What changed in this filing

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Item 1. Financial Statements

2021-11-03 compared with 2021-08-04 · 192 added, 133 removed, 598 unchanged (35% of the section changed)

3 unchanged sentences

(Dollars in millions, except per share amounts)

September 30,

2021 December 31,

48 unchanged sentences

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

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

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

2021 2020 2021 2020

12 unchanged sentences

Transaction and integration costs 10.2 5.4 24.7 15.8

Impairment charges — 33.5 — 33.5

Grant funds — 9.9 ( 20.0 ) ( 33.2 )

Loss on debt extinguishment 9.6 — 9.6 —

(Gain) loss on debt extinguishment ( 0.5 ) — 9.1 —

Litigation settlement — — — 1.2

4 unchanged sentences

Income (loss) before income taxes 9.4 ( 33.0 ) 26.5 ( 61.1 )

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

Income tax expense (benefit) 1.2 1.3 ( 1.3 ) ( 14.5 )

Net income (loss) 8.2 ( 34.3 ) 27.8 ( 46.6 )

15 unchanged sentences

(Unaudited, dollars in millions)

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

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

2021 2020 2021 2020

18 unchanged sentences

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

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

Equity offering 8,625 0.1 248.2 — — — 248.3

Other comprehensive income — — — 6.4 — — 6.4

Acquisition and disposal of shares of non-controlling interests, net — — 0.3 — — 2.0 2.3

— — ( 0.7 ) — — 1.4 0.7

Distributions to non-controlling interests—non-redeemable holders — — — — — ( 20.8 ) ( 20.8 )

2 unchanged sentences

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

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

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

Other comprehensive income — — — 0.2 — — 0.2

Acquisition and disposal of shares of non-controlling interests, net — — 11.9 — — ( 6.3 ) 5.6

— — ( 1.2 ) — — 2.9 1.7

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

Net (loss) income — — — — ( 22.9 ) 21.7 ( 1.2 )

Equity-based compensation ( 21 ) — 4.1 — — — 4.1

Other comprehensive income — — — 6.5 — — 6.5

Acquisition and disposal of shares of non-controlling interests, net — — 3.5 — — 33.6 37.1

Distributions to non-controlling interests—non-redeemable holders — — — — — ( 21.8 ) ( 21.8 )

Balance at September 30, 2021 82,458 $ 0.8 $ 1,306.0 $ ( 47.9 ) $ ( 502.6 ) $ 795.7 $ 1,552.0

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, 2019 49,299 $ 0.5 $ 662.7 $ ( 50.7 ) $ ( 315.7 ) $ 686.6 $ 983.4

2 unchanged sentences

Preferred dividends — — ( 9.5 ) — — — ( 9.5 )

Equity offering 8,625 0.1 248.2 — — — 248.3

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

Acquisition and disposal of shares of non-controlling interests, net — — ( 0.7 ) — — 1.4 0.7

— — 0.3 — — 2.0 2.3

Distributions to non-controlling interests—non-redeemable holders — — — — — ( 14.9 ) ( 14.9 )

2 unchanged sentences

Equity-based compensation 33 — 3.8 — — — 3.8

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

Other comprehensive loss — — — 0.2 — — 0.2

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

Other comprehensive income — — — 7.3 — — 7.3

Acquisition and disposal of shares of non-controlling interests, net — — ( 1.2 ) — — 2.9 1.7

— — 11.9 — — ( 6.3 ) 5.6

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

(1) Includes post acquisition date adjustments.

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 — — ( 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

See notes to unaudited condensed consolidated financial statements.

2 unchanged sentences

(Unaudited, dollars in millions)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from operating activities:

5 unchanged sentences

Loss on disposals and deconsolidations, net 2.0 7.1

Impairment charges — 33.5

Loss on debt extinguishment 9.1 —

13 unchanged sentences

Other investing activities 0.3 0.5

Net cash used in investing activities ( 40.7 ) ( 22.5 )

Net cash (used in) provided by investing activities ( 141.7 ) 6.8

Cash flows from financing activities:

2 unchanged sentences

Payments of debt issuance costs ( 11.7 ) ( 8.3 )

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 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.

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

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

18 unchanged sentences

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 continue to improve as states re-open and allow for non-emergent procedures.

Although the Company cannot provide any certainty regarding the length and severity of the impact of the COVID-19 pandemic, surgical case volumes continue to improve in 2021 as government restrictions ease and public sentiment changes.

The Company has implemented new clinical safety measures to provide a safe environment for its patients, surgeons and employees.

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.

1 unchanged sentence

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

The Company did no t receive any grant funds during the three months ended September 30, 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.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

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 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.

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.

Based on guidance, the Company estimates approximately $ 20.0 million of grant funds received qualified for recognition as a reduction in operating expenses for the nine months ended September 30, 2021.

Amounts received, but not recognized as a reduction to operating expenses, are reflected as a component of Medicare accelerated payments and deferred governmental grants in the condensed consolidated balance sheets as of both September 30, 2021 and December 31, 2020.

Any unrecognized amounts may be recognized as a reduction in operating expenses in subsequent 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.

1 unchanged sentence

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.

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.

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.

During the three and nine months ended September 30, 2021, approximately $ 18 million and $ 38 million, respectively, has been repaid in accordance with the terms of the program.

These repayments are included as a component of the change in Medicare accelerated payments and deferred government grants in the condensed consolidated statements of cash flows.

Under these terms, repayment started one year after the initial funding by offsetting 25% of new claims paid by CMS.

After 11 months of repayment at this level, the repayments will increase to 50% of new claims paid by CMS for a period of six months.

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

As of September 30, 2021 and December 31, 2020, the current portion of deferred accelerated payments was approximately $ 80 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 condensed consolidated 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.

As of both June 30, 2021 and December 31, 2020, the Company had deferred approximately $ 16.9 million.

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

As of both September 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.

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.

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

Variable Interest Entities

2 unchanged sentences

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

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.

As of September 30, 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 September 30, 2021 and December 31, 2020 were $ 26.7 million and $ 27.7 million, respectively, and the total liabilities of the consolidated VIEs were $ 19.1 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):

Carrying Amount Fair Value

September 30,

2021 December 31,

2020 June 30,

2020 September 30,

2021 December 31,

12 unchanged sentences

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

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

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

2021 2020 2021 2020

19 unchanged sentences

Other service revenues.

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

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.

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.

For the three and nine months ended September 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 June 30,

Three Months Ended September 30,

Amount % Amount %

7 unchanged sentences

Total revenues $ 559.2 $ 496.1

Six Months Ended June 30,

Nine Months Ended September 30,

Amount % Amount %

13 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 six months ended June 30, 2021.

The restrictions were released during the nine months ended September 30, 2021.

Accounts Receivable

4 unchanged sentences

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

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

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

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

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.

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

6 unchanged sentences

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

A summary of the Company's acquisitions and dispositions for the six months ended June 30, 2021 is included in Note 2.

A summary of the Company's acquisitions and dispositions for the nine months ended September 30, 2021 is included in Note 2.

"Acquisitions."

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

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

Balance at December 31, 2020 $ 3,468.0

1 unchanged sentence

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.

Balance at September 30, 2021 $ 3,613.6

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

On the basis of available evidence as of September 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 material 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.

11 unchanged sentences

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):

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

Balance at beginning of period $ 306.8 $ 321.0

17 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 ( 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.

The Company's effective tax rate was ( 4.9 )% for the nine months ended September 30, 2021 compared to 23.7 % for the nine months ended September 30, 2020.

For the nine months ended September 30, 2021, the effective tax rate differed from 21% primarily due to discrete tax benefits of (a) $ 4.4 million related to the vesting of restricted stock awards, and (b) $ 3.0 million related to entity divestitures.

For the nine months ended September 30, 2020, the effective tax rate differed from 21% primarily due to (a) discrete tax benefits of $ 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 9.

"Commitments and Contingencies," being classified as "restitution" for income tax purposes, and (b) a discrete tax expense of $ 5.0 million attributable to the 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.

Recent Accounting Pronouncements

7 unchanged sentences

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.

During the nine months ended September 30, 2021, the Company acquired controlling interests in four surgical facilities in new markets and two surgical facilities in existing markets that were merged into existing facilities for aggregate cash consideration of $ 101.0 million, net of cash acquired.

The cash consideration was funded through available resources.

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

8 unchanged sentences

Right-of-use operating lease assets 8.2

Other long-term assets 0.1

Current liabilities ( 8.2 )

3 unchanged sentences

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

During the six months ended June 30, 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 nine months ended September 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 six months ended June 30, 2021.

Long-Term Debt

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

September 30,

2021 December 31,

9 unchanged sentences

Total long-term debt $ 2,791.9 $ 2,792.4

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

(1) Includes unamortized fair value discount of $ 3.1 million and $ 3.7 million as of September 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"), 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 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.

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 (the "Credit Agreement"), 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 effective on February 1, 2021.

As of September 30, 2021,

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

the Company's availability on the Revolver was $ 163.0 million (including outstanding letters of credit of $ 7.0 million).

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

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”).

On May 3, 2021, the Company entered into a sixth amendment to 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.

3 unchanged sentences

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.

In connection with the sixth amendment, the Company recorded debt issuance costs and discount of $ 11.9 million, and a debt extinguishment loss of $ 9.1 million, included in loss on debt extinguishment in the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2021.

The loss includes the partial write-off of unamortized debt issuance costs and discounts 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):

Six Months Ended June 30,

Nine Months Ended September 30,

Operating lease costs $ 56.6 $ 54.9

6 unchanged sentences

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

Six Months Ended June 30,

Nine Months Ended September 30,

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

11 unchanged sentences

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.

(the “Certificate of Designation”), the Company was permitted to 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.

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

4 unchanged sentences

Redeemable preferred stock conversion to common stock ( 439.7 )

Balance at June 30, 2021 $ —

Balance at September 30, 2021 $ —

Derivatives and Hedging Activities

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements.

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

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

During 2021 and 2020, such derivatives have been used to hedge the variable cash flows associated with existing variable-rate debt.

3 unchanged sentences

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.

As of September 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-Month 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-Month LIBOR (subject to a minimum of 1.00 %) interest rate swaps and three pay 1-Month 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.

13 unchanged sentences

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

In September 2021, the Company entered into interest rate cap agreements to more effectively hedge the interest rate risk.

As of September 30, 2021, the Company had two interest rate caps with a total hedged notional amount of $ 337.5 million, and each has a termination date of March 31, 2025.

Within the Company’s condensed consolidated balance sheets, the interest rate caps are recorded at fair value.

The cash flows related to the interest rate caps are classified as operating activities in the condensed consolidated statements of cash flows.

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

September 30, 2021 December 31, 2020

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

2 unchanged sentences

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

Interest rate cap September 30, 2021 168.8 Active — NA March 31, 2025

Interest rate cap September 30, 2021 168.7 Active — NA March 31, 2025

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

10 unchanged sentences

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

The fair value of the interest rate caps are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps.

The variable interest rates used in the calculation of projected receipts on the caps are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities.

The interest rate caps are classified using Level 2 inputs within the fair value hierarchy.

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

September 30, 2021 December 31, 2020

Location Assets Liabilities Assets Liabilities

5 unchanged sentences

— 51.0 — 61.0

Interest rate caps Other long-term assets 1.8 — — —

Total $ 17.6 $ 66.6 $ — $ 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 June 30, Six Months Ended June 30,

(1) The balance as of September 30, 2021 includes $ 49.4 million related to the financing component of the pay-fixed, receive floating interest rate swaps.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

Location 2021 2020 2021 2020

2 unchanged sentences

Derivatives in cash flow hedging relationships

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

Loss recognized in OCI (effective portion) $ 0.1 $ 2.3 $ 5.0 $ 29.2

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

Interest expense, net $ 6.6 $ 5.6 $ 18.1 $ 14.6

(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.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Includes amortization of accumulated OCI related to de-designated and terminated interest rate swaps of $ 5.4 million and $ 8.6 million for the three and nine months ended September 30, 2021, respectively.

Earnings Per Share

4 unchanged sentences

shares in thousands):

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

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

2021 2020 2021 2020

12 unchanged sentences

Restricted shares 1,461 986 1,444 848

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

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

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

4 unchanged sentences

In connection with the offering, the Company incurred underwriting discounts, commissions and other related costs of $ 12.7 million, which were recognized as a direct reduction of proceeds received.

On May 17, 2021, the Company converted all outstanding shares of Series A Preferred Stock into approximately 22.609 million shares of common stock.

"Redeemable Preferred Stock" for further discussion.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Other Current Liabilities

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

September 30,

2021 December 31,

Right-of-use operating lease liabilities $ 40.5 $ 39.2

Accrued legal settlement (1)

Interest payable 37.0 24.5

Tax receivable agreement liability 21.2 21.2

Amounts due to patients and payors 22.2 20.9

Cost report liabilities 28.5 16.9

Amounts due to patients and payors 28.0 20.9

Tax receivable agreement liability 21.2 21.2

Accrued legal settlement (1)

Accrued expenses and other 53.1 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 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.

Total professional, general and workers' compensation claim liabilities as of September 30, 2021 and December 31, 2020 were $ 22.9 million and $ 21.4 million, respectively.

Expected insurance recoveries of $ 10.5 million as of both September 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

6 unchanged sentences

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

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

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

Under the terms of the Settlement Agreement, the Companies 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 DOJ investigation included in litigation settlement on the condensed consolidated statement of operations.

Under the terms of the Settlement Agreement, the Companies paid $ 30.7 million plus accrued interest on April 1, 2021, representing the final payment related to the resolution of the DOJ Investigation.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Stockholder Litigation

On December 4, 2017, a purported Company stockholder filed an action in the Delaware Court of Chancery (the "Delaware Action").

That action is captioned Witmer v.

Capital, L.L.C., et al., C.A.

The plaintiff in the Delaware Action asserted claims against (i) certain current and former members of the Company’s Board of Directors (together, the "Directors");

Capital, LLC and certain of its affiliates (collectively, "H.I.G.");

and (iii) Bain Capital Private Equity, L.P.

and certain of its affiliates (collectively, "Bain Capital" and, together with the Directors and H.I.G., the "Defendants").

The plaintiff asserted derivative claims on behalf of the Company, which is a nominal defendant in the Delaware Action, as well as putatively direct claims on behalf of a purported class of Company stockholders.

The plaintiff in the Delaware Action asserted that the Defendants breached their fiduciary duties in connection with the transactions in which (i) the Company acquired National Surgical Healthcare;

(ii) Bain Capital acquired preferred equity in the Company;

and (iii) Bain Capital acquired H.I.G.'s equity stake in the Company, and that, in the alternative, Bain Capital aided and abetted those purported breaches.

The plaintiff also asserted an unjust enrichment claim against Bain Capital.

On January 2, 2018, the Defendants moved to dismiss the plaintiff’s complaint.

On December 19, 2018, the Court of Chancery issued a decision on that motion.

Following that decision, all of the Directors have been dismissed from the Delaware Action.

The Court did not dismiss the plaintiff’s breach of fiduciary duty claim against H.I.G.

or the aiding and abetting claim asserted against Bain Capital.

However, the Court dismissed the plaintiff’s breach of fiduciary duty and unjust enrichment claims against Bain Capital.

In addition, the Court dismissed all of the plaintiff’s claims that were asserted on behalf of a putative class of Company stockholders.

Accordingly, all of the plaintiff’s remaining claims in the Delaware Action are asserted derivatively on the Company’s behalf.

Discovery in the Delaware Action principally concluded on July 30, 2021, and the Defendants moved for summary judgment with respect to the remaining claims asserted against them.

While those motions were pending, the parties to the Delaware Action reached an agreement-in-principle to settle the Delaware Action.

The parties are currently negotiating the final terms of that settlement, which will be subject to approval by the Court of Chancery.

Because the plaintiff in the Delaware Action asserts only derivative claims on the Company’s behalf, the Company will be the beneficiary of any settlement that is ultimately approved by the Court of Chancery.

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

11 unchanged sentences

To the extent that the Company is unable to make payments under the TRA, such payments will be deferred and will accrue interest at a rate of the LIBOR plus 500 basis points until paid.

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 June 30, 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 $ 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.

If the terms of credit agreements and other debt documents cause the Company to be unable to make payments under the TRA and

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

such terms are not materially more restrictive than those existing as of September 30, 2015, such payments will be deferred and will accrue interest at a rate of LIBOR plus 300 basis points until paid.

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

The carrying value of the liability under the TRA, reflecting the discount, was $ 39.9 million and $ 37.0 million as of September 30, 2021 and December 31, 2020, respectively.

The current portion of the liability was $ 21.2 million as of both September 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.

Segment Reporting

2 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 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.

The Optical Services segment for the three and nine months ended September 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 June 30, Six Months Ended June 30,

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

2021 2020 2021 2020

17 unchanged sentences

10.2 7.5 31.0 30.2

Impairment charges — 33.5 — 33.5

Loss on disposals and deconsolidations, net 1.9 0.7 2.0 7.1

1 unchanged sentence

2.5 1.1 4.3 4.9

Loss on debt extinguishment 9.6 — 9.6 —

(Gain) loss on debt extinguishment ( 0.5 ) — 9.1 —

Gain on escrow release (3)

— — — ( 0.8 )

Hurricane-related operating losses (4)

Adjusted EBITDA $ 76.4 $ 61.1 $ 225.2 $ 165.8

(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

(1) This amount includes transaction and integration costs of $ 10.2 million and $ 5.4 million for the three months ended September 30, 2021 and 2020, respectively.

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

This amount includes transaction and integration costs of $ 24.7 million and $ 15.8 million for the nine months ended September 30, 2021 and 2020, respectively.

This amount further includes start-up costs related to a de novo surgical hospital of $ 6.3 million and $ 14.4 million for the nine months ended September 30, 2021 and 2020, respectively.

(2) This amount includes other litigation costs of $ 2.5 million and $ 1.1 million for the three months ended September 30, 2021 and 2020, respectively.

This amount includes other litigation costs of $ 4.3 million and $ 3.7 million for the nine months ended September 30, 2021 and 2020, respectively.

This amount further includes litigation settlement costs of $ 1.2 million for the nine months ended September 30, 2020, with no comparable costs for the nine months ended September 30, 2021.

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

(4) Reflects losses incurred in the month of September 2021 at a surgical facility that was closed following Hurricane Ida.

September 30,

2021 December 31,

3 unchanged sentences

Total assets $ 5,631.6 $ 5,413.2

Six Months Ended June 30,

Nine Months Ended September 30,

Cash purchases of property and equipment:

4 unchanged sentences

Subsequent Events

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.

In October 2021, the Company completed the acquisition of additional interest in one of its consolidated Surgical Facilities for a market-based acquisition price of $ 31.8 million.

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