Grant funds were
$43.1 million for the six months ended June 30, 2020. For further discussion,
see Note 1. "Organization and Summary of Accounting Polices - COVID-19 Pandemic"
to our condensed consolidated financial statements included elsewhere in this
report.
Loss on Debt Extinguishment. The net loss on debt extinguishment was $9.6
million for the 2021 period. See Note 3. "Long-Term Debt" to our condensed
financial statements included elsewhere in this report.
Interest Expense, Net. Interest expense, net, increased to $106.7 million for
the six months ended June 30, 2021 compared to $96.3 million for the six months
ended June 30, 2020. The increase primarily relates to the 2020 Incremental Term
Loans, which were fully drawn on April 22, 2020 and the issuance of additional
2027 Unsecured Notes in the amount of $115.0 million effective July 30, 2020. As
a percentage of revenues, interest expense, net was 10.1% for the 2021 period
compared to 11.8% for the 2020 period.
Income Tax Benefit.  The income tax benefit was $2.5 million for the six months
ended June 30, 2021 compared to $15.8 million for the 2020 period. The effective
tax rate was (14.6)% for the six months ended June 30, 2021 compared to 56.2%
for the six months ended June 30, 2020. For the six months ended June 30, 2021,
the effective tax rate differed from 21% due to tax benefits of $4.1 million
related to the vesting of restricted stock awards, as well as tax benefits of
$3.0 million related to entity divestitures. For the six months ended June 30,
2020, the effective tax rate differed from 21% due to tax benefits of $11.9
million attributable to (a) the release of federal and state valuation
allowances on the Company's Internal Revenue Code Section 163(j) interest
carryforwards as a result of the increase in deductible interest expense allowed
under the CARES Act, and (b) the Settlement Agreement, discussed in Note 9.
"Commitments and Contingencies" to our condensed consolidated financial
statements included elsewhere in this report. Based upon the application of
interim accounting guidance, the tax rate as a percentage of net income after
income attributable to non-controlling interests will vary based upon the
relative net income from period to period.
Net Income Attributable to Non-Controlling Interests. Net income attributable to
non-controlling interests was $67.5 million for the six months ended June 30,
2021 compared to $47.7 million for the six months ended June 30, 2020. As a
percentage of revenues, net income attributable to non-controlling interests was
6.4% for the 2021 period and 5.8% for the 2020 period.
Liquidity and Capital Resources
Operating Activities
The primary source of our operating cash flow is the collection of accounts
receivable from federal and state agencies (under the Medicare and Medicaid
programs), private insurance companies and individuals. During the six months
ended June 30, 2021, our cash flow provided by operating activities was $52.5
million compared to $211.1 million in the six months ended June 30, 2020. The
decrease is primarily due to the final DOJ settlement payment in second quarter
of 2021, receipts of government grants and Medicare advance payments provided
through the CARES Act as well as actions taken to significantly reduce cash
operating expenses and defer non-essential expenditures during the second
quarter of 2020.
Investing Activities
Net cash used in investing activities during the six months ended June 30, 2021,
was $40.7 million, which included $28.0 million related to purchases of property
and equipment. We paid $15.2 million in cash for acquisitions (net of cash
acquired), which included one surgical facility in a new market and two surgical
facilities in existing markets that were merged into existing facilities.
Additionally, we received cash proceeds of $2.5 million related to the disposal
of certain long-lived assets.
Net cash used in investing activities during the six months ended June 30, 2020,
was $22.5 million, which included $19.9 million related to purchases of property
and equipment. We paid $12.4 million in cash for acquisitions (net of cash
acquired), which included a surgical facility in a new market and three surgical
facilities in existing markets that were merged into existing facilities.
Additionally, we

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received cash proceeds of $9.4 million related to the sale of our interests in
two surgery centers, one of which was previously accounted for as an equity
method investment.
Financing Activities
Net cash provided by financing activities during the six months ended June 30,
2021 was $134.8 million. During this period, we received gross proceeds of
$260.9 million from an equity offering which was partially offset by equity
offering costs paid of $12.7 million. We made distributions to non-controlling
interest holders of $63.4 million and received proceeds related to ownership
transactions with consolidated affiliates of $3.4 million. We made repayments on
our long-term debt of $309.4 million and paid debt issuance costs of $8.7
million, which were partially offset by borrowings of $283.1 million. We further
paid a prepayment premium of $2.4 million related to the modification of the
term loan. We also paid a cash dividend of $5.1 million related to the Series A
Preferred Stock.
Net cash provided by financing activities during the six months ended June 30,
2020 was $45.0 million. During this period, we made distributions to
non-controlling interest holders of $51.7 million and payments related to
ownership transactions with consolidated affiliates of $1.9 million.
Additionally, we made repayments on our long-term debt of $182.8 million, which
were offset by borrowings of $288.2 million.
On May 17, 2021, the Company issued 22,608,925 shares of its common stock, $0.01
par value per share (the "Common Stock") to Bain Capital, as a result of the
conversion of all outstanding shares of the Company's Series A Preferred Stock
at a conversion price of $19.00 per share. As a result of such conversion, the
Company currently has no shares of Series A Preferred Stock issued or
outstanding.
Debt
As of June 30, 2021, the carrying value of our total indebtedness was $2.856
billion, which includes unamortized fair value discount of $3.2 million and
unamortized deferred financing costs and issuance discount of $16.8 million.
Term Loan and Revolving Credit Facility
As of June 30, 2021, we had term loan borrowings with a carrying value of $1.538
billion, consisting of outstanding aggregate principal of $1.541 billion and
unamortized fair value discount of $3.2 million.
On May 3, 2021, the Company entered into a sixth amendment to credit agreement,
dated as of May 3, 2021 (the "Sixth Amendment"), which amended the credit
agreement, originally dated as of August 31, 2017 (the "Credit Agreement"). The
Sixth Amendment provides for, among other things, a new tranche of term loans
under the Credit Agreement in an aggregate original principal amount of
approximately $1.545 billion (the "New Term Loans"), which New 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 Sixth Amendment),
all as further set forth in the Sixth Amendment. See Note 3. "Long-Term Debt"
for further discussion.
On January 27, 2021, the Company entered into an amendment to the credit
agreement governing its revolving credit facility (the "Revolver"), dated as of
January 27, 2021, which amended and supplemented the credit agreement, dated as
of August 31, 2017, to provide for an extension of the maturity date of the
Revolver to February 1, 2026 and an increase in the outstanding commitments
under the Revolver in an amount equal to $50.0 million. The maturity extension
and the additional commitments became operative on February 1, 2021. As of
June 30, 2021, the Company's availability on the Revolver was $163.7 million
(including outstanding letters of credit of $6.3 million).
The Revolver may be utilized for working capital, capital expenditures and
general corporate purposes. 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 on the
Revolver.
The Revolver and the Term Loans, together the "Senior Secured Credit Facilities"
bear interest at a rate per annum equal to (x) LIBOR plus a margin ranging from
3.00% to 3.25% per annum, depending on our first lien net leverage ratio or (y)
an alternate base rate (which will be the highest of (i) the prime rate, (ii)
0.5% per annum above the federal funds effective rate and (iii) one-month LIBOR
plus 1.00% per annum (solely with respect to the Term Loan, the alternate base
rate shall not be less than 2.00% per annum)) plus a margin ranging from 2.00%
to 2.25% per annum. In addition, we are required to pay a commitment fee of
0.50% per annum in respect of unused commitments on the Revolver.
Senior Unsecured Notes
We have $545.0 million aggregate principal amount of senior unsecured notes due
April 15, 2027 (the "2027 Unsecured Notes"). The 2027 Unsecured Notes bear
interest at the rate of 10.000% per year, payable semi-annually on April 15 and
October 15 of each year.
We have $370.0 million aggregate principal amount of senior unsecured notes due
July 1, 2025 outstanding (the "2025 Unsecured Notes"). The 2025 Unsecured Notes
bear interest at the rate of 6.750% per year, payable semi-annually on January 1
and July 1 of each year.
Other Debt
We and certain of our subsidiaries have other debt consisting of outstanding
bank indebtedness of $137.6 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

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obligations of $281.7 million for which we are liable to various vendors for
several property and equipment leases classified as finance leases.
Pursuant to the CARES Act, repayment of certain advanced payments and other
deferrals received as part of relief during 2020 will begin in 2021. During the
six months ended June 30, 2021, we repaid approximately $20 million. See Note 1.
"Organization and Summary of Accounting Policies" to our condensed consolidated
financial statements included elsewhere in this report, for further discussion
on the repayment terms related to certain relief previously received by us.
Capital Resources
In addition to cash flows from operations, available cash and capacity on our
Revolver, other sources of capital include funds we have received under the
CARES Act as well as continued access to the capital markets.
As previously noted in Note 7. "Earning Per Share" to our condensed consolidated
financial statements included elsewhere in this report, on February 1, 2021, we
completed a public offering pursuant to which the Company sold 8,625,000 shares
of common stock, resulting in net proceeds of $248.3 million.
As previously noted in Note 1. "Organization and Summary of Accounting Policies"
to our condensed consolidated financial statements included elsewhere in this
report, for the six months ended June 30, 2021, we received additional relief
via the CARES Act, including approximately $8 million in direct grant payments,
which are not required to be repaid, subject to certain terms and conditions,
Summary
The COVID-19 pandemic has resulted in, and may continue to result in,
significant disruptions of financial and capital markets, which could reduce our
ability to access capital and negatively affect our liquidity in the future.
Additionally, while we have received grants and accelerated payments under the
CARES Act and other government assistance programs and may receive additional
amounts in the future, there is no assurance regarding the extent to which
anticipated negative impacts arising from the COVID-19 pandemic will be offset
by amounts and benefits received under the CARES Act or future legislation.
Although we have seen continued improvement in surgical case volumes as states
begin to re-open and allow for non-emergent procedures, broad economic factors
resulting from the current COVID-19 pandemic, including increased unemployment
rates and reduced consumer spending, 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. Business closings and layoffs in the areas in which we operate may
lead to increases in the uninsured and underinsured populations and adversely
affect demand for our services, as well as the ability of payors to pay for
services as rendered. Any increase in the amount or deterioration in the
collectability of patient accounts receivable will adversely affect our cash
flows and results of operations, requiring an increased level of working
capital. If general economic conditions continue to deteriorate or remain
uncertain for an extended period of time, our liquidity and ability to repay our
outstanding debt may be harmed.
Based on our current level of operations, we believe cash flow from operations,
available cash, available capacity on our Revolver, funds we have received under
the CARES Act, funds we may receive in the future and continued 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 Metrics
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):
                                                      Three Months Ended June 30,                Six Months Ended June 30,
                                                         2021                 2020                 2021                2020
Condensed Consolidated Statements of Operations
Data:
Income (loss) before income taxes                 $           6.1          $   (4.5)         $        17.1          $  (28.1)
Plus (minus):
Net income attributable to non-controlling
interests                                                   (35.7)            (28.6)                 (67.5)            (47.7)
Depreciation and amortization                                25.2              23.4                   50.9              45.2
Interest expense, net                                        53.4              49.2                  106.7              96.3
Equity-based compensation expense                             4.1               3.4                    9.3               6.9
Transaction, integration and acquisition costs
(1)                                                          11.4              10.1                   20.8              22.7
Loss on disposals and deconsolidations, net                   1.0               2.9                    0.1               6.4
Litigation settlement and other litigation costs
(2)                                                           0.8               2.3                    1.8               3.8
Loss on debt extinguishment                                   9.6                 -                    9.6                 -
Gain on escrow release (3)                                      -                 -                      -              (0.8)
Adjusted EBITDA                                   $          75.9          $   58.2          $       148.8          $  104.7
Less: Impact of grant funds (4)                              (2.9)            (27.0)                 (13.7)            (27.0)
Adjusted EBITDA excluding grant funds             $          73.0          

$ 31.2 $ 135.1 $ 77.7



(1)This amount includes transaction and integration costs of $9.2 million and
$4.9 million for the three months ended June 30, 2021 and 2020, respectively.
This amount further includes start-up costs related to a de novo surgical
hospital of $2.2 million and $5.2 million for the three months ended June 30,
2021 and 2020, respectively. This amount includes transaction and integration
costs of $14.5 million and $10.4 million for the six months ended June 30, 2021
and 2020, respectively. This amount further includes start-up costs related to a
de novo surgical hospital of $6.3 million and $12.3 million for the six months
ended June 30, 2021 and 2020, respectively.
(2)This amount includes other litigation costs of $0.8 million and $2.3 million
for the three months ended June 30, 2021 and 2020, respectively. This amount
includes other litigation costs of $1.8 million and $2.6 million for the six
months ended June 30, 2021 and 2020, respectively. This amount further includes
litigation settlement costs of $1.2 million for the six months ended June
30,2020.
(3)Included in other income in the condensed consolidated statement of
operations for the six months ended June 30, 2020, with no comparable gain in
the same 2021 period.
(4)Represents the impact of grant funds recognized, net of amounts attributable
to non-controlling interests.
We use Credit Agreement EBITDA as a measure of liquidity and to determine our
compliance under certain covenants pursuant to our credit facilities. 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 our management and calculated in conformance
with the definition of "Consolidated EBITDA" used in the credit agreements
governing our credit facilities.

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