What changed in this filing

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Item 9A. Controls and Procedures

2021-03-10 compared with 2020-03-13 · 471 added, 539 removed, 932 unchanged (52% of the section changed)

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Surgery Partners, Inc.

To the Stockholders and the Board of Directors of Surgery Partners, Inc.

Opinion on Internal Control over Financial Reporting

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In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report dated March 13, 2020 expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph regarding the Company’s adoption of Accounting Standards Codification Topic 842, “Leases”.

Basis for Opinion

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We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining and understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

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Directors, Executive Officers and Corporate Governance

The information called for by Item 10 is incorporated herein by reference to the definitive Proxy Statement of the Company relating to the 2020 Annual Meeting of Stockholders (the "Definitive Proxy Statement"), which the Company intends to file within 120 days after the close of our fiscal year ended December 31, 2019 .

The information called for by Item 10 is incorporated herein by reference to the definitive Proxy Statement of the Company relating to the 2021 Annual Meeting of Stockholders (the "Definitive Proxy Statement"), which the Company intends to file within 120 days after the close of its fiscal year ended December 31, 2020.

Executive Compensation

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3.3 Amended and Restated Bylaws of Surgery Partners, Inc., dated August 31, 2017 (incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed September 1, 2017).

Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.

4.1 Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 ( incorporated herein by reference to Exhibit 4.1 to the Company's Annu al Report on Form 10-K filed March 5, 2020 ) .

4.2 Indenture, dated June 30, 2017, among SP Finco, LLC and Wilmington Trust, National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed July 6, 2017).

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4.4 Indenture by and among Surgery Center Holdings, Inc., the guarantors from time to time party thereto and Wilmington Trust, National Association, dated April 11, 2019 (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed April 12, 2019).

4.5 Second Supplemental Indenture, dated July 30, 2020, among Surgery Center Holdings, Inc., the guarantors party thereto and Wilmington Trust, National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed July 31, 2020).

10.1 First Lien Incremental Term Loan Amendment and Consent, dated as of March 24, 2016, by and among SP Holdco I, Inc., Surgery Center (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed March 30, 2016).

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and certain other parties thereto (incorporated herein by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K filed March 15, 2019).

10.9 Second Incremental Term Loan Amendment, dated as of April 22, 2020, by and among SP Holdco I, Inc., Surgery Center Holdings, Inc., Jefferies Finance LLC and the other guarantors and lenders party thereto (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed April 22, 2020).

10.10 Amendment to the Credit Agreement, by and among SP Holdco I, Inc., Surgery Center Holdings, Inc., Jefferies Finance LLC and the other guarantors and lenders party thereto, dated March 25, 2019 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 25, 2019).

10.11 Third Amendment to the Credit Agreement, dated as of April 16, 2020, by and among SP Holdco I, Inc., Surgery Center Holdings, Inc., Jefferies Finance LLC and the other lenders party thereto (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed April 22, 2020).

10.12 Fifth amendment to credit agreement , dated as of January 27, 2021, by and among SP Holdco I, Inc., Surgery Center Holdings, Inc.

Jefferies Finance LLC and the other guarantors and lenders party thereto.

10.13 Tax Receivable Agreement, dated as of September 30, 2015, among Surgery Partners, Inc., H.I.G.

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10.15 Form of TRA Waiver and Assignment Agreement (incorporated herein by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K filed March 16, 2018).

Form of Indemnification Agreement (incorporated herein by reference to Exhibit 10.14 to Amendment No.

10.16 (a) Form of Indemnification Agreement (incorporated herein by reference to Exhibit 10.14 to Amendment No.

1 to the Company's Registration Statement on Form S-1, filed September 14, 2015).

Surgery Partners, Inc.

2015 Omnibus Incentive Plan (incorporated herein by reference as Exhibit 4.3 to the Company's Registration Statement on Form S-8 filed October 6, 2015).

First Amendment to the Surgery Partners, Inc.

2015 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed August 9, 2019).

Surgery Partners, Inc.

Cash Incentive Plan (incorporated herein by reference to Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q filed November 13, 2015).

Symbion, Inc.

10.17 (a) Surgery Partners, Inc.

2015 Omnibus Incentive Plan, as amended and restated effective January 1, 2020 (incorporated herein by reference as E xhib it 10.2 to the Company's Quarterly Report on Form 10-Q filed August 5, 2020).

10.18 (a) Surgery Partners, Inc.

Cash Incentive Plan, as amended and restated effective January 1, 2020 (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed August 5, 2020).

10.19 (a) Symbion, Inc.

Supplemental Executive Retirement Plan, Effective May 1, 2005 (incorporated herein by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1, Amended, filed September 21, 2015).

Form of Non-Statutory Stock Option Agreement under the 2015 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed November 13, 2015).

Form of Non-Employee Director Non-Statutory Stock Option Agreement under the Surgery Partners, Inc.

10.20 (a) Form of Non-Statutory Stock Option Agreement under the 2015 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed November 13, 2015).

10.21 (a) Form of Non-Employee Director Non-Statutory Stock Option Agreement under the Surgery Partners, Inc.

2015 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q filed November 13, 2015).

Form of Restricted Stock Agreement under the Surgery Partners, Inc.

10.22 (a) Form of Restricted Stock Agreement under the Surgery Partners, Inc.

2015 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q filed November 13, 2015).

Form of Restricted Stock Award Agreement under the 2015 Surgery Partners, Inc.

10.23 (a) Form of Restricted Stock Award Agreement under the 2015 Surgery Partners, Inc.

Omnibus Incentive Plan (incorporated herein by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed March 15, 2016).

Form of Performance Stock Unit Award Agreement under the Surgery Partners, Inc.

10.24 (a) Form of Performance Stock Unit Award Agreement under the Surgery Partners, Inc.

2015 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed July 5, 2016).

Form of Non-Employee Director Restricted Stock Award Agreement under the Surgery Partners, Inc.

10.25 (a) Form of Non-Employee Director Restricted Stock Award Agreement under the Surgery Partners, Inc.

2015 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed April 3, 2017).

Form of Leveraged Performance Unit Award Agreement under the Surgery Partners, Inc.

2015 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K filed September 8, 2017).

Form of Stock-Settled Stock Appreciation Right Agreement under the Surgery Partners, Inc.

10.26 (a) Form of Stock-Settled Stock Appreciation Right Agreement under the Surgery Partners, Inc.

2015 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed December 20, 2018).

Amended and Restated Employment Agreement, dated September 17, 2015, between Surgery Partners, Inc., Symbion, Inc.

and John Crysel (incorporated herein by reference to Exhibit 10.12 to Amendment No.

2 to the Company's Registration Statement on Form S-1, filed September 21, 2015).

Letter Agreement to Employment Agreement, dated November 22, 2017, by and between Surgery Partners, Inc., Symbion, Inc.

and John Crysel (incorporated herein by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K filed March 16, 2018).

Amended and Restated Employment Agreement, dated April 13, 2017, by and between Surgery Partners, Inc., Symbion, Inc.

10.27 (a) Amended and Restated Employment Agreement, dated April 13, 2017, by and between Surgery Partners, Inc., Symbion, Inc.

and Jennifer Baldock (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 17, 2017).

Employment Agreement, dated September 7, 2017, between Surgery Partners, Inc.

10.28 (a) Employment Agreement, dated September 7, 2017, between Surgery Partners, Inc.

and Cliff Adlerz (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 8, 2017).

Employment Agreement, dated January 4, 2018, between Surgery Partners, Inc., Surgery Partners, LLC and Wayne DeVeydt (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 8, 2018).

Amendment No.

10.29 (a) Employment Agreement, dated January 4, 2018, between Surgery Partners, Inc., Surgery Partners, LLC and Wayne DeVeydt (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 8, 2018).

10.30 (a) Amendment No.

1 to Employment Agreement by and between Surgery Partners, Inc., Surgery Partners, LLC and Wayne DeVeydt, dated January 13, 2020 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 13, 2020).

Employment Agreement, dated March 9, 2018, by and between Surgery Partners, Inc.

10.31 (a) Employment Agreement, dated March 9, 2018, by and between Surgery Partners, Inc.

and Thomas F.

Cowhey (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 12, 2018).

Employment Agreement, dated February 11, 2019, by and between Surgery Partners, Inc., Surgery Partners, LLC and J.

10.32 (a) Employment Agreement, dated February 11, 2019, by and between Surgery Partners, Inc., Surgery Partners, LLC and J.

Eric Evans (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 12, 2019).

Amendment No.

10.33 (a) Amendment No.

1 to Employment Agreement by and between Surgery Partners, Inc., Surgery Partners, LLC and J.

Eric Evans, dated January 13, 2020 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 13, 2020).

Employment Agreement by and between Symbion, Inc.

and Angela Justice, dated February 22, 2018 (incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on May 10, 2019).

Employment Agreement by and between Symbion, Inc.

10.34 (a) Employment Agreement by and between Symbion, Inc.

and George M.

Goodwin, dated June 13, 2014 (incorporated herein by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on May 10, 2019).

Letter of Ernst & Young LLP, dated May 18, 2018 (incorporated herein by reference to Exhibit 16.1 to the Company's Current Report on form 8-K filed May 18, 2018).

10.35 (a) Employment Agreement, dated June 13, 2014, by and between Symbion, Inc.

and Anthony W.

Taparo, as amended by that certain First Amendment to Employment Agreement dated July 31, 2016, and that certain Second Amendment to Employment Agreement dated August 7, 2019.

10.36 (a) Employment Agreement, dated November 12 , 2019, by and between Surgery Partners, Inc.

and Brad ley R.

10.37 (a) Employment Agreement, dated June 30, 2019, by and between Surgery Partners, Inc.

Brocklehurst.

10.38 Settlement Agreement regarding Logan Laboratories, LLC and Tampa Pain Relieve Centers, Inc., dated April 14, 2020 (incorporated herein by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed May 11, 2020).

21.1 List of Subsidiaries of the Registrant.

23.1 Consent of Independent Registered Public Accounting Firm (Deloitte).

Consent of Independent Registered Public Accounting Firm (Ernst & Young LLP).

31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

XBRL Instance Document

XBRL Taxonomy Extension Schema Document

XBRL Taxonomy Extension Calculation Linkbase Document

XBRL Taxonomy Extension Definition Linkbase Document

XBRL Taxonomy Extension Label Linkbase Document

XBRL Taxonomy Extension Presentation Linkbase Document

101.INS Inline XBRL Taxonomy Extension Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.

101.SCH Inline XBRL Taxonomy Extension Schema Document

101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document

104 The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, formatted in Inline XBRL (included in Exhibit 101).

(a) Management Contract or Compensatory Plan or Arrangement.

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INDEX TO FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firms

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets - December 31, 20 20 and 2019

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Surgery Partners, Inc.

To the Stockholders and the Board of Directors of Surgery Partners, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Surgery Partners, Inc.

and subsidiaries (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), cash flow, stockholders' equity, for the years ended December 31, 2019 and 2018, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years ended December 31, 2019 and 2018, in conformity with accounting principles generally accepted in the United States of America.

and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.

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These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

Our responsibility is to express an opinion on the Company's financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Accounts Receivable — Refer to Note 1 to the financial statements

Critical Audit Matter Description

Accounts receivable are recorded net of estimated implicit price concessions at both surgical hospitals and ambulatory surgical centers.

At surgical hospitals, the estimation process is based on historical trend of cash collections and contractual write-offs.

The inputs used to determine the estimated implicit price concessions are based on objective data.

Management’s determination of the estimate is complex and involves their assessment of the appropriateness and relevancy of the inputs and methodology to record accounts receivable at the net realizable value.

We identified surgical hospitals accounts receivable as a critical audit matter because of the significant estimates management makes to determine the implicit price concession.

This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the methodology and application of the Company’s estimated implicit price concessions for the surgical hospitals.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the Company’s estimated implicit price concessions for surgical hospitals include the following, among others:

• We tested the effectiveness of controls over accounts receivable, including management’s controls over the review of the implicit price concessions and the verification of the accuracy and completeness of the data used in the assessment.

• We evaluated management’s methodology and related assumptions, including cash collections, used in recording implicit price concessions, by comparing actual results to management’s historical estimates.

• We tested the underlying data related to the recognition of patient level charges and the subsequent activities, including cash collections and contractual write-offs.

• We tested the mathematical accuracy of the estimates applied to period-end accounts receivable.

• We considered industry, economic, and company factors to determine the appropriateness of the net realizable value of accounts receivable.

/s/ Deloitte & Touche LLP

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We have served as the Company's auditor since 2018.

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Surgery Partners, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for the periods September 1, 2017 to December 31, 2017 (Successor) and January 1, 2017 to August 31, 2017 (Predecessor) of Surgery Partners, Inc.

(the Company), and the related notes (collectively referred to as the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the results of the Company's operations and its cash flows for the periods September 1, 2017 to December 31, 2017 (Successor) and January 1, 2017 to August 31, 2017 (Predecessor), in conformity with U.S.

generally accepted accounting principles.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

/s/ Ernst & Young

We served as the Company’s auditor from 2014 to 2018.

Nashville, Tennessee

March 16, 2018, except for the effect of adopting ASU 2016-18, Statement of Cash Flows - Restricted Cash , as to which the date is March 15, 2019

SURGERY PARTNERS, INC.

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Accounts receivable 382.2 326.9

Inventories 56.4 46.3

Prepaid expenses 17.6 17.8

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Intangible assets, net 46.9 47.3

Goodwill 3,468.0 3,402.4

Investments in and advances to affiliates 90.3 93.2

Right-of-use operating lease assets 310.1 297.7

Long-term deferred tax assets 124.8 98.7

Other long-term assets 27.0 30.8

Total assets $ 5,413.2 $ 5,018.9

LIABILITIES AND STOCKHOLDERS' EQUITY

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Accrued payroll and benefits 65.4 54.2

Medicare accelerated payments and deferred governmental grants 109.8 —

Other current liabilities 217.0 191.2

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Long-term debt, less current maturities 2,792.4 2,524.7

Right-of-use operating lease liabilities 300.9 283.1

Other long-term liabilities 139.7 113.6

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Year Ended December 31,

September 1 to

2020 2019 2018

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

Operating expenses:

Salaries and benefits 550.3 550.0 534.7

Supplies 538.4 507.9 490.3

Professional and medical fees 191.4 154.8 145.5

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Depreciation and amortization 94.8 76.5 67.4

Provision for doubtful accounts (see Note 1)

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 (benefit)

(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 )

Amounts attributable to participating securities ( 39.5 ) ( 35.7 ) ( 32.4 )

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Net loss per share attributable to common stockholders - basic and diluted (1)

$ ( 3.19 ) $ ( 2.29 ) $ ( 4.96 )

Weighted average common shares outstanding - basic and diluted (1)

48,776 48,280 48,028

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

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Year Ended December 31,

September 1 to

2020 2019 2018

Net income (loss) $ 1.3 $ 45.1 $ ( 95.6 )

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Derivative activity ( 10.3 ) ( 28.3 ) ( 22.4 )

Comprehensive income (loss)

Comprehensive (loss) income ( 9.0 ) 16.8 ( 118.0 )

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

Comprehensive loss attributable to Surgery Partners, Inc.

$ ( 126.4 ) $ ( 103.1 ) $ ( 228.1 )

See notes to consolidated financial statements.

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shares in thousands)

Paid-in Capital

Accumulated Other Comprehensive Loss

Retained Deficit

Non-Controlling Interests—

Non-Redeemable

Common Stock Additional

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

Non-Redeemable Total

Shares Amount

Balance as of December 31, 2017 48,687 $ 0.5 $ 695.5 $ — $ ( 41.3 ) $ 681.9 $ 1,336.6

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Equity-based compensation 339 — 8.1 — — — 8.1

Acquisition of NSH

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

Distributions to non-controlling interests—non-redeemable holders

Balance as of August 31, 2017

Balance as of September 1, 2017

Net (loss) income

Equity-based compensation

Preferred dividends — — ( 32.4 ) — — — ( 32.4 )

Mark to redemption adjustment

Other comprehensive loss — — — ( 22.4 ) — — ( 22.4 )

Repurchase of shares ( 157 ) — ( 2.0 ) — — — ( 2.0 )

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Distributions to non-controlling interests—non-redeemable holders — — — — — ( 78.3 ) ( 78.3 )

Other — — — — — ( 0.6 ) ( 0.6 )

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

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Other comprehensive loss — — — ( 28.3 ) — — ( 28.3 )

Repurchase of shares

Acquisition and disposal of shares of non-controlling interests, net — — 15.7 — — ( 7.4 ) 8.3

Distributions to non-controlling interests—non-redeemable holders — — — — — ( 81.2 ) ( 81.2 )

Impact of adoption of ASC 842 — — — — 6.1 — 6.1

Other — — — — — 0.1 0.1

Balance as of December 31, 2019 49,299 0.5 662.7 ( 50.7 ) ( 315.7 ) 686.6 983.4

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Distributions to non-controlling interests—non-redeemable holders — — — — — ( 73.1 ) ( 73.1 )

Impact of adoption of ASC 842

Other — — — — — ( 0.2 ) ( 0.2 )

Balance as of December 31, 2020 50,462 $ 0.5 $ 607.9 $ ( 61.0 ) $ ( 431.8 ) $ 766.5 $ 882.1

Includes post acquisition date adjustments in all periods, including reallocation in application of pushdown accounting in the 2017 successor period.

See notes to consolidated financial statements.

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Year Ended December 31,

September 1 to

2020 2019 2018

Cash flows from operating activities:

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Equity-based compensation expense 13.2 10.2 9.3

(Gain) loss on disposals and deconsolidations, net

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

Impairment charges 33.5 7.9 74.4

Loss on debt extinguishment — 11.7 —

Deferred income taxes ( 21.9 ) 8.5 25.3

Income from equity investments, net of distributions received 0.5 0.3 0.2

Loss on debt extinguishment

Non-cash lease expense 39.4 40.0 —

Impairment charges

Gain on legal settlements

Gain on amendment to tax receivable agreement

Tax receivable agreement benefit

Provision for doubtful accounts

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

Accounts receivable ( 46.6 ) ( 23.5 ) ( 22.8 )

Medicare accelerated payments and deferred governmental grants 135.2 — —

Other operating assets and liabilities ( 12.7 ) ( 45.3 ) 56.0

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Cash flows from investing activities:

Purchases of property and equipment, net

Purchases of property and equipment ( 42.9 ) ( 73.6 ) ( 39.8 )

Payments for acquisitions, net of cash acquired ( 104.6 ) ( 13.8 ) ( 106.8 )

Proceeds from disposals of facilities and other assets 58.5 17.6 19.2

Purchase of equity investments — ( 15.2 ) —

Proceeds from divestitures

Other investing activities 0.6 ( 0.2 ) ( 1.5 )

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Payments of debt issuance costs ( 8.5 ) ( 8.9 ) ( 3.0 )

Penalty on prepayment of debt

Payment of premium on debt extinguishment — ( 17.8 ) —

Distributions to non-controlling interest holders ( 109.6 ) ( 121.2 ) ( 109.0 )

(Payments) proceeds related to ownership transactions with non-controlling interest holders, net

Proceeds from preferred stock issuance

Payments of stock issuance costs

Payments related to ownership transactions with non-controlling interest holders ( 27.4 ) ( 3.2 ) ( 2.2 )

Payments of preferred dividends — — ( 7.8 )

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Other financing activities ( 0.9 ) ( 0.9 ) ( 7.4 )

Net cash (used in) provided by financing activities

Net (decrease) increase in cash, cash equivalents and restricted cash

Net cash provided by (used in) financing activities 66.7 ( 135.9 ) ( 6.3 )

Net increase (decrease) in cash, cash equivalents and restricted cash 225.2 ( 91.6 ) 9.4

Cash, cash equivalents and restricted cash at beginning of period 93.0 184.6 175.2

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Surgery Partners, Inc., a Delaware corporation (together with its subsidiaries, the "Company"), was formed April 2, 2015.

On August 31, 2017, a fund advised by an affiliate of Bain Capital Private Equity ("Bain Capital"), purchased approximately 54.2% of the Company’s outstanding common stock.

As a result, Bain Capital became the controlling stockholder of the Company, holding Series A Preferred Stock (as defined in Note 7.

"Redeemable Preferred Stock") and common stock that collectively represent approximately 67.0% of the voting power of all classes of capital stock of the Company.

On August 31, 2017, a fund advised by an affiliate of Bain Capital Private Equity LP ("Bain Capital") became the controlling stockholder of the Company, holding Series A Preferred Stock (as defined in Note 7.

"Redeemable Preferred Stock") and common stock that collectively represented approximately 65.7 % of the voting power of all classes of capital stock of the Company as of August 31, 2017.

As of December 31, 2020, Bain Capital held approximately 67.0 % of the voting power of all classes of capital stock of the Company.

As of December 31, 2020, the Company owned and operated a national network of surgical facilities and ancillary services in 30 states.

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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 and anesthesia services.

As of December 31, 2020, the Company owned or operated a portfolio of 127 surgical facilities, comprised of 110 ASCs and 17 surgical hospitals.

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All significant intercompany balances and transactions are eliminated in consolidation.

In connection with the change of control effective August 31, 2017, the Company elected to apply "pushdown" accounting by applying the guidance in Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 805, Business Combinations .

Accordingly, the consolidated financial statements of the Company for periods before and after August 31, 2017 reflect different bases of accounting, and the results of operations, changes in stockholders' equity and cash flows of those periods are not comparable.

Throughout the Company's consolidated financial statements and the accompanying notes herein, periods prior to August 31, 2017 (the date of the change of control) are identified as "Predecessor" and periods after the date of the change of control are identified as "Successor."

COVID-19 Pandemic

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

economy and financial markets.

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

Due in part to local, state and federal guidelines, as well as recommendations from major medical societies, 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 of 2020.

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 improved in the second half of 2020 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 for the remainder of 2020, 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 U.S.

As part of the CARES Act, the U.S.

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 sources are obligated to reimburse.

The Company received approximately $ 59 million of the grant funds distributed under the CARES Act and other governmental assistance programs during the year ended December 31, 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’s assessment of whether the terms and conditions for amounts received are reasonably assured of having been met considers, among other things, the CARES Act, the COVID-19 Economic Relief Bill, enacted on December 27, 2020, and all frequently

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

asked questions and other interpretive guidance issued by HHS, including the Post-Payment Notice of Reporting Requirements issued on January 15, 2021 (the “January 15, 2021 Notice”) and frequently asked questions issued by HHS on January 28, 2021 which clarified previously issued guidance, as well as expenses incurred attributable to COVID-19 and the Company’s results of operations during such period as compared to the Company’s budget.

Such guidance, set forth the allowable methods for quantifying eligible healthcare related expenses and lost revenues.

Only healthcare related expenses attributable to COVID-19 that another source has not reimbursed and is not obligated to reimburse are eligible to be claimed.

As a result, the Company estimates approximately $ 46.2 million of grant funds received qualified for recognition as a reduction in operating expenses under the caption Grant funds in the consolidated statements of operations for the year ended December 31, 2020.

While the January 15, 2021 Notice and frequently asked questions issued by HHS on January 28, 2021 indicate that targeted distribution payments may be allocated or transferred to subsidiaries, distinct conditions exist for such allocations or transfers.

There are significant uncertainties as to the meaning and interpretation of conditions specific to the allocation or transfer of targeted distribution payments such that, as of December 31, 2020, the Company is not reasonably assured that it can or will choose to comply with such conditions in order to allocate or transfer targeted distribution payments.

Amounts received, but not recognized as a reduction to operating expenses as of December 31, 2020, are reflected as a component of Medicare accelerated payments and deferred governmental grants in the consolidated balance sheets as of December 31, 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, may evolve.

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.

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 to request an advance payment of anticipated Medicare revenues.

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

Hospitals could 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.

Under the current 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 year ended December 31, 2020.

These accelerated payments received were deferred.

The current portion was approximately $ 95 million and is included as a component of Medicare accelerated payments and deferred governmental grants in the consolidated balance sheets as of December 31, 2020.

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

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

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

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

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

As of December 31, 2020, the Company has deferred approximately $ 16.9 million.

The current portion is included as a component of accrued payroll and benefits and the long term portion is included as a component of other long-term liabilities in the consolidated balance sheets as of December 31, 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

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

At December 31, 2019 , the variable interest entities include four surgical facilities, three anesthesia practices and three physician practices.

At December 31, 2020, the variable interest entities include four surgical facilities and three physician practices.

The total assets (excluding goodwill and intangible assets, net) of the consolidated VIEs included in the accompanying consolidated balance sheets as of December 31, 2020 and 2019, were $ 27.7 million and $ 36.2 million, respectively, and the total liabilities of the consolidated VIEs were $ 21.1 million and $ 25.2 million, respectively.

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Unadjusted quoted prices in active markets for identical assets or liabilities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.

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

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

Carrying Amount

Carrying Amount Fair Value

December 31, December 31,

2020 2019 2020 2019

Senior secured term loan $ 1,539.4 $ 1,434.1 $ 1,533.4 $ 1,434.1

6.750 % senior unsecured notes due 2025

6.750% senior unsecured notes due 2025

$ 370.0 $ 370.0 $ 376.0 $ 368.2

10.000 % senior unsecured notes due 2027

$ 545.0 $ 430.0 $ 596.8 $ 471.4

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

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

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

The Company 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, the Company 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.

The Company's revenues generally relate to contracts with patients in which the performance obligations are to provide health care services.

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Year Ended December 31,

September 1 to

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 %

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Patient service revenues.

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However, in several surgical facilities, the Company charges for anesthesia services.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Ancillary service revenues include fees for patient visits to the Company's physician practices, pharmacy services and diagnostic tests ordered by physicians.

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The Company bases its estimates for sales returns and discounts on historical experience and has not experienced significant fluctuations between estimated and actual return activity and discounts given.

The Company sold its optical products purchasing organization on December 31, 2020.

Other revenues include management and administrative service fees derived from the non-consolidated facilities that the Company accounts for under the equity method, management of surgical facilities in which it does not own an interest, and management services provided to physician practices for which the Company is not required to provide capital or additional assets.

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Year Ended December 31,

September 1 to

2020 2019 2018

Amount % Amount % Amount %

Patient service revenues:

Private insurance $ 989.9 53.9 % $ 970.5 53.8 % $ 948.9 54.6 %

Government 708.5 38.6 % 701.9 38.9 % 653.3 37.6 %

Self-pay 58.5 3.2 % 46.1 2.6 % 50.0 2.9 %

79.2 4.3 % 84.6 4.7 % 84.8 4.9 %

Total patient service revenues 1,836.1 100.0 % 1,803.1 100.0 % 1,737.0 100.0 %

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

The increase in other revenues from 2017 to 2018 is primarily due to an increase in management and administrative service fees due to the acquisitions completed in 2017.

Total net revenues in 2018 additionally reflect the impact of the Company's adoption of ASU 2014-09 as discussed above.

Subsequent to the transactions on August 31, 2017 (Predecessor), the Company, as part of a review of operations undertaken to create a solid foundation to support the Company's long-term growth objectives, incurred a non-recurring adjustment to revenue of $15.6 million , which was attributable to an increase in reserves for certain accounts receivable during the eight months ended August 31, 2017 (Predecessor).

The increase in reserves resulted from certain known events and actions during the eight months ended August 31, 2017 (Predecessor) related to select payors primarily in the Company’s ancillary services segment.

Upon consideration of such additional information, related receivables

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

were determined to have a low likelihood of collection.

The majority of this adjustment related to receivables with balances from the first quarter of 2016 and prior.

Cash, Cash Equivalents and Restricted Cash

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Accounts Receivable

Accounts receivable from third-party payors are recorded net of estimated implicit price concessions, which are estimated based on the historical trend of the Company's surgical facilities’ cash collections and contractual write-offs, established fee schedules, relationships with payors and procedure statistics.

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

Accounts receivable from third-party payors are recorded net of estimated implicit price concessions, which are estimated based on the historical trend of the Company's surgical hospitals’ cash collections and contractual write-offs, and for the Company's surgical facilities in general, established fee schedules, relationships with payors and procedure statistics.

While changes in estimated reimbursement from

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

third-party payors remain a possibility, the Company expects that any such changes would be minimal and, therefore, would not have a material effect on its financial condition or results of operations.

Accounts receivable consists of receivables from federal and state agencies (under the Medicare and Medicaid programs), private insurance organizations, employers and patients.

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

As of December 31, 2019 and December 31, 2018 , the Company had a net third-party Medicaid settlements liability of $5.6 million and $4.8 million , respectively.

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

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The Company's collection policies and procedures are based on the type of payor, size of claim and estimated collection percentage for each patient account.

The operating systems used to manage patient accounts provide for an aging schedule in 30-day increments, by payor, physician and patient.

The Company analyzes accounts receivable at each of its surgical facilities to ensure the proper collection and aged category.

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

Collection efforts include direct contact with third-party payors or patients, written correspondence and the use of legal or collection agency assistance, as required.

A summary of the changes in the allowance for doubtful accounts receivable follows (in millions):

Balance at Beginning of Period

Provision for Doubtful Accounts

Accounts Written off, Net of Recoveries

Impact of adoption of ASC 606

Balance at End of Period

Eight months ended August 31, 2017

Four months ended December 31, 2017

Year ended December 31, 2018

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

Such receivables were $8.6 million and $8.5 million at December 31, 2019 and 2018 , respectively.

Prior to its sale on December 31, 2020, the receivables related to the Company's optical products purchasing organization were recognized separately from patient accounts receivable and included in other current assets in the consolidated balance sheets.

Such receivables were $ 8.6 million at December 31, 2019.

Impairment of Long-Lived Assets, Goodwill and Intangible Assets

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"Goodwill and Intangible Assets."

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Professional and General and Workers' Compensation Insurance

The Company maintains general liability and professional liability insurance in excess of self-insured retentions through third party commercial insurance carriers in amounts that management believes is sufficient for the Company's operations, although, potentially, some claims may exceed the scope of coverage in effect.

The professional and general insurance coverage is on a claims-made basis.

The Company also maintains workers' compensation insurance, subject to a deductible.

The professional liability insurance coverage is on a claims-made basis and the general liability insurance is on an occurrence basis.

The Company also maintains workers' compensation insurance, subject to a self-insured retention.

The Company expenses the costs under the self-insured retention exposure for general and professional liability and workers' compensation claims which relate to (i) claims made during the policy period, which are offset by insurance recoveries and (ii) an estimate of claims incurred but not yet reported that are expected to be reported after the policy period expires.

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Derivative Instruments and Hedging Activities

In accordance with Accounting Standards Codification 815, Derivatives and Hedging , the Company records all derivatives on the balance sheet at fair value.

The Company records all derivatives on the balance sheet at fair value.

The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.

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The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

In accordance with the FASB’s fair value measurement guidance in ASU 2011-04, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

The Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

Investments in Unconsolidated Affiliates

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Transactions that result in the deconsolidation of a previously consolidated entity, are measured at fair value.

The fair value measurement utilizes Level 3 inputs, which include unobservable data, to measure the fair value of the retained non-controlling interest.

The fair value measurement utilizes Level 3 inputs,

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

which include unobservable data, to measure the fair value of the retained non-controlling interest.

The fair value determination is generally based on a combination of multiple valuation methods, which can include discounted cash flow, income approach, or market value approach which incorporates estimates of future earnings and market valuation multiples for certain guideline companies.

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The Company monitors its investments for other-than-temporary impairment by considering factors such as current economic and market conditions and the operating performance of the investees and records reductions in carrying values when necessary.

Summarized financial information for these equity method investees is included in the following tables (in millions):

Current assets

Noncurrent assets

Current liabilities

Noncurrent liabilities

Year Ended December 31,

Cost of revenues

The results of operations for the Company's equity method investees was not considered material for the four months ended December 31, 2017 (Successor) and the eight months ended August 31, 2017 (Predecessor).

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

During the year ended December 31, 2019 , the Company 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.

During the year ended December 31, 2018, the Company sold a portion of its interest in one surgery center for net cash proceeds of $0.5 million .

As a result of this transaction, the Company lost control of the previously controlled entity but retains a non-controlling interest, resulting in the deconsolidation of the previously consolidated entity.

The remaining non-controlling interest was accounted for as an equity method investment, and initially measured and recorded at fair value as of the date of the transaction.

The transaction resulted in a pretax gain on deconsolidation of $1.1 million , which is included in loss on disposals and deconsolidations, net, in the accompanying consolidated statement of operations for the year ended December 31, 2018.

The gain was determined based on the difference between the fair value of the Company's retained interest in the entity and the carrying value of both the tangible and intangible assets of the entity immediately prior to the transaction less cash proceeds received.

The fair value of the investment of $2.0 million was recorded as a component of investments in and advances to affiliates in the accompanying consolidated balance sheets.

Non-Controlling Interests

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Non-Controlling Interests — Redeemable.

Each partnership and limited liability company through which the Company owns and operates its surgical facilities is governed by a partnership or operating agreement.

Each partnership and limited liability company through which the Company owns and operates its surgical facilities is governed by a partnership or operating agreement, respectively.

In certain circumstances, the applicable partnership or operating agreements for the Company's surgical facilities provide that the facilities will purchase all of the physician limited partners’ or physician minority members’, as applicable, ownership if certain adverse regulatory events occur, such as it becoming illegal for the physician(s) to own an interest in a surgical facility, refer patients to a surgical facility or receive cash distributions from a surgical facility.

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

A summary of activity related to the non-controlling interests—redeemable follows (in millions):

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

Balance at beginning of period $ 321.0 $ 326.6

Net income attributable to non-controlling interests—redeemable 31.7 39.1

(Disposal) and acquisition of shares of non-controlling interests, net—redeemable (1)

Acquisition and disposal of shares of non-controlling interests, net—redeemable ( 9.4 ) ( 4.7 )

Distributions to non-controlling interest —redeemable holders ( 36.5 ) ( 40.0 )

Balance at end of period $ 306.8 $ 321.0

Includes post acquisition date adjustments in all periods.

Inventories, which consist primarily of medical and drug supplies, are stated at the lower of cost or market value.

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Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, "Leases" (the "Lease Accounting Standard").

The Company adopted the Lease Accounting Standard effective January 1, 2019, using a modified retrospective transition approach.

The most prominent among the changes

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 year ended December 31, 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

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

from this ASU is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases.

derivatives consistent with past presentation.

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

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

The new current expected credit losses (“CECL”) model generally calls for the immediate recognition of all expected credit losses and applies to financial instruments and other assets, which is primarily applicable to accounts receivable for the Company.

This ASU was effective for the Company on January 1, 2020.

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

In February 2016, the FASB issued ASU 2016-02, "Leases" (the "Lease Accounting Standard").

The Company adopted the Lease Accounting Standard effective January 1, 2019, using a modified retrospective transition approach.

The most prominent of the changes resulting from this ASU is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases.

The Company’s accounting for finance leases remained substantially unchanged from its prior accounting for capital leases.

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The cumulative effect of the accounting change recognized upon adoption was $ 6.1 million reflected as an adjustment to retained deficit in our consolidated balance sheets.

"Leases" for further discussion.

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

The new current expected credit losses ("CECL") model generally calls for the immediate recognition of all expected credit losses and applies to financial instruments and other assets, including accounts receivable and other financial assets measured at amortized cost, debt securities and other financial assets.

This guidance replaces the current incurred loss model for measuring expected credit losses, requires expected losses on available-for-sale debt securities to be recognized through an allowance for credit losses rather than as reductions in the amortized cost of the securities, and provides for additional disclosure requirements.

This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted.

The Company adopted this ASU on January 1, 2020, and does not expect the adoption of this ASU will have a material impact on its consolidated financial position and results of operations.

Acquisitions and Disposals

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Acquisitions in which the Company is able to exert significant influence but does not have control are accounted for using the equity method.

Acquired assets and assumed liabilities typically include, but are not limited to, fixed assets, intangible assets and professional liabilities.

Acquired assets and assumed liabilities typically include, but are not limited to, fixed assets, intangible assets and right-of-use leases.

The valuations are based on appraisal reports, discounted cash flow analyses, actuarial analyses or other appropriate valuation techniques to determine the fair value of the assets acquired or liabilities assumed.

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Fair values assigned to acquired working capital are based on carrying amounts reported by the acquiree at the date of acquisition, which approximate their fair values.

During the year ended December 31, 2020, the Company 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 its recent divestitures and other available resources.

The total consideration was allocated to the assets acquired and liabilities assumed based upon the respective acquisition date fair values.

During the year ended December 31, 2019, the Company acquired a controlling interest in one surgical facility, a clinic that was merged into an existing facility and a physician practice for total aggregate consideration of $ 26.7 million, including cash consideration of $ 20.1 million, net of cash acquired.

The remainder of the consideration related to the forgiveness of certain amounts due to the Company from the acquired clinic.

The cash consideration was funded through cash from operations.

The total consideration was allocated to the assets acquired and liabilities assumed based upon the respective acquisition date fair values.

During the year ended December 31, 2018, the Company acquired a controlling interest in five surgical facilities in new markets, two surgical facilities in existing markets, one of which was merged into an existing facility and multiple physician practices for a combined cash purchase price of $105.6 million , net of cash acquired.

The 2018 acquisitions were funded through cash from operations.

The total consideration related to these acquisitions was allocated to the assets acquired and liabilities assumed based upon their respective acquisition date fair values.

During 2020, the Company made a working capital settlement payment resulting in additional cash consideration of $ 0.8 million related to the clinic acquisition.

The additional consideration is reflected in the table below.

During the year ended December 31, 2020, no other 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.

SURGERY PARTNERS, INC.

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Preliminary or final amounts recognized for each major class of assets acquired and liabilities assumed for acquisitions completed during the years ended December 31, 2020 and 2019, including post acquisition date adjustments, are as follows (in millions):

Cash consideration (1)

Consideration transferred (1)

$ 120.1 $ 27.4

Fair value of non-controlling interests 57.3 8.3

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Intangible assets 3.6 —

Goodwill 153.7 23.4

Right-of-use operating lease assets 15.4 28.8

Other long-term assets (2)

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Long-term debt ( 40.0 ) ( 0.2 )

Long-term liabilities

Right-of-use operating lease liabilities ( 14.0 ) ( 28.2 )

Aggregate acquisition date fair value $ 177.4 $ 35.7

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The fair values assigned to certain assets acquired and liabilities assumed by the Company in 2020 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 year ended December 31, 2019 , 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 2018 .

The goodwill acquired in connection with the 2019 acquisitions was allocated to the Company's reportable segments as follows:

$14.1 million to surgical facility services and $8.5 million to ancillary services.

The results of operations of the 2019 acquisitions are included in the Company’s results of operations beginning on the dates of acquisitions, and were not considered significant for the year ended December 31, 2019 .

The goodwill acquired in connection with the 2020 acquisitions was allocated to the Company's Surgical Facility Services reportable segment.

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

During the year ended December 31, 2019, the Company 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.

During the year ended December 31, 2020, the Company sold its interests in three surgery centers, one of which was previously accounted for as an equity method investment, sold certain assets related to its anesthesia business, certain imaging assets and its optical products purchasing organization for combined net cash proceeds of $ 58.5 million, and recognized a net pre-tax gain of $ 5.2 million included in loss on disposals and deconsolidations, net in the consolidated statement of operations for the year ended December 31, 2020.

Additionally, 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 consolidated statement of operations for the year ended December 31, 2020.

During the year ended December 31, 2019, the Company disposed of previously owned real property associated with one of its existing non-consolidated surgical facilities.

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During the year ended December 31, 2018, the Company disposed of four surgery centers, two surgical hospitals and its optical laboratory for net cash proceeds of $ 18.7 million, and recognized a net pretax loss of $ 21.2 million included in loss on disposals and deconsolidations, net in the consolidated statement of operations for the year ended December 31, 2018.

This non-cash loss was primarily a result of the write-off of the net assets of the facility (net of proceeds received) and was primarily driven by the write-off of the associated goodwill.

The non-cash loss was primarily a result of the write-off of the net assets of the facility (net of proceeds received) and was primarily driven by the write-off of the associated goodwill.

Property and Equipment

Property and equipment are stated at cost or, if obtained through acquisition, at fair value determined on the date of acquisition.

Depreciation is recognized using the straight-line method over the estimated useful lives of the assets, generally 20 to 40 years for buildings and building improvements, three to five years for computers and software and five to seven years for furniture and equipment.

Depreciation is recognized using the straight-line method over the estimated useful lives of the assets, generally 20 to 40 years for buildings

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

and building improvements, three to five years for computers and software and five to seven years for furniture and equipment.

Leasehold improvements are depreciated on a straight-line basis over the shorter of the lease term or the estimated useful life of the assets.

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Such assets are amortized on a straight-line basis over the lesser of the lease term or the remaining useful life of the leased asset.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

A summary of property and equipment follows (in millions):

Land $ 11.1 $ 11.0

Buildings and improvements 109.7 106.6

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Property and equipment, net $ 544.6 $ 523.3

At December 31, 2018, the Company had certain land, buildings and improvements that arose solely as a result of the Company being the deemed accounting owner under the build-to-suit guidance in in effect prior to the adoption of the Lease Accounting Standard.

Upon adoption of the Lease Accounting Standard on January 1, 2019, the Company derecognized the build-to-suit assets and related liabilities and concluded the leases should be recognized on the balance sheet as finance leases under the new guidance.

Further the Company had an ongoing development agreement to construct a new hospital, which costs were recognized as incurred as construction in progress at December 31, 2018.

Upon reevaluation, the Company concluded that it did not control the assets under construction and therefore the obligation and related asset were derecognized from the balance sheets upon adoption of the Lease Accounting Standard.

The lease related to this new hospital commenced in November 2019, and is recognized as a finance lease at December 31, 2019 (see Note.

Depreciation expense was $71.9 million and $62.5 million for the years ended December 31, 2019 and 2018 (Successor), respectively, $20.0 million for the four months ended December 31, 2017 (Successor) and $24.1 million for the eight months ended August 31, 2017 (Predecessor).

Depreciation expense was $ 90.5 million, $ 71.9 million and $ 62.5 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Goodwill and Intangible Assets

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

As of October 1, 2019, the Company has identified three reporting units, which include the following:

During 2020, the Company 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.

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

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.

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.

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 typically utilizes 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.

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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 DCF model.

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

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

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

premium, which was based on observable market data and a review of selected transactions of companies that operate in the Company's sector.

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 October 1, 2019, prior to impairment testing, the Company 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 .

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.

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.

On the basis of available evidence as of August 31, 2020, the Company identified indicators of impairment related to its Ancillary Services and Alliance reporting units, including the impacts of the COVID-19 pandemic, the closure of its diagnostic laboratory (as discussed in Note 2.

"Acquisitions and Disposals") and its strategic decision to sell its optical products purchasing organization.

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

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

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.

The fair values as of August 31, 2020 were determined using the adjusted book value for the Ancillary Services reporting unit and the discounted cash flow model for the Alliance reporting unit.

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.

The fair value of the Surgical Facilities reporting unit as of October 1, 2020 was determined using the income and market approach as discussed above.

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.

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.

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.

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Disposals and deconsolidations ( 55.6 ) ( 0.2 )

Impairments ( 33.5 ) ( 2.5 )

Balance at end of period $ 3,468.0 $ 3,402.4

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A summary of the components of intangible assets follows (in millions):

December 31, 2019

December 31, 2018

Gross Carrying Amount

Accumulated Amortization

Gross Carrying Amount

Accumulated Amortization

December 31, 2020 December 31, 2019

Gross Carrying Amount Accumulated Amortization Net Gross Carrying Amount Accumulated Amortization Net

Finite-lived intangible assets:

Management rights agreements $ 31.1 $ ( 10.1 ) $ 21.0 $ 31.1 $ ( 7.3 ) $ 23.8

Other 13.6 ( 6.5 ) 7.1 8.8 ( 4.5 ) 4.3

Total finite-lived intangible assets 44.7 ( 16.6 ) 28.1 39.9 ( 11.8 ) 28.1

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Total intangible assets $ 63.5 $ ( 16.6 ) $ 46.9 $ 59.1 $ ( 11.8 ) $ 47.3

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

During the year ended December 31, 2019, the Company acquired a clinic that was previously managed by the Company.

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As such, the Company recorded non-cash impairment charges of $ 5.4 million, which was included as a component of impairment charges on the accompanying consolidated statement of operations.

Amortization expense for intangible assets was $4.6 million and $4.9 million for the years ended December 31, 2019 and 2018 (Successor), respectively, $1.8 million for the four months ended December 31, 2017 (Successor) and $6.0 million for the eight months ended August 31, 2017 (Predecessor).

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amortization expense for intangible assets was $ 4.3 million, $ 4.6 million and $ 4.9 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Total estimated amortization expense for the next five years and thereafter related to intangible assets follows (in millions):

Thereafter 11.3

Long-Term Debt

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Senior secured term loan (1)

$ 1,539.4 $ 1,434.1

Senior secured revolving credit facility — —

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10.000 % senior unsecured notes due 2027

10.000% senior unsecured notes due 2027

Notes payable and other secured loans 137.5 104.0

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unamortized debt issuance costs ( 16.3 ) ( 10.8 )

Total debt 2,856.8 2,580.7

Current maturities 64.4 56.0

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(1) Includes unamortized fair value discount of $ 3.7 million and $ 4.6 million as of December 31, 2020 and 2019, respectively.

Includes unamortized fair value premium of $6.7 million as of December 31, 2018 .

The premium was written-off upon redemption as discussed below.

In connection with the adoption of the Lease Accounting Standard, the Company's capital lease obligations that existed as of December 31, 2018 were derecognized and included as a component of the finance lease obligations included in the table shown above.

"Leases" for further discussion on the adoption of the Lease Accounting Standard.

The increase in finance lease obligations upon adoption of the Lease Accounting Standard is due to the inclusion of certain financing obligations that were previously recognized as a component of other current and long-term liabilities as discussed further in Note 13.

"Other Assets and Liabilities." The increase also includes the addition of a new finance lease associated with a new de novo hospital, which began operations in the fourth quarter of 2019.

Senior Secured Credit Facilities

The Company has a credit agreement (the "Credit Agreement") providing for a $1.44 billion senior secured term loan (the "Term Loan") and a $120.0 million senior secured revolving credit facility (the "Revolver" and, together with the Term Loan, the "Senior Secured Credit Facilities").

The Company has a credit agreement (the "Credit Agreement") providing for a $ 1.29 billion senior secured term loan (the "Term Loan"), a $ 180.0 million senior secured incremental term loan (the "2018 Incremental Term Loan"), a $ 120.0 million senior secured incremental term loan (the "2020 Incremental Term Loan") and a $ 120.0 million senior secured revolving credit facility (the "Revolver" and, together with the Term Loan, the 2018 Incremental Term Loan and the 2020 Incremental Term Loan, the “Senior Secured Credit Facilities").

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, the Company may request one or more additional incremental term loan facilities or one or more increases in the commitments under the Revolver.

During 2019, in connection with the completion of the issuance of the 2027 Unsecured Notes (defined below), the outstanding commitments under the Company's Revolver were increased by $45.0 million pursuant to an incremental amendment to the credit agreement governing its revolving credit facility.

On March 18, 2020, the Company drew down its available capacity under its 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 both December 31, 2020 and 2019, the Company had no outstanding borrowing on the Revolver.

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

The Term Loan amortizes in equal quarterly installments of 0.25% of the aggregate original principal amount of the Term Loan.

The Term Loan is subject to mandatory prepayments based on excess cash flow for the applicable fiscal year that will depend on the first lien net

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

leverage ratio as of the last day of the applicable fiscal year, as well as upon the occurrence of certain other events, as described in the Credit Agreement.

The Term Loan amortizes in equal quarterly installments of 0.25 % of the aggregate original principal amount of the Term Loan.

The Term Loan is subject to mandatory prepayments based on excess cash flow for the applicable fiscal year that will depend on the first lien net leverage ratio as of the last day of the applicable fiscal year, as well as upon the occurrence of certain other events, as described in the Credit Agreement.

There were no excess cash flow payments required as of December 31, 2020.

With respect to the Revolver, the Company is required to comply with a maximum consolidated total net leverage ratio of 9.50 :

1.00 , which covenant will be tested quarterly on a trailing four quarter basis only if, as of the last day of the applicable fiscal quarter the Revolver is drawn in an aggregate amount greater than 35% of the total commitments under the Revolver.

On April 22, 2020, the Company entered into a second incremental term loan amendment, which further amended and supplemented the Credit Agreement to provide for a $ 120.0 million senior secured incremental term loan.

The 2020 Incremental Term Loans were fully drawn on April 22, 2020 and bear interest at a rate per annum equal to (x) LIBOR plus a margin of 8.00 % per annum or (y) an alternate base rate (which will be the highest of (i) the prime rate, (ii) 0.5 % per annum above the federal funds effective rate, (iii) one-month LIBOR plus 1.00 % per annum and (iv) 2.00 % per annum) plus a margin of 7.00 % per annum.

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

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

With respect to the Revolver, the Company is required to comply with a maximum consolidated total net leverage ratio of 9.50 :1.00, which covenant will be tested quarterly on a trailing four quarter basis only if, as of the last day of the applicable fiscal quarter the Revolver is drawn in an aggregate amount greater than 35 % of the total commitments under the Revolver.

Such financial maintenance covenant is subject to an equity cure.

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The Credit Agreement also contains customary affirmative covenants and events of default.

On April 16, 2020, the Company entered into a third amendment to Credit Agreement governing the Revolver, which amended and supplemented financial covenants applicable to the Revolver.

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 2020 Incremental Term Loans on April 22, 2020, and are discussed in more detail above.

As of December 31, 2020, the Company was in compliance with the covenants contained in the Credit Agreement.

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and each of Surgery Center Holdings, Inc.'s current and future wholly-owned domestic restricted subsidiaries (subject to certain exceptions) (the "Subsidiary Guarantors") and are secured by a first priority security interest in substantially all of Surgery Center Holdings, Inc.'s, SP Holdco I, Inc.'s and the Subsidiary Guarantors’ assets (subject to certain exceptions).

In connection with the Term Loan and Revolver, in 2017 the Company repaid its then-existing 2014 First Lien Credit Agreement, resulting in a debt extinguishment loss of $18.2 million , included in the loss on debt refinancing in the consolidated statement of operations for the eight months ending August 31, 2017 (Predecessor).

The loss includes the partial write-off of unamortized debt issuance costs and discount related to the 2014 Revolver Loan and 2014 First Lien Credit Agreement and a portion of costs incurred with the Senior Secured Credit Facilities.

In connection with the application of pushdown accounting, the Company remeasured and recorded the Term Loan at fair value using a measurement date of August 31, 2017 (Predecessor).

The fair value was based on a Level 2 computation using quoted prices for identical liabilities in inactive markets.

As a result, the Company recorded a fair value discount of $6.5 million as of the measurement date, which is reported in the consolidated balance sheets as a direct deduction from the face amount the Term Loan.

The Company amortizes the fair value discount to interest expense over the life of the Term Loan.

In connection with incremental Term Loan borrowings in 2018, the Company recorded debt issuance costs and discount of $3.0 million .

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

6.750 % Senior Unsecured Notes due 2025

Effective June 30, 2017 (Predecessor), the Company issued $370.0 million in gross proceeds of senior unsecured notes due July 1, 2025 (the "2025 Unsecured Notes").

Effective June 30, 2017, the Company issued $ 370.0 million in gross proceeds of senior unsecured notes due July 1, 2025 (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.

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and are guaranteed on a senior unsecured basis by each of Surgery Center Holdings, Inc.'s existing and future domestic wholly-owned restricted subsidiaries that guarantees the Senior Secured Credit Facilities (subject to certain exceptions).

The Company may redeem up to 40% of the aggregate principal amount of the 2025 Unsecured Notes at any time prior to July 1, 2020, with the net cash proceeds of certain equity issuances at a redemption price equal to 106.75% of the principal amount to be redeemed, plus accrued and unpaid interest to, but excluding, the date of redemption, provided that at least 50% of the aggregate principal amount of the 2025 Unsecured Notes remain outstanding immediately after the occurrence of such redemption and such redemption occurs within 180 days of the date of the closing of the applicable equity offering.

The Company may redeem the 2025 Unsecured Notes, in whole or in part, at any time prior to July 1, 2020, at a price equal to 100% of the principal amount to be redeemed plus the applicable premium, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption.

The Company may redeem the 2025 Unsecured Notes, in whole or in part, at any time on or after July 1, 2020, at the redemption prices set forth below (expressed as a percentage of the principal amount to be redeemed), plus accrued and unpaid interest, if any, up to, but excluding, the date of redemption:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

In connection with the offering of the 2025 Unsecured Notes, the Company recorded debt issuance costs of $17.3 million in the Predecessor period, which were eliminated with the application of pushdown accounting.

10.000 % Senior Unsecured Notes due 2027

Effective April 11, 2019, the Company issued the 2027 Unsecured Notes in an aggregate principal amount of $430.0 million due April 15, 2027.

Effective April 11, 2019, the Company issued $ 430.0 million in an 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 annum, payable semi-annually on April 15 and October 15 of each year, beginning on October 15, 2019.

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The indenture governing the 2027 Unsecured Notes contains customary affirmative and negative covenants, which, among other things, limit the Company’s ability to incur additional debt, pay dividends, create or assume liens, effect transactions with its affiliates, guarantee payment of certain debt securities, sell assets, merge, consolidate, enter into acquisitions and effect sale and leaseback transactions.

In connection with the offering of the 2027 Unsecured Notes, the Company recorded debt issuance costs of $8.8 million .

8.875% Senior Unsecured Notes due 2021

In connection with issuance of the 2027 Unsecured Notes as discussed above, the Company redeemed all of the then existing senior unsecured notes due 2021 ("2021 Unsecured Notes").

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

In connection with the redemption, the Company recorded a debt extinguishment loss of $11.7 million , included in loss on debt extinguishment in the consolidated statements of operations for the year ended December 31, 2019.

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

Certain of the Company’s subsidiaries have outstanding indebtedness under notes payable and other secured loans, 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 for which we are liable to various vendors for several property and equipment leases classified as finance leases.

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.

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

Certain of the Company’s subsidiaries have outstanding indebtedness under notes payable and other secured loans, 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 for which the Company is liable to various vendors for several property and equipment leases classified as finance leases.

The various bank indebtedness agreements contain covenants to maintain certain financial ratios and also restrict encumbrance of assets, creation of indebtedness, investing activities and payment of distributions.

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A summary of maturities for the Company's long-term debt, excluding unamortized debt issuance costs and the unamortized fair value discount discussed above, for the next five years and thereafter as of December 31, 2020 follows (in millions):

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

On January 1, 2019, the Company adopted the Lease Accounting Standard using the modified retrospective transition approach by applying the new standard to all leases existing at that date.

Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under the new guidance, while prior period amounts have not been adjusted.

The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward its historical lease identification, lease classification and initial direct costs for any leases that existed prior to January 1, 2019.

The Company also elected the accounting policy practical expedient to exclude leases with an initial term of twelve months or less from the balance sheet.

Certain of the Company’s lease agreements have lease and non-lease components, which for the majority of leases the Company accounts for separately when the actual lease and non-lease components are determinable.

Thereafter 785.5

Total $ 2,876.8

The Company determines if an arrangement is a lease at inception.

Right-of-use assets represent the right to use the underlying assets for the lease term and the lease liabilities represent the obligation to make lease payments arising from the leases.

Right-of-use assets and liabilities are recognized at commencement date based on the present value of future lease payments over the lease term, which includes only payments that are fixed and determinable at the time of commencement.

Right-of-use assets and liabilities are recognized at commencement date based on the present value of future lease payments over the lease term, which includes

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

only payments that are fixed and determinable at the time of commencement.

When readily determinable, the Company uses the interest rate implicit in a lease to determine the present value of future lease payments.

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These variable components of lease payments are expensed as incurred and are not included in the determination of the right-of-use asset or lease liability.

The following table presents the components of the Company's right-of-use assets and liabilities related to leases and their classification in the consolidated balance sheets at December 31, 2019 (in millions):

Classification in Consolidated Balance Sheets

December 31, 2019

Operating lease assets

Other long-term assets

Finance lease assets

Property and equipment, net of accumulated depreciation

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 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 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 $ 27.4 million during the year ended December 31, 2020.

Classification in Consolidated Balance Sheets December 31, 2020 December 31, 2019

Operating lease assets Right-of-use operating lease assets $ 310.1 $ 297.7

Finance lease assets Property and equipment, net of accumulated depreciation 258.1 237.1

Total leased assets $ 568.2 $ 534.8

Operating lease liabilities:

Other current liabilities

Other long-term liabilities

Current Other current liabilities $ 39.2 $ 37.3

Long-term Right-of-use operating lease liabilities 300.9 283.1

Total operating lease liabilities 340.1 320.4

Finance lease liabilities:

Current maturities of long-term debt

Long-term debt, less current maturities

Current Current maturities of long-term debt 18.9 15.8

Long-term Long-term debt, less current maturities 262.3 237.6

Total finance lease liabilities 281.2 253.4

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table presents the weighted-average lease terms and discount rates at December 31, 2019 (in millions):

Operating Leases

Finance Leases

Weighted-average remaining lease term

The following table presents the weighted-average lease terms and discount rates at December 31, 2020 and 2019 (in millions):

December 31, 2020 December 31, 2019

Operating Leases Finance Leases Operating Leases Finance Leases

Weighted-average remaining lease term 8.9 years 15.9 years 8.9 years 16.6 years

Weight average discount rate 10.3 % 9.2 % 10.4 % 8.7 %

The following table presents the components of the Company's lease expense and their classification in the consolidated statement of operations for the year ended December 31, 2019 (in millions):

December 31, 2019

The following table presents the components of the Company's lease expense and their classification in the consolidated statement of operations for the years ended December 31, 2020 and 2019 (in millions):

December 31, 2020 December 31, 2019

Operating lease costs $ 74.1 $ 70.4

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Total lease costs $ 139.4 $ 118.8

During the year ended December 31, 2019 , the Company incurred lease costs of $20.6 million under operating lease agreements with physician investors who are related parties.

During the year ended December 31, 2019 , the Company paid rent of $6.7 million under a finance lease agreement with a lessor who is a related party.

During the years ended December 31, 2020 and 2019, the Company incurred lease costs of $ 22.8 million and $ 20.6 million, respectively, under operating lease agreements with physician investors who are related parties.

During the years ended December 31, 2020 and 2019, the Company paid rent of $ 6.9 million and $ 6.7 million, respectively, under a finance lease agreement with a lessor who is a related party.

One of the Company's surgical facilities has a non-controlling ownership interest in the lessor.

Payments are allocated to principal adjustments of the finance lease liability and interest expense.

The following table presents supplemental cash flow information for the year ended December 31, 2019 (dollars in millions):

December 31, 2019

The following table presents supplemental cash flow information for the years ended December 31, 2020 and 2019 (dollars in millions):

December 31, 2020 December 31, 2019

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

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Future maturities of lease liabilities at December 31, 2020 are presented in the following table (in millions):

Operating Leases

Finance Leases

Operating Leases Finance Leases

2021 $ 70.7 $ 43.2

2022 66.1 40.7

2023 62.1 37.0

2024 58.4 32.1

2025 50.0 30.7

Thereafter 219.1 381.9

Total lease payments 526.4 565.6

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Future maturities of lease liabilities at December 31, 2018, prior to the adoption of the Lease Accounting Standard, are presented in the following table (in millions):

Operating Leases (1)

Capital Leases

Total lease payments

imputed interest

Total lease obligations

Includes financing obligations payable to the lessors of certain land, buildings and improvements that arose due to the Company's continued involvement with the leased assets under the sale-leaseback guidance in effect prior to the adoption of the Lease Accounting Standard.

As of December 31, 2018, the current portion of the financing obligations was $7.0 million and was included in other current liabilities in the consolidated balance sheets.

The long-term portion of the finance obligations was $149.8 million and was included as other long-term liabilities in the consolidated balance sheets.

As of December 31, 2018, the Company had various non-cancellable sub-lease arrangements.

The total future minimum rentals to be received under these arrangements as of December 31, 2018 is estimated to be $3.4 million .

Rental expense for operating leases was $83.5 million for the year ended December 31, 2018 (Successor), $27.8 million for the four months ended December 31, 2017 (Successor) and $39.2 million for the eight months ended August 31, 2017 (Predecessor).

Included in these amounts, the Company incurred lease expense under operating lease agreements with physician investors who are related parties of $20.2 million for the year ended December 31, 2018 (Successor), $7.5 million for the four months ended December 31, 2017 (Successor) and $9.8 million for the eight months ended August 31, 2017 (Predecessor).

Redeemable Preferred Stock

On August 31, 2017 (Predecessor), the Company completed the sale issuance of 310,000 shares of the Company's preferred stock, par value $0.01 per share, designated as 10.00% Series A Convertible Perpetual Participating Preferred Stock (the "Series A Preferred Stock") to Bain Capital at a purchase price of $1,000 per share for an aggregate purchase price of $310.0 million (the "Preferred Private Placement").

On August 31, 2017, the Company completed the sale issuance of 310,000 shares of the Company's preferred stock, par value $ 0.01 per share, designated as 10.00 % Series A Convertible Perpetual Participating Preferred Stock (the "Series A Preferred Stock") to Bain Capital at a purchase price of $ 1,000 per share for an aggregate purchase price of $ 310.0 million (the "Preferred Private Placement").

The accrued value of the Series A Preferred Stock is convertible into shares of common stock at a price per share of common stock equal to $ 19.00 , subject to certain adjustments as provided in the Certificate of Designations, Preferences, Rights and Limitations of the 10.00 % Series A Convertible Perpetual Participating Preferred Stock of Surgery Partners, Inc.

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In addition to participating in any dividends that may be declared with respect to the common stock on an as-converted basis, each share of Series A Preferred Stock accrues dividends daily at a dividend rate of 10.00 %, compounding quarterly, and in any given quarter, subject to certain conditions, the Board of Directors of the Company may declare a cash dividend in an amount up to 50 % of the amount of the dividend that has accrued and accumulated during such quarter through the end of such quarter, and the amount of any quarterly dividend paid in cash shall not compound on the applicable date and shall not be included in the accrued value of the Series A Preferred Stock.

In the event of the Company’s liquidation, dissolution or winding-up (whether voluntary of involuntary), holders of Series A Preferred Stock will be entitled to receive out of the assets of the Company available for distribution to shareholders, after satisfaction of any liabilities and obligations to creditors of the Company, with respect to each Series A Preferred Share, an amount equal to the greater of (i) $1,000.00 per share, plus dividends compounded to date, plus

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

dividends accrued but not yet compounded and (ii) the amount that a holder of one share of common stock would receive, assuming the Series A Preferred Stock had converted into shares of common stock.

In connection with the issuance of Series A Preferred Stock, the Company incurred issuance costs of $18.3 million in the eight months ended August 31, 2017 (Predecessor), which were eliminated with the application of pushdown accounting.

In the event of the Company’s liquidation, dissolution or winding-up (whether voluntary of involuntary), holders of Series A Preferred Stock will be entitled to receive out of the assets of the Company available for distribution to shareholders, after satisfaction of any liabilities and obligations to creditors of the Company, with respect to each Series A Preferred Share, an amount equal to the greater of (i) $ 1,000.00 per share, plus dividends compounded to date, plus dividends accrued but not yet compounded and (ii) the amount that a holder of one share of common stock would receive, assuming the Series A Preferred Stock had converted into shares of common stock.

The following table presents a summary of activity related to the redeemable preferred stock for the years ended December 31, 2020 and 2019 (in millions):

Balance at beginning of period $ 395.0 $ 359.3

Dividends accrued

Cash dividends declared

Dividends accrued (there were no cash dividends declared)

Balance at end of period $ 434.5 $ 395.0

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During 2020 and 2019, such derivatives have been used to hedge the variable cash flows associated with existing variable-rate debt.

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 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 other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.

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

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

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

As of December 31, 2019 , the Company had four interest rate swaps with a current notional amount of $1.2 billion and a termination date of November 30, 2023.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of December 31, 2020 and 2019, the Company had four interest rate swaps with a current notional amount of $ 1.2 billion and a termination date of November 30, 2023.

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

"Organization and Summary of Accounting Policies") and classified as a long-term liability included in other long-term liabilities in the consolidated balance sheets as of December 31, 2020 and 2019.

As of December 31, 2018 , the Company had three interest rate swaps with a notional amount of $900.0 million .

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

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

Year Ended December 31,

September 1 to

2020 2019 2018

Derivatives in cash flow hedging relationships:

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Loss reclassified from accumulated OCI to interest expense (effective portion) 20.2 7.5 0.6

There were no derivatives outstanding for the comparative periods in 2017.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Earnings Per Share

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Year Ended December 31,

September 1 to

2020 2019 2018

Net loss attributable to Surgery Partners, Inc.

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

Amounts allocated to participating securities (1)

Mark to redemption adjustment

( 39.5 ) ( 35.7 ) ( 32.4 )

Net loss attributable to common stockholders $ ( 155.6 ) $ ( 110.5 ) $ ( 238.1 )

Weighted average shares outstanding- basic and diluted (2)

48,776 48,280 48,028

Basic and diluted loss per share (2)

$ ( 3.19 ) $ ( 2.29 ) $ ( 4.96 )

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

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Restricted shares 981 67 198

Includes dividends accrued during the Successor periods for the Series A Preferred Stock.

(1) Includes dividends accrued during all periods for the Series A Preferred Stock.

The Series A Preferred Stock does not participate in undistributed losses.

There were no participating securities during the Predecessor periods.

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

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The authorization does not have a specified expiration date, and the share repurchase program may be suspended, recommenced or discontinued at any time or from time to time without prior notice.

In December 2017, the Company repurchased 180,664 shares of its common stock at an average price of $11.12 per share through market purchases.

In 2018, the Company repurchased 156,818 shares of its common stock at an average price of $ 12.64 per share through market purchases.

At December 31, 2020, the Company had $ 46.0 million of repurchase authorization available under the December 2017 authorization.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company uses the asset and liability method to account for income taxes.

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Any change in tax rates that could impact deferred tax assets or liabilities are recognized in the same period the change occurs.

If a net operating loss ("NOL") carryforward exists, the Company makes a determination as to whether that NOL carryforward will be utilized in the future.

A valuation allowance is established for certain net operating loss 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

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

A valuation allowance is established for certain net operating loss and interest limitation 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.

If these estimates and related assumptions change in the future, the Company may be required to adjust its deferred tax valuation allowances.

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

The Company made income tax payments of $1.6 million and $2.2 million for the years ended December 31, 2019 and 2018 (Successor), $0.5 million for the four months ended December 31, 2017 (Successor) and $0.6 million for the eight months ended August 31, 2017 (Predecessor).

Income tax expense (benefit) is comprised of the following (in millions):

The Company made income tax payments of $ 1.7 million, $ 1.6 million and $ 2.2 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Income tax (benefit) expense is comprised of the following (in millions):

Year Ended December 31,

September 1 to

Total income tax expense (benefit)

A reconciliation of the provision for income taxes as reported in the consolidated statements of operations and the amount of income tax expense (benefit) computed by multiplying consolidated income (loss) in each year by the U.S.

federal statutory rate of 21% (2019 and 2018) and 35% (2017) follows (in millions):

2020 2019 2018

Federal $ ( 0.2 ) $ ( 0.2 ) $ ( 0.3 )

State 1.9 1.7 1.5

Federal ( 22.2 ) 3.2 16.5

State 0.4 4.8 8.7

Total income tax (benefit) expense $ ( 20.1 ) $ 9.5 $ 26.4

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

A reconciliation of the provision for income taxes as reported in the consolidated statements of operations and the amount of income tax (benefit) expense computed by multiplying consolidated income (loss) in each year by the U.S.

federal statutory rate of 21% (2020, 2019 and 2018) follows (in millions):

Year Ended December 31,

September 1 to

Tax expense (benefit) at U.S.federal statutory rate

2020 2019 2018

Tax (benefit) expense at U.S.federal statutory rate $ ( 4.0 ) $ 11.5 $ ( 14.5 )

State income tax, net of U.S.

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Differences related to divested facilities ( 0.7 ) 0.1 6.0

Nondeductible transaction costs

Tax return reconciling differences — 1.1 1.7

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Litigation settlement ( 3.7 ) — 8.6

Total income tax expense (benefit)

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Other 1.0 ( 0.9 ) 0.1

Total income tax (benefit) expense $ ( 20.1 ) $ 9.5 $ 26.4

The components of temporary differences and the approximate tax effects that give rise to the Company’s net deferred tax asset are as follows (in millions):

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Capital loss carryforwards 1.7 2.0

Deferred rent

Amortization of intangible assets 2.2 0.3

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TRA liability 1.0 1.2

Right of use 50.6 52.1

Affiliate indebtedness receivable — 6.8

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Basis differences of partnerships and joint ventures ( 73.6 ) ( 67.5 )

Right of use ( 47.5 ) ( 51.5 )

Other deferred liabilities ( 1.0 ) ( 1.1 )

1 unchanged sentence

Net deferred tax assets $ 124.8 $ 98.7

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company had federal NOL carryforwards of $ 615.7 million as of December 31, 2020, of which $ 516.2 million expire between 2026 and 2037.

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Approximately $ 16.8 million of the valuation allowance as of December 31, 2020 is recorded against deferred tax assets that, if subsequently recognized, will be credited directly to contributed capital.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

A reconciliation of the beginning and ending liability for gross unrecognized tax benefits for the years ended December 31, 2020 and 2019 is as follows (in millions):

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The Company recognizes interest and penalties related to uncertain tax positions in its provision for income taxes in the consolidated statements of operations.

For both the years ended December 31, 2019 and 2018 , the Company had approximately $0.1 million of accrued interest and penalties related to uncertain tax positions.

The total amount of accrued liabilities related to uncertain tax positions that would affect the Company's effective tax rate, if recognized, is $0.1 million and $0.1 million as of December 31, 2019 and 2018 , respectively.

The reserves are included in long-term taxes payable and long-term deferred tax assets in the consolidated balance sheet as of December 31, 2019 .

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 guidance on accounting for the tax effects of the Tax Act.

SAB 118 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.

The Company's accounting for elements of the Tax Act is complete as of December 31, 2018, including a reduction of the U.S.

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

For both years ended December 31, 2020 and 2019, the Company had approximately $ 0.1 million each of accrued interest and penalties related to uncertain tax positions.

The total amount of accrued liabilities related to uncertain tax positions that would affect the Company's effective tax rate, if recognized, is $ 0.1 million as of both December 31, 2020 and 2019.

The reserves are included in long-term taxes payable in the consolidated balance sheet as of December 31, 2020.

Equity-Based Compensation

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The Surgery Partners, Inc.

2015 Omnibus Incentive Plan, as amended ("2015 Omnibus Incentive Plan") from which all equity-based awards will be granted.

Under this plan, the Company can grant stock options, SARs, restricted stock, unrestricted stock, stock units, performance awards, cash awards and other awards convertible into or otherwise based on shares of its common stock.

2015 Omnibus Incentive Plan, as amended and restated effective January 1, 2020 ("2015 Omnibus Incentive Plan") from which all equity-based awards will be granted.

Under this plan, the Company can grant stock options, stock appreciation rights, restricted stock, unrestricted stock, stock units, performance awards, cash awards and other awards convertible into or otherwise based on shares of its common stock.

As of December 31, 2020, 8,315,700 shares were authorized to be granted under the 2015 Omnibus Incentive Plan and 5,285,421 were available for future equity grants.

Restricted Share-Based Awards

Restricted and Performance Share-Based Awards

During the years ended December 31, 2020 and 2019, the Company granted 1,077,367 and 556,450 restricted stock awards ("RSAs") to certain officers, employees and non-employee directors in accordance with the 2015 Omnibus Incentive Plan, respectively.

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The fair values of these RSAs were determined based on the closing price of the Company’s common stock on the trading date immediately prior to the grant date.

During the years ended December 31, 2019 and 2018 , the Company granted 389,972 and 335,074 performance-based restricted stock units ("PSUs") subject to the achievement of a combination of performance conditions, respectively.

In addition to the achievement of the performance conditions, these PSUs are generally subject to the continuing service of the employee over the ratable vesting period from the earned date continuing for two years.

For these restricted stock units, the number of shares payable at the end of the performance periods ranges from 0% to 150% of the targeted units based on the Company’s actual performance and/or market conditions results as compared to the targets.

These stock units are not considered outstanding until earned.

During the year ended December 31, 2019 , 245,301 of the PSUs granted in 2018 were deemed to have been earned.

During the year ended December 31, 2018, none of the PSUs previously granted were deemed to have been earned.

Additionally, during the year ended December 31, 2018 , the Company granted 127,292 leverage performance restricted stock units ("LPUs") subject to the achievement of a combination of market conditions.

The Company did not grant any LPUs during the year ended December 31, 2019 .

The market condition for the LPUs granted during the year ended December 31, 2018 is based on the compound annual growth rate of the Company’s total stockholder return, considered both alone and relative to that of the companies making up the S&P Composite 1500 Health Care Companies, over a three-year performance period.

In addition to the achievement of the market conditions, these LPUs are generally subject to the continuing service of the employee over the ratable vesting period from the performance period end date continuing for two years.

These stock units are not considered outstanding until earned.

During the years ended December 31, 2019 and 2018, none of the LPUs granted were deemed to have been earned.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

For LPUs, the number of shares payable at the end of the vesting periods ranges from 0% to 500% of the targeted units based on the Company’s actual performance and/or market conditions results as compared to the targets.

The fair values of these restricted stock units were determined based on a combination, where applicable, of the closing price of the Company’s common stock on the trading date immediately prior to the grant date for units subject to performance conditions, or at its Monte-Carlo simulation value for units subject to market conditions.

The Company recognizes compensation expense for the portion of the targeted performance-based restricted stock units subject to market conditions even if the condition is never satisfied.

However, if the performance conditions are not met for the portion of the targeted performance-based restricted stock units subject to such performance conditions, no compensation expense will be recognized, and any previously recognized compensation expense will be reversed.

Forfeitures are recognized as incurred.

In early 2019, after analysis and consideration by the Company's Compensation Committee, including consultation with Frederic W.

Cook & Co., Inc., an independent compensation consulting firm, the Compensation Committee determined that the terms of the LPUs were not appropriate to incentivize and retain the Company’s current executive management team.

In March 2019, the Compensation Committee permitted certain named executive officers to exchange their previously granted LPUs for new stock option awards.

As a result, 190,538 LPUs were voluntarily exchanged for 1,756,500 new stock option awards.

Restricted Share-Based Activity

During the years ended December 31, 2020 and 2019, the Company granted 854,367 and 389,972 performance-based restricted stock units ("PSUs") subject to the achievement of a combination of performance conditions, respectively.

For these PSUs, the number of shares payable at the end of the performance periods ranges from 0 % to 150 % of the targeted units based on the Company’s actual performance and/or market conditions results as compared to the targets.

These PSUs are not considered outstanding until earned.

During the years ended December 31, 2020 and 2019, 309,692 and 245,301 of the PSUs previously granted were deemed to have been earned, respectively.

Restricted and Performance Share-Based Activity

A summary of non-vested restricted share-based activity for the years ended December 31, 2020, 2019, and 2018 follows:

Unvested Shares

Weighted Average Grant Date Fair Value

Unvested Shares Weighted Average Grant Date Fair Value

Outstanding at December 31, 2017 574,456 $ 15.95

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Forfeited/Cancelled ( 180,719 ) 15.09

Outstanding at August 31, 2017

Outstanding at September 1, 2017

Granted/Earned

Forfeited/Cancelled

Vested ( 210,318 ) 16.31

Outstanding at December 31, 2018 703,024 $ 16.18

1 unchanged sentence

Forfeited/Cancelled ( 272,706 ) 12.97

Vested ( 456,183 ) 16.20

Outstanding at December 31, 2019 775,886 $ 13.78

1 unchanged sentence

Forfeited/Cancelled ( 162,635 ) 13.77

Vested ( 552,943 ) 12.78

Outstanding at December 31, 2020 1,447,367 $ 9.75

1 unchanged sentence

The Company granted 2,256,500 and 700,000 stock options during the years ended December 31, 2019 and 2018, respectively.

The Company did not grant any stock options during either the four months ended December 31, 2017 (Successor) or the eight months ended August 31, 2017 (Predecessor).

No stock options were granted during the year ended December 31, 2020.

Options to purchase shares are granted with an exercise price equal to the fair market value of the Company’s common stock on the day of grant, based on the closing price of the Company’s common stock on the trading date immediately prior to the grant date.

2 unchanged sentences

Forfeitures are recognized as incurred.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The stock options granted during the year ended December 31, 2018 are subject to the following performance and vesting criteria:

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Forfeitures are recognized as incurred.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Option/SAR Valuation

2 unchanged sentences

The risk-free interest rate is used as a component of the fair value of stock options to take into account the time value of money.

For the risk-free interest rate, the Company uses the implied yield on United States Treasury zero-coupon issues with a remaining term equal to the expected life, in years, of the options granted.

For the risk-free interest rate, the Company uses the implied yield on U.S.

Treasury zero-coupon issues with a remaining term equal to the expected life, in years, of the options granted.

▪ Expected volatility .

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As a result, the Company does not apply a dividend yield component to its valuation.

The following table sets forth the assumptions used by the Company to estimate the fair value of options and SAR Awards granted during the years ended December 31, 2019 and 2018:

The following table sets forth the assumptions used by the Company to estimate the fair value of stock options and SAR Awards granted during the years ended December 31, 2019 and 2018.

No stock options or SAR Awards were granted during the year ended December 31, 2020.

Expected volatility 60 % 60 % - 65 %

1 unchanged sentence

2.50 % - 2.90 %

2.50% - 2.90%

Expected dividends — —

2 unchanged sentences

$ 8.48 - $ 9.44

$8.48 - $9.44

The estimated fair value of options is amortized to expense on a straight-line basis over the options’ vesting period.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Stock Option and Stock Appreciation Rights Activity

A summary of stock option and SAR Award activity for the years ended December 31, 2020, 2019, and 2018 follows:

Weighted Average Exercise Price

Weighted Average Remaining Contractual Term (years)

Options/SARs Weighted Average Exercise Price Weighted Average Remaining Contractual Term (years)

Outstanding at December 31, 2017 12,687 $ 20.10 1.2

Forfeited/Cancelled

Outstanding at August 31, 2017

Outstanding at September 1, 2017

Granted 700,000 12.90 10.0

Forfeited/Cancelled ( 200,000 ) 12.90 10.0

Outstanding at December 31, 2018 512,687 $ 13.03 9.8

Granted 2,256,500 13.00 9.2

Forfeited/Cancelled —

Outstanding at December 31, 2019 2,769,187 $ 13.02 9.0

Exercised ( 4,199 ) 20.24 5.8

Forfeited/Cancelled ( 4,473 ) 19.00 4.8

Outstanding at December 31, 2020 (1)

(1) Of the outstanding options, 153,409 were exercisable as of December 31, 2019 .

2,760,515 $ 12.88 8.0

(1) Of the outstanding stock options, 585,119 were exercisable as of December 31, 2020.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Other information pertaining to equity-based compensation

2 unchanged sentences

The Company records equity-based compensation expense to recognize the fair value of the restricted shares that vest and stock options granted.

The Company recorded equity-based compensation expense of $10.2 million and $9.3 million for the years ended December 31, 2019 and 2018 (Successor), respectively, $1.9 million for the four months ended December 31, 2017 (Successor) and $3.7 million for the eight months ended August 31, 2017 (Predecessor).

The Company recorded equity-based compensation expense of $ 13.2 million, $ 10.2 million and $ 9.3 million for the years ended December 31, 2020, 2019, and 2018, respectively.

Employee Benefit Plans

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Employer contributions vest incrementally over a period of five years .

The Company's contributions were $7.6 million for each of the years ended December 31, 2019 and 2018 (Successor), $2.3 million for the four months ended December 31, 2017 (Successor) and $2.8 million for the eight months ended August 31, 2017 (Predecessor).

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Other Assets and Liabilities

Other Long-Term Assets

A summary of other long-term assets is as follows (in millions):

Right-of-use operating lease assets

The Company's contributions were $ 7.2 million for the year ended December 31, 2020 and $ 7.6 million for each of the years ended December 31, 2019 and 2018.

Other Current Liabilities

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

Right-of-use operating lease liabilities $ 39.2 $ 37.3

Accrued legal settlement (1)

Interest payable 24.5 21.8

Tax receivable agreement liability 21.2 16.9

Amounts due to patients and payors 20.9 16.5

Accrued legal settlement

Right-of-use operating lease liabilities

Cost report liabilities 16.9 5.6

Accrued expenses and other 62.1 58.0

Other Long-Term Liabilities

A summary of other long-term liabilities is as follows (in millions):

Right-of-use operating lease liabilities

Facility lease obligations

At December 31, 2018, the Company had financing obligations payable to the lessors of certain land, buildings and improvements that arose solely as a result of the Company being the deemed accounting owner under the build-to-suit guidance in effect prior to the adoption of the Lease Accounting Standard.

These obligations were included as facility lease obligations in other long-term liabilities at December 31, 2018 in the table above.

Upon adoption of the Lease Accounting Standard on January 1, 2019, the Company derecognized the build-to-suit liabilities and related assets and concluded the leases should be recognized on the balance sheet as finance leases under the new guidance.

Further, the Company had an ongoing development agreement to construct a new hospital, which costs were recognized as incurred as a deferred financing obligation included in facility lease obligations at December 31, 2018.

The lease related to this new hospital commenced in November 2019, and is recognized as a component of finance lease assets and liabilities at December 31, 2019 (see Note.

Total $ 217.0 $ 191.2

(1) See Note 14.

"Commitments and Contingencies" for further discussion.

Commitments and Contingencies

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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,

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

general and workers' compensation claim liabilities as of December 31, 2019 and 2018 were $19.4 million and $18.2 million , respectively.

The balance includes expected insurance recoveries of $12.1 million and $12.0 million as of December 31, 2019 and 2018 , respectively.

Total professional, general and workers' compensation claim liabilities as of December 31, 2020 and 2019 were $ 21.4 million and $ 19.4 million, respectively.

Expected insurance recoveries of $ 10.5 million and $ 12.1 million as of December 31, 2020 and 2019, respectively, are included as a component of other current assets and other long-term assets in the consolidated balance sheets.

Laws and Regulations

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Compliance with such laws and regulations can be subject to future government agency review and interpretation as well as legislative changes to such laws.

Noncompliance with such laws and regulations may subject the Company to significant regulatory action including fines, penalties, and exclusion from the Medicare, Medicaid and other federal health care programs.

Noncompliance with such laws and regulations may subject the Company to significant regulatory sanctions including fines, penalties, and exclusion from the Medicare, Medicaid and other federal health care programs.

From time to time, governmental regulatory agencies will conduct inquiries of the Company's practices, including, but not limited to, the Company's compliance with federal and state fraud and abuse laws, billing practices and relationships with physicians.

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

In addition, the Company was informed by CMS that payments to its diagnostic laboratory, Logan Laboratories, were suspended for a period of time, pending further investigations by CMS.

CMS lifted the suspension as of December 18, 2019.

On January 23, 2020, the United States District Court for the Middle District of Florida unsealed the Complaint in the case of Cho et al.

United States v.

Surgery Partners et al., which we understand to be related to the investigation that gave rise to the CIDs.

The Company has been providing information to the government in response to the CIDs and currently has a non-binding agreement in principle with the United States Department of Justice on the financial terms of a settlement with the goal of resolving these matters.

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

The Company continues to believe that this reserve is sufficient to cover a potential resolution with the government relating to these matters, including legal expenses relating to the settlement that have not previously been recorded in operating expenses.

The ultimate timing, amount and/or final terms of any such resolution may differ materially from those anticipated or the Company may not be able to reach a resolution at all.

It is reasonably possible that the Company will incur additional losses above the amount reserved, but the Company is not able to estimate such amounts at this time.

See Item 1A "Risk Factors" included elsewhere in this Annual Report under the heading "Risk Factors - Risks Related to Government Regulation - Companies within the health care industry, including us, continue to be the subject of federal and state audits and investigations, including actions for false and other improper claims ."

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Government Settlement

On April 14, 2020, Logan Laboratories, LLC ("Logan Labs"), a toxicology laboratory based in Tampa, Florida, that provides urine testing services and Tampa Pain Relief Centers, Inc.

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

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

Under the terms of the Settlement Agreement, the Companies still owe payment of $ 30.7 million plus accrued interest on April 1, 2021.

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

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

Acquired Facilities

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.

11 unchanged sentences

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

The amounts payable under the TRA are

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

The amounts payable under the TRA are related to the Company’s projected realized tax savings over the next five years and are not dependent on the Company’s actual tax savings over such period.

2 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.

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.

During the eight months ended August 31, 2017 (Predecessor), the Company recognized a reduction in the carrying value of the liability under the TRA of $43.9 million , with $15.3 million of the reduction recorded to a gain on amendment of TRA and $28.6 million recorded as a reduction to the goodwill recorded in connection with the application of pushdown accounting related to the change of control.

As a result of the reduction in the corporate tax rate from the Tax Cuts and Jobs Act, the Company remeasured the value of the liability under the TRA pursuant to the calculation terms as described above.

During the four months ended December 31, 2017 (Successor), the Company recognized a reduction in the carrying value of the liability under the TRA of $25.3 million , included as a tax receivable agreement benefit in the consolidated statement of operations.

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 $ 43.2 million and $ 60.1 million as of December 31, 2020 and 2019, respectively.

The carrying value of the liability under the TRA, reflecting the discount as discussed above, was $48.7 million and $48.5 million as of December 31, 2019 and 2018 , respectively.

The current portion of the liability was $16.9 million and $7.6 million as of December 31, 2019 and 2018 , respectively, and is included as a component of other current liabilities in the consolidated balance sheet.

The long-term portion is included as a component of other long-term liabilities in the consolidate balance sheet.

Contingent Consideration

In connection with certain prior period acquisitions, pursuant to the applicable purchase agreements, the Company was required to pay consideration to the prior owners of the applicable facilities should the requirements for continuing employment agreed to in the purchase agreements be met.

In accordance with Accounting Standards Codification 805, Business Combinations , contingent consideration with a continuing employment provision is recognized ratably over the defined performance period as compensation expense.

The Company recognized contingent acquisition compensation expense of $1.5 million for the year ended December 31, 2018 (Successor), $1.9 million for the four months ended December 31, 2017 (Successor) and $5.1 million for the eight months ended August 31, 2017 (Predecessor).

There was no contingent acquisition compensation expense during the year ended December 31, 2019 (Successor).

The Company recorded the expense as a component of general and administrative expenses in the consolidated statement of operations.

The Company has no further contingent acquisition compensation expense obligations.

In connection with the Company's integration of the corporate office functions related to the acquisition of NSH, the Company closed its Chicago, Illinois office on September 30, 2018.

As a result, the Company recognized a cease-use liability of $1.4 million , representing the estimated costs that will continue to be incurred under the office lease for its remaining term.

The estimated costs were included as transaction and integration costs in the consolidated statement of operations for the year ended December 31, 2018 and as a component of other current liabilities and other long-term liabilities in the consolidated balance sheet as of December 31, 2018.

In 2018, the Company recognized a liability of $4.5 million for estimated severance costs in connection with the corporate office integration.

The estimated costs were included as transaction and integration costs in the consolidated statement of operations for the year ended December 31, 2018.

There were no unpaid severance costs remaining as of December 31, 2019.

The carrying value of the liability under the TRA, reflecting a discount, was $ 37.0 million and $ 48.7 million as of December 31, 2020 and 2019, respectively.

The current portion of the liability was $ 21.2 million and $ 16.9 million as of December 31, 2020 and 2019, respectively, and is included as a component of other current liabilities in the

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

consolidated balance sheets.

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

Segment Reporting

1 unchanged sentence

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 optical services segment consists of an optical products group purchasing organization, and until October 2018, an optical laboratory that manufactured eyewear.

"All other" primarily consists of the Company's corporate general and administrative functions.

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, which was sold on December 31, 2020, as discussed in Note 2.

"Acquisitions and Disposals." "All other" primarily consists of the Company's corporate general and administrative functions.

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

Year Ended December 31,

September 1 to

2020 2019 2018

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

1 unchanged sentence

Optical Services 3.1 3.8 9.5

Total $ 1,860.1 $ 1,831.4 $ 1,771.5

Adjusted EBITDA:

2 unchanged sentences

Optical Services 1.4 1.4 2.5

Adjusted EBITDA:

All other ( 80.7 ) ( 74.3 ) ( 80.2 )

Total $ 256.6 $ 258.6 $ 234.8

Reconciliation of Adjusted EBITDA:

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

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

Depreciations and amortization

Depreciation and amortization 94.8 76.5 67.4

Interest expense, net 201.8 178.9 147.0

1 unchanged sentence

Transaction, integration and acquisition costs (1)

Gain (loss) on disposals and deconsolidation, 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

(Loss) income before income taxes

For the years ended December 31, 2019 and 2018 (Successor), this amount includes transaction and integration costs of $19.0 million and $31.7 million , respectively, and acquisition costs of $2.8 million and $2.2 million , respectively.

This amount further includes start-up costs related to a de novo surgical hospital of $14.3 million for the year ended December 31, 2019 (Successor), with no comparable costs in the 2018 period (Successor).

For the four months ended December 31, 2017 (Successor) and the eight months ended August 31, 2017 (Predecessor), this amount includes transaction and integration costs of $7.5 million and $5.6 million , respectively, and acquisition costs of $1.8 million and $2.1 million , respectively.

There were no start-up costs related to the de novo surgical hospital in the 2017 periods.

For the years ended December 31, 2019 and 2018 (Successor), this amount includes a loss on litigation settlements of $0.2 million and $46.0 million , respectively.

This amount further includes other litigation costs of $4.4 million for the year ended December 31, 2019 (Successor), with no comparable costs in the 2018 period (Successor).

For the four months ended December 31, 2017 (Successor) and the eight months ended August 31, 2017 (Predecessor), this amount includes a gain on litigation settlements of $8.7 million and $3.8 million , respectively.

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

(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 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 includes other acquisition costs of $ 2.3 million.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

This amount represents adjustments to revenue in connection with applying consistent policies across the combined company as a result of the integration of Surgery Partners and a previously acquired entity.

(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 further 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.

Surgical Facility Services $ 4,962.4 $ 4,580.4

1 unchanged sentence

Optical Services — 17.7

All other 415.8 351.2

Total assets $ 5,413.2 $ 5,018.9

Year Ended December 31,

September 1 to

Cash purchases of property and equipment, net:

2020 2019 2018

Cash purchases of property and equipment:

Surgical Facility Services $ 38.7 $ 65.9 $ 34.2

Ancillary Services 0.4 1.1 0.4

Optical services

Quarterly Financial Information (Unaudited)

The following tables include a summary of certain information related to the Company's quarterly consolidated results of operations for each of the four quarters in the years ended December 31, 2019 and 2018 .

The timing of acquisitions and divestitures completed during the years presented affects the comparability of the quarterly financial information.

The following should be read in conjunction with the audited consolidated financial statements included herein.

The amounts are as follows (in millions except per share amounts):

Cost of revenues

Net income (loss)

Net income attributable to non-controlling interests

Net loss attributable to Surgery Partners, Inc.

Basic net loss per share attributable to common stockholders

Diluted net loss per share attributable to common stockholders

Cost of revenues

Net income (loss)

Net income attributable to non-controlling interests

Net loss attributable to Surgery Partners, Inc.

Basic net loss per share attributable to common stockholders

Diluted net loss per share attributable to common stockholders

All other 3.8 6.6 5.2

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

Subsequent Events

On January 27, 2021, the Company entered into an underwriting agreement relating to a public offering of 7,500,000 shares (the “Firm Shares”) of the Company’s common stock, $ 0.01 par value per share, at a price to the public of $ 30.25 per share.

In addition, the Company granted the underwriters an option to purchase up to an additional 1,125,000 shares of common stock at the same price per share as the Firm Shares.

On February 1, 2021, the Company completed the public offering pursuant to which the Company sold 8,625,000 shares of common stock, resulting in net proceeds of $ 249.2 million, net of underwriting discounts and commissions.

On January 27, 2021, the Company entered into an amendment to the credit agreement governing the Revolver, dated as of January 27, 2021 (the “Amendment”), which amended and supplemented the credit agreement, dated as of August 31, 2017, to provide for an extension of the maturity date of the Revolver to February 1, 2026 and an increase in the outstanding commitments under the Revolver in an amount equal to $ 50.0 million.

The maturity extension and the additional commitments became operative on February 1, 2021, upon satisfaction by the Borrower of certain conditions precedent set forth in the Amendment, including the closing of the offering of the Firm Shares.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

4 unchanged sentences

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SIGNATURES TITLE DATE

Chief Executive Officer, Director

(Principal Executive Officer)

March 13, 2020

(Principal Executive Officer) March 10, 2021

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

March 13, 2020

(Principal Financial and Accounting Officer) March 10, 2021

/s/ Thomas F.

Executive Chairman of the Board

March 13, 2020

Executive Chairman of the Board March 10, 2021

Director March 10, 2021

Devin O'Reilly

March 13, 2020

Director March 10, 2021

/s/ Teresa DeLuca

Teresa DeLuca

March 13, 2020

Director March 10, 2021

/s/ Brent Turner

March 13, 2020

Director March 10, 2021

/s/ Andrew Kaplan

Andrew Kaplan

March 13, 2020

Director March 10, 2021

/s/ Clifford G.

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 9A. Controls and Procedures