What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-08-04 compared with 2021-05-05 · 224 added, 114 removed, 507 unchanged (40% of the section changed)

31 unchanged sentences

Redeemable preferred stock - Series A;

shares authorized, issued and outstanding - 310,000 ;

shares authorized - 310,000 ;

shares issued or outstanding - none and 310,000 , respectively;

redemption value - $ — and $ 434.5 , respectively

18 unchanged sentences

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

Three Months Ended March 31,

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

2021 2020 2021 2020

Revenues $ 543.3 $ 374.7 $ 1,055.7 $ 815.7

9 unchanged sentences

Income from equity investments ( 3.0 ) ( 2.5 ) ( 5.6 ) ( 4.5 )

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

Loss on disposals and deconsolidations, net 1.0 2.9 0.1 6.4

Transaction and integration costs 9.2 4.9 14.5 10.4

Grant funds ( 4.9 ) ( 43.1 ) ( 20.0 ) ( 43.1 )

Loss on debt extinguishment 9.6 — 9.6 —

Litigation settlement — — — 1.2

4 unchanged sentences

Income (loss) before income taxes 6.1 ( 4.5 ) 17.1 ( 28.1 )

Income tax expense (benefit) 0.2 ( 15.2 )

Income tax benefit ( 2.7 ) ( 0.6 ) ( 2.5 ) ( 15.8 )

Net income (loss) 8.8 ( 3.9 ) 19.6 ( 12.3 )

15 unchanged sentences

(Unaudited, dollars in millions)

Three Months Ended March 31,

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

2021 2020 2021 2020

Net income (loss) $ 8.8 $ ( 3.9 ) $ 19.6 $ ( 12.3 )

22 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

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

8 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 — — — — ( 26.9 ) 22.0 ( 4.9 )

Equity-based compensation ( 29 ) — 3.7 — — — 3.7

Preferred share conversion 22,609 0.2 439.5 — — — 439.7

Other comprehensive loss — — — 0.2 — — 0.2

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

— — 11.9 — — ( 6.3 ) 5.6

Distributions to non-controlling interests—non-redeemable holders — — — — — ( 22.3 ) ( 22.3 )

Balance at June 30, 2021 82,479 $ 0.8 $ 1,298.4 $ ( 54.4 ) $ ( 479.7 ) $ 762.2 $ 1,527.3

(1) Includes post acquisition date adjustments.

3 unchanged sentences

(Unaudited, dollars in millions)

Three Months Ended March 31,

Six Months Ended June 30,

Cash flows from operating activities:

Net income (loss) $ 19.6 $ ( 12.3 )

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

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

Depreciation and amortization 50.9 45.2

1 unchanged sentence

Equity-based compensation expense 9.3 6.9

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

Loss on disposals and deconsolidations, net 0.1 6.4

Loss on debt extinguishment 9.6 —

Deferred income taxes ( 3.2 ) ( 16.4 )

4 unchanged sentences

Medicare accelerated payments and deferred governmental grants ( 28.8 ) 124.7

DOJ settlement payments ( 32.2 ) ( 4.0 )

Other operating assets and liabilities 5.0 22.2

10 unchanged sentences

Payments of debt issuance costs ( 8.7 ) ( 6.5 )

Payment of premium on debt extinguishment ( 2.4 ) —

Proceeds from equity offering 260.9 —

18 unchanged sentences

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

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.

As of June 30, 2021, the Company owned or operated a portfolio of 123 surgical facilities, comprised of 106 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.

The Company owned a majority interest in 85 of the surgical facilities and consolidated 107 of these facilities for financial reporting purposes.

The Company owned a majority interest in 87 of the surgical facilities and consolidated 106 of the facilities for financial reporting purposes.

Basis of Presentation

7 unchanged sentences

All significant intercompany balances and transactions are eliminated in consolidation.

Reclassifications

Certain reclassifications have been made to the comparative periods' financial statements to conform to the current year presentation.

Use of Estimates

9 unchanged sentences

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 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 Company has received approximately $ 67 million of the grant funds distributed under the CARES Act and other governmental assistance programs, including approximately $ 1 million and $ 8 million during the three and six months ended June 30, 2021, respectively.

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

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

asked questions and other interpretive guidance issued by the United States Department of Health and Human Services ("HHS"), including in the Provider Relief Fund Reporting Portal and associated user guides.

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.

Based on guidance, the Company estimates approximately $ 4.9 million and $ 20.0 million of grant funds received qualified for recognition as a reduction in operating expenses for the three and six months ended June 30, 2021, respectively.

Amounts received, but not recognized as a reduction to operating expenses as of June 30, 2021, are reflected as a component of Medicare accelerated payments and deferred governmental grants in the condensed consolidated balance sheets as of June 30, 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.

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.

5 unchanged sentences

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 payments received were deferred and included in the condensed consolidated balance sheets.

During the six months ended June 30, 2021, approximately $ 20 million has been repaid in accordance with the terms above.

As of June 30, 2021 and December 31, 2020, the current portion of deferred accelerated payments was approximately $ 76 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.

2 unchanged sentences

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

As of both March 31, 2021 and December 31, 2020, the Company had deferred approximately $ 16.9 million.

As of both June 30, 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.

4 unchanged sentences

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

As of March 31, 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.

During the three months ended June 30, 2021, the Company divested its interest in one surgical facility and one physician practice.

As of June 30, 2021, the Company's consolidated VIEs include three surgical facilities and two physician practices.

The total assets (excluding goodwill and intangible assets, net) of the consolidated VIEs included in the accompanying condensed consolidated balance sheets as of June 30, 2021 and December 31, 2020 were $ 26.2 million and $ 27.7 million, respectively, and the total liabilities of the consolidated VIEs were $ 19.9 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 calculations.

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):

1 unchanged sentence

2021 December 31,

2020 March 31,

2020 June 30,

2021 December 31,

6 unchanged sentences

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 $ 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.

4 unchanged sentences

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

Three Months Ended March 31,

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

2021 2020 2021 2020

Patient service revenues:

15 unchanged sentences

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

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

its discount policies and historical experience.

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

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

3 unchanged sentences

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

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.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

months ended June 30, 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 March 31,

Three Months Ended June 30,

Amount % Amount %

7 unchanged sentences

Total revenues $ 543.3 $ 374.7

Six Months Ended June 30,

Amount % Amount %

Patient service revenues:

Private insurance $ 519.1 49.8 % $ 425.2 52.9 %

Government 452.6 43.5 % 316.6 39.4 %

Self-pay 31.0 3.0 % 24.0 3.0 %

38.9 3.7 % 37.9 4.7 %

Total patient service revenues 1,041.6 100.0 % 803.7 100.0 %

Other service revenues 14.1 12.0

Total revenues $ 1,055.7 $ 815.7

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

4 unchanged sentences

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.

The restrictions were released during the six months ended June 30, 2021.

Accounts Receivable

6 unchanged sentences

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

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

Amounts are classified

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The Company's policy is to collect co-payments and deductibles prior to providing medical services.

2 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 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

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

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

1 unchanged sentence

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.

A summary of the Company's acquisitions and dispositions for the six months ended June 30, 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):

A summary of activity related to goodwill for the six months ended June 30, 2021 is as follows (in millions):

Balance at December 31, 2020 $ 3,468.0

Acquisitions, including post acquisition adjustments 20.2

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.

Divestitures and deconsolidations ( 0.1 )

Balance at June 30, 2021 $ 3,488.1

A detailed evaluation of potential impairment indicators was performed as of June 30, 2021, which specifically considered the ongoing impact of the COVID-19 pandemic.

On the basis of available evidence as of June 30, 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.

1 unchanged sentence

Derivative Instruments and Hedging Activities

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

The Company records all derivatives on the balance sheet at fair value and any financing elements treated as debt instruments are recorded at amortized cost.

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.

6 unchanged sentences

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

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A summary of activity related to non-controlling interests—redeemable for the six months ended June 30, 2021 and 2020 is as follows (in millions):

Balance at beginning of period $ 306.8 $ 321.0

Net income attributable to non-controlling interests—redeemable 24.4 11.3

Acquisition and disposal of shares of non-controlling interests, net—redeemable 1.2 ( 1.6 )

Acquisition (disposal) of shares of non-controlling interests, net—redeemable 1.9 ( 1.7 )

Distributions to non-controlling interest—redeemable holders ( 20.3 ) ( 15.9 )

2 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

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.

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.

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.

9 unchanged sentences

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

The Company's effective tax rate was 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.

The Company's effective tax rate was ( 14.6 )% for the six months ended June 30, 2021 compared to 56.2 % for the six months ended June 30, 2020.

For the six months ended June 30, 2021, the effective tax rate differed from 21% due to tax benefits of $ 4.1 million related to the vesting of restricted stock awards, as well as a $ 3.0 million tax benefit related to entity divestitures.

For the six months ended June 30, 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.

5 unchanged sentences

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 Company is evaluating the impact of this ASU on its consolidated financial statements.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During the six months ended June 30, 2021, the Company acquired a controlling interest in a surgical facility in a new market and two surgical facilities in existing markets that were merged into existing facilities for aggregate cash consideration of $ 15.2 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, with $ 1.6 million allocated to goodwill.

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

Fair value of non-controlling interests 7.5

Aggregate acquisition date fair value $ 22.9

Net assets acquired:

Current assets $ 1.7

Property and equipment 1.7

Goodwill 20.0

Right-of-use operating lease assets 2.1

Current liabilities ( 0.6 )

Long-term debt ( 0.1 )

Right-of-use operating lease liabilities ( 1.9 )

Aggregate acquisition date fair value $ 22.9

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

During the three months ended March 31, 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.

During the six months ended June 30, 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 three months ended March 31, 2021.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Long-Term Debt

7 unchanged sentences

Finance lease obligations 281.7 281.2

unamortized debt issuance costs, discount and premium, net ( 15.7 ) ( 16.3 )

unamortized debt issuance costs and discounts ( 16.8 ) ( 16.3 )

Total debt 2,855.7 2,856.8

1 unchanged sentence

Total long-term debt $ 2,786.1 $ 2,792.4

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

(1) Includes unamortized fair value discount of $ 3.2 million and $ 3.7 million as of June 30, 2021 and December 31, 2020, respectively.

Revolving Credit Facility

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.

On January 27, 2021, the Company entered into an amendment to the credit agreement governing its revolving credit facility (the "Revolver"), 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.

As of June 30, 2021, the Company's availability on the Revolver was $ 163.7 million (including outstanding letters of credit of $ 6.3 million).

There were no outstanding borrowings under the Revolver as of both June 30, 2021 and December 31, 2020.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Sixth Amendment to Credit Agreement

On May 3, 2021, the Company entered into a sixth amendment to the credit agreement, which amended the credit agreement originally dated as of August 31, 2017 (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.

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 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 1.00 % per annum.

Voluntary prepayments of the New Term Loans 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).

In connection with the sixth amendment, the Company recorded debt issuance costs and discount of $ 8.9 million, and a debt extinguishment loss of $ 9.6 million, included in loss on debt extinguishment in the accompanying condensed consolidated statement of operations for the three and six months ended June 30, 2021.

The loss includes the partial write-off of unamortized debt issuance costs and discounts and a prepayment premium related to the prior existing term loans, and a portion of debt issuance costs incurred with the New Term Loans.

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

1 unchanged sentence

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

Three Months Ended March 31,

Six Months Ended June 30,

Operating lease costs $ 37.5 $ 36.3

5 unchanged sentences

Total lease costs $ 73.7 $ 67.0

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Three Months Ended March 31,

Six Months Ended June 30,

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

5 unchanged sentences

Finance leases $ 6.6 $ 8.5

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Redeemable Preferred Stock

1 unchanged sentence

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

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 May 17, 2021, the Company converted all outstanding shares of Series A Preferred Stock into approximately 22.609 million shares of common stock, $0.01 par value per share.

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

The conversion of the Series A Preferred Stock into common stock was a non-cash transaction, and therefore had no impact on the condensed consolidated statements of cash flows.

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

2 unchanged sentences

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.

Redeemable preferred stock conversion to common stock ( 439.7 )

Balance at June 30, 2021 $ —

Derivatives and Hedging Activities

5 unchanged sentences

Over the next 12 months, the Company estimates that an additional $ 25.8 million will be reclassified as an increase to interest expense.

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.

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

In May 2021, the Company entered into additional interest rate swap agreements to match the terms of the New Term Loan and effectively extend the termination date to March 31, 2025.

As of June 30, 2021, the Company had nine interest rate swaps with a total net hedged notional amount of $ 1.2 billion.

Of the nine interest rate swaps, three are pay-fixed, receive 1 mo.

LIBOR (subject to a minimum of 0.75 %) interest rate swaps designated in cash flow hedging relationships with a total notional amount of $ 1.2 billion and a termination date of March 31, 2025.

The remaining six interest rate swaps are undesignated and consist of three pay-fixed, receive 1 mo.

LIBOR (subject to a minimum of 1.00 %) interest rate swaps and three pay 1 mo.

LIBOR (subject to a minimum of 1.00 %), receive-fixed interest rate swaps with a termination date of November 30, 2023.

The pay-floating, receive-fixed swaps are designed to economically offset the undesignated pay-fixed, receive-floating swaps.

Concurrently with the May 2021 transactions, the four previously existing interest rate swap positions were amended, de-designated or terminated and replaced with the new interest rate swaps discussed above.

The Company voluntarily de-designated an aggregate notional amount of $ 435 million (the effects of which are offset by the pay-floating, receive-fixed interest rate swaps) and terminated an aggregate notional amount of $ 435 million.

No cash was exchanged between the Company and the counterparties due to the transactions described above, therefore the non-cash transactions had no impact on the condensed consolidated statements of cash flows.

The amount of unrealized losses recorded in OCI related to the de-designated and terminated notional amounts at the time of the de-designation and termination was $ 55.0 million.

This amount will be amortized to interest expense over the remaining term of the original interest rate swaps.

The liability of the de-designated and terminated notional amounts was blended into the fixed rate of the new pay-fixed interest rate swaps.

The pay-fixed, receive floating interest rate swaps entered into in May 2021 did not meet the requirements to be considered derivatives in their entirety as a result of the financing component.

Accordingly, the swaps are considered hybrid instruments, consisting of a financing element treated as a debt instrument and an embedded at-market derivative that was designated as a cash flow hedge.

Within the Company’s condensed consolidated balance sheets, the financing elements treated as debt instruments described above are carried at amortized cost and the embedded at-market derivatives and the undesignated swaps are recorded at fair value.

The cash flows related to the portion treated as debt are classified as financing activities in the condensed consolidated statements of cash flows while the

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

portion treated as an at-market derivative are classified as operating activities.

Cash settlements related to the undesignated swaps will offset and are classified as operating activities in the condensed consolidated cash flows.

The key terms of interest rate swaps outstanding are presented below:

June 30, 2021 December 31, 2020

Description Effective Date Notional Amount (in millions) Status Notional Amount (in millions) Status Maturity Date

Pay-fixed swap May 7, 2021 $ 435.0 Active $ — NA March 31, 2025

Pay-fixed swap May 7, 2021 330.0 Active — NA March 31, 2025

Pay-fixed swap May 7, 2021 435.0 Active — NA March 31, 2025

Pay-fixed swap November 30, 2018 165.0 Active — NA November 30, 2023

Pay-fixed swap November 30, 2018 120.0 Active — NA November 30, 2023

Pay-fixed swap June 28, 2019 150.0 Active — NA November 30, 2023

Receive-fixed swap April 30, 2021 ( 165.0 ) Active — NA November 30, 2023

Receive-fixed swap April 30, 2021 ( 120.0 ) Active — NA November 30, 2023

Receive-fixed swap April 30, 2021 ( 150.0 ) Active — NA November 30, 2023

Pay-fixed swap November 30, 2018 — Terminated 330.0 Active November 30, 2023

Pay-fixed swap November 30, 2018 — Terminated 240.0 Active November 30, 2023

Pay-fixed swap June 28, 2019 — Terminated 300.0 Active November 30, 2023

$ 1,200.0 $ 1,200.0

Our interest rate swap agreements, excluding the portion treated as debt, are recognized at fair value in the condensed consolidated balance sheets and are valued using pricing models that rely on market observable inputs such as yield curve data, which are classified as Level 2 inputs within the fair value hierarchy.

The following table presents the the fair values of our derivatives and their location on the condensed consolidated balance sheets (in millions):

June 30, 2021 December 31, 2020

Location Assets Liabilities Assets Liabilities

Derivatives not designated as hedging instruments

Interest rate swaps Other long-term assets $ 17.6 $ — $ — $ —

Interest rate swaps Other long-term liabilities — 17.3 — —

Derivatives in cash flow hedging relationships

Interest rate swaps Other long-term liabilities (1)

— 55.5 — 61.0

Total $ 17.6 $ 72.8 $ — $ 61.0

(1) The balance as of June 30, 2021 includes $ 52.9 million related to the financing component of the pay-fixed, receive floating interest rate swaps.

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

Three Months Ended March 31,

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

Location 2021 2020 2021 2020

Derivatives not designated as hedging instruments

Gain recognized in income Other income $ 0.2 $ — $ 0.2 $ —

Derivatives in cash flow hedging relationships

(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

Loss (gain) recognized in OCI (effective portion) $ 5.8 $ ( 1.7 ) $ 4.9 $ 26.9

Loss reclassified from accumulated OCI into income (effective portion) (1)

Interest expense, net $ 6.0 $ 5.6 $ 11.5 $ 9.0

(1) Includes amortization of accumulated OCI related to de-designated and terminated interest rate swaps of $ 3.2 million for the three and six months ended June 30, 2021.

SURGERY PARTNERS, INC.

6 unchanged sentences

shares in thousands):

Three Months Ended March 31,

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

2021 2020 2021 2020

Net loss attributable to Surgery Partners, Inc.

40 unchanged sentences

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

Total professional, general and workers' compensation claim liabilities as of March 31, 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.

Total professional, general and workers' compensation claim liabilities as of June 30, 2021 and December 31, 2020 were $ 23.2 million and $ 21.4 million, respectively.

Expected insurance recoveries of $ 10.5 million as of both June 30, 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

8 unchanged sentences

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

Under the terms of the Settlement Agreement, the Companies were required to pay $ 30.7 million plus accrued interest on April 1, 2021.

Under the terms of the Settlement Agreement, the Companies paid $ 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.

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 DOJ investigation included in litigation settlement on the condensed consolidated statement of operations.

Acquired Facilities

21 unchanged sentences

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

Assuming the Company's tax rate is 24 %, calculated as the maximum corporate federal tax rate plus three percent, throughout the remaining term of the TRA, the Company estimates the total remaining amounts payable under the TRA was approximately $ 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 $ 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 carrying value of the liability under the TRA, reflecting the discount, was $ 38.9 million and $ 37.0 million as of June 30, 2021 and December 31, 2020, respectively.

The current portion of the liability was $ 21.2 million as of both June 30, 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.

5 unchanged sentences

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 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.

The Optical Services segment for the three and six months ended June 30, 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 March 31,

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

2021 2020 2021 2020

Surgical Facility Services $ 525.8 $ 361.0 $ 1,021.6 $ 784.2

15 unchanged sentences

Transaction, integration and acquisition costs (1)

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

11.4 10.1 20.8 22.7

Loss on disposals and deconsolidations, net 1.0 2.9 0.1 6.4

Litigation settlement and other litigation costs (2)

0.8 2.3 1.8 3.8

Loss on debt extinguishment 9.6 — 9.6 —

Gain on escrow release (3)

— — — ( 0.8 )

Adjusted EBITDA $ 75.9 $ 58.2 $ 148.8 $ 104.7

(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.

(1) This amount includes transaction and integration costs of $ 9.2 million and $ 4.9 million for the three months ended June 30, 2021 and 2020, respectively.

This amount further includes start-up costs related to a de novo surgical hospital of $ 2.2 million and $ 5.2 million for the three months ended June 30, 2021 and 2020, respectively.

This amount includes transaction and integration costs of $ 14.5 million and $ 10.4 million for the six months ended June 30, 2021 and 2020, respectively.

This amount further includes start-up costs related to a de novo surgical hospital of $ 6.3 million and $ 12.3 million for the six months ended June 30, 2021 and 2020, respectively.

(2) This amount includes other litigation costs of $ 0.8 million and $ 2.3 million for the three months ended June 30, 2021 and 2020, respectively.

This amount includes other litigation costs of $ 1.8 million and $ 2.6 million for the six months ended June 30, 2021 and 2020, respectively.

This amount includes litigation settlement costs of $ 1.2 million for the six months ended June 30, 2020, with no comparable costs in the 2021 period.

(3) Included in other income in the condensed consolidated statement of operations for the six months ended June 30, 2020.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2021 December 31,

3 unchanged sentences

Total assets $ 5,620.6 $ 5,413.2

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended March 31,

Six Months Ended June 30,

Cash purchases of property and equipment:

4 unchanged sentences

Subsequent Events

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

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 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).

During August 2021, the Company purchased a controlling interest in three ASCs in new markets for a combined purchase price of $ 85.0 million.

The Company funded the purchase price with available resources.

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

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

What changed 10-Q

Item 1. Financial Statements