What changed in this filing

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Item 1. Financial Statements

2020-08-05 compared with 2020-05-11 · 283 added, 139 removed, 431 unchanged (49% of the section changed)

3 unchanged sentences

(Unaudited, dollars in millions, except per share amounts)

2020 December 31,

Current assets:

1 unchanged sentence

Accounts receivable

Prepaid expenses and other current assets

Inventories 49.0 46.3

Prepaid expenses 23.3 17.8

Other current assets 37.0 41.8

Total current assets 746.5 525.5

5 unchanged sentences

Other long-term assets 21.7 30.8

Total assets $ 5,244.7 $ 5,018.9

LIABILITIES AND STOCKHOLDERS' EQUITY

2 unchanged sentences

Accrued payroll and benefits 57.9 54.2

Medicare accelerated payments and deferred governmental grants 124.7 —

Other current liabilities 220.4 191.2

15 unchanged sentences

shares issued and outstanding - 50,551,483 and 49,298,940 , respectively

Additional paid-in capital

Accumulated other comprehensive loss

Retained deficit

Other stockholders' equity 203.9 296.3

Total Surgery Partners, Inc.

7 unchanged sentences

(Unaudited, dollars in millions, except per share amounts, shares in thousands)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Revenues $ 374.7 $ 445.4 $ 815.7 $ 862.2

Operating expenses:

Salaries and benefits 116.1 132.7 256.5 261.9

Supplies 110.1 123.4 239.4 238.4

Professional and medical fees 45.3 36.4 92.1 71.5

5 unchanged sentences

Income from equity investments ( 2.5 ) ( 2.2 ) ( 4.5 ) ( 4.2 )

Loss on disposals and deconsolidations, net

Loss (gain) on disposals and deconsolidations, net 2.9 ( 8.2 ) 6.4 ( 7.6 )

Transaction and integration costs 4.9 6.2 10.4 8.2

Grant funds ( 43.1 ) — ( 43.1 ) —

Litigation settlement — — 1.2 —

Loss on debt extinguishment — 11.7 — 11.7

Other income ( 0.2 ) ( 0.4 ) ( 1.7 ) ( 0.4 )

Total operating expenses 330.0 389.9 747.5 757.1

7 unchanged sentences

Net loss attributable to Surgery Partners, Inc.

( 32.5 ) ( 19.8 ) ( 60.0 ) ( 39.9 )

Amounts attributable to participating securities ( 9.7 ) ( 8.8 ) ( 19.2 ) ( 17.3 )

1 unchanged sentence

Net loss per share attributable to common stockholders

Basic $ ( 0.86 ) $ ( 0.59 ) $ ( 1.63 ) $ ( 1.19 )

$ ( 0.86 ) $ ( 0.59 ) $ ( 1.63 ) $ ( 1.19 )

Weighted average common shares outstanding

Basic 48,840 48,291 48,661 48,241

48,840 48,291 48,661 48,241

(1) The impact of potentially dilutive securities for all periods presented was not considered because the effect would be anti-dilutive in those periods.

3 unchanged sentences

(Unaudited, dollars in millions)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Net (loss) income $ ( 3.9 ) $ 8.1 $ ( 12.3 ) $ 11.6

Other comprehensive loss, net of tax:

Other comprehensive income (loss), net of tax:

Derivative activity 7.3 ( 16.8 ) ( 17.9 ) ( 28.3 )

Comprehensive loss

Comprehensive income (loss) 3.4 ( 8.7 ) ( 30.2 ) ( 16.7 )

Comprehensive income attributable to non-controlling interests ( 28.6 ) ( 27.9 ) ( 47.7 ) ( 51.5 )

Comprehensive loss attributable to Surgery Partners, Inc.

$ ( 25.2 ) $ ( 36.6 ) $ ( 77.9 ) $ ( 68.2 )

See notes to unaudited condensed consolidated financial statements.

2 unchanged sentences

(Unaudited, dollars in millions, shares in thousands)

Paid-in Capital

Accumulated Other Comprehensive Loss

Retained Deficit

Non-Controlling Interests—

Non-Redeemable

Common Stock Additional

Paid-in Capital Accumulated Other Comprehensive Loss Retained Deficit Non-Controlling Interests—

Non-Redeemable Total

Shares Amount

Balance at December 31, 2018 48,869 $ 0.5 $ 673.5 $ ( 22.4 ) $ ( 247.0 ) $ 694.3 $ 1,098.9

5 unchanged sentences

Acquisition and disposal of shares of non-controlling interests, net (1)

— — 8.0 — — 6.1 14.1

Distributions to non-controlling interests—non-redeemable holders — — — — — ( 23.5 ) ( 23.5 )

Balance at March 31, 2019 49,386 0.5 673.9 ( 33.9 ) ( 249.1 ) 692.9 1,084.3

Net (loss) income — — — — ( 19.8 ) 18.7 ( 1.1 )

Equity-based compensation 117 — 3.1 — — — 3.1

Preferred dividends — — ( 8.8 ) — — — ( 8.8 )

Other comprehensive loss — — — ( 16.8 ) — — ( 16.8 )

Acquisition and disposal of shares of non-controlling interests, net (1)

— — 9.6 — — ( 7.6 ) 2.0

Distributions to non-controlling interests—non-redeemable holders — — — — — ( 17.7 ) ( 17.7 )

Balance at June 30, 2019 49,503 $ 0.5 $ 677.8 $ ( 50.7 ) $ ( 268.9 ) $ 686.3 $ 1,045.0

Balance at December 31, 2019 49,299 $ 0.5 $ 662.7 $ ( 50.7 ) $ ( 315.7 ) $ 686.6 $ 983.4

4 unchanged sentences

Acquisition and disposal of shares of non-controlling interests, net (1)

— — ( 0.7 ) — — 1.4 0.7

Distributions to non-controlling interests—non-redeemable holders — — — — — ( 14.9 ) ( 14.9 )

Balance at March 31, 2020 50,518 0.5 655.3 ( 75.9 ) ( 343.2 ) 686.7 923.4

Net (loss) income — — — — ( 32.5 ) 22.8 ( 9.7 )

Equity-based compensation 33 — 3.8 — — — 3.8

Preferred dividends — — ( 9.7 ) — — — ( 9.7 )

Other comprehensive income — — — 7.3 — — 7.3

Acquisition and disposal of shares of non-controlling interests, net (1)

— — ( 1.2 ) — — 2.9 1.7

Distributions to non-controlling interests—non-redeemable holders — — — — — ( 20.9 ) ( 20.9 )

Balance at June 30, 2020 50,551 $ 0.5 $ 648.2 $ ( 68.6 ) $ ( 375.7 ) $ 691.5 $ 895.9

(1) Includes post acquisition date adjustments.

3 unchanged sentences

(Unaudited, dollars in millions)

Three Months Ended March 31,

Six Months Ended June 30,

Cash flows from operating activities:

4 unchanged sentences

Equity-based compensation expense 6.9 4.9

Loss on disposals and deconsolidations, net

Loss (gain) on disposals and deconsolidations, net 6.4 ( 7.6 )

Loss on debt extinguishment — 11.7

Deferred income taxes ( 16.4 ) 2.0

Income from equity investments, net of distributions received

(Loss) income from equity investments, net of distributions received ( 0.2 ) 0.1

Non-cash lease expense 20.1 19.6

1 unchanged sentence

Accounts receivable 16.3 6.9

Medicare accelerated payments and deferred governmental grants 124.7 —

Other operating assets and liabilities 18.2 ( 40.0 )

4 unchanged sentences

Proceeds from disposals of facilities and other assets 9.4 17.6

Purchases of equity investments — ( 15.2 )

Other investing activities 0.4 ( 0.3 )

3 unchanged sentences

Borrowings of long-term debt 288.2 438.9

Payments of debt issuance costs ( 6.5 ) ( 8.8 )

Payment of premium on debt extinguishment — ( 17.8 )

Distributions to non-controlling interest holders ( 51.7 ) ( 60.9 )

15 unchanged sentences

and its subsidiaries are referred to herein as "Surgery Partners," "we," "us," "our" or the "Company."

As of March 31, 2020 , the Company owned or operated a portfolio of 127 surgical facilities, comprised of 111 ASCs and 16 surgical hospitals in 30 states.

As of June 30, 2020, the Company owned or operated a portfolio of 127 surgical facilities, comprised of 111 ASCs and 16 surgical hospitals in 30 states.

The Company owns these facilities in partnership with physicians and, in some cases, health care systems in the markets and communities it serves.

13 unchanged sentences

Actual results could differ from those estimates.

COVID-19 Pandemic

The COVID-19 global pandemic has significantly affected the Company's facilities, employees, patients, communities, business operations and financial performance, as well as the United States economy and financial markets.

Beginning mid-March, the COVID-19 pandemic began to negatively affect the Company's net revenue and business operations.

Due in part to local, state and federal guidelines as well as recommendations from major medical societies, social distancing and self-quarantines in response to the COVID-19 pandemic, surgical case volumes across most of the Company's surgical facilities were significantly impacted in the second quarter.

The impact of COVID-19 on the Company's surgical facilities varies based on the market in which the facility operates, the type of surgical facility and the procedures that are typically performed.

Although the Company cannot provide any certainty regarding the length and severity of the impact of the COVID-19 pandemic, surgical case volumes gradually improved throughout the second quarter as states began to re-open and allow for non-emergent procedures.

The Company's operating structure naturally enables some flexibility in the cost structure according to the volume of surgical procedures performed, including much of its cost of revenues.

In addition to the natural variability of these costs, the Company and its partners in the surgical facilities have undertaken additional steps to preserve financial flexibility.

Beginning in mid-March, and into the second quarter, the Company took actions that included significantly reducing cash operating expenses and deferring non-essential expenditures at the height of the crisis.

The Company is continuing to closely monitor legislative actions at the federal, state and local levels including the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and other governmental assistance that might be available in response to the COVID-19 pandemic.

As part of the CARES Act, the United States government initially announced that it would offer $100 billion of relief to eligible health care providers.

On April 7, 2020, Centers for Medicare and Medicaid Services ("CMS") officials indicated they would distribute $30 billion of direct grants to hospitals, ASCs and other health care providers based on how much they bill Medicare.

Payments received from these grants are not required to be repaid provided the recipients attest to and comply with certain terms and conditions, including limitations on balance billing and not using funds received from the grants to reimburse expenses or losses that other

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

sources are obligated to reimburse.The Company received approximately $ 48 million of the grant funds distributed under the CARES Act and other governmental assistance programs during the six months ended June 30, 2020.

Based on an analysis of the compliance and reporting requirements and the impact of the COVID-19 pandemic on our operating results through the end of the second quarter, approximately $ 43.1 million was recognized as a reduction in operating expenses under the caption Grant funds in the condensed consolidated statements of operations for the three and six months ended June 30, 2020.

The recognition of amounts received is conditioned upon certification that payment will be used to prevent, prepare for and respond to the COVID-19 pandemic and shall reimburse the recipient only for healthcare related expenses or lost revenues that are attributable to the COVID-19 pandemic.

Amounts are recognized as a reduction to operating costs and expenses only to the extent the Company is reasonably assured that underlying conditions are met.

Amounts received, but not recognized as a reduction to operating expenses as of June 30, 2020, are reflected as a component of Medicare accelerated payments and deferred governmental grants in the condensed consolidated balance sheets as of June 30, 2020, and such unrecognized amounts may be recognized as a reduction in operating expenses in future periods if the underlying conditions for recognition are met.

Additionally, approximately $ 4 million in rural grant funds were received in July 2020 which did not qualify for recognition during the three months ended June 30, 2020.

As a way to increase cash flow to Medicare providers impacted by the COVID-19 pandemic, the CARES Act expanded the Medicare Accelerated and Advance Payment Program, which allows for most providers and suppliers, including the Company’s surgical hospitals and ASCs.

ASCs can request up to 100% of the Medicare Fee-for-Service payment amount for a three-month period.

Hospitals can request up to 100% of the payment amount for a six-month period, with certain critical access hospitals able to request up to 125% of the payment for a six-month period.

Repayment of advance payments will commence 120 days after the date the payment is issued and will be effectuated via an automatic 100% offset against future claims payments.

Hospitals will have one year from the date the payment is received to repay the advance payments;

all other providers will have 210 days to repay the advance payment.

The program currently requires that any outstanding balance remaining after 12 months must be repaid by the provider or be subjected to a 10.25% annual interest rate.

The Company received approximately $ 120 million of accelerated payments during the six months ended June 30, 2020.

These accelerated payments received were deferred and included as a component of Medicare accelerated payments and deferred governmental grants in the condensed consolidated balance sheets as of June 30, 2020.

The Company does not expect to receive additional Medicare accelerated payments.

The CARES Act also provides for the deferral of the Company's portion of social security payroll taxes for the remainder of 2020.

Under the CARES Act, half of the deferred amount will have to be paid in each of December 2021 and December 2022.

The Company began deferring the social security payroll tax match in April 2020.

As of June 30, 2020, the Company has deferred approximately $ 4.3 million, included as a component of accrued payroll and benefits in the condensed consolidated balance sheets as of June 30, 2020.

Variable Interest Entities

2 unchanged sentences

Additionally, the Company would absorb the majority of the expected losses from any of these entities should such expected losses occur.

As of March 31, 2020 , the consolidated VIEs include four surgical facilities, three anesthesia practices and three physician practices.

The total assets (excluding goodwill and intangible assets, net) of the consolidated VIEs included in the accompanying condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019 , were $34.2 million and $36.2 million , respectively, and the total liabilities of the consolidated VIEs were $24.5 million and $25.2 million , respectively.

As of June 30, 2020, the Company's consolidated VIEs include four surgical facilities, three anesthesia practices and three physician practices.

The total assets (excluding goodwill and intangible assets, net) of the consolidated VIEs included in the accompanying condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019, were $ 35.9 million and $ 36.2 million, respectively, and the total liabilities of the consolidated VIEs were $ 26.2 million and $ 25.2 million, respectively.

Fair Value of Financial Instruments

5 unchanged sentences

Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, depending on the nature of the item being valued.

The carrying amounts reported in the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, restricted invested assets and accounts payable approximate their fair values under Level 3 inputs.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A summary of the carrying amounts and estimated fair values of the Company's long-term debt follows (in millions):

Carrying Amount

Carrying Amount Fair Value

2020 December 31,

2019 June 30,

2020 December 31,

Senior secured term loan $ 1,546.9 $ 1,434.1 $ 1,373.9 $ 1,434.1

6.750 % senior unsecured notes due 2025

$ 370.0 $ 370.0 $ 338.6 $ 368.2

10.000 % senior unsecured notes due 2027

$ 430.0 $ 430.0 $ 435.9 $ 471.4

The fair values in the table above were based on a Level 2 inputs using quoted prices for identical liabilities in inactive markets.

2 unchanged sentences

"Derivatives and Hedging Activities").

The fair value of these derivative instruments was $75.9 million and $50.7 million at March 31, 2020 and December 31, 2019 , respectively, and was included in other long-term liabilities in the condensed consolidated balance sheets.

The fair value of these derivative instruments was $ 68.6 million and $ 50.7 million at June 30, 2020 and December 31, 2019, respectively, and was included in other long-term liabilities in the condensed consolidated balance sheets.

The fair value of these derivative financial instruments was based on a quoted market price, or a Level 2 input.

5 unchanged sentences

A summary of revenues by service type as a percentage of total revenues follows:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Patient service revenues:

1 unchanged sentence

Ancillary services revenues 3.5 % 4.6 % 3.7 % 4.7 %

98.5 % 98.7 % 98.5 % 98.7 %

Other service revenues:

1 unchanged sentence

Other revenues 1.4 % 1.1 % 1.3 % 1.1 %

1.5 % 1.3 % 1.5 % 1.3 %

Total revenues 100.0 % 100.0 % 100.0 % 100.0 %

9 unchanged sentences

As the Company primarily performs outpatient procedures, performance obligations are generally satisfied same day and revenue is recognized on the date of service.

The Company determines the transaction price based on gross charges for services provided, net of estimated contractual adjustments and discounts from third-party payors.

The Company estimates its contractual adjustments and discounts based on contractual agreements,

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company determines the transaction price based on gross charges for services provided, net of estimated contractual adjustments and discounts from third-party payors.

The Company estimates its contractual adjustments and discounts based on contractual agreements, its discount policies and historical experience.

its discount policies and historical experience.

Changes in estimated contractual adjustments and discounts are recorded in the period of change.

9 unchanged sentences

The following table sets forth patient service revenues by type of payor and as a percentage of total patient service revenues for the Company's consolidated surgical facilities (dollars in millions):

Three Months Ended March 31,

Three Months Ended June 30,

Amount % Amount %

Patient service revenues:

Private insurance $ 199.2 54.0 % $ 230.5 52.4 %

Government 140.8 38.1 % 178.1 40.5 %

Self-pay 11.2 3.0 % 9.5 2.2 %

17.9 4.9 % 21.4 4.9 %

Total patient service revenues 369.1 100.0 % 439.5 100.0 %

3 unchanged sentences

Total revenues $ 374.7 $ 445.4

Six Months Ended June 30,

Amount % Amount %

Patient service revenues:

Private insurance $ 425.2 52.9 % $ 445.8 52.4 %

Government 316.6 39.4 % 343.0 40.3 %

Self-pay 24.0 3.0 % 20.3 2.4 %

37.9 4.7 % 41.2 4.9 %

Total patient service revenues 803.7 100.0 % 850.3 100.0 %

Other service revenues:

Optical services revenues 1.3 2.1

Other revenues 10.7 9.8

Total revenues $ 815.7 $ 862.2

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

2 unchanged sentences

The Company maintains its cash and cash equivalent balances at high credit quality financial institutions.

Cash, cash equivalents and restricted cash reported within the consolidated statement of cash flows includes $0.3 million of restricted investments, which are reflected in other long-term assets in the consolidated balance sheet at both March 31, 2020 and December 31, 2019 .

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Cash, cash equivalents and restricted cash reported within the consolidated statement of cash flows includes $ 0.3 million of restricted investments, which are reflected in other long-term assets in the consolidated balance sheet at both June 30, 2020 and December 31, 2019.

These restricted investments represent restricted cash held in accordance with the provisions of a long-term operating lease agreement held as security for performance under the Company's covenants and obligations within the agreement through January 2024.

5 unchanged sentences

Concentration of credit risk with respect to other payors is limited because of the large number of such payors.

As of March 31, 2020 and December 31, 2019 , the Company had a net third-party Medicaid settlements liability of $8.3 million and $5.6 million , respectively, included in other current liabilities in the condensed consolidated balance sheets.

As of June 30, 2020 and December 31, 2019, the Company had a net third-party Medicaid settlements liability of $ 13.0 million and $ 5.6 million, respectively, included in other current liabilities in the condensed consolidated balance sheets.

The Company recognizes that final reimbursement of accounts receivable is subject to final approval by each third-party payor.

However, because the Company has contracts with its third-party payors and also verifies insurance coverage of the patient before medical services are

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

rendered, the amounts that are pending approval from third-party payors are not considered significant.

However, because the Company has contracts with its third-party payors and also verifies insurance coverage of the patient before medical services are rendered, the amounts that are pending approval from third-party payors are not considered significant.

Amounts are classified outside of self-pay if the Company has an agreement with the third-party payor or has verified a patient’s coverage prior to services rendered.

8 unchanged sentences

The receivables related to the Company's optical products purchasing organization are recognized separately from patient accounts receivable, as discussed above, and are included in other current assets in the condensed consolidated balance sheets.

Such receivables were $8.6 million as of March 31, 2020 and December 31, 2019 .

Such receivables were $ 8.2 million and $ 8.6 million as of June 30, 2020 and December 31, 2019, respectively.

Goodwill represents the fair value of the consideration provided in an acquisition over the fair value of net assets acquired and is not amortized.

Additions to goodwill include amounts resulting from new business combinations and incremental ownership purchases in the Company's subsidiaries.

A summary of the Company's acquisitions and dispositions for the three months ended March 31, 2020 is included in Note 2.

A summary of the Company's acquisitions and dispositions for the six months ended June 30, 2020 is included in Note 2.

"Acquisitions and Disposals."

A summary of activity related to goodwill for the three months ended March 31, 2020 is as follows (in millions):

A summary of activity related to goodwill for the six months ended June 30, 2020 is as follows (in millions):

Balance at December 31, 2019 $ 3,402.4

1 unchanged sentence

Divestitures and deconsolidations ( 14.2 )

Balance at March 31, 2020

A detailed evaluation of potential impairment indicators was performed as of March 31, 2020, which specifically considered the decline in the fair market value of the Company’s outstanding senior secured term loan and unsecured notes and common stock during the first quarter as a result of the COVID-19 pandemic.

Volatility was observed in the prices of the Company’s outstanding debt securities and common stock and the decline in surgical case volumes following the emergence of COVID-19 was also considered.

On the basis of available evidence as of March 31, 2020, no indicators of impairment were identified.

Balance at June 30, 2020 $ 3,408.9

A detailed evaluation of potential impairment indicators was performed as of June 30, 2020, which specifically considered the decline in the fair market value of the Company’s outstanding senior secured term loan and unsecured notes and common stock during the six months ended June 30, 2020 as a result of the COVID-19 pandemic.

Volatility was observed in the prices of the Company’s outstanding debt securities and common stock and the decline in surgical case volumes following the emergence of COVID-19 was also considered, all of which have improved throughout the second quarter as states began to re-open and allow for non-emergent procedures.

On the basis of available evidence as of June 30, 2020, no indicators of impairment were identified.

Future estimates of fair value could be adversely affected if the actual outcome of one or more of the Company's assumptions changes materially in the future, including a decline in the Company’s stock price and the fair value of its long-term debt, lower than expected surgical case volumes, higher market interest rates or increased operating costs.

Such changes impacting the calculation of fair value, the risks of which are amplified by the COVID-19 pandemic, could result in a material impairment charge in the future.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Derivative Instruments and Hedging Activities

8 unchanged sentences

The non-controlling interests — redeemable are reported outside of stockholders' equity in the condensed consolidated balance sheets.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A summary of activity related to non-controlling interests—redeemable for the three months ended March 31, 2020 and 2019 is as follows (in millions):

A summary of activity related to non-controlling interests—redeemable for the six months ended June 30, 2020 and 2019 is as follows (in millions):

Balance at beginning of period $ 321.0 $ 326.6

17 unchanged sentences

The remaining income or loss of each partnership and limited liability company is allocated to the other owners.

The Company's effective tax rate was 64.4% for the three months ended March 31, 2020 compared to 32.7% for the three months ended March 31, 2019 .

The higher effective tax rate for the 2020 period was primarily due to discrete tax benefits of approximately $6.9 million attributable to the release of federal and state valuation allowances on the Company’s IRC Section 163(j) interest carryforwards as a result of the increase in deductible interest expense allowed under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), and $5.0 million attributable to a portion of the payments under the Settlement Agreement, as defined in Note 10.

"Subsequent Events," being classified as "restitution" for income tax purposes.

The Company's effective tax rate was 56.2 % for the six months ended June 30, 2020 compared to 18.9 % for the six months ended June 30, 2019.

The higher effective tax rate for the 2020 period was primarily due to discrete tax benefits of approximately $ 6.9 million attributable to the release of federal and state valuation allowances on the Company’s IRC Section 163(j) interest carryforwards as a result of the increase in deductible interest expense allowed under the CARES Act, and $ 5.0 million attributable to a portion of the payments under the Settlement Agreement, as defined in Note 9.

"Commitments and Contingencies," being classified as "restitution" for income tax purposes.

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.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Recent Accounting Pronouncements

In March 2020, the FASB issued Accounting Standard Update ("ASU") 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting .

This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting and applies only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.

This ASU is effective as of March 12, 2020 through December 31, 2022.

Entities may adopt ASU 2020-04 as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020 or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued.

The Company is evaluating the impact of this ASU on the Company’s consolidated financial statements.

During the six months ended June 30, 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-04 Reference Rate Reform (Topic 848) .

ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts.

The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur.

During the six months ended June 30, 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future London Interbank Offered Rate ("LIBOR") indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives.

Application of these expedients preserves the presentation of derivatives consistent with past presentation.

The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses , which introduced a new model for recognizing credit losses on financial instruments based on an estimate of the current expected credit losses.

2 unchanged sentences

The adoption of this ASU did not have a material impact on its consolidated financial position and results of operations.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Acquisitions and Disposals

During the three months ended March 31, 2020 , the Company acquired a controlling interest in a surgical facility in a new market and a surgical facility in an existing market that was merged into an existing facility for total cash consideration of $5.5 million , net of cash acquired.

During the six months ended June 30, 2020, the Company acquired a controlling interest in a surgical facility in a new market and a controlling interest three surgical facilities in existing markets, that were merged into existing facilities for cash consideration of $ 12.4 million, net of cash acquired, and non-cash consideration of $ 2.0 million.

The non-cash consideration consisted of a non-controlling interest in one of the Company's existing surgical facilities.

The cash consideration was funded through cash from operations.

7 unchanged sentences

Property and equipment 1.7

Goodwill 19.8

Right-of-use operating lease assets 9.0

3 unchanged sentences

The fair values assigned to certain assets acquired and liabilities assumed by the Company have been estimated on a preliminary basis and are subject to change as new facts and circumstances emerge that were present at the date of acquisition.

During the three months ended March 31, 2020 , no significant changes were made to the purchase price allocation of assets and liabilities, existing at the date of acquisition, related to individual acquisitions completed in 2019.

During the six months ended June 30, 2020, no significant changes were made to the purchase price allocation of assets and liabilities, existing at the date of acquisition, related to individual acquisitions completed in 2019.

The goodwill acquired was allocated to the Company's surgical facility services reportable segment.

The results of operations of the acquisitions were included in the Company’s results of operations beginning on the dates of acquisition and were not considered significant for the three months ended March 31, 2020 .

During the three months ended March 31, 2020 , the Company sold its interests in two surgery centers, one of which was previously accounted for as an equity method investment, for net cash proceeds of $9.4 million , and recognized a net pre-tax loss of $3.1 million included in loss on disposals and deconsolidations, net in the condensed consolidated statement of operations for the three months ended March 31, 2020 .

During the six months ended June 30, 2020, the Company sold its interests in two surgery centers, one of which was previously accounted for as an equity method investment, for net cash proceeds of $ 9.4 million, and recognized a net pre-tax loss of $ 3.1 million included in loss on disposals and deconsolidations, net in the condensed consolidated statement of operations for the six months ended June 30, 2020.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Long-Term Debt

A summary of long-term debt follows (in millions):

2020 December 31,

Senior secured term loan (1)

$ 1,546.9 $ 1,434.1

Senior secured revolving credit facility — —

4 unchanged sentences

unamortized debt issuance costs ( 16.6 ) ( 10.8 )

Total debt 2,686.0 2,580.7

Current maturities 63.5 56.0

Total long-term debt $ 2,622.5 $ 2,524.7

Includes unamortized fair value discount of $ 4.4 million and $4.6 million as of March 31, 2020 and December 31, 2019 , respectively.

(1) Includes unamortized fair value discount of $ 4.1 million and $ 4.6 million as of June 30, 2020 and December 31, 2019, respectively.

Third Amendment to Credit Agreement

On April 16, 2020, SP Holdco I, Inc., a Delaware corporation (“Holdings”), and Surgery Center Holdings, Inc., a Delaware corporation (the “Borrower”), each a wholly-owned subsidiary of the Company, entered into a third amendment to credit agreement governing their revolving credit facility (the “Revolver”), dated as of April 16, 2020 (the “Third Amendment”), with Jefferies Finance LLC, as administrative agent and collateral agent, and the other financial institutions party thereto, which amended and supplemented financial covenants applicable to the Revolver under the credit agreement, dated as of August 31, 2017, by and among the Borrower, Holdings, certain subsidiaries of the Borrower party thereto from time to time, Jefferies Finance LLC, as administrative agent and collateral agent, and the other financial institutions party thereto from time to time (as previously amended) (the “Credit Agreement”).

Pursuant to the Third Amendment, the Company's requirement to comply with a maximum consolidated total net leverage ratio will be waived for the remainder of 2020.

Additionally, for the first three quarters of 2021, the Third Amendment provides for an alternative calculation for the maximum consolidated total net leverage ratio where the trailing four quarter basis may be negatively impacted by the impacts of COVID-19.

The Third Amendment became effective concurrently with the funding of the 2020 Incremental Term Loans on April 22, 2020, and are discussed in more detail below.

Second Incremental Term Loan Amendmen t

On April 22, 2020, Holdings and the Borrower, together with certain subsidiaries of the Borrower, entered into a second incremental term loan amendment, dated as of April 22, 2020 (the “Second Incremental Term Loan Amendment”), with Jefferies Finance LLC, as administrative agent and collateral agent, and the other financial institutions party thereto, which further amended and supplemented the Credit Agreement to provide for a $ 120.0 million senior secured incremental term loan (the “2020 Incremental Term Loans”).

The 2020 Incremental Term Loans were fully drawn on April 22, 2020 and bear interest at a rate per annum equal to (x) LIBOR plus a margin of 8.00 % per annum 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, (iii) one-month LIBOR plus 1.00 % per annum and (iv) 2.00 % per annum) plus a margin of 7.00 % per annum.

The 2020 Incremental Term Loans were incurred as a separate tranche of term loans under the Credit Agreement, and are subject to maturity, amortization and mandatory prepayment provisions consistent with the existing terms loans outstanding under the Credit Agreement.

Voluntary prepayments of the 2020 Incremental Term Loans are permitted, in whole or in part, with prior notice, without premium or penalty (except LIBOR breakage costs and a make-whole and call premium, as applicable, in the case of certain prepayments or events within a specified period of time after April 22, 2020, as set forth in the Second Incremental Term Loan Amendment).

On March 18, 2020, the Company drew down its available capacity under the Revolver, as a precautionary measure in order to increase liquidity and preserve financial flexibility in light of current uncertainty resulting from the COVID-19 pandemic.

During the second quarter, the Company fully repaid the outstanding balance.

As of June 30, 2020, the Company's availability on the Revolver was $ 113.2 million (including outstanding letters of credit of $ 6.8 million).

The Company's operating leases are primarily for real estate, including medical office buildings, and corporate and other administrative offices.

The Company's finance leases are primarily for medical equipment and information technology and telecommunications assets.

Due to the COVID-19 pandemic, the Company received concessions for certain of its leases primarily consisting of deferral of rental payments.

The Company has elected to account for these COVID-19 related concessions as though the

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On March 18, 2020, the Company drew down its available capacity under the senior secured revolving credit facility, as a precautionary measure in order to increase liquidity and preserve financial flexibility in light of current uncertainty resulting from the COVID-19 pandemic.

enforceable rights and obligations for those concessions are explicit within the underlying contract.

The Company accounts for the deferred rentals as a component of other current liabilities within the condensed consolidated balance sheets.

In a few instances the Company modified the terms of the lease in exchange for lease concessions.

These modifications resulted in an increase to the Company's right-of-use operating lease assets and liabilities of $ 23.2 million during the three and six months ended June 30, 2020.

The following table presents the components of the Company's lease expense and their classification in the condensed consolidated statement of operations (in millions):

Six Months Ended June 30,

Operating lease costs $ 36.3 $ 34.4

Finance lease costs:

Amortization of leased assets 12.0 9.3

Interest on lease liabilities 10.4 7.3

Total finance lease costs 22.4 16.6

Variable and short-term lease costs 8.3 6.0

Total lease costs $ 67.0 $ 57.0

The following table presents supplemental cash flow information (dollars in millions):

Six Months Ended June 30,

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash outflows from operating leases $ 33.7 $ 32.8

Operating cash outflows from finance leases $ 10.4 $ 7.3

Financing cash outflows from finance leases $ 8.3 $ 5.2

Right-of-use assets obtained in exchange for lease obligations:

Operating leases $ 37.5 $ 5.0

Finance leases $ 8.5 $ 5.0

Redeemable Preferred Stock

4 unchanged sentences

Dividends accrued (there were no cash dividends declared) 19.2

Balance at March 31, 2020

There were no unpaid cash dividends declared at both March 31, 2020 and December 31, 2019 .

The aggregate and per share amounts of unpaid cumulative preferred dividends as of March 31, 2020 was $78.9 million and $254.61 , respectively.

Balance at June 30, 2020 $ 414.2

There were no unpaid cash dividends declared at both June 30, 2020 and December 31, 2019.

The aggregate and per share amounts of unpaid cumulative preferred dividends as of June 30, 2020 was $ 88.6 million and $ 285.89 , respectively.

Derivatives and Hedging Activities

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For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income ("OCI") and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings, as documented at hedge inception in accordance with the Company’s accounting policy election.

Amounts reported in accumulated OCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.

Amounts reported in accumulated OCI related to derivatives will be reclassified to interest expense as interest payments are made on the

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Company’s variable-rate debt.

Over the next 12 months, the Company estimates that an additional $ 21.7 million will be reclassified as an increase to interest expense.

As of March 31, 2020 , the Company had four interest rate swaps with a notional amount of $1.2 billion and a termination date of November 30, 2023.

As of June 30, 2020, the Company had four interest rate swaps with a notional amount of $ 1.2 billion and a termination date of November 30, 2023.

The derivatives are recorded at fair value (see Note 1.

1 unchanged sentence

The following table presents the pre-tax effect of the interest rate swaps on the Company's accumulated OCI and condensed consolidated statement of operations (in millions):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Derivatives in cash flow hedging relationships

Loss recognized in OCI (effective portion)

(Gain) loss recognized in OCI (effective portion) $ ( 1.7 ) $ 18.3 $ 26.9 $ 31.1

Loss reclassified from accumulated OCI to interest expense (effective portion) $ 5.6 $ 1.5 $ 9.0 $ 2.8

3 unchanged sentences

The two-class method of computing earnings per share is an earnings allocation method that determines earnings per share for common shares and participating securities according to their participation rights in dividends and undistributed earnings.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A reconciliation of the numerator and denominator of basic and diluted earnings per share follows (dollars in millions, except per share amounts;

shares in thousands):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Net loss attributable to Surgery Partners, Inc.

$ ( 32.5 ) $ ( 19.8 ) $ ( 60.0 ) $ ( 39.9 )

amounts allocated to participating securities (1)

( 9.7 ) ( 8.8 ) ( 19.2 ) ( 17.3 )

Net loss attributable to common stockholders $ ( 42.2 ) $ ( 28.6 ) $ ( 79.2 ) $ ( 57.2 )

Weighted average shares outstanding- basic and diluted (2)

48,840 48,291 48,661 48,241

Loss per share:

Basic and diluted (2)

$ ( 0.86 ) $ ( 0.59 ) $ ( 1.63 ) $ ( 1.19 )

Dilutive securities outstanding not included in the computation of loss per share as their effect is antidilutive:

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(2) The impact of potentially dilutive securities for all periods presented was not considered because the effect would be anti-dilutive in each period.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Other Current Liabilities

A summary of other current liabilities is as follows (in millions):

2020 December 31,

Right-of-use operating lease liabilities $ 37.8 $ 37.3

3 unchanged sentences

Accrued expenses and other 108.6 80.5

"Subsequent Events" for further discussion.

Total $ 220.4 $ 191.2

(1) See Note 9.

"Commitments and Contingencies" for further discussion.

Commitments and Contingencies

5 unchanged sentences

The Company is not aware of any such proceedings that are reasonably possible to have a material adverse effect on the Company's business, financial position, results of operations or liquidity.

Total professional, general and workers' compensation claim liabilities as of March 31, 2020 and December 31, 2019 were $20.2 million and $19.4 million , respectively.

The balance includes expected insurance recoveries of $12.1 million as of both March 31, 2020 and December 31, 2019 .

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Total professional, general and workers' compensation claim liabilities as of June 30, 2020 and December 31, 2019 were $ 21.0 million and $ 19.4 million, respectively.

The Company had expected insurance recoveries of $ 12.1 million as of both June 30, 2020 and December 31, 2019.

Laws and Regulations

5 unchanged sentences

On October 23, 2017, the Company received several civil investigative demands ("CIDs") from the federal government under the False Claims Act (the "FCA") for documents and information dating back to January 1, 2010 relating to the medical necessity of certain drug tests conducted by the Company’s physicians and submitted to laboratories owned and operated by the Company.

In addition, the Company was informed by the Centers for Medicare and Medicaid Services ("CMS") that payments to its diagnostic laboratory, Logan Laboratories, LLC ("Logan Labs"), a toxicology laboratory based in Tampa, Florida that provides urine testing services, were suspended for a period of time, pending further investigations by CMS.

In addition, the Company was informed by CMS that payments to its diagnostic laboratory, Logan Laboratories, LLC ("Logan Labs"), a toxicology laboratory based in Tampa, Florida, that provides urine testing services, were suspended for a period of time, pending further investigations by CMS.

CMS lifted the suspension as of December 18, 2019.

3 unchanged sentences

On April 14, 2020, Logan Labs and Tampa Pain Relief Centers, Inc.

"Subsequent Events" for further discussion of this settlement.

("Tampa Pain" and, together with Logan Labs, the "Companies"), a pain management medical practice based in Tampa, Florida, both indirect wholly-owned subsidiaries of the Company, entered into a settlement agreement (the "Settlement Agreement") with the United States of America, acting through the United States Department of Justice (“DOJ”) and on behalf of the Office of Inspector General of the Department of Health and Human Services ("OIG"), the Defense Health Agency, acting on behalf of the TRICARE Program, the Office of Personnel Management, as the administrator of the Federal Employees Health Benefits Program, the Office of Workers Compensation Programs of the United States Department of Labor, which administers federal workers compensation claims for federal employees, including the United States Postal Service, and the United States Department of Veterans Affairs (collectively, the "U.S.

Parties") and certain other parties to resolve the pending DOJ investigation.

As part of the Settlement Agreement, the DOJ asserted that certain urine tests ordered by Tampa Pain’s physicians and conducted at Tampa Pain and Logan Labs for patients receiving opioid therapy to manage pain were not medically necessary and the resulting claims submitted to the U.S.

Parties violated the federal False Claims Act (the "Covered Conduct").

Under the terms of the Settlement Agreement, the Companies will pay a total of $ 40.0 million plus accrued interest from March 14, 2019, at the rate of 2.75 % per annum to the U.S.

Parties and participating states.

The Settlement Amount is expected to be paid on the

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

following schedule:

the forfeiture of $ 7.5 million of approved, paid claims currently held in suspense by the U.S.

Parties and the payment of $ 1.8 million plus accrued interest within 20 business days of the date of the Settlement Agreement and the payment of $ 30.7 million plus accrued interest on April 1, 2021.

The Company previously recorded a litigation-related charge of $ 46.0 million relating to an anticipated resolution of the Covered Conduct on the consolidated statements of operations for the year ended December 31, 2018.

For the three months ended March 31, 2020, the Company recorded an additional litigation-related charge of $ 1.2 million relating to the resolution of the Covered Conduct on the condensed consolidated statement of operations.

Under the Settlement Agreement, the U.S.

Parties agree to release the Companies from any civil or administrative monetary liability arising from the Covered Conduct.

Additionally, under the Settlement Agreement, the OIG agrees, conditioned upon the Companies’ full payment of the Settlement Amount, and in consideration of Logan Labs’ and Tampa Pain’s obligations under their respective Corporate Integrity Agreements (as defined and described below), to release its permissive exclusion rights and refrain from instituting any administrative action seeking to exclude the Companies from participating in Medicare, Medicaid or other Federal health care programs as a result of the Covered Conduct.

The Settlement Agreement contains no admissions of liability on the part of the Companies or the Company.

In connection with the resolution of this matter and in exchange for the OIG’s agreement not to exclude the Companies from participating in the federal health care programs, on April 14, 2020, Tampa Pain entered into a five -year corporate integrity agreement with the OIG and Logan Labs entered into a three -year corporate integrity agreement with the OIG (together, the “Corporate Integrity Agreements”).

Acquired Facilities

13 unchanged sentences

On May 9, 2017, the Company entered into an agreement to amend that certain Income Tax Receivable Agreement, dated September 30, 2015 (as amended, the "TRA"), by and between the Company, and the other parties referred to therein, which amendment became effective on August 31, 2017.

Pursuant to the amendment to the TRA, the Company agreed to make payments to H.I.G., the Company's former controlling shareholder, in its capacity as the stockholders representative pursuant to a fixed payment schedule.

Pursuant to the amendment to the TRA, the Company agreed to make payments to H.I.G.

Capital, LLC., the Company's former controlling shareholder, in its capacity as the stockholders representative pursuant to a fixed payment schedule.

The amounts payable under the TRA are calculated as the product of (i) an annual base amount and (ii) the maximum corporate federal income tax rate for the applicable year plus three percent.

1 unchanged sentence

The calculation of amounts payable pursuant to the TRA is thus dependent on the maximum corporate federal income tax rate.

To the extent that the Company is unable to make payments under the TRA, such payments will be deferred and will accrue interest at a rate of the London Interbank Offered Rate ("LIBOR") plus 500 basis points until paid.

To the extent that the Company is unable to make payments under the TRA, such payments will be deferred and will accrue interest at a rate of the LIBOR plus 500 basis points until paid.

If the terms of credit agreements and other debt documents cause the Company to be unable to make payments under the TRA and such terms are not materially more restrictive than those existing as of September 30, 2015, such payments will be deferred and will accrue interest at a rate of LIBOR plus 300 basis points until paid.

Assuming the Company's tax rate is 24 %, calculated as the maximum corporate federal tax rate plus three percent, throughout the remaining term of the TRA, the Company estimates the total remaining amounts payable under the TRA was approximately $ 60.1 million as of both June 30, 2020 and December 31, 2019.

As a result of the amendment to the TRA, the Company was required to value the

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Assuming the Company's tax rate is 24% , calculated as the maximum corporate federal tax rate plus three percent, throughout the remaining term of the TRA, the Company estimates the total remaining amounts payable under the TRA was approximately $60.1 million as of both March 31, 2020 and December 31, 2019 .

As a result of the amendment to the TRA, the Company was required to value the liability under the TRA by discounting the fixed payment schedule using the Company’s incremental borrowing rate.

The carrying value of the liability under the TRA, reflecting the discount, was $49.9 million and $48.7 million as of March 31, 2020 and December 31, 2019 , respectively.

The current portion of the liability was $16.9 million as of both March 31, 2020 and December 31, 2019 , and is included as a component of other current liabilities in the condensed consolidated balance sheets.

liability under the TRA by discounting the fixed payment schedule using the Company’s incremental borrowing rate.

The carrying value of the liability under the TRA, reflecting the discount, was $ 51.2 million and $ 48.7 million as of June 30, 2020 and December 31, 2019, respectively.

The current portion of the liability was $ 16.9 million as of both June 30, 2020 and December 31, 2019, and is included as a component of other current liabilities in the condensed consolidated balance sheets.

The long-term portion is included as a component of other long-term liabilities in the condensed consolidated balance sheets.

6 unchanged sentences

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

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Surgical facility services $ 361.0 $ 424.0 $ 784.2 $ 819.8

1 unchanged sentence

Optical services 0.5 1.0 1.3 2.1

Total $ 374.7 $ 445.4 $ 815.7 $ 862.2

Adjusted EBITDA:

2 unchanged sentences

Optical services 0.2 0.4 0.6 0.9

All other ( 20.7 ) ( 19.0 ) ( 39.8 ) ( 38.3 )

Total $ 58.2 $ 61.2 $ 104.7 $ 112.0

Reconciliation of Adjusted EBITDA:

5 unchanged sentences

Transaction, integration and acquisition costs (1)

Loss on disposals and deconsolidations, net

10.1 8.0 22.7 11.5

Loss on debt extinguishment — 11.7 — 11.7

Loss (gain) on disposals and deconsolidations, net 2.9 ( 8.2 ) 6.4 ( 7.6 )

Litigation settlement and other litigation costs (2)

Gain on escrow release (3)

— — ( 0.8 ) —

Tax receivable agreement expense — — — 2.4

Adjusted EBITDA $ 58.2 $ 61.2 $ 104.7 $ 112.0

This amount includes transaction and integration costs of $5.5 million and $2.0 million for the three months ended March 31, 2020 and 2019 , respectively.

This amount further includes other acquisition costs and start-up costs related to a de novo surgical hospital of $7.1 million and $1.4 million for the three months ended March 31, 2020 and 2019 , respectively.

This amount includes litigation settlement costs of $1.2 million and other litigation costs of $0.3 million for the three months ended March 31, 2020, with no comparable costs in the same 2019 period.

Included in other income in the condensed consolidated statement of operations for the three months ended March 31, 2020, with no comparable gain in the same 2019 period.

(1) This amount includes transaction and integration costs of $ 4.9 million and $ 6.2 million for the three months ended June 30, 2020 and 2019, respectively.

This amount further includes other acquisition costs and start-up costs related to a de novo surgical hospital of $ 5.2 million and $ 1.8 million for the three months ended June 30, 2020 and 2019, respectively.

This amount includes transaction and integration costs of $ 10.4 million and $ 8.2 million for the six months ended June 30, 2020 and 2019, respectively.

This amount further includes other acquisition costs and start-up costs related to a de novo surgical hospital of $ 12.3 million and $ 3.3 million for the six months ended June 30, 2020 and 2019, respectively.

(2) This amount includes other litigation costs of $ 2.3 million for the three months ended June 30, 2020, with no comparable costs in the same 2019 period.

This amount includes litigation settlement costs of $ 1.2 million and other litigation costs of $ 2.6 million for the six months ended June 30, 2020, with no comparable costs in the same 2019 period.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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 2019 period.

2020 December 31,

Surgical facility services $ 4,751.5 $ 4,580.4

1 unchanged sentence

Optical services 17.6 17.7

Three Months Ended March 31,

Cash purchases of property and equipment, net:

All other 405.4 351.2

Total assets $ 5,244.7 $ 5,018.9

Six Months Ended June 30,

Cash purchases of property and equipment:

Surgical facility services $ 16.8 $ 25.3

Ancillary services 0.1 0.3

Total cash purchases of property and equipment, net

All other 3.0 6.2

Total cash purchases of property and equipment $ 19.9 $ 31.8

Subsequent Events

Settlement Agreement

On April 14, 2020, Logan Labs and Tampa Pain entered into a settlement agreement (the "Settlement Agreement") with the United States of America., acting through the United States Department of Justice (“DOJ”) and on behalf of the Office of Inspector General of the Department of Health and Human Services ("OIG"), the Defense Health Agency, acting on behalf of the TRICARE Program, the Office of Personnel Management, as the administrator of the Federal Employees Health Benefits Program, the Office of Workers Compensation Programs of the United States Department of Labor, which administers federal workers compensation claims for federal employees, including the United States Postal Service, and the United States Department of Veterans Affairs (collectively, the "U.S.

Parties") and certain other parties to resolve the pending DOJ investigation.

Parties violated the federal False Claims Act (the "Covered Conduct").

Under the terms of the Settlement Agreement, the Companies will pay a total of $40.0 million plus accrued interest from March 14, 2019, at the rate of 2.75% per annum to the U.S.

Parties and participating states.

The Settlement Amount is expected to be paid on the following schedule:

the forfeiture of $7.5 million of approved, paid claims currently held in suspense by the U.S.

Parties and the payment of $1.8 million plus accrued interest within 20 business days of the date of the Settlement Agreement and the payment of $30.7 million plus accrued interest on April 1, 2021.

The Company previously recorded a litigation-related charge of $46.0 million relating to an anticipated resolution of the Covered Conduct on the consolidated statements of operations for the year ended December 31, 2018.

For the three months ended March 31, 2020, the Company recorded an additional litigation-related charge of $1.2 million relating to the resolution of the Covered Conduct on the condensed consolidated statement of operations.

Under the Settlement Agreement, the U.S.

Parties agrees to release the Companies from any civil or administrative monetary liability arising from the Covered Conduct.

The Settlement Agreement contains no admissions of liability on the part of the Companies or the Company.

In connection with the resolution of this matter, and in exchange for the OIG’s agreement not to exclude the Companies from participating in the federal health care programs, on April 14, 2020, Tampa Pain entered into a five -year corporate integrity agreement with the OIG and Logan Labs entered into a three -year corporate integrity agreement with the OIG (together, the “Corporate Integrity Agreements”).

The foregoing description of the Settlement Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Settlement Agreement, which is attached as Exhibit 10.4 to this Quarterly Report on Form 10-Q.

Third Amendment to Credit Agreement

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

revolving credit facility (the “Revolver”), dated as of April 16, 2020 (the “Third Amendment”), with Jefferies Finance LLC, as administrative agent and collateral agent, and the other financial institutions party thereto, which amended and supplemented financial covenants applicable to the Revolver under the credit agreement, dated as of August 31, 2017, by and among the Borrower, Holdings, certain wholly-owned subsidiaries of the Borrower party thereto from time to time, Jefferies Finance LLC, as administrative agent and collateral agent, and the other financial institutions party thereto from time to time (as amended prior to the date hereof) (the “Credit Agreement”).

Pursuant to the Third Amendment, the Company's requirement to comply with a maximum consolidated total net leverage ratio will be waived for the remainder of 2020.

The amendments pursuant to the Third Amendment became effective concurrently with the funding of the 2020 Incremental Term Loans on April 22, 2020.

Second Incremental Term Loan Amendment

On April 22, 2020, Holdings and the Borrower, together with certain wholly-owned subsidiaries of the Borrower, entered into a second incremental term loan amendment, dated as of April 22, 2020 (the “Second Incremental Term Loan Amendment”), with Jefferies Finance LLC, as administrative agent and collateral agent, and the other financial institutions party thereto, which further amended and supplemented the Credit Agreement to provide for a $120.0 million senior secured incremental term loan (the “2020 Incremental Term Loans”).

The 2020 Incremental Term Loans were fully drawn on April 22, 2020 and bear interest at a rate per annum equal to (x) LIBOR plus a margin of 8.00% per annum 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, (iii) one-month LIBOR plus 1.00% per annum and (iv) 2.00% per annum) plus a margin of 7.00% per annum.

The Company is closely monitoring legislative actions at the federal, state and local levels including the CARES Act and other governmental assistance that might be available.

As part of the CARES Act, the United States government initially announced that it would offer $100 billion of relief to eligible health care providers.

On April 7, 2020, CMS officials indicated they would distribute $30 billion of direct grants to hospitals, ASCs and other health care providers based on how much they bill Medicare.

Payments received from these grants are not required to be repaid provided the recipients attest to and comply with certain terms and conditions.

The Company received approximately $45 million of the grant funds distributed through the date of this filing, which did not qualify for recognition during the three months ended March 31, 2020.

Hospitals can request up to 100% of the payment amount for a six-month period, with certain critical access hospitals able to request up to 125% of the payment for a six-month period.

Repayment of advance payments will commence 120 days after the date the payment is issued and will be effectuated via an automatic 100% offset against future claims payments.

Hospitals will have one year from the date the payment is received to repay the advance payments;

all other providers will have 210 days to repay the advance payment.

Through the date of this filing, the Company received approximately $120 million of accelerated payments, which did not qualify for recognition during the three months ended March 31, 2020.

The CARES Act also provides for the deferral of the Company's portion of social security payroll taxes for the remainder of 2020.

Under the CARES Act, half of the deferred amount will have to be paid in each of December 2021 and December 2022.

The Company began deferring the social security payroll tax match in April 2020.

On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act (the “New PPP Act”) was adopted which allocates an additional $75 billion to eligible health care providers for the same purposes as in the CARES Act.

Recipients will not be required to repay the amounts received, provided they comply with terms and conditions, which have not yet been finalized.

On July 20, 2020, the Company entered into a definitive agreement to sell certain assets related to its anesthesia business.

The transaction is expected to close within 60 to 90 days.

As previously disclosed in a Current Report on Form 8-K filed on July 31, 2020, on July 30, 2020, the Company completed the issuance and sale of $ 115.0 million in aggregate principal amount of senior unsecured notes due 2027 at 100.75 % of the principal amount.

The notes were issued as part of the same series as the existing 2027 Unsecured Notes originally issued in April 2019, and have the same terms.

The notes bear interest at an annual rate of 10.000 % per year, payable semi-annually on April 15 and October 15 of each year, beginning on October 15, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements