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Item 7. Management’s Discussion and Analysis

2021-03-10 compared with 2020-03-13 · 205 added, 183 removed, 263 unchanged (60% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Item 6.

"Selected Financial Data" and our audited consolidated financial statements and related notes included elsewhere in this Annual Report.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this Annual Report.

This discussion contains forward-looking statements that involve risks and uncertainties.

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and the term "employees" refers to employees of affiliates of Surgery Partners, Inc.

The following discussion and analysis of our financial condition and results of operations covers periods both prior to and subsequent to the Transactions (as defined in Item 1.

Business above).

Accordingly, the discussion and analysis of historical periods do not reflect the significant impact the Transactions had on the Company.

As discussed in the notes to the consolidated financial statements included in this report, in connection with the change of control effected by the Private Sale, we elected to apply "pushdown" accounting.

We have presented the information for the year ended December 31, 2017 on a Predecessor period and Successor period combined basis (each as defined in Note 1.

"Organization and Summary of Accounting Policies" of our consolidated financial statements) to facilitate meaningful comparisons of operating results to the prior year period.

You should read the following discussion together with our historical financial statements and related notes included elsewhere herein.

Executive Overview

As of December 31, 2019 , we owned and operated a national network of surgical facilities, physician practices and a suite of ancillary services in 30 states.

Our surgical facilities, which include ASCs and surgical hospitals, primarily provide non-emergency surgical procedures across many specialties, including, among others, gastroenterology ("GI"), general surgery, ophthalmology, orthopedics and pain management.

Our surgical hospitals also provide services, such as diagnostic imaging, laboratory, obstetrics, oncology, cardiology, pharmacy, physical therapy and wound care.

Our portfolio of outpatient surgical facilities is complemented by our suite of ancillary services, which support our physicians in providing high quality and cost-efficient patient care.

As a result, we believe we are well positioned to benefit from rising consumerism and payors’ and patients’ focus on the delivery of high quality care and superior clinical outcomes in the lowest cost setting.

As of December 31, 2020, we owned or operated, primarily in partnership with physicians, a portfolio of 127 surgical facilities comprised of 110 ASCs and 17 surgical hospitals across 30 states.

We owned a majority interest in 84 of the surgical facilities and consolidated 107 of these facilities for financial reporting purposes.

During the year ended December 31, 2019 , approximately 525,000 surgical procedures were performed in our surgical facilities, generating approximately $1.7 billion in revenue.

We continue to focus on improving our same-facility performance, selectively acquiring established facilities and developing new facilities.

During the year ended December 31, 2019 , we completed the acquisitions of a surgical facility, a clinic that was merged into an existing facility and a physician practice for an aggregate cash investment of $20.1 million , net of cash acquired.

In connection with the clinic acquisition in 2019, the Company acquired the remaining non-controlling interests in one of its existing consolidated surgical facilities.

As such, $6.3 million of the cash consideration for the clinic acquisition was classified as a financing activity and presented in payments related to ownership transactions with non-controlling interest holders in the Consolidated Statements of Cash Flows elsewhere in this Annual Report.

Additionally, during the year ended December 31, 2019, we acquired non-controlling interests, primarily in four surgical facilities, for a cash investment of $15.2 million .

The non-controlling interests were accounted for as equity method investments.

Total revenues for 2020 increased 1.6% to $1.9 billion from $1.8 billion in 2019.

Same-facility revenues for 2019 increased 7.6% from 2018, with a 5.5% increase in revenue per case and a 2.0% increase in same-facility cases.

As a result of our targeted net revenue improvement initiatives, the three months ended December 31, 2019 represented the sixth consecutive quarter of same-facility case volume growth.

Same-facility revenues for 2020 decreased 1.1% from 2019, with a 14.1% increase in revenue per case and a 13.3% decrease in same-facility cases.

The decrease in same-facility cases is attributable to the impacts of the COVID-19 pandemic that the Company began experiencing in mid-March, and extending into the fourth quarter.

Same-facility revenue per case growth was driven by a favorable surgical case mix as we experienced a faster recovery of higher acuity cases as states began to re-open and allow for non-emergent procedures.

For 2020, the net loss attributable to common stockholders was $155.6 million compared to $110.5 million for 2019.

Additionally, for 2019, Adjusted EBITDA increased 10.1% to $258.6 million compared to $234.8 million for 2018.

A reconciliation of non-GAAP financial measures appears below under "Certain Non-GAAP Metrics."

Additionally, for 2020, Adjusted EBITDA decreased 0.8% to $256.6 million compared to $258.6 million for 2019.

A reconciliation of non-GAAP financial measures appears below under "Certain Non-GAAP Measures."

We continue to focus on improving our same-facility performance, selectively acquiring established facilities and developing new facilities.

During the year ended December 31, 2020, we acquired a controlling interest in three surgical facilities, including a surgical hospital, a controlling interest in five surgical facilities in existing markets, that were merged into existing facilities and a physician practice for total aggregate consideration of $120.1 million, including cash consideration of $104.6 million, net of cash acquired, non-cash consideration of $8.7 million and contingent consideration of $0.7 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, proceeds from our recent divestitures and other available resources.

During 2020, we sold our interests in three surgery centers, one of which was previously accounted for as an equity method investment, sold certain assets related to our anesthesia business, certain imaging assets and our optical products purchasing organization for combined net cash proceeds of $59.0 million.

Additionally, we closed our diagnostic laboratory in 2020.

We had cash and cash equivalents of $317.9 million and $112.5 million of borrowing capacity under our revolving credit facility at December 31, 2020.

Operating cash flows were $246.9 million in 2020, an increase of $117.4 million compared to the prior year, primarily attributable to Medicare accelerated payments and other funds received under the CARES Act as well as actions taken to significantly reduce operating expenses and defer non-essential capital expenditures at the height of the crisis.

Net operating cash inflows, including operating cash flows less distributions to non-controlling interests, were $137.3 million for 2020.

We are actively monitoring the worldwide outbreak of novel coronavirus, or COVID-19, and planning for any potential impact on our business.

For a description of risks relating to COVID-19 or any other pandemic, epidemic or outbreak of contagious disease, see See Item 1A "Risk Factors" elsewhere in this report under the heading "Risk Factors - Risks Related to Our Business and Industry - A pandemic, epidemic or outbreak of a contagious disease in the markets in which we operate or that otherwise impacts our facilities could adversely impact our revenue, profitability and cash flows ."

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

Impact of COVID-19

The COVID-19 global pandemic has significantly affected our facilities, employees, patients, communities, business operations and financial performance, as well as the U.S.

economy and financial markets.

The COVID-19 pandemic materially impacted our financial performance for the year ending December 31, 2020.

The length and severity of the pandemic continues to be difficult to predict and is dependent on factors beyond our control.

We continue to take or support measures to try to slow the spread and minimize the impact of the virus.

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

Due in part to local, state and federal guidelines as well as recommendations from major medical societies regarding social distancing and self-quarantines in response to the COVID-19 pandemic, we cancelled or postponed a substantial percentage of the elective procedures scheduled at our facilities and reduced operating hours at a significant number of our facilities.

As a result, surgical case volumes across most of our surgical facilities were significantly impacted in the second quarter of 2020.

The impact of the COVID-19 pandemic on our surgical facilities varies based on the market in which the facility operates, the type of surgical facility and the procedures typically performed.

Although we cannot provide any certainty regarding the length and severity of the impact of the COVID-19 pandemic, surgical case volumes improved in the second half of 2020 as states began to re-open and allow for non-emergent procedures.

Our 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 and third quarters, we took actions that included significantly reducing cash operating expenses and deferring non-essential expenditures at the height of the crisis.

These measures were gradually reduced as surgical case volumes improved.

On April 22, 2020, we entered into a second incremental term loan amendment providing for an incremental borrowing of $120.0 million, and on July 30, 2020, we issued an additional $115.0 million aggregate principal amount of 10.000% senior unsecured notes due 2027.

"Long-Term Debt" to our consolidated financial statements included elsewhere in this report for a further discussion of the second incremental term loan amendment and the senior unsecured notes.

Additionally, as a result of the CARES Act and other governmental assistance programs, during the year ended December 31, 2020, the Company received approximately $59 million in direct grant funding and approximately $120 million in accelerated Medicare payments, each of which is described in more detail in Note 1.

“Organization and Summary of Accounting Polices - COVID-19 Pandemic” to our consolidated financial statements included elsewhere in this report.

Even after taking into account our actions intended to increase financial flexibility (including actions that management estimates have lowered cash operating expenses), the volume reductions resulted in materially higher losses and material decreases in Adjusted EBITDA during 2020, and may potentially continue to do so for subsequent quarters.

We cannot predict if or when utilization may return to pre-pandemic levels.

The Company is continuing to monitor legislative actions at federal and state levels, including the impact of the CARES Act and other governmental assistance that might be available.

Furthermore, please see "Capital Resources" and "Summary" under the heading "Liquidity and Capital Resources" below for more information about the impact of the COVID-19 pandemic on the Company.

Our revenues consist of patient service revenues and other service revenues.

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Other service revenues include management and administrative service fees derived from our non-consolidated facilities that we account for under the equity method, management of surgical facilities and physician practices in which we do not own an interest and management services we provide to physician practices for which we are not required to provide capital or additional assets.

Prior to the sale of our optical laboratory in 2018, other revenue also included product sales.

The following table summarizes revenues by service type as a percentage of total revenues:

Year Ended December 31,

2020 2019 2018

Patient service revenues:

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Ancillary services revenues 3.4 % 4.3 % 4.5 %

98.7 % 98.4 % 98.1 %

Other service revenues:

Optical services revenues 0.2 % 0.2 % 0.5 %

Other 1.1 % 1.4 % 1.4 %

1.3 % 1.6 % 1.9 %

Total revenues 100.0 % 100.0 % 100.0 %

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Year Ended December 31,

2020 2019 2018

Private insurance payors 53.9 % 53.8 % 54.6 %

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Other payors (1)

4.3 % 4.7 % 4.9 %

Total 100.0 % 100.0 % 100.0 %

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

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We believe this diversification helps to protect us from adverse pricing and utilization trends in any individual procedure type and results in greater consistency in our case volume.

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

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

Year Ended December 31,

2020 2019 2018

Orthopedics and pain management 39.3 % 38.3 % 37.8 %

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General surgery 3.1 % 3.2 % 3.0 %

Other 12.9 % 12.8 % 12.5 %

Total 100.0 % 100.0 % 100.0 %

Segment Information

Our business is comprised of three segments:

(1) surgical facility services, (2) ancillary facility services and (3) optical services.

(1) Surgical Facility Services, (2) Ancillary Services and (3) Optical Services.

On December 31, 2020, we sold the remaining assets of the Optical Services segment.

For more information about the components of each segment, please see Part I, Item 1.

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Year Ended December 31,

2020 2019 2018

Surgical Facility Services $ 1,793.4 $ 1,748.2 $ 1,682.4

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Optical Services 1.4 1.4 2.5

All other (80.7) (74.3) (80.2)

Total Adjusted EBITDA (1)

$ 256.6 $ 258.6 $ 234.8

Supplemental Information:

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Ancillary Services 0.4 1.1 0.4

Optical services

All other 3.8 6.6 5.2

Total cash purchases of property and equipment, net $ 42.9 $ 73.6 $ 39.8

For a reconciliation of Adjusted EBITDA to income before income taxes as reflected in the audited consolidated statements of operations see "Certain Non-GAAP Metrics" below.

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

(1) For a reconciliation of Adjusted EBITDA to income before income taxes as reflected in the audited consolidated statements of operations see "Certain Non-GAAP Measures" below.

Surgical Facility Services $ 4,962.4 $ 4,580.4

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Optical Services — 17.7

All other 415.8 351.2

Total assets $ 5,413.2 $ 5,018.9

Critical Accounting Policies

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Revenue Recognition

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers .

We adopted the new standard effective January 1, 2018, using the modified retrospective method.

The presentation of the amount of earnings from operations and net earnings were unchanged upon adoption of the new standard;

however, during the year of adoption, we determined that amounts historically considered to be bad debt should be considered an implicit price concession, as defined in FASB Accounting Standards Codification 606, " Revenue From Contracts With Customers" .

This resulted in changes to the presentation of revenues and the provision for bad debts in the consolidated statements of operations.

Previously, the estimate for unrealizable amounts was recorded to the provision for bad debts and presented as a component of operating expenses.

Upon reassessment during the year of adoption, the estimate for unrealizable amounts is now reflected as an implicit price concession as a reduction to arrive at net revenue.

This change in presentation was not material to the financial statements.

Our patient service revenues are derived primarily from surgical procedures performed at our ASCs and surgical hospitals, patient visits to physician practices, anesthesia services provided to patients, pharmacy services and diagnostic screens ordered by our physicians.

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

Our optical products purchasing organization negotiates volume buying discounts with optical product manufacturers.

The buying discounts and any handling charges billed to the members of the purchasing organization represent the revenues recognized for financial reporting purposes.

Prior to its sale on December 31, 2020, our optical products purchasing organization negotiated volume buying discounts with optical product manufacturers.

The buying discounts and any handling charges billed to the members of the purchasing organization represented the revenues recognized for financial reporting purposes.

Revenue is recognized as orders are shipped to members.

Prior to the sale of our optical laboratories in 2018, product sale revenues from our optical laboratories and marketing products and services businesses, net of an allowance for returns and discounts, were recognized when the product was shipped or service is provided to the customer.

Other service revenues consist of management and administrative service fees derived from non-consolidated surgical facilities that we account for under the equity method, management of surgical facilities in which we do not own an interest and management services we provide to physician networks for which we are not required to provide capital or additional assets.

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Accounts Receivable

Our patient service revenues and other receivables from third-party payors are recorded net of estimated implicit price concessions which are estimated based on the historical trend of our surgical facilities’ cash collections and contractual write-offs, established fee schedules, relationships with payors and procedure statistics.

Our patient service revenues and other receivables from third-party payors are recorded net of estimated implicit price concessions which are estimated based on the historical trend of our surgical hospitals’ cash collections and contractual write-offs, and for our surgical facilities in general, established fee schedules, relationships with payors and procedure statistics.

While changes in estimated reimbursement from third-party payors remain a possibility, we expect that any such changes would be minimal and, therefore, would not have a material effect on our financial condition or results of operations.

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The operating systems generate reports that assist in the collection efforts by prioritizing patient accounts.

Collection efforts include direct contact with

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

insurance carriers or patients, written correspondence and the use of legal or collection agency assistance, as required.

Collection efforts include direct contact with insurance carriers or patients, written correspondence and the use of legal or collection agency assistance, as required.

Our days sales outstanding was 69 days for the year ended December 31, 2020 and 64 days for the year ended December 31, 2019.

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Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

If a NOL carryforward exists, we make a determination as to whether that NOL carryforward will be utilized in the future.

A valuation allowance will be established for certain NOL carryforwards and other deferred tax assets where their recoverability is deemed to be uncertain.

If a NOL and/or interest limitation ("163(j)") carryforward exists, we make a determination as to whether that NOL and/or 163(j) carryforward will be utilized in the future.

A valuation allowance will be established for certain NOL and 163(j) carryforwards and other deferred tax assets where their recoverability is deemed to be uncertain.

The carrying value of the net deferred tax assets is based upon estimates and assumptions related to our ability to generate sufficient future taxable income in certain tax jurisdictions.

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These changes could have a significant impact on our future earnings.

Section 382 ("Section 382") of the Internal Revenue Code of 1986, as amended (the "Code") imposes an annual limit on the ability of a corporation that undergoes an "ownership change" to use its NOLs to reduce its tax liability.

Section 382 of the Internal Revenue Code of 1986 ("Section 382"), as amended (the "Code") imposes an annual limit on the ability of a corporation that undergoes an "ownership change" to use its NOLs to reduce its tax liability.

An "ownership change" is generally defined as any change in ownership of more than 50.0% of a corporation’s "stock" by its "5-percent shareholders" (as defined in Section 382) over a rolling three-year period based upon each of those shareholder’s lowest percentage of stock owned during such period.

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If our ability to utilize our NOLs to offset taxable income generated in the future is subject to this limitation, it could have an adverse effect on our business, prospects, results of operations and financial condition.

The Tax Cuts and Jobs Act (the "Tax Act") was enacted on December 22, 2017.

The Tax Act reduces the U.S.

federal corporate tax rate from 35% to 21%, allows for 100% expensing of certain capital expenditures, and limits interest expense deductions beginning in 2018.

The Securities and Exchange Commission issued Staff Accounting Bulletin No.

118 ("SAB 118"), which provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification 740.

In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under Accounting Standards Codification 740 is complete.

Our accounting for elements of the Tax Act is complete, and we reduced the U.S.

federal corporate tax rate from 35% to 21%, expensed 100% of capital expenditures, and utilized the interest expense limitation under Section 163(j).

Impairment of Goodwill

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Our judgments regarding the existence of impairment indicators are based on market conditions and operational performance of each reporting unit.

We completed our most recent annual impairment test for goodwill as of October 1, 2019.

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

As of October 1, 2019 , we had three reporting units with allocated goodwill as follows:

1) Surgical Facilities - $3.4 billion , 2) Ancillary Services - $28.6 million , and 3) Alliance - $11.6 million , which is a component of our Optical Services operating segment.

In 2018, we disposed of two previously identified reporting units, Midwest Labs and Family Vision Care.

As of the October 1, 2019 valuation, the fair value for both the Surgical Facilities and Ancillary Services reporting units was substantially in excess of its carrying value.

For the Alliance reporting unit, the carrying value exceeded the fair value, resulting in non-cash impairment charges of $2.5 million in accordance with ASU No.

During the year ended December 31, 2018, as a result of its impairment testing, the Company recorded non-cash impairment charges of $60.7 million and $13.7 million related to the Ancillary Services and Alliance reporting units, respectively.

In connection with the implementation of pushdown accounting in 2017, we performed our goodwill impairment test as of August 31, 2017, then re-evaluated for impairment at October 1, 2017.

Both evaluations resulted in no impairment.

As a result of the impairment charges, the fair value equaled carrying value as of October 1, 2019 for the Alliance reporting unit, any future adverse events or changes in the assumptions could require additional impairment.

During 2020, the Company had 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.

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.

A detailed evaluation of potential impairment indicators was performed, 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 in the second half of 2020 as states began to re-open and allow for non-emergent procedures.

On the basis of available evidence as of August 31, 2020, we identified indicators of impairment related to the Ancillary Services and Alliance reporting units, including the impacts of the COVID-19 pandemic and the closure of our diagnostic laboratory.

No indicators of impairment were identified for the Surgical Facilities reporting unit.

Based on the impairment indicators noted, we performed an impairment analysis for the Ancillary Services and Alliance reporting units as of August 31, 2020.

As of the August 31, 2020 valuation, the 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.

As of October 1, 2020, prior to its annual impairment testing, the Company's three reporting units with allocated goodwill were as follows:

1) Surgical Facilities - $3.3 billion, 2) Ancillary Services - no remaining goodwill after the August 31 impairment discussed above, and 3) Alliance - $4.2 million.

As of the October 1, 2020 valuation, the fair value for the Surgical Facilities reporting unit was substantially in excess of its carrying value, and there were no additional indicators of impairment related to the other reporting units.

Subsequent to the date of our annual impairment test, the Company considered its operating results for the fourth quarter of 2020, macroeconomic, industry and market conditions, and other market indicators including its market capitalization.

Based on its evaluation of all such factors, the Company concluded that an event had not occurred or circumstances had not changed that would more likely than not reduce the fair value of its reporting units below their carrying values.

See Note 4 to the consolidated financial statements elsewhere in this Annual Report for additional disclosure related to goodwill.

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

On December 31, 2020, the Company disposed of the Alliance reporting unit with the sale of its optical products purchasing organization.

During the year ended December 31, 2019, as a result of its impairment testing, the Company recorded non-cash impairment charges of $2.5 million related to the Alliance reporting unit.

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

Results of Operations

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Year Ended December 31,

2020 2019 2018

Revenues $ 1,860.1 $ 1,831.4 $ 1,771.5

Operating expenses:

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Depreciation and amortization 94.8 76.5 67.4

Provision for doubtful accounts

Income from equity investments (10.8) (10.2) (8.9)

(Gain) loss on disposals and deconsolidations, net

Loss (gain) on disposals and deconsolidations, net 5.7 (4.4) 31.8

Transaction and integration costs 23.2 19.0 31.7

Impairment charges 33.5 7.9 74.4

Grant funds (46.2) — —

Loss on debt extinguishment — 11.7 —

Loss (gain) on litigation settlements

Gain on acquisition escrow release

Litigation settlement 1.2 0.2 46.0

Other income (1.7) (1.4) (3.7)

Total operating expenses 1,677.1 1,595.5 1,693.7

Operating income 183.0 235.9 77.8

Gain on amendment to tax receivable agreement

Tax receivable agreement (expense) benefit

Tax receivable agreement expense — (2.4) —

Interest expense, net (201.8) (178.9) (147.0)

Income (loss) before income taxes

Income tax expense

(Loss) income before income taxes (18.8) 54.6 (69.2)

Income tax (benefit) expense (20.1) 9.5 26.4

Net income (loss) 1.3 45.1 (95.6)

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Net loss attributable to Surgery Partners, Inc.

$ (116.1) $ (74.8) $ (205.7)

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

During 2019 , our revenues increased 3.4% to $1,831.4 million from $1,771.5 million in 2018 .

During 2020, our revenues increased 1.6% to $1.9 billion from $1.8 billion in 2019.

We incurred net loss attributable to Surgery Partners, Inc.

in 2019 of $74.8 million , compared to net loss of $205.7 million in 2018 .

in 2020 of $116.1 million, compared to net loss of $74.8 million in 2019, primarily attributable to the impairment charges taken during 2020 and the continued impact of the COVID-19 pandemic on surgical case volumes.

Revenues for 2020 and 2019 were as follows (dollars in millions):

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Total revenues $ 1,860.1 $ 1,831.4

Patient service revenues increased 3.8% to $1,803.1 million in 2019 compared to $1,737.0 million in 2018 .

The three months ended December 31, 2019 represented the sixth consecutive quarter of same-facility case volume growth, which resulted in 2.0% same-facility case growth for the year ended December 31, 2019.

Additionally, our targeted net revenue improvement initiatives have resulted in 5.5% same-facility revenue per case growth for the same period.

The 2018 period includes patient service revenues associated with disposed facilities that are not included in the 2019 period.

Patient service revenues increased 1.8% to $1.84 billion in 2020 compared to $1.80 billion in 2019.

The increase in patient service revenues was primarily attributable to a de novo hospital completed in 2019 and acquisitions completed in 2020 and 2019.

Same-facility revenues for 2020 decreased 1.1% from 2019, with a 14.1% increase in same-facility revenue per case, and a 13.3% decrease in the same-facility case volume primarily due to the impacts of the COVID-19 pandemic.

Same-facility revenue per case growth was driven by a favorable surgical case mix as higher acuity cases were some of the first to recover when elective procedures returned in the second quarter of 2020.

Cost of Revenues.

Cost of revenues were $1,407.6 million in 2019 compared to $1,361.4 million in 2018 , with the increase in costs primarily attributable to our 2019 and 2018 acquisitions and an increase in supply costs associated with higher acuity surgical case volume.

As a percentage of revenues, cost of revenues was 76.9% for both 2019 and 2018 .

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

Cost of revenues were $1.5 billion in 2020 compared to $1.4 billion in 2019.

The increase in costs was primarily attributable to a de novo hospital completed in 2019, acquisitions completed in 2020 and 2019 and an increase in supply costs associated with higher acuity surgical case volumes.

As a percentage of revenues, cost of revenues was 79.6% and 76.9% for 2020 and 2019, respectively.

The increase as a percentage of revenues is primarily the result of the decreased revenues in 2020 driven by the decline in surgical case volume that began in mid-March due to the COVID-19 pandemic.

General and Administrative Expenses.

General and administrative expenses were $97.1 million and $88.6 million in 2020 and 2019, respectively.

The decrease is primarily due to reduced costs as we continue our planned investment in our corporate infrastructure and integration of corporate office functions related to acquisitions we completed in 2017.

As a percentage of revenues, general and administrative expenses were 5.2% in 2020 compared to 4.8% in 2019.

The increase as a percentage of revenues is primarily the result of the decreased revenues driven by the decline in surgical case volume that began in mid-March due to the COVID-19 pandemic.

Depreciation and Amortization.

Depreciation and amortization was $94.8 million and $76.5 million in 2020 and 2019, respectively.

The increase is primarily due to increased capital investments and integration of a de novo hospital completed in 2019 as well as acquisitions completed in 2020 and 2019.

As a percentage of revenues, depreciation and amortization expenses were 5.1% in 2020 and 4.2% in 2019.

The increase is primarily due to increased capital investments and integration of acquisitions we completed in 2019 and 2018.

Income from Equity Investments.

Income from equity investments was $10.8 million and $10.2 million in 2020 and 2019, respectively.

The increase is primarily due to the addition of four non-consolidated surgical facility equity method investments in 2019.

(Gain) Loss on Disposals and Deconsolidations, Net.

The net gain on disposals and deconsolidations was $4.4 million in 2019, including a $10.9 million gain on the sale of previously owned real property associated with one of our non-consolidated surgical facility equity method investments, offset by a loss of $6.5 million on disposals of other long-lived assets.

The net loss on disposals and deconsolidations was $31.8 million in 2018, which included a net loss of $20.1 million on the disposal of six surgical facilities and our optical laboratory, and the deconsolidation of a surgical facility.

The remaining loss in 2018 is related to disposals of other long-lived assets.

As a percentage of revenues, income from equity investments was 0.6% for both 2020 and 2019.

Loss (gain) on Disposals and Deconsolidations, Net.

The net loss on disposals and deconsolidations was $5.7 million in 2020, including a $2.5 million net gain on the sale of three surgical facilities, certain assets related to its anesthesia business, certain imaging assets, its optical products purchasing organization and the closure of a diagnostic laboratory and $8.2 million primarily related to disposals of other long-lived assets.

Transaction and Integration Costs.

We incurred $23.2 million of transaction and integration costs in 2020 compared to $19.0 million in 2019.

The decrease primarily relates to reduced reorganization costs as we continue our planned investment in our infrastructure and the integration of acquisitions completed in 2017.

The increase primarily relates to costs for ongoing development initiatives, divestitures completed in 2020 and the integration of acquisitions we completed in 2020 and 2019.

Impairment Charges.

In 2020 we recorded non-cash impairment charges of $28.6 million and $4.9 million for goodwill assigned to the Ancillary Services and Alliance reporting units, respectively.

"Goodwill and Intangibles" to our consolidated financial statements included elsewhere in this report for further discussion.

In 2019 we recorded non-cash impairment charges of $2.5 million for goodwill assigned to the Alliance reporting unit and $5.4 million related to a management rights agreement intangible asset.

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As a result of the transaction, we determined the management rights agreement related to the acquired clinic no longer provided a future benefit.

In 2018 we recorded a non-cash impairment charge of $60.7 million and $13.7 million for goodwill assigned to the Ancillary Services and the Alliance reporting units, respectively.

The goodwill impairment charges in each period were warranted based on the calculated fair value compared to the carrying value of the reporting units.

See Note 4 to the consolidated financial statements elsewhere in this Annual Report for further discussion.

We recognized $46.2 million in grant funds in 2020.

The funds were received based on relief available to eligible health care providers under the provisions of the CARES Act, which is described in further detail above in the section titled "Impact of COVID-19” and in Note 1.

“Organization and Summary of Accounting Polices - COVID-19 Pandemic” to our consolidated financial statements included elsewhere in this report.

There were no grant funds received in 2019.

Loss on Debt Extinguishment.

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The loss includes the redemption premium paid to redeem the 2021 Unsecured Notes partially offset by the write-off of the unamortized fair value premium as of the redemption date.

Loss (Gain) on Litigation Settlement.

We incurred a loss in the amount of $0.2 million and $46.0 million in 2019 and 2018 , respectively, related to the potential resolution of the government investigation discussed in Item 3.

Legal Proceedings.

Litigation Settlement.

We incurred a loss in the amount of $1.2 million and $0.2 million in 2020 and 2019, respectively, related to the potential resolution of the government investigation discussed in Note 14.

"Commitments and Contingencies" to our consolidated financial statements included elsewhere in this report.

Interest Expense, Net.

Interest expense, net, increased to $178.9 million in 2019 compared to $147.0 million in 2018 .

The increase primarily relates to the $180.0 million senior secured incremental term loan, which was fully funded on October 23, 2018 and the issuance of the 2027 Unsecured Notes in the amount of $430.0 million effective April 11, 2019.

Interest expense, net, was $201.8 million in 2020 compared to $178.9 million in 2019.

The increase primarily relates to the issuance of the 2027 Unsecured Notes effective April 11, 2019, the 2020 Incremental Term Loans, which were fully drawn on April 22, 2020, the issuance of additional 2027 Unsecured Notes in the amount of $115.0 million effective July 30, 2020 as well as interest on the Revolver during the period it was fully drawn.

As a percentage of revenues, interest expense, net was 10.8% in 2020 compared to 9.8% in 2019.

Income Tax Expense (Benefit) .

Income tax expense was $9.5 million and $26.4 million in 2019 and 2018 , respectively.

Income Tax (Benefit) Expense .

The income tax benefit was $20.1 million and income tax expense was $9.5 million in 2020 and 2019, respectively.

The effective tax rate was 106.9% for 2020 compared to 17.4% in 2019.

The change in effective tax rate from 2018 to 2019 was primarily attributable to the tax-effect of the non-deductible goodwill impairment, non-deductible settlement accruals related to a potential resolution of the investigation discussed in Item 3.

Legal Proceedings, and non-deductible differences related to divested entities.

New reconciling items in the 2020 effective tax rate include (i) 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;

(ii) the release of federal and state valuation allowances on the Company’s deferred tax assets related to debt financing costs as a result of the finalization of the Internal Revenue Code Section 163(j) interest regulations, for which the deductions of such debt financing costs that are incurred in years 2021 and forward are not considered interest expense for income tax purposes;

and (iii) the Settlement Agreement, as discussed in Note 14.

"Commitments and Contingencies" to our consolidated financial statements included elsewhere in this Annual Report, which provided that a portion of the final settlement amount was "restitution" for income tax purposes.

Net Income Attributable to Non-Controlling Interests.

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As a percentage of revenues, net income attributable to non-controlling interests was 6.3% in the 2020 period and 6.5% for the 2019 period.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Our discussion regarding the comparison of the year ended December 31, 2019 compared to the year ended December 31, 2018 was previously disclosed beginning on page 46 in our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed on March 13, 2020, under "Item 7.

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Cash flow provided by operating activities was $246.9 million and $129.5 million in 2020 and 2019, respectively.

The decrease in operating cash flow in 2019 is primarily attributed to higher interest payments related to the $180.0 million senior secured incremental term loan, which was fully funded on October 23, 2018 and the issuance of $430.0 million in senior unsecured notes effective April 11, 2019.

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

The increase in operating cash flow in 2020 is primarily attributable to Medicare accelerated payments and other funds received under the CARES Act, discussed further below under the heading "Capital Resources," as well as actions taken to significantly reduce operating expenses and defer non-essential capital expenditures at the height of the crisis.

Investing Activities

Net cash used in investing activities in 2020 was $88.4 million, which included $42.9 million related to purchases of property and equipment.

We paid $104.6 million, in cash for acquisitions (net of cash acquired), which included a controlling interest in three surgical facilities, including a surgical hospital, a controlling interest in five surgical facilities in existing markets, that were merged into existing facilities and a physician practice.

Additionally, we received cash proceeds of $58.5 million related to the sale of interests in three surgery centers, certain assets related to our anesthesia business, certain imaging assets and an optical products purchasing organization

Net cash used in investing activities in 2019 was $85.2 million, which included $73.6 million related to purchases of property and equipment.

We paid $13.8 million, in cash for acquisitions (net of cash acquired), which primarily included a surgical facility, a clinic that was merged into an existing facility and a physician practice.

Further, we paid $15.2 million in cash for a non-controlling interest in four surgical facilities accounted for as equity method investments and we received cash proceeds of $17.6 million related to the sale of previously owned real property associated with one of our non-consolidated equity method investments.

Net cash used in investing activities in 2018 was $128.9 million, which included $39.8 million related to purchases of property and equipment.

We paid $106.8 million, in cash for acquisitions (net of cash acquired), which included five surgical facilities in new markets, two surgical facilities in an existing market, one of which was merged into an existing facility and multiple physician practices.

Further, we received $19.2 million in proceeds from disposals of six surgical facilities and our optical laboratory.

Financing Activities

Net cash provided by financing activities in 2020 was $66.7 million.

During the year, we made distributions to non-controlling interest holders of $109.6 million and payments related to ownership transactions with consolidated affiliates of $27.4 million.

Further, we made repayments on our long-term debt of $216.3 million, which was offset by borrowings of $429.4 million.

In connection with the 2020 Incremental Term Loans, which were fully drawn on April 22, 2020, and the issuance of additional 2027 Unsecured Notes in the amount of $115.0 million effective July 30, 2020, we paid debt issuance costs of $8.5 million.

Net cash used in financing activities in 2019 was $135.9 million.

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In connection with the issuance of the 2027 Unsecured Notes and redemption of the then existing 2021 Unsecured Notes, we paid debt issuance costs of $8.9 million and paid a redemption premium of $17.8 million.

Net cash used in financing activities in 2018 was $6.3 million.

During this period, we made distributions to non-controlling interest holders of $109.0 million and payments related to ownership transactions with consolidated affiliates of $2.2 million.

Further, we made repayments on our long-term debt of $157.6 million offset by borrowings of $282.7 million, which included incremental term loan borrowings of $180.0 million.

In connection with the incremental term loan, we made payments of debt issuance costs of $3.0 million.

In addition, we made preferred dividend payments of $7.8 million and repurchased $2.0 million of our common stock pursuant to our $50 million repurchase program announced on December 15, 2017.

Discussion of the operating, investing and financing activities for the year ended December 31, 2018 was previously disclosed beginning on page 47 in our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed on March 13, 2020, under "Item 7.

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As of December 31, 2020, our availability on the Revolver was $112.5 million (including outstanding letters of credit of $7.5 million).

On January 27, 2021, the Company entered into an amendment to the Senior Secured Credit Facilities, which amended and

supplemented the credit agreement to provide for an extension of the maturity date of the Revolver to February 1, 2026 and an increase in the outstanding commitments under the Revolver in an amount equal to $50.0 million.

The maturity extension and the additional commitments became operative on February 1, 2021.

"Subsequent Events" to our consolidated financial statements included elsewhere in this Annual Report for a further discussion of the amendment.

The Revolver may be utilized for working capital, capital expenditures and general corporate purposes.

Subject to certain conditions and requirements set forth in the credit agreement, we may request one or more additional incremental term loan facilities or one or more increases in the commitments under the Revolver.

The Senior Secured Credit Facilities bear interest at a rate per annum equal to (x) LIBOR plus a margin ranging from 3.00% to 3.25% per annum, depending on our first lien net leverage ratio or (y) an alternate base rate (which will be the highest of (i) the prime rate, (ii) 0.5% per annum above the federal funds effective rate and (iii) one-month LIBOR plus 1.00% per annum (solely with respect to the Term Loan, the alternate base rate shall not be less than 2.00% per annum)) plus a margin ranging from 2.00% to 2.25% per annum.

In addition, we are required to pay a commitment fee of 0.50% per annum in respect of unused commitments under the Revolver.

In addition, we are required to pay a commitment fee of 0.50% per annum in respect of unused commitments on the Revolver.

On April 22, 2020, we entered into a second incremental term loan amendment, which amended and supplemented the existing credit agreement, to provide for an incremental borrowing of $120.0 million.

The incremental amounts were fully drawn on April 22, 2020, and are included in the term loan borrowings discussed above.

The incremental term loans 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.

On April 16, 2020, we entered into a third amendment to our credit agreement, which amended and supplemented financial covenants applicable to the Revolver under the credit agreement.

Pursuant to the third amendment, the Company's requirement to comply with a maximum consolidated total net leverage ratio was 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 the COVID-19 pandemic.

The third amendment became effective concurrently with the funding of the incremental term loans on April 22, 2020, discussed above.

Senior Unsecured Notes

On April 11, 2019, we completed the issuance and sale of $430.0 million in gross proceeds of 2027 Unsecured Notes.

The 2027 Unsecured Notes bear interest at the rate of 10.000% per year, payable semi-annually on April 15 and October 15 of each year, beginning on October 15, 2019.

In connection with issuance of the 2027 Unsecured Notes, we redeemed in whole the then existing 2021 Unsecured Notes.

The redemption price was equal to 104.438% of the outstanding principal amount plus accrued and unpaid interest.

Refer to Note 3.

"Long-Term Debt" to the Consolidated Financial Statements elsewhere in this Annual Report for further discussion.

We have $545.0 million aggregate principal amount of senior unsecured notes due April 15, 2027 (the "2027 Unsecured Notes").

The 2027 Unsecured Notes bear interest at the rate of 10.000% per year, payable semi-annually on April 15 and October 15 of each year.

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

On July 30, 2020, we 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.

We have $370.0 million aggregate principal amount of senior unsecured notes due July 1, 2025 outstanding (the "2025 Unsecured Notes").

The 2025 Unsecured Notes bear interest at the rate of 6.750% per year, payable semi-annually on January 1 and July 1 of each year.

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

We and certain of our subsidiaries have other debt consisting of outstanding bank indebtedness of $137.5 million, which is collateralized by the real estate and equipment owned by the surgical facilities to which the loans were made, and right-of-use finance lease obligations of $281.2 million for which we are liable to various vendors for several property and equipment leases classified as finance leases.

We believe we have sufficient liquidity in the next 12 to 18 months as described above.

Nevertheless, we continue to monitor the state of the financial and credit markets and our current and expected liquidity and capital resource needs, and intend to continue to explore various financing alternatives to improve our capital structure, including extending maturities or relaxing financial covenants.

These may include new equity or debt financings or exchange offers with existing security holders (including exchanges of debt for debt or equity) and other transactions involving our outstanding securities, given their secondary market trading prices.

We cannot assure you, if we pursue any of these transactions, that we will be successful in completing a transaction on attractive terms, or at all.

Certain Non-GAAP Metrics

Capital Resources

In addition to cash flows from operations, available cash and capacity on our Revolver, other sources of capital include funds we have received under the CARES Act as well as continued access to the capital markets.

As noted in Note 1.

"Organization and Summary of Accounting Policies" to our consolidated financial statements included elsewhere in this report, as of December 31, 2020, we received relief via the CARES Act, including approximately $59 million in direct grant payments and approximately $120 million of accelerated payments pursuant to the Medicare Accelerated and Advance Payment Program.

The direct grant payments are not required to be repaid, subject to certain terms and conditions, while payments received under the Medicare Accelerated and Advance Payment Program are required to be repaid.

As of December 31, 2020, approximately $95 million of accelerated payments are reflected as a component of Medicare accelerated payments and deferred governmental grants in the consolidated balance sheets while the remaining payments are included within other long-term liabilities.

Based on the repayment terms, we expect recoupment of these funds to begin in 2021 under the repayment framework more specifically described in Note 1.

"Organization and Summary of Accounting Policies."

Additionally, the CARES Act permitted the deferral of payment of the social security payroll tax between March 27, 2020 and December 31, 2020, with half of the deferred amount due December 2021 and the other half due December 2022.

As of December 31, 2020, we have deferred approximately $16.9 million.

We believe that deferral of the social security payroll tax match, which we began doing in April 2020, along with the funds received under the CARES Act as noted above, have positively impacted our cash flows from operations during 2020.

The COVID-19 pandemic has resulted in, and may continue to result in, significant disruptions of financial and capital markets, which could reduce our ability to access capital and negatively affect our liquidity in the future.

Additionally, while we have received grants and accelerated payments under the CARES Act and other government assistance programs and may receive additional amounts in the future, there is no assurance regarding the extent to which anticipated negative impacts arising from the COVID-19 pandemic will be offset by amounts and benefits received under the CARES Act or future legislation.

Although we have seen continued improvement in surgical case volumes as states begin to re-open and allow for non-emergent procedures, broad economic factors resulting from the current COVID-19 pandemic, including increased unemployment rates and reduced consumer spending, could negatively affect our payor mix, increase the relative proportion of lower margin services we provide and reduce patient volumes, as well as diminish our ability to collect outstanding receivables.

Business closings and layoffs in the areas in which we operate may lead to increases in the uninsured and underinsured populations and adversely affect demand for our services, as well as the ability of payors to pay for services as rendered.

Any increase in the amount or deterioration in the collectability of patient accounts receivable will adversely affect our cash flows and results of operations, requiring an increased level of working capital.

If general economic conditions continue to deteriorate or remain uncertain for an extended period of time, our liquidity and ability to repay our outstanding debt may be harmed.

Based on our current level of operations, we believe cash flow from operations, available cash, available capacity on our Revolver, the incremental term loan borrowings and issuance of new notes discussed above, funds we have received under the CARES Act, funds we may receive in the future and continued access to capital markets, together with the cost cutting steps taken in response to the impact of the COVID-19 pandemic, as discussed in Item 1A.

"Risk Factors" elsewhere in this report, will be adequate to meet our short-term (i.e., 12 months) and long-term (beyond 12 months) liquidity needs.

Certain Non-GAAP Measures

Adjusted EBITDA is not a measurement of financial performance under GAAP, and should not be considered in isolation or as a substitute for net income, operating income or any other measure calculated in accordance with GAAP.

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Our calculation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.

When we use the term "Adjusted EBITDA", we are referring to income (loss) before income taxes, adjusted for net income attributable to non-controlling interests, interest expense, net, depreciation and amortization, equity-based compensation expense, transaction, integration and acquisition costs, (gain) loss on disposals and deconsolidations, net, loss (gain) on litigation settlements and other litigation costs, loss on debt extinguishment, tax receivable agreement expense (benefit), impairment charges, reserve adjustments, contingent acquisition compensation expense, gain on acquisition escrow release and gain on amendment to tax receivable agreement.

We use Adjusted EBITDA as a measure of financial performance.

Adjusted EBITDA is a key measure used by our management to assess operating performance, make business decisions and allocate resources.

The following table reconciles Adjusted EBITDA to income (loss) before income taxes, the most directly comparable GAAP financial measure (in millions and unaudited):

When we use the term "Adjusted EBITDA," we are referring to (loss) income before income taxes, adjusted for net income attributable to non-controlling interests, depreciation and amortization, net interest expense, equity-based compensation expense, transaction, integration and acquisition costs, impairment charges, net loss (gain) on disposals and deconsolidations, litigation settlements and other litigation costs, reserve adjustments, contingent acquisition compensation expense, gain on escrow release, loss on debt extinguishment and tax receivable agreement expense.

When we use “Adjusted EBITDA excluding grant funds,” we are referring to Adjusted EBITDA less the impact of grant funds.

We use Adjusted EBITDA and Adjusted EBITDA excluding grant funds as measures of financial performance.

Adjusted EBITDA and Adjusted EBITDA excluding grant funds are key measures used by our management to assess operating performance, make business decisions and allocate resources.

The following table reconciles Adjusted EBITDA and Adjusted EBITDA excluding grant funds to (loss) income before income taxes, the most directly comparable GAAP financial measure (in millions and unaudited):

Year Ended December 31,

2020 2019 2018

Consolidated Statements of Operations Data:

Income (loss) before income taxes

(Loss) income before income taxes $ (18.8) $ 54.6 $ (69.2)

Plus (minus):

Net income attributable to non-controlling interests (117.4) (119.9) (110.1)

Interest expense, net

Depreciation and amortization 94.8 76.5 67.4

Interest expense, net 201.8 178.9 147.0

Equity-based compensation expense 13.2 10.2 9.3

Transaction, integration and acquisition costs (1)

(Gain) loss on disposals and deconsolidations, net

Loss (gain) on litigation settlements and other litigation costs (2)

Loss on debt extinguishment

Tax receivable agreement expense (benefit)

38.2 36.1 34.0

Impairment charges 33.5 7.9 74.4

Loss (gain) on disposals and deconsolidations, net 5.7 (4.4) 31.8

Litigation settlement and other litigation costs (2)

Reserve adjustments (3)

Contingent acquisition compensation expense — — 1.5

Gain on acquisition escrow release

Gain on amendment to tax receivable agreement

Gain on escrow release (4)

Loss on debt extinguishment — 11.7 —

Tax receivable agreement expense — 2.4 —

Adjusted EBITDA $ 256.6 $ 258.6 $ 234.8

This amount includes transaction and integration costs of $19.0 million , $31.7 million and $13.1 million in 2019, 2018 and 2017, respectively, acquisition costs of $2.8 million , $2.2 million and $3.9 million in 2019, 2018 and 2017, respectively.

This amount further includes start-up costs related to a de novo surgical hospital of $14.3 million in 2019, with no comparable costs in the 2018 and 2017 periods.

This amount includes a loss on litigation settlements of $0.2 million and $46.0 million in 2019 and 2018, respectively, and a gain on litigation of $12.5 million in 2017.

This amount further includes other litigation costs of $4.4 million in 2019, with no comparable costs in the 2018 and 2017 periods.

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

Impact of grant funds (5)

Adjusted EBITDA excluding grant funds $ 225.5 $ 258.6 $ 234.8

(1) For the year ended December 31, 2020, this amount includes transaction and integration costs of $23.2 million, of which $6.6 million were acquisition related costs, and includes start-up costs related to a de novo surgical hospital of $15.0 million.

For the year ended December 31, 2019, this amount includes transaction and integration costs of $19.0 million, and further includes other acquisition costs and start-up costs related to a de novo surgical hospital of $17.1 million.

For the year ended December 31, 2018, this amount includes transaction and integration costs of $31.7 million, and further includes other acquisition costs of $2.3 million.

(2) This amount includes litigation settlement costs of $1.2 million, $0.2 million and $46.0 million for the years ended December 31, 2020, 2019 and 2018, respectively.

This amount also includes other litigation costs of $5.2 million and $4.4 million for the years ended December 31, 2020 and 2019, respectively, with no comparable costs in 2018.

(3) This amount represents adjustments to revenue in order to apply consistent policies to businesses acquired by Surgery Partners in prior periods.

(4) Included in other income in the consolidated statement of operations for the year ended December 31, 2020, with no comparable gain in 2019 and 2018.

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

We use Credit Agreement EBITDA as a measure of liquidity and to determine our compliance under certain covenants pursuant to our credit facilities.

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Changes in operating assets and liabilities, net of acquisitions and divestitures 59.3

Income tax expense

Medicare accelerated payments and deferred governmental grants (135.2)

Income tax benefit (20.1)

Net income attributable to non-controlling interests (117.4)

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Transaction, integration and acquisition costs 38.2

Loss on litigation settlements and other litigation costs

Tax receivable agreement expense

Litigation settlement and other litigation costs 6.4

Gain on escrow release (0.8)

Acquisitions and synergies (1)

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Payments Due by Period

Less than 1 year

More than 5 years

Total Less than 1 year 1-3 years 4-5 years More than 5 years

Long-term debt obligations, including interest (1)

$ 3,760.8 $ 233.2 $ 439.9 $ 2,041.9 $ 1,045.8

Operating lease obligations, including interest (2)

526.4 70.7 128.2 108.4 219.1

Tax receivable agreement (3)

43.2 21.2 21.5 0.5 —

Total contractual obligations $ 4,330.4 $ 325.1 $ 589.6 $ 2,150.8 $ 1,264.9

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These amounts exclude our unamortized fair value adjustments related non-cash amortization for the Term Loan.

These obligations are explained further in Note 5 to our consolidated financial statements included elsewhere in this Annual Report.

These obligations are explained further in Note 5.

"Long-Term Debt" to our consolidated financial statements included elsewhere in this Annual Report.

We used the applicable annual interest rate as of December 31, 2020 of 4.25%, based on LIBOR plus the applicable margin, for our $1.4 billion outstanding Term Loan to estimate interest payments on this variable rate debt instrument.

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Our future operating lease obligations would change if we exercised these renewal options and if we entered into additional operating lease agreements.

These obligations are explained further in Note 6 to our consolidated financial

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (continued)

statements included elsewhere in this Annual Report.

These obligations are explained further in Note 6.

"Leases" to our consolidated financial statements included elsewhere in this Annual Report.

Operating lease obligations do not include common area maintenance, insurance or tax payments for which we are also obligated to pay.

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Recent Accounting Pronouncements

Please refer to Note 1 to our consolidated financial statements included elsewhere in this Annual Report for a discussion of the impact of the adoption of recently issued accounting standards and accounting standards not yet adopted.

Please refer to Note 1.

"Organization and Summary of Accounting Policies - Recent Accounting Pronouncements" to our consolidated financial statements included elsewhere in this Annual Report for a discussion of the impact of the adoption of recently issued accounting standards and accounting standards not yet adopted.

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-K

Item 7. Management’s Discussion and Analysis