What changed in this filing

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Item 1. Financial Statements

2020-11-04 compared with 2020-08-05 · 221 added, 134 removed, 580 unchanged (38% of the section changed)

3 unchanged sentences

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

September 30,

2020 December 31,

45 unchanged sentences

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

12 unchanged sentences

Transaction and integration costs 5.4 3.4 15.8 11.6

Impairment charges 33.5 — 33.5 —

Grant funds 9.9 — ( 33.2 ) —

7 unchanged sentences

(Loss) income before income taxes ( 33.0 ) 13.3 ( 61.1 ) 27.6

Income tax (benefit) expense ( 0.6 ) 1.0 ( 15.8 ) 2.7

Income tax expense (benefit) 1.3 2.4 ( 14.5 ) 5.1

Net (loss) income ( 34.3 ) 10.9 ( 46.6 ) 22.5

15 unchanged sentences

(Unaudited, dollars in millions)

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

2 unchanged sentences

Derivative activity 3.3 ( 6.8 ) ( 14.6 ) ( 35.1 )

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

Comprehensive (loss) income ( 31.0 ) 4.1 ( 61.2 ) ( 12.6 )

Comprehensive income attributable to non-controlling interests ( 27.3 ) ( 26.6 ) ( 75.0 ) ( 78.1 )

14 unchanged sentences

Other comprehensive loss — — — ( 25.2 ) — — ( 25.2 )

Net effect of adoption of new accounting standard — — — — 18.0 — 18.0

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

5 unchanged sentences

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

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

Other comprehensive income — — — 7.3 — — 7.3

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

2 unchanged sentences

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

Net (loss) income — — — — ( 61.6 ) 19.3 ( 42.3 )

Equity-based compensation ( 56 ) — 3.0 — — — 3.0

Preferred dividends — — ( 10.0 ) — — — ( 10.0 )

Other comprehensive income — — — 3.3 — — 3.3

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

— — ( 37.9 ) — — 7.6 ( 30.3 )

Distributions to non-controlling interests—non-redeemable holders — — — — — ( 18.8 ) ( 18.8 )

Balance at September 30, 2020 50,495 $ 0.5 $ 603.3 $ ( 65.3 ) $ ( 437.3 ) $ 699.6 $ 800.8

(1) Includes post acquisition date adjustments.

See notes to unaudited condensed consolidated financial statements.

SURGERY PARTNERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited, dollars in millions, shares in thousands)

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

3 unchanged sentences

Other comprehensive loss — — — ( 11.5 ) — — ( 11.5 )

Net effect of adoption of new accounting standard — — — — 18.0 — 18.0

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

5 unchanged sentences

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

Other comprehensive income — — — 7.3 — — 7.3

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

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

2 unchanged sentences

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

Net (loss) income — — — — ( 15.7 ) 19.3 3.6

Equity-based compensation 3 — 2.7 — — — 2.7

Preferred dividends — — ( 9.1 ) — — — ( 9.1 )

Other comprehensive loss — — — ( 6.8 ) — — ( 6.8 )

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

— — ( 1.1 ) — — ( 7.9 ) ( 9.0 )

Distributions to non-controlling interests—non-redeemable holders — — — — — ( 19.9 ) ( 19.9 )

Balance at September 30, 2019 49,506 $ 0.5 $ 670.3 $ ( 57.5 ) $ ( 284.6 ) $ 677.8 $ 1,006.5

(1) Includes post acquisition date adjustments.

3 unchanged sentences

(Unaudited, dollars in millions)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from operating activities:

2 unchanged sentences

Depreciation and amortization 69.3 56.3

Non-cash interest expense (income), net 2.2 0.1

Non-cash interest expense, net 3.1 0.6

Equity-based compensation expense 9.9 7.6

Loss (gain) on disposals and deconsolidations, net 7.1 ( 7.0 )

Impairment charges 33.5 —

Loss on debt extinguishment — 11.7

Deferred income taxes ( 15.3 ) 4.1

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

Income from equity investments, net of distributions received ( 1.0 ) 0.5

Non-cash lease expense 29.4 28.8

10 unchanged sentences

Other investing activities 0.5 ( 0.2 )

Net cash used in investing activities ( 22.5 ) ( 42.9 )

Net cash provided by (used in) investing activities 6.8 ( 61.8 )

Cash flows from financing activities:

4 unchanged sentences

Distributions to non-controlling interest holders ( 82.3 ) ( 89.5 )

(Payments) receipts related to ownership transactions with non-controlling interest holders ( 1.9 ) 1.2

Payments related to ownership transactions with non-controlling interest holders ( 27.3 ) ( 4.6 )

Other financing activities ( 0.3 ) ( 1.0 )

10 unchanged sentences

The Company's surgical hospitals also provide services such as diagnostic imaging, laboratory, obstetrics, oncology, pharmacy, physical therapy and wound care.

Ancillary services are comprised of a diagnostic laboratory, multi-specialty physician practices, urgent care facilities, anesthesia services and optical services.

Ancillary services are comprised of multi-specialty physician practices, urgent care facilities, anesthesia services and optical services.

Unless the context otherwise indicates, Surgery Partners, Inc.

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

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.

As of September 30, 2020, the Company owned or operated a portfolio of 126 surgical facilities, comprised of 110 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.

16 unchanged sentences

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.

Due in part to local, state and federal guidelines, as well as recommendations from major medical societies, requiring 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.

Although the Company cannot provide any certainty regarding the length and severity of the impact of the COVID-19 pandemic, surgical case volumes improved throughout the second and third quarters 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.

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

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law to provide stimulus funding for the United States economy.

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

The Company received approximately $ 53 million of the grant funds distributed under

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.

the CARES Act and other governmental assistance programs during the nine months ended September 30, 2020, including approximately $ 5 million received during the three months ended September 30, 2020.

The recognition of amounts received is conditioned upon attestation with terms and conditions that funds will be used for COVID-19 related healthcare expenses or lost revenues.

The Company previously recognized approximately $ 43.1 million as a reduction in operating expenses under the caption Grant funds in the condensed consolidated statements of operations during the six months ended June 30, 2020.

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.

On September 19, 2020, the U.S.

Department of Health and Human Services ("HHS") issued a Post-Payment Notice of Reporting Requirements (the “September Notice”), which revised previous guidance.

The September Notice substantially altered the definition of lost revenues eligible to be claimed in a manner less favorable to recipients of grant funds received through the CARES Act and other governmental assistance programs.

During the three months ended September 30, 2020, the Company updated its estimate of the amount of grant funds received that qualify for recognition based on, among other things, the September Notice, the Company’s results of operations and receipt of additional payments during such period.

Based on the revised guidance, for the three months ended September 30, 2020, the Company reversed approximately $ 9.9 million of amounts previously recognized in the second quarter.

As a result, the Company estimates approximately $ 33.2 million of grant funds received qualified for recognition as a reduction in operating expenses under the caption Grant funds in the condensed consolidated statements of operations for the nine months ended September 30, 2020.

Amounts received, but not recognized as a reduction to operating expenses as of September 30, 2020, are reflected as a component of Medicare accelerated payments and deferred governmental grants in the condensed consolidated balance sheets as of September 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.

HHS’ interpretation of the underlying terms and conditions of grant funds received through the CARES Act and other governmental assistance programs, including auditing and reporting requirements, continues to evolve.

For example, in October 2020, HHS issued updated guidance that revised the September Notice.

Please refer to Note 12.

"Subsequent Events" for additional information.

Additional guidance or new and amended interpretations of existing guidance on the terms and conditions of such payments may result in the Company’s inability to recognize certain payments, changes in the estimate of amounts recognized, or the derecognition of amounts previously recognized, which may be material.

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.

Under the original terms of the program, the repayment of these accelerated/advanced payments would have begun 120 days after the date of the issuance of the payment and the amounts advanced to our facilities would have been recouped from new Medicare claims as a 100% offset.

Our ASCs would have had 210 days from the date the accelerated or advance payment was made to repay the amounts that they owe and our hospitals would have had one year to repay the advance payment.

On October 1, 2020, Congress amended the terms of the Accelerated and Advance Payment Program to extend the term of the loan and adjust the repayment process.

Under the new terms of the program, all providers will have 29 months from the date of their first program payment to repay the full amount of the accelerated or advance payments they have received.

The revised terms extend the period before repayment begins from 210 days to one year from the date that payment under the program was received.

Once the repayment period begins, the offset will be limited to 25% of new claims during the first 11 months of repayment and 50% of new claims during the final 6 months.

The revised program terms also lower the interest rate on outstanding amounts due at the end of the repayment period from 10% to 4%.The Company received approximately $ 120 million of accelerated payments during the nine months ended September 30, 2020.

The Company did no t receive any Medicare accelerated payments during the three months ended September 30, 2020, and 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.

1 unchanged sentence

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.

As of September 30, 2020, the Company has deferred approximately $ 7.3 million, included as a component of accrued payroll and benefits in the condensed consolidated balance sheets as of September 30, 2020.

The Company is continuing to closely monitor legislative actions and regulatory guidance at the federal, state and local levels with respect to the CARES Act as other governmental assistance might become available to the Company.

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 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.

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The total assets (excluding goodwill and intangible assets, net) of the consolidated VIEs included in the accompanying condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019, were $ 28.2 million and $ 36.2 million, respectively, and the total liabilities of the consolidated VIEs were $ 22.2 million and $ 25.2 million, respectively.

Fair Value of Financial Instruments

6 unchanged sentences

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 Fair Value

September 30,

2020 December 31,

2019 June 30,

2019 September 30,

2020 December 31,

8 unchanged sentences

"Derivatives and Hedging Activities").

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 instruments was $ 65.3 million and $ 50.7 million at September 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.

4 unchanged sentences

The Company continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms resulting from contract renegotiations and renewals.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

19 unchanged sentences

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

its discount policies and historical experience.

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

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

8 unchanged sentences

The fees derived from these management arrangements are based on a predetermined percentage of the revenues of each facility or practice and are recognized in the period in which management services are rendered and billed.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 June 30,

Three Months Ended September 30,

Amount % Amount %

9 unchanged sentences

Total revenues $ 496.1 $ 452.0

Six Months Ended June 30,

Nine Months Ended September 30,

Amount % Amount %

13 unchanged sentences

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

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 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.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020 and December 31, 2019, the Company had a net third-party Medicaid settlements liability of $ 15.7 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.

10 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 $ 8.2 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 six months ended June 30, 2020 is included in Note 2.

"Acquisitions and Disposals."

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

Acquisitions, including post acquisition adjustments 20.7

Divestitures and deconsolidations ( 14.2 )

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

Such receivables were $ 9.7 million and $ 8.6 million as of September 30, 2020 and December 31, 2019, respectively.

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.

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):

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

Balance at beginning of period $ 321.0 $ 326.6

9 unchanged sentences

A valuation allowance is established for certain carryforwards when their recoverability is deemed to be uncertain.

The carrying value of the net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions.

The carrying value of the net deferred tax assets

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

assumes that the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions.

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

5 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 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.

The Company's effective tax rate was 23.7 % for the nine months ended September 30, 2020 compared to 18.5 % for the nine months ended September 30, 2019.

The higher effective tax rate for the 2020 period was primarily due to (a) discrete tax benefits of approximately $ 6.9 million attributable to 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 $ 5.0 million attributable to a portion of the payments under the Settlement Agreement, as defined in Note 10.

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

and (b) a discrete tax expense of approximately $ 5.0 million attributable to the Company's impairment of goodwill.

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

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

In March 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.

During the nine months ended September 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.

4 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 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.

During the nine months ended September 30, 2020, the Company acquired a controlling interest in a surgical facility in a new market and a controlling interest in four surgical facilities in existing markets, that were merged into existing facilities for cash consideration of $ 14.2 million, net of cash acquired, and non-cash consideration of $ 3.2 million.

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

The cash consideration was funded through cash from operations.

10 unchanged sentences

Current liabilities ( 2.0 )

Long-term debt, less current maturities ( 4.6 )

Right-of-use operating lease liabilities ( 10.3 )

1 unchanged sentence

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 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.

During the nine months ended September 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 six months ended June 30, 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.

During the nine months ended September 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 nine months ended September 30, 2020.

During the nine months ended September 30, 2020, the Company sold certain assets related to its anesthesia business for net cash proceeds of $ 38.9 million, and recognized a net pre-tax gain of $ 5.1 million included in loss on disposals and deconsolidations, net in the condensed consolidated statement of operations for the three and nine months ended September 30, 2020.

During the nine months ended September 30, 2020, the Company closed its diagnostic laboratory, and recognized a net pre-tax loss of $ 3.5 million included in loss on disposals and deconsolidations, net in the condensed consolidated statement of operations for the three and nine months ended September 30, 2020.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

The Company tests its goodwill and indefinite-lived intangible assets for impairment at least annually, as of October 1, or more frequently if certain indicators arise.

The Company tests for goodwill impairment at the reporting unit level, which is defined as one level below an operating segment.

A detailed evaluation of potential impairment indicators was performed as of September 30, 2020, which specifically considered the volatility observed in the prices of the Company’s outstanding debt securities and common stock, as well as the decline in surgical case volumes following the emergence of the COVID-19 pandemic, all of which improved throughout the second and third quarters as states began to re-open and allow for non-emergent procedures.

As of September 30, 2020, the Company has identified three reporting units, which include the following:

1) Surgical Facilities, 2) Ancillary Services, and 3) Alliance, which is a component of the Optical Services operating segment.

On the basis of available evidence as of September 30, 2020, no indicators of impairment were identified for the Company's Surgical Facilities reporting unit.

The Company did identify indicators of impairment related to its Ancillary Services and Alliance reporting units, including the impacts of the COVID-19 pandemic and the closure of its diagnostic laboratory (as discussed in Note 2.

"Acquisitions and Disposals").

Based on the impairment indicators for these reporting units, the Company performed an impairment analysis as of September 30, 2020.

The Company compares the carrying value of the net assets of the reporting unit to the estimated fair value of the reporting unit.

To determine the fair value of the reporting units, the Company obtained valuations at the reporting unit level prepared by third-party valuation specialists which utilized a combination of the income and market approaches.

The discounted cash flow model is projected based on a year-by-year assessment that considers historical results, estimated market conditions, internal projections, and relevant publicly available statistics.

Determining fair value requires the exercise of significant judgment, including assumptions about appropriate discount rates, perpetual growth rates and the amount and timing of expected future cash flows.

The significant judgments are typically based upon Level 3 inputs, generally defined as unobservable inputs representing the Company's own assumptions.

The cash flows employed in the discounted cash flow analysis are based on the Company's most recent budgets and business plans aligned with provided guidance and, when applicable, various growth rates are assumed for years beyond the current business plan period.

Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting units.

The variables within the discount rate, many of which are outside of the Company's control, provide the best estimate of all assumptions applied within the discounted cash flow model.

There can be no assurance that operations will achieve the future cash flows reflected in the projections.

In determining the fair value under the market approaches, the analysis includes a control premium, which was based on observable market data and a review of selected transactions of companies that operate in the Company's sector.

While the Company believes that all assumptions utilized in the testing were appropriate, they may not reflect actual outcomes that could occur.

Specific factors that could negatively impact the assumptions used include changes to the discount and growth rates and a change in the equity and enterprise premiums being realized in the market.

As of the September 30, 2020 valuation, carrying value for both the Ancillary Services and Alliance reporting units exceeded the fair value, resulting in non-cash impairment charges of $ 28.6 million and $ 4.9 million, respectively.

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.

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

Balance at December 31, 2019 $ 3,402.4

Acquisitions, including post acquisition adjustments 24.9

Divestitures ( 49.2 )

Impairment charges ( 33.5 )

Balance at September 30, 2020 $ 3,344.6

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

"Acquisitions and Disposals."

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Long-Term Debt

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

September 30,

2020 December 31,

6 unchanged sentences

Finance lease obligations 242.7 253.4

unamortized debt issuance costs ( 16.6 ) ( 10.8 )

unamortized debt issuance costs, discount and premium, net ( 16.8 ) ( 10.8 )

Total debt 2,822.4 2,580.7

1 unchanged sentence

Total long-term debt $ 2,761.3 $ 2,524.7

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

(1) Includes unamortized fair value discount of $ 3.9 million and $ 4.6 million as of September 30, 2020 and December 31, 2019, respectively.

Revolving Credit Facility

On March 18, 2020, the Company drew down its available capacity under its revolving credit facility (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 September 30, 2020, the Company's availability on the Revolver was $ 112.5 million (including outstanding letters of credit of $ 7.5 million).

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”).

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 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.

4 unchanged sentences

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).

In connection with the 2020 Incremental Term Loans borrowings, the Company recorded debt issuance costs and discount of $ 6.5 million.

10.000 % Senior Unsecured Notes due 2027

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

In connection with the notes issuance, the Company recorded debt issuance costs, net of issuance premium of $ 1.0 million.

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

1 unchanged sentence

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

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

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

These modifications resulted in an increase to the Company's right-of-use operating lease assets and liabilities of $ 26.4 million during the nine months ended September 30, 2020, respectively.

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,

Nine Months Ended September 30,

Operating lease costs $ 54.9 $ 50.8

6 unchanged sentences

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

Six Months Ended June 30,

Nine Months Ended September 30,

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

11 unchanged sentences

Dividends accrued (there were no cash dividends declared)

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.

Balance at September 30, 2020 $ 424.2

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

The aggregate and per share amounts of unpaid cumulative preferred dividends as of September 30, 2020 was $ 98.7 million and $ 318.30 , respectively.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Derivatives and Hedging Activities

3 unchanged sentences

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 Company’s variable-rate debt.

Over the next 12 months, the Company estimates that an additional $ 21.8 million will be reclassified as an increase to interest expense.

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.

As of September 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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Derivatives in cash flow hedging relationships:

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

Loss recognized in OCI (effective portion) $ 2.3 $ 8.5 $ 29.2 $ 39.6

Loss reclassified from accumulated OCI to interest expense (effective portion) $ 5.6 $ 1.7 $ 14.6 $ 4.5

5 unchanged sentences

shares in thousands):

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

19 unchanged sentences

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

September 30,

2020 December 31,

14 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 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.

Total professional, general and workers' compensation claim liabilities as of September 30, 2020 and December 31, 2019 were $ 21.8 million and $ 19.4 million, respectively.

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

Laws and Regulations

15 unchanged sentences

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:

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.

1 unchanged sentence

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.

During the nine months ended September 30, 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.

5 unchanged sentences

The Company, through its wholly-owned subsidiaries or controlled partnerships and limited liability companies, has acquired and will continue to acquire surgical facilities with prior operating histories.

Such facilities may have unknown or contingent liabilities, including liabilities for failure to comply with health care laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws.

Although the Company attempts to assure that no such liabilities exist, obtain indemnification from prospective sellers covering such matters and institute policies designed to conform centers to its standards following completion of acquisitions, there can be no assurance that the Company will not become liable for past activities that may later be asserted to be improper by private plaintiffs or government agencies.

17 unchanged sentences

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

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.

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 $ 52.5 million and $ 48.7 million as of September 30, 2020 and December 31, 2019, respectively.

The current portion of the liability was $ 16.9 million as of both September 30, 2020 and December 31, 2019, respectively, 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.

2 unchanged sentences

The Surgical Facility Services segment consists of the operation of ASCs and surgical hospitals and includes anesthesia services.

The ancillary services segment consists of a diagnostic laboratory and multi-specialty physician practices.

The Ancillary Services segment consists of multi-specialty physician practices and a diagnostic laboratory, which was closed during the third quarter of 2020.

The Optical Services segment consists of an optical products group purchasing organization.

1 unchanged sentence

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

17 unchanged sentences

7.5 5.3 30.2 16.8

Loss on debt extinguishment — 11.7 — 11.7

Impairment charges 33.5 — 33.5 —

Loss (gain) on disposals and deconsolidations, net 0.7 0.6 7.1 ( 7.0 )

Litigation settlement and other litigation costs (2)

1.1 2.8 4.9 2.8

Gain on escrow release (3)

— — ( 0.8 ) —

Loss on debt extinguishment — — — 11.7

Tax receivable agreement expense — — — 2.4

Adjusted EBITDA 61.1 62.2 165.8 174.2

(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.

Impact of grant funds (4)

5.4 — ( 21.9 ) —

Adjusted EBITDA excluding grant funds $ 66.5 $ 62.2 $ 143.9 $ 174.2

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.

(1) This amount includes transaction and integration costs of $ 5.4 million and $ 3.4 million for the three months ended September 30, 2020 and 2019, respectively.

This amount further includes other acquisition costs and start-up costs related to a de novo surgical hospital of $ 2.1 million and $ 1.9 million for the three months ended September 30, 2020 and 2019, respectively.

This amount includes transaction and integration costs of $ 15.8 million and $ 11.6 million for the nine months ended September 30, 2020 and 2019, respectively.

This amount further includes other acquisition costs and start-up costs related to a de novo surgical hospital of $ 14.4 million and $ 5.2 million for the nine months ended September 30, 2020 and 2019, respectively.

(2) This amount includes other litigation costs of $ 1.1 million and $ 2.8 million for the three months ended September 30, 2020 and 2019, respectively.

This amount includes litigation settlement costs of $ 1.2 million for the nine months ended September 30, 2020, with no comparable settlement costs in the same 2019 period.

This amount further includes other litigation costs of $ 3.7 million and $ 2.8 million for the nine months ended September 30, 2020 and 2019, respectively.

(3) Included in other income in the condensed consolidated statement of operations for the nine months ended September 30, 2020, with no comparable gain in the same 2019 period.

(4) Represents the impact of grant funds recognized, net of amounts attributable to non-controlling interests.

September 30,

2020 December 31,

4 unchanged sentences

Total assets $ 5,312.9 $ 5,018.9

Six Months Ended June 30,

Nine Months Ended September 30,

Cash purchases of property and equipment:

4 unchanged sentences

Subsequent Events

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.

On October 22, 2020, HHS issued an updated Post-Payment Notice of Reporting Requirements and a Reporting Requirements Policy Update (collectively, the "October Notice") which, among other changes, provides that grant funds may be applied to patient care lost revenues, net of other reimbursed sources, up to the amount of the difference between the Company’s 2019 and 2020 actual patient care revenue.

The October Notice modified the September Notice, which limited the definition of lost revenue to a year-over-year decrease in net patient operating income.

As a non-recognizable subsequent event, GAAP does not permit amounts recognized as of September 30, 2020 to be updated on the basis of new information in the October Notice.

The Company’s evaluation of the October Notice is ongoing and the amount of unrecognized grant funds received as of September 30, 2020 that may be recognized as a result of the October Notice is not yet known.

However, based on the more favorable definition of lost revenues, the October Notice is expected to result in the recognition of additional grant funds in future periods as compared to the September Notice.

During October 2020, the Company purchased an ASC and a surgical hospital in existing markets for a combined purchase price of $ 79.8 million.

The Company funded the purchase price with proceeds from its recent divestitures and available resources.

As of the date of this filing, the Company has not completed its preliminary estimation of the fair values assigned to the assets acquired and liabilities assumed.

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