What changed in this filing

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Item 1. Financial Statements

2021-05-05 compared with 2020-11-04 · 183 added, 363 removed, 438 unchanged (55% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

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

September 30,

(Dollars in millions, except per share amounts)

2021 December 31,

35 unchanged sentences

shares issued and outstanding - 59,898,730 and 50,461,706 , respectively

Other stockholders' equity 100.7 296.3

Additional paid-in capital 843.3 607.9

Accumulated other comprehensive loss ( 54.6 ) ( 61.0 )

Retained deficit ( 452.8 ) ( 431.8 )

Total Surgery Partners, Inc.

7 unchanged sentences

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

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

2020 2019 2020 2019

Three Months Ended March 31,

Revenues $ 512.4 $ 441.0

9 unchanged sentences

Income from equity investments ( 2.6 ) ( 2.0 )

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

(Gain) loss on disposals and deconsolidations, net ( 0.9 ) 3.5

Transaction and integration costs 5.3 5.5

Impairment charges 33.5 — 33.5 —

Grant funds ( 15.1 ) —

Litigation settlement — 1.2

Loss on debt extinguishment — — — 11.7

Other income — ( 1.5 )

1 unchanged sentence

Operating income 64.3 23.5

Tax receivable agreement expense — — — ( 2.4 )

Interest expense, net ( 53.3 ) ( 47.1 )

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

Income (loss) before income taxes 11.0 ( 23.6 )

Income tax expense (benefit) 0.2 ( 15.2 )

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

Net income (loss) 10.8 ( 8.4 )

Net income attributable to non-controlling interests ( 31.8 ) ( 19.1 )

14 unchanged sentences

(Unaudited, dollars in millions)

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

2020 2019 2020 2019

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

Three Months Ended March 31,

Net income (loss) $ 10.8 $ ( 8.4 )

Other comprehensive income (loss), net of tax:

Derivative activity 6.4 ( 25.2 )

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

Comprehensive income (loss) 17.2 ( 33.6 )

Comprehensive income attributable to non-controlling interests ( 31.8 ) ( 19.1 )

18 unchanged sentences

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

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

Equity-based compensation 33 — 3.8 — — — 3.8

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

Other comprehensive income — — — 7.3 — — 7.3

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

— — ( 1.2 ) — — 2.9 1.7

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

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

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

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

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

Other comprehensive income — — — 3.3 — — 3.3

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

— — ( 37.9 ) — — 7.6 ( 30.3 )

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

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

(1) Includes post acquisition date adjustments.

See notes to unaudited condensed consolidated financial statements.

SURGERY PARTNERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited, dollars in millions, shares in thousands)

Common Stock Additional

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

Non-Redeemable Total

Shares Amount

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

2 unchanged sentences

Preferred dividends — — ( 10.3 ) — — — ( 10.3 )

Equity offering 8,625 0.1 248.2 — — — 248.3

Other comprehensive loss — — — 6.4 — — 6.4

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

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

2 unchanged sentences

Balance at March 31, 2021 59,899 $ 0.6 $ 843.3 $ ( 54.6 ) $ ( 452.8 ) $ 768.8 $ 1,105.3

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

Equity-based compensation 117 — 3.1 — — — 3.1

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

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

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

— — 9.6 — — ( 7.6 ) 2.0

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

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

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

Equity-based compensation 3 — 2.7 — — — 2.7

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

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

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

— — ( 1.1 ) — — ( 7.9 ) ( 9.0 )

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

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

(1) Includes post acquisition date adjustments.

3 unchanged sentences

(Unaudited, dollars in millions)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flows from operating activities:

Net (loss) income $ ( 46.6 ) $ 22.5

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Net income (loss) $ 10.8 $ ( 8.4 )

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization 25.7 21.8

1 unchanged sentence

Equity-based compensation expense 5.2 3.5

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

Impairment charges 33.5 —

Loss on debt extinguishment — 11.7

(Gain) loss on disposals and deconsolidations, net ( 0.9 ) 3.5

Deferred income taxes ( 0.1 ) ( 15.5 )

10 unchanged sentences

Proceeds from disposals of facilities and other assets 2.3 9.4

Purchases of equity investments — ( 15.2 )

Other investing activities — 0.2

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

Net cash used in investing activities ( 14.3 ) ( 7.7 )

Cash flows from financing activities:

2 unchanged sentences

Payments of debt issuance costs ( 1.1 ) —

Payment of premium on debt extinguishment — ( 17.8 )

Proceeds from equity offering 260.9 —

Payments of equity offering costs ( 12.6 ) —

Payment of preferred dividends ( 5.1 ) —

Distributions to non-controlling interest holders ( 31.3 ) ( 24.0 )

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

Receipts (payments) related to ownership transactions with non-controlling interest holders 1.0 ( 0.4 )

Other financing activities ( 8.0 ) ( 0.8 )

Net cash provided by (used in) financing activities 112.5 ( 115.3 )

Net increase (decrease) in cash, cash equivalents and restricted cash 357.3 ( 73.0 )

Net cash provided by financing activities 187.8 80.4

Net increase in cash, cash equivalents and restricted cash 223.7 101.9

Cash, cash equivalents and restricted cash at beginning of period 318.2 93.0

7 unchanged sentences

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

Ancillary services are comprised of 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.

Unless the context otherwise indicates, Surgery Partners, Inc.

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

As of September 30, 2020, the Company owned or operated a portfolio of 126 surgical facilities, comprised of 110 ASCs and 16 surgical hospitals in 30 states.

As of March 31, 2021, the Company owned or operated a portfolio of 127 surgical facilities, comprised of 110 ASCs and 17 surgical hospitals in 30 states.

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

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

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

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

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

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

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

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

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

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

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

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

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

As part of the CARES Act, the United States government announced that it would offer relief to eligible health care providers, including distribution 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 $ 53 million of the grant funds distributed under

The Company has received approximately $ 66 million of the grant funds distributed under the CARES Act and other governmental assistance programs, including approximately $ 7 million during the three months ended March 31, 2021.

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 asked questions and other interpretive guidance issued by the United States Department of Health and Human Services ("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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

On September 19, 2020, the U.S.

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

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

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

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

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

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

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

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

Please refer to Note 12.

"Subsequent Events" for additional information.

COVID-19 and the Company’s results of operations during such period compared to the Company’s budget.

This guidance sets 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.

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

There is limited guidance on the allocation of other grants distributed (e.g., not identified as "targeted").

The Company adopted a methodology that considered the allocation or transfer of the Company’s portion of projected unused grants, based on ownership interests, to subsidiaries.

The methodology was consistently applied for all grants received.

The Company may adjust its methodology in the future if further guidance is issued by HHS.

The Company estimates approximately $ 15.1 million of grant funds received qualified for recognition as a reduction in operating expenses for the three months ended March 31, 2021.

Amounts received, but not recognized as a reduction to operating expenses as of March 31, 2021, are reflected as a component of Medicare accelerated payments and deferred governmental grants in the condensed consolidated balance sheets as of March 31, 2021, and such unrecognized amounts may be recognized as a reduction in operating expenses in future periods if the underlying conditions for recognition are met.

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

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

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

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

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

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

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

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 allowed for most providers and suppliers, including the Company’s surgical hospitals and ASCs to request an advance payment of anticipated Medicare revenues.

Under the current terms of the program, repayment begins one year from the date that payment under the program was received, and 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.

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

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

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

The Company did no t receive any Medicare accelerated payments during the three months ended September 30, 2020, and does not expect to receive additional Medicare accelerated payments.

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

Any outstanding amounts due at the end of the repayment period are subject to interest at a rate of 4%.

The Company received approximately $ 120 million of accelerated payments during the year ended December 31, 2020.

These accelerated payments received were deferred.

As of March 31, 2021 and December 31, 2020, the current portion was approximately $ 104 million and $ 95 million, respectively, and is included as a component of Medicare accelerated payments and deferred governmental grants in the condensed consolidated balance sheets.

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 provided for the deferral of the Company's portion of social security payroll taxes during 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 September 30, 2020, the Company has deferred approximately $ 7.3 million, included as a component of accrued payroll and benefits in the condensed consolidated balance sheets as of September 30, 2020.

As of both March 31, 2021 and December 31, 2020, the Company had 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 condensed consolidated balance sheets.

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.

1 unchanged sentence

The condensed consolidated financial statements include the accounts of variable interest entities ("VIE") in which the Company is the primary beneficiary under the provisions of the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification 810, " Consolidation ".

The Company has the power to direct the activities that most significantly impact a VIEs economic performance.

The Company has the power to direct the activities that most significantly impact a VIE's economic performance.

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

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

As of March 31, 2021, the Company's consolidated VIEs 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 condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020 were $ 28.0 million and $ 27.7 million, respectively, and the total liabilities of the consolidated VIEs were $ 21.4 million and $ 21.1 million, respectively.

Fair Value of Financial Instruments

5 unchanged sentences

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

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Carrying Amount Fair Value

September 30,

2021 December 31,

2019 September 30,

2020 March 31,

2021 December 31,

4 unchanged sentences

$ 545.0 $ 545.0 $ 598.8 $ 596.8

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

The carrying amounts related to the Company's other long-term debt obligations, including finance lease obligations, approximate their fair values under Level 3 inputs.

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

The carrying amounts related to the Company's other long-term debt obligations, including finance lease obligations, approximate their fair values based on Level 3 inputs.

The Company has entered into certain interest rate swap agreements (see Note 6.

"Derivatives and Hedging Activities").

The fair value of these derivative instruments was $ 65.3 million and $ 50.7 million at September 30, 2020 and December 31, 2019, respectively, and was included in other long-term liabilities in the condensed consolidated balance sheets.

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

The fair value of these derivative instruments was $ 54.6 million and $ 61.0 million at March 31, 2021 and December 31, 2020, respectively, and was included in other long-term liabilities in the condensed consolidated balance sheets.

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

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

The Company recognizes revenues in the period in which our obligations to provide health care services are satisfied and reports the amount that reflects the consideration the Company expects to be entitled to receive.

The Company recognizes revenues in the period in which its obligations to provide health care services are satisfied and reports the amount that reflects the consideration the Company expects to be entitled to receive.

The contractual relationships with patients, in most cases, also involve a third-party payor (e.g., Medicare, Medicaid and private insurance organizations, including plans offered through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided by or negotiated with the third-party payors.

1 unchanged sentence

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

2020 2019 2020 2019

Three Months Ended March 31,

Patient service revenues:

1 unchanged sentence

Ancillary services revenues 3.2 % 3.9 %

98.8 % 98.3 % 98.6 % 98.6 %

Total patient service revenues 98.7 % 98.6 %

Other service revenues 1.3 % 1.4 %

Optical services revenues 0.2 % 0.2 % 0.2 % 0.2 %

Other revenues 1.0 % 1.5 % 1.2 % 1.2 %

1.2 % 1.7 % 1.4 % 1.4 %

Total revenues 100.0 % 100.0 %

10 unchanged sentences

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

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

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

its discount policies and historical experience.

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

Other service revenues.

Optical service revenues consist of handling charges billed to the members of the Company's optical products purchasing organization.

The Company's optical products purchasing organization negotiates volume buying discounts with optical products manufacturers.

The buying discounts and any handling charges billed to the members of the buying group represent the revenue recognized for financial reporting purposes.

The Company satisfies the performance obligation and recognizes revenue when the orders are shipped to members.

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.

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.

Other service 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.

These agreements typically require the Company to provide recurring management services over a multi-year period, which are billed and collected on a monthly basis.

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended March 31, 2020, other service revenues also includes optical service revenues, which consisted of handling charges billed to the members of the Company's optical products purchasing organization.

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

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

Three Months Ended September 30,

Amount % Amount %

Patient service revenues:

Private insurance $ 257.4 52.6 % $ 236.3 53.2 %

Government 188.8 38.5 % 175.4 39.5 %

Self-pay 19.4 4.0 % 11.8 2.7 %

24.2 4.9 % 21.0 4.6 %

Total patient service revenues 489.8 100.0 % 444.5 100.0 %

Other service revenues:

Optical services revenues 0.9 0.9

Other revenues 5.4 6.6

Total revenues $ 496.1 $ 452.0

Nine Months Ended September 30,

Three Months Ended March 31,

Amount % Amount %

6 unchanged sentences

Other service revenues 6.7 6.4

Optical services revenues 2.2 3.0

Other revenues 16.1 16.4

Total revenues $ 512.4 $ 441.0

3 unchanged sentences

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

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

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

At December 31, 2020, cash, cash equivalents and restricted cash reported within the condensed consolidated statement of cash flows includes $ 0.3 million of restricted investments, which are reflected in other long-term assets in the condensed consolidated balance sheets.

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

The restrictions were released during the three months ended March 31, 2021.

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.

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 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.

2 unchanged sentences

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020 and December 31, 2019, the Company had a net third-party Medicaid settlements liability of $ 15.7 million and $ 5.6 million, respectively, included in other current liabilities in the condensed consolidated balance sheets.

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

5 unchanged sentences

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.

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

A summary of the Company's acquisitions and dispositions for the three months ended March 31, 2021 is included in Note 2.

"Acquisitions."

A summary of activity related to goodwill for the three months ended March 31, 2021 is as follows (in millions):

Balance at December 31, 2020 $ 3,468.0

Acquisitions, including post acquisition adjustments 2.0

Balance at March 31, 2021 $ 3,470.0

A detailed evaluation of potential impairment indicators was performed as of March 31, 2021, which specifically considered the ongoing impact of the COVID-19 pandemic.

On the basis of available evidence as of March 31, 2021, no indicators of impairment were identified.

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

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

Derivative Instruments and Hedging Activities

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

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

A summary of activity related to non-controlling interests—redeemable for the three months ended March 31, 2021 and 2020 is as follows (in millions):

Balance at beginning of period $ 306.8 $ 321.0

5 unchanged sentences

Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

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

Deferred tax assets and liabilities are measured using enacted tax rates expected

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

1 unchanged sentence

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

The carrying value of the net deferred tax assets

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

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

Based upon the application of interim accounting guidance, the tax rate as a percentage of net income after income attributable to non-controlling interests will vary based upon the relative net income from period to period.

The Company's effective tax rate was 1.8 % for the three months ended March 31, 2021 compared to 64.4 % for the three months ended March 31, 2020.

For the three months ended March 31, 2021, the effective tax rate differed from 21% due to tax benefits of $ 2.2 million related to the vesting of restricted stock awards.

For the three months ended March 31, 2020, the effective tax rate differed from 21% due to tax benefits of $ 11.9 million attributable to (a) the release of federal and state valuation allowances on the Company’s Internal Revenue Code Section 163(j) interest carryforwards as a result of the increase in deductible interest expense allowed under the CARES Act, and (b) the Settlement Agreement, as defined in Note 9.

"Commitments and Contingencies." Based upon the application of interim accounting guidance, the tax rate as a percentage of net income after income attributable to non-controlling interests will vary based upon the relative net income from period to period.

Recent Accounting Pronouncements

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

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

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.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Acquisitions and Disposals

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

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

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

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

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

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

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

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

During the three months ended March 31, 2021, the Company acquired two surgical facilities in existing markets that were merged into existing facilities for cash consideration of $ 2.1 million, net of cash acquired.

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.

The aggregate amounts preliminarily recognized for each major class of assets acquired and liabilities assumed for the acquisitions are as follows (in millions):

Total consideration $ 18.6

Fair value of non-controlling interests 6.7

Aggregate acquisition date fair value $ 25.3

Net assets acquired:

Current assets $ 1.9

Property and equipment 5.8

Goodwill 23.8

Right-of-use operating lease assets 10.7

Current liabilities ( 2.0 )

Long-term debt, less current maturities ( 4.6 )

Right-of-use operating lease liabilities ( 10.3 )

Aggregate acquisition date fair value $ 25.3

The total consideration was allocated to the assets acquired and liabilities assumed based upon the respective acquisition date fair values, with $ 1.6 million allocated to goodwill.

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

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

During the three months ended March 31, 2021, 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 2020.

The goodwill acquired was allocated to the Company's Surgical Facility services reportable segment.

The results of operations of the acquisitions were included in the Company’s results of operations beginning on the dates of acquisition and were not considered significant for the nine months ended September 30, 2020.

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

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

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

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

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

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

"Acquisitions and Disposals").

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Balance at December 31, 2019 $ 3,402.4

Acquisitions, including post acquisition adjustments 24.9

Divestitures ( 49.2 )

Impairment charges ( 33.5 )

Balance at September 30, 2020 $ 3,344.6

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

"Acquisitions and Disposals."

SURGERY PARTNERS, INC.

2 unchanged sentences

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

September 30,

2021 December 31,

1 unchanged sentence

$ 1,535.7 $ 1,539.4

Senior secured revolving credit facility — —

6.750 % senior unsecured notes due 2025

6 unchanged sentences

Total long-term debt $ 2,789.5 $ 2,792.4

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

(1) Includes unamortized fair value discount of $ 3.4 million and $ 3.7 million as of March 31, 2021 and December 31, 2020, respectively.

Revolving Credit Facility

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

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

As of September 30, 2020, the Company's availability on the Revolver was $ 112.5 million (including outstanding letters of credit of $ 7.5 million).

Third Amendment to Credit Agreement

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

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

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

Second Incremental Term Loan Amendmen t

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

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

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

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

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

10.000 % Senior Unsecured Notes due 2027

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On July 30, 2020, the Company completed the issuance and sale of $ 115.0 million in aggregate principal amount of senior unsecured notes due 2027 at 100.75 % of the principal amount.

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

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

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

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

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

As of March 31, 2021, the Company's availability on the Revolver was $ 162.5 million (including outstanding letters of credit of $ 7.5 million).

There were no outstanding borrowings under the Revolver as of both March 31, 2021 and December 31, 2020.

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

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

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

The Company has elected to account for these COVID-19 related concessions as though the enforceable rights and obligations for those concessions are explicit within the underlying contract.

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

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

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

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

Nine Months Ended September 30,

Three Months Ended March 31,

Operating lease costs $ 18.6 $ 18.2

5 unchanged sentences

Total lease costs $ 37.2 $ 33.5

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Nine Months Ended September 30,

Three Months Ended March 31,

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

7 unchanged sentences

On August 31, 2017, the Company issued 310,000 shares of Series A Preferred Stock to Bain Capital Private Equity, L.P.

at a purchase price of $ 1,000 per share for an aggregate purchase price of $ 310.0 million.

("Bain Capital") at a purchase price of $ 1,000 per share for an aggregate purchase price of $ 310.0 million.

A summary of activity related to the Series A Preferred Stock follows (in millions):

Balance at December 31, 2019 $ 434.5

Dividends accrued (there were no cash dividends declared)

Balance at September 30, 2020 $ 424.2

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

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Dividends accrued 10.3

Dividends declared ( 5.1 )

Balance at March 31, 2021 $ 439.7

There were no unpaid cash dividends declared at both March 31, 2021 and December 31, 2020.

The aggregate and per share amounts of unpaid cumulative preferred dividends as of March 31, 2021 was $ 114.1 million and $ 368.20 , respectively.

On April 20, 2021, the Company announced that it sent notice to Bain Capital of its intent to convert all of the outstanding shares of Series A Preferred Stock into shares of common stock of the Company on May 17, 2021.

"Subsequent Events" for further discussion.

Derivatives and Hedging Activities

1 unchanged sentence

To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy.

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

During 2020 and 2021, 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 ("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.

1 unchanged sentence

Over the next 12 months, the Company estimates that an additional $ 21.9 million will be reclassified as an increase to interest expense.

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

As of March 31, 2021, the Company had four interest rate swaps with a notional amount of $ 1.2 billion and a termination date of November 30, 2023.

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

1 unchanged sentence

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

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

2020 2019 2020 2019

Three Months Ended March 31,

Derivatives in cash flow hedging relationships:

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

(Gain) loss recognized in OCI (effective portion) $ ( 0.9 ) $ 28.6

Loss reclassified from accumulated OCI to interest expense (effective portion) $ 5.5 $ 3.4

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Earnings Per Share

4 unchanged sentences

shares in thousands):

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

2020 2019 2020 2019

Three Months Ended March 31,

Net loss attributable to Surgery Partners, Inc.

14 unchanged sentences

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 (including the Firm Shares and the option shares), resulting in gross proceeds of $ 260.9 million.

In connection with the offering, the Company incurred underwriting discounts, commissions and other related costs of $ 12.6 million, which were recognized as a direct reduction of proceeds received .

Other Current Liabilities

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

September 30,

2021 December 31,

2 unchanged sentences

Interest payable 31.5 24.5

Tax receivable agreement liability 21.2 21.2

Amounts due to patients and payors 22.4 20.9

Cost report liabilities 21.7 16.9

Accrued expenses and other 72.7 62.1

2 unchanged sentences

"Commitments and Contingencies" for further discussion.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Commitments and Contingencies

5 unchanged sentences

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

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

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

Total professional, general and workers' compensation claim liabilities as of March 31, 2021 and December 31, 2020 were $ 22.1 million and $ 21.4 million, respectively.

Expected insurance recoveries of $ 10.5 million as of both March 31, 2021 and December 31, 2020, are included as a component of other current assets and other long-term assets in the condensed consolidated balance sheets.

Laws and Regulations

4 unchanged sentences

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 False Claims Act (the "FCA") for documents and information dating back to January 1, 2010 relating to the medical necessity of certain drug tests conducted by the Company’s physicians and submitted to laboratories owned and operated by the Company.

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

CMS lifted the suspension as of December 18, 2019.

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.

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

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.

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

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Parties and participating states.

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

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

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

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

During the nine months ended September 30, 2020, the Company recorded an additional litigation-related charge of $ 1.2 million relating to the resolution of the Covered Conduct on the condensed consolidated statement of operations.

Under the Settlement Agreement, the U.S.

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

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

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

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

Under the terms of the Settlement Agreement, the Companies were required to pay $ 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.

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

Acquired Facilities

5 unchanged sentences

Management believes, however, that it will be able to adjust the Company's operations so as to be in compliance with any statutory or regulatory provision as may be applicable.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Potential Physician Investor Liability

6 unchanged sentences

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

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

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

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

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

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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.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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 as of both March 31, 2021 and December 31, 2020.

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

The carrying value of the liability under the TRA, reflecting the discount, was $ 52.5 million and $ 48.7 million as of September 30, 2020 and December 31, 2019, respectively.

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

The carrying value of the liability under the TRA, reflecting the discount, was $ 37.9 million and $ 37.0 million as of March 31, 2021 and December 31, 2020, respectively.

The current portion of the liability was $ 21.2 million as of both March 31, 2021 and December 31, 2020, and is included as a component of other current liabilities in the condensed consolidated balance sheets.

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Segment Reporting

The Company operates in three major lines of business that are also the Company's reportable operating segments - the operation of surgical facilities, the operation of ancillary services and the operation of optical services.

The Company currently operates in two major lines of business that are also the Company's reportable operating segments - the operation of surgical facilities and the operation of ancillary services.

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

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.

The Optical Services segment for the three months ended March 31, 2020 reflected in the table below consisted of an optical products group purchasing organization, which was sold on December 31, 2020.

"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):

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

2020 2019 2020 2019

Three Months Ended March 31,

Surgical Facility Services $ 495.8 $ 423.2

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Reconciliation of Adjusted EBITDA:

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

Income (loss) before income taxes $ 11.0 $ ( 23.6 )

Net income attributable to non-controlling interests ( 31.8 ) ( 19.1 )

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Transaction, integration and acquisition costs (1)

7.5 5.3 30.2 16.8

Impairment charges 33.5 — 33.5 —

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

(Gain) loss on disposals and deconsolidations, net ( 0.9 ) 3.5

Litigation settlement and other litigation costs (2)

1.1 2.8 4.9 2.8

Gain on escrow release (3)

— — ( 0.8 ) —

Loss on debt extinguishment — — — 11.7

Tax receivable agreement expense — — — 2.4

Adjusted EBITDA $ 72.9 $ 46.5

Impact of grant funds (4)

5.4 — ( 21.9 ) —

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

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

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

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

September 30,

(1) This amount includes transaction and integration costs of $ 5.3 million and $ 5.5 million for the three months ended March 31, 2021 and 2020, respectively.

This amount further includes start-up costs related to a de novo surgical hospital of $ 4.1 million and $ 7.1 million for the three months ended March 31, 2021 and 2020, respectively.

(2) This amount includes other litigation costs of $ 1.0 million for the three months ended March 31, 2021.

This amount includes litigation settlement costs of $ 1.2 million and other litigation costs of $ 0.3 million for the three months ended March 31, 2020.

(3) Included in other income in the condensed consolidated statement of operations for the three months ended March 31, 2020, with no comparable gain in the same 2021 period.

2021 December 31,

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Ancillary Services 34.7 35.0

Optical Services 14.2 17.7

All other 638.0 415.8

Total assets $ 5,639.0 $ 5,413.2

Nine Months Ended September 30,

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended March 31,

Cash purchases of property and equipment:

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Subsequent Events

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

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

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

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

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

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

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

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

Pursuant to the Certificate of Designations, Preferences, Rights and Limitations of 10.00 % Series A Convertible Perpetual Participating Preferred Stock of Surgery Partners, Inc.

(the “Certificate of Designation”), the Company may require the conversion of all, but not less than all, of the Series A Preferred Stock pursuant to the terms and conditions of the Certificate of Designation, after the second anniversary of the date of issuance, if the volume weighted average closing price of the Common Stock for any twenty out of thirty consecutive trading days prior to such date, equals or exceeds $ 42.00 per share.

In accordance with such provision, on April 20, 2021, the Company announced that it sent notice to Bain Capital of its intent to convert all of the outstanding shares of Series A Preferred Stock into approximately 22.609 million shares of common stock, par value $ 0.01 per share, of the Company on May 17, 2021.

Following the conversion, no shares of Series A Preferred Stock will remain outstanding.

On May 3, 2021, SP Holdco I, Inc., a Delaware corporation (“Holdings”), and Surgery Center Holdings, Inc., a Delaware corporation (the “Borrower”) and certain wholly-owned subsidiaries of the Borrower party thereto from time to time, entered into a sixth amendment to credit agreement, dated as of May 3, 2021 (the “Sixth Amendment”), with Jefferies Finance LLC, as administrative agent and collateral agent, and the other financial institutions and lenders party thereto, which amended the credit agreement, originally dated as of August 31, 2017, by and among the Borrower, Holdings, certain wholly-owned subsidiaries of the Borrower party thereto from time to time, Jefferies Finance LLC, as administrative agent and collateral agent, and the other financial institutions party thereto from time to time (as amended prior to May 3, 2021) (the “Credit Agreement”).

The Sixth Amendment provides for, among other things, a new tranche of term loans under the Credit Agreement in an aggregate original principal amount of approximately $ 1.545 billion (the “New Term Loans”), which New Term Loans replace or refinance in full all of the existing term loans outstanding under the Credit Agreement (as in effect immediately prior to the Sixth Amendment), all as further set forth in the Sixth Amendment.

The New Term Loans mature on August 31, 2026 (or, if at least $ 185 million of the Borrower’s 6.750 % senior unsecured notes due 2025 shall have not either been repaid, repurchased or redeemed or refinanced with indebtedness having a maturity date not earlier than 91 days after August 31, 2026 by no later than April 1, 2025, then April 1, 2025).

The New Term Loans shall bear interest at a rate per annum equal to (x) LIBOR plus a margin of 3.75 % per annum (LIBOR with respect to the New Term Loans shall be subject to a floor of 0.75 %) or (y) an alternate base rate (which will be the highest of (i) the prime rate, (ii) 0.5 % per annum above the federal funds effective rate and (iii) one-month LIBOR plus 1.00 % per annum (the alternate base rate with respect to the New Term Loans shall be subject to a floor of 1.75 %)) plus a margin of 2.75 % per annum.

The New Term Loans are subject to quarterly amortization in an aggregate original principal amount of approximately 1.0 % per annum.

Voluntary prepayments of the New Term Loan are permitted, in whole or in part, with prior notice, without premium or penalty (except LIBOR breakage costs and a call premium in the case of certain repricing events within a specified period of time after May 3, 2021, as further set forth in the Sixth Amendment).

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

What changed 10-Q

Item 1. Financial Statements