What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2022-03-01 compared with 2021-03-10 · 397 added, 353 removed, 1050 unchanged (42% of the section changed)

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/s/ Deloitte & Touche LLP

Nashville, Tennessee

Nashville, TN

March 1, 2022

Other Information

On February 25, 2022, George M.

Goodwin, the Company’s American Group President, notified the Company of his intention to retire later this year.

In recognition of his service to the Company and for potential consulting services that Mr.

Goodwin may provide to the Company following his retirement, the Board approved a Retirement and Consulting Agreement between the Company and Mr.

Goodwin (the “Retirement Agreement”).

Pursuant to the terms of the Retirement Agreement, Mr.

Goodwin is entitled to receive, among other consideration, $704,000 in cash paid beginning six months after his retirement, continued participation in the Company’s health plan for 12 months following retirement, a prorated portion of any annual cash incentive award earned by Mr.

Goodwin for the calendar year 2022 determined in accordance with past Company practices, and partial vesting of equity awards.

Additionally, Mr.

Goodwin will be paid $300 per hour for consulting services requested by the Company following his retirement.

Pursuant to the Retirement Agreement, Mr.

Goodwin agrees to be bound by certain restrictive covenants, including non-competition, interference with relationships, and non-solicitation restrictions for a period of 12 months following the date of his retirement.

The Retirement Agreement includes certain other customary terms, including with respect to protection of confidential information.

The foregoing description of the Retirement Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Retirement Agreement, which is incorporated into this Item 9B by reference to Exhibit 10.41 of this Annual Report on Form 10-K.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Not applicable.

Directors, Executive Officers and Corporate Governance

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3.1 Amended and Restated Certificate of Incorporation of Surgery Partners, Inc., dated October 30, 2017 (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed November 3, 2017).

3.2 Certificate of Designations, Preferences, Rights and Limitations of the 10.00% Series A Convertible Perpetual Participating Preferred Stock of Surgery Partners, Inc., dated August 31, 2017 (incorporated herein by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed September 1, 2017).

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

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

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

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

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

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

10.2 Amendment No.

4 to Credit Agreement, dated as of September 26, 2016, by and among SP Holdco I, Inc., Surgery Center Holdings, Inc., Jefferies Finance LLC and the other guarantors and lenders party thereto (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 27, 2016).

10.1 Office Lease Agreement dated November 17, 2015 between Highwoods Realty Limited Partnership and Surgery Partners, Inc.

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

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

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

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

10.10 Fifth Amendment to Credit Agreement, dated as of January 27, 2021, by and among SP Holdco I, Inc., Surgery Center Holdings, Inc.

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

Jefferies Finance LLC and the other guarantors and lenders party thereto (incorporated herein by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K filed March 10, 2021).

10.11 Sixth Amendment to the Credit Agreement, dated as of May 3, 2021, by and among SP Holdco I, Inc., Surgery Center Holdings, Inc., the other Guarantors party thereto, Jefferies Finance LLC and the other lenders party thereto (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 5, 2021).

10.12 Seventh Amendment to the Credit Agreement, dated as of November 19, 2021, by and among SP Holdco I, Inc., Surgery Center Holdings, Inc., the other Guarantors party thereto, Jefferies Finance LLC and the other lenders party thereto (incorporated herein by reference to the Company’s Current Report on Form 8-K filed on November 22, 2021).

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

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10.17 (a) Surgery Partners, Inc.

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

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

10.18 (a) First Amendment to the Surgery Partners, Inc.

2015 Omnibus Incentive Plan, as amended and restated effective January 1, 2020 (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed August 4, 2021).

10.19 (a) Surgery Partners, Inc.

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

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

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

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

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and Anthony W.

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

Taparo, as amended by that certain First Amendment to Employment Agreement dated July 31, 2016, and that certain Second Amendment to Employment Agreement dated August 7, 2019 (incorporated herein by reference to Exhibit 10.35 (a) to the Company’s Annual Report on Form 10-K filed March 10, 2021).

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

and Brad ley R.

and Bradley R.

Owens (incorporated herein by reference to Exhibit 10.36 (a) to the Company’s Annual Report on Form 10-K filed March 10, 2021).

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

Brocklehurst.

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

Brocklehurst (incorporated herein by reference to Exhibit 10.37 (a) to the Company’s Annual Report on Form 10-K filed March 10, 2021).

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

10.39 (a) Employment Agreement, dated January 7, 2022, by and between Surgery Partners, Inc.

Doherty (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 10, 2022).

10.40 (a) Employment Agreement, dated November 23, 2021 , by and between Surgery Partners, Inc.

and Marissa Brittenham .

10.41 (a) Retirement and Consulting Agreement , dated February 25, 2022, by and between Surgery Partners, Inc.

and George M.

21.1 List of Subsidiaries of the Registrant.

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INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm ( PCAOB ID No.

Consolidated Balance Sheets - December 31, 20 2 1 and 2020

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and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements").

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

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Company has adopted Accounting Standards Codification Topic 842, “Leases”, using the modified retrospective adoption method on January 1, 2019.

Basis for Opinion

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Critical Audit Matter Description

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

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

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

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

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

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

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

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

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

How the Critical Audit Matter Was Addressed in the Audit

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

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

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

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

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

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

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

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

• We developed independent estimates of the price concessions and compared the independent estimates to the recorded balances.

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

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Redeemable preferred stock - Series A;

shares authorized, issued and outstanding - 310,000 ;

redemption value - $ 434.5 and $ 395.0 , respectively

shares authorized - 310,000 ;

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

redemption value - none and $ 434.5 , respectively

Stockholders' equity:

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Income from equity investments ( 11.3 ) ( 10.8 ) ( 10.2 )

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

Loss (gain) on disposals, net 2.2 5.7 ( 4.4 )

Transaction and integration costs 39.8 23.2 19.0

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Interest expense, net ( 221.0 ) ( 201.8 ) ( 178.9 )

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

Income tax (benefit) expense ( 20.1 ) 9.5 26.4

Net income (loss) 1.3 45.1 ( 95.6 )

Income (loss) before income taxes 81.2 ( 18.8 ) 54.6

Income tax expense (benefit) 10.5 ( 20.1 ) 9.5

Net income 70.7 1.3 45.1

Net income attributable to non-controlling interests ( 141.6 ) ( 117.4 ) ( 119.9 )

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2021 2020 2019

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

Other comprehensive (loss) income, net of tax:

Net income $ 70.7 $ 1.3 $ 45.1

Other comprehensive income (loss), net of tax:

Derivative activity 29.5 ( 10.3 ) ( 28.3 )

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

Comprehensive income (loss) 100.2 ( 9.0 ) 16.8

Comprehensive income attributable to non-controlling interests ( 141.6 ) ( 117.4 ) ( 119.9 )

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

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

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

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

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

Other — — — — — 0.1 0.1

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

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

Other — — — — — ( 0.2 ) ( 0.2 )

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

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

Equity offering 15,525 0.2 554.0 — — — 554.2

Other comprehensive loss — — — 29.5 — — 29.5

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Distributions to non-controlling interests—non-redeemable holders — — — — — ( 87.6 ) ( 87.6 )

Other — — — — — ( 0.2 ) ( 0.2 )

Balance as of December 31, 2021 89,333 $ 0.9 $ 1,622.3 $ ( 31.5 ) $ ( 502.7 ) $ 880.6 $ 1,969.6

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Cash flows from operating activities:

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

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

Net income $ 70.7 $ 1.3 $ 45.1

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

Depreciation and amortization 98.8 94.8 76.5

Non-cash interest expense (income), net 4.5 2.5 ( 1.4 )

Non-cash interest expense, net 22.0 4.5 2.5

Equity-based compensation expense 17.4 13.2 10.2

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

Loss (gain) on disposals, net 2.2 5.7 ( 4.4 )

Impairment charges — 33.5 7.9

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Medicare accelerated payments and deferred governmental grants ( 73.6 ) 135.2 —

DOJ settlement payments ( 32.2 ) ( 4.0 ) —

Other operating assets and liabilities ( 43.4 ) ( 8.7 ) ( 45.3 )

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Proceeds from disposals of facilities and other assets 6.0 58.5 17.6

Purchase of equity investments — ( 15.2 ) —

Sale (purchase) of equity investments 5.4 — ( 15.2 )

Other investing activities 0.3 0.6 ( 0.2 )

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Payments of debt issuance costs ( 11.7 ) ( 8.5 ) ( 8.9 )

Proceeds from equity offerings 581.8 — —

Payments of equity offering costs ( 27.6 ) — —

Payment of premium on debt extinguishment — — ( 17.8 )

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Payments of preferred dividends ( 5.1 ) — —

Repurchase of shares — — ( 2.0 )

Other financing activities ( 17.9 ) ( 0.9 ) ( 0.9 )

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Organization and Summary of Accounting Policies

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

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

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

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

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

Surgery Partners, Inc., a Delaware corporation (together with its subsidiaries, the "Company"), acting through its subsidiaries, owns and operates a national network of surgical facilities and ancillary services.

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

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Ancillary services are comprised of multi-specialty physician practices, urgent care facilities and anesthesia services.

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

On August 31, 2017, a fund advised by an affiliate of Bain Capital Private Equity LP ("Bain Capital") became the controlling stockholder of the Company.

As of December 31, 2021, Bain Capital held approximately 54.9 % of the voting power of all classes of capital stock of the Company.

As of December 31, 2021, the Company owned or operated a portfolio of 126 surgical facilities in 31 states, comprised of 108 ASCs and 18 surgical hospitals.

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

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COVID-19 Pandemic

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

economy and financial markets.

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

Due in part to local, state and federal guidelines, as well as recommendations from major medical societies, requiring social distancing and self-quarantines in response to the COVID-19 pandemic, surgical case volumes across most of the Company's surgical facilities were significantly impacted in the second quarter of 2020.

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

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

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

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

Beginning in mid-March, and for the remainder of 2020, the Company took actions that included significantly reducing cash operating expenses and deferring non-essential expenditures at the height of the crisis.

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

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

government initially announced that it would offer $100 billion of relief to eligible health care providers.

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

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

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

Although the Company cannot provide any certainty regarding the length and severity of the impact of the COVID-19 pandemic, surgical case volumes improved in 2021 as government restrictions eased and public sentiment changed.

As a result of the COVID-19 pandemic, 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.

As part of the CARES Act, the United States government announced that it would offer relief to eligible health care providers, including distribution of direct grants to hospitals, ASCs and other health care providers based on how much they bill Medicare.

Payments received from these grants are not required to be repaid provided the recipients attest to and comply with certain terms and conditions, including limitations on balance billing and not using funds received from the grants to reimburse expenses or losses that other sources are obligated to reimburse.

The Company received approximately $ 59 million of the grant funds distributed under the CARES Act and other governmental assistance programs during the year ended December 31, 2020.

The Company has received approximately $ 86 million of the grant funds distributed under the CARES Act and other governmental assistance programs, including approximately $ 27 million during the year ended December 31, 2021.

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

The Company’s assessment of whether the terms and conditions for amounts received are reasonably assured of having been met considers, among other things, the CARES Act, the COVID-19 Economic Relief Bill, enacted on December 27, 2020, and all frequently asked questions and other interpretive guidance issued by the United States Department of Health and Human Services ("HHS"), including 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 this guidance, the Company estimates approximately $ 37.9 million of grant funds received qualified for recognition as a reduction in operating expenses for the year ended December 31, 2021.

During the year ended December 31, 2020, the Company recognized $ 46.2 million as a reduction in operating expenses.

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 consolidated balance sheets as of December 31, 2021 and 2020.

Any unrecognized amounts may be recognized as a reduction in operating expenses in subsequent periods if the underlying conditions for recognition are met.

Additional guidance or new and amended interpretations of existing guidance on the terms and conditions of such payments may result in

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

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

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

Amounts received, but not recognized as a reduction to operating expenses as of December 31, 2020, are reflected as a component of Medicare accelerated payments and deferred governmental grants in the consolidated balance sheets as of December 31, 2020, and such unrecognized amounts may be recognized as a reduction in operating expenses in future periods if the underlying conditions for recognition are met.

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

Additional guidance or new and amended interpretations of existing guidance on the terms and conditions of such payments may result in the Company’s inability to recognize certain payments, changes in the estimate of amounts recognized, or the derecognition of amounts previously recognized, which may be material.

As a way to increase cash flow to Medicare providers impacted by the COVID-19 pandemic, the CARES Act expanded the Medicare Accelerated and Advance Payment Program, which allows for most providers and suppliers, including the Company’s surgical hospitals and ASCs to request an advance payment of anticipated Medicare revenues.

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

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

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

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

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

The revised program terms also lower the interest rate on outstanding amounts due at the end of the repayment period from 10% to 4%.The Company received approximately $ 120 million of accelerated payments during the year ended December 31, 2020.

These accelerated payments received were deferred.

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

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

the Company’s inability to recognize certain payments, changes in the estimate of amounts recognized, or the derecognition of amounts previously recognized, which may be material.

As a way to increase cash flow to Medicare providers impacted by the COVID-19 pandemic, the CARES Act expanded the Medicare Accelerated and Advance Payment Program, which allowed for most providers and suppliers, including the Company’s surgical hospitals and ASCs to request an advance payment of anticipated Medicare revenues.

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 consolidated balance sheets.

During the year ended December 31, 2021, approximately $ 60 million 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 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 December 31, 2021 and 2020, the current portion of deferred accelerated payments was approximately $ 60 million and $ 95 million, respectively, and is included as a component of Medicare accelerated payments and deferred governmental grants in the consolidated balance sheets.

The long-term portion as of December 31, 2020 was included as a component of other long-term liabilities in the consolidated balance sheets.

There was no remaining long-term portion as of December 31, 2021.

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

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

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

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

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

The current portion is included as a component of accrued payroll and benefits and the long term portion is included as a component of other long-term liabilities in the consolidated balance sheets as of December 31, 2020.

The 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 was paid in December 2021 and the remaining portion will be paid in December 2022.

As of December 31, 2021 and 2020, the Company had deferred approximately $ 8.5 million and $ 16.9 million, respectively.

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

There was no remaining long-term portion as of December 31, 2021.

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

Variable Interest Entities

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

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

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

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

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

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

As of December 31, 2021, the Company's consolidated VIEs include five surgical facilities and four physician practices.

The total assets (excluding goodwill and intangible assets, net) of the consolidated VIEs included in the accompanying consolidated balance sheets as of December 31, 2021 and 2020, were $ 48.1 million and $ 27.7 million, respectively, and the total liabilities of the consolidated VIEs were $ 20.1 million and $ 21.1 million, respectively.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

Carrying Amount Fair Value

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$ 545.0 $ 545.0 $ 577.0 $ 596.8

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

The Company has entered into certain interest rate swap agreements (see Note 8.

"Derivatives and Hedging Activity").

At December 31, 2020 and 2019, the fair value of these derivative instruments was $ 61.0 million and $ 50.7 million, respectively, and was included in other long-term liabilities in the consolidated balance sheets.

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

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

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Ancillary services revenues 3.0 % 3.4 % 4.3 %

98.7 % 98.4 % 98.1 %

Total patient service revenues 98.7 % 98.7 % 98.4 %

Other service revenues 1.3 % 1.3 % 1.6 %

Optical services revenues 0.2 % 0.2 % 0.5 %

Other 1.1 % 1.4 % 1.4 %

1.3 % 1.6 % 1.9 %

Total revenues 100.0 % 100.0 % 100.0 %

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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As the Company primarily performs outpatient procedures, performance obligations are generally satisfied same day and revenue is recognized on the date of service.

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

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

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

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Other service revenues.

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

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

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

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

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

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

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

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.

For the years ended December 31, 2020 and 2019, 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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):

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Other service revenues 30.1 24.0 28.3

Optical service revenues 3.0 3.8 9.5

Other revenues 21.0 24.5 25.0

Total revenues $ 2,225.1 $ 1,860.1 $ 1,831.4

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

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

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

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

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

The restrictions were released during the year ended December 31, 2021.

Accounts Receivable

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

While changes in estimated reimbursement from

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

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

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

Impairment of Long-Lived Assets, Goodwill and Intangible Assets

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"Goodwill and Intangible Assets."

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Professional and General and Workers' Compensation Insurance

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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.

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Equity method investments are initially recorded at cost, unless the investments are a result of the Company losing control of a previously controlled entity, but still retaining a non-controlling interest.

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

The fair value measurement utilizes Level 3 inputs,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

The Company did not have any such deconsolidations during the years ended December 31, 2021 and 2020.

These investments are included as investments in and advances to affiliates in the accompanying consolidated balance sheets.

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

for the physician(s) to own an interest in a surgical facility, refer patients to a surgical facility or receive cash distributions from a surgical facility.

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

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Recent Accounting Pronouncements

In March 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-04 Reference Rate Reform (Topic 848) .

ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts.

The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur.

During the year ended December 31, 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future London Interbank Offered Rate ("LIBOR") indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives.

Application of these expedients preserves the presentation of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

derivatives consistent with past presentation.

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

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

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

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

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

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

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

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

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

Upon adoption of the Lease Accounting Standard, the Company recorded $ 294.0 million of operating lease liabilities and right-of-use assets on January 1, 2019.

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

In November 2021, the FASB issued Accounting Standards Update ("ASU") 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance .

The ASU provides specific authoritative guidance for the disclosure of government assistance including the nature of assistance received, the accounting for and presentation of assistance received and the significant terms and conditions, including commitments and contingencies regarding such assistance.

The ASU is effective for financial statements issued for annual periods beginning after December 15, 2021 and may be early adopted.

The Company early adopted this ASU beginning with this Annual Report on Form 10-K for the year ended December 31, 2021.

Acquisitions and Disposals

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

During the year ended December 31, 2021, the Company acquired controlling interests in eight surgical facilities, including a surgical hospital, and two physician practices for aggregate cash consideration of $ 285.8 million, net of cash acquired.

Two of the surgical facilities were in existing markets that were merged into existing facilities.

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.

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

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

The cash consideration was funded through cash from operations, proceeds from its recent divestitures and other available resources.

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

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

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

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

The additional consideration is reflected in the table below.

During the year ended December 31, 2020, no other significant changes were made to the purchase price allocation of assets and liabilities, existing at the date of acquisition, related to individual acquisitions completed in 2019.

During the year ended December 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.

SURGERY PARTNERS, INC.

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Preliminary or final amounts recognized for each major class of assets acquired and liabilities assumed for acquisitions completed during the years ended December 31, 2021 and 2020, including post acquisition date adjustments, are as follows (in millions):

Consideration transferred (1)

$ 120.1 $ 27.4

Total consideration $ 290.0 $ 120.1

Fair value of non-controlling interests 185.9 57.3

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Right-of-use operating lease liabilities ( 15.1 ) ( 14.0 )

Long-term liabilities ( 4.4 ) —

Aggregate acquisition date fair value $ 475.9 $ 177.4

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

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

(2) The assets acquired in 2019 includes the fair value of a non-controlling investment held by the acquired clinic in one of the Company's consolidated surgical facilities of $ 8.8 million.

This investment asset was subsequently eliminated in consolidation.

The fair values assigned to certain assets acquired and liabilities assumed by the Company in 2021 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.

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The results of operations of the 2021 acquisitions are included in the Company’s results of operations beginning on the dates of acquisition, and were not considered significant for the year ended December 31, 2021.

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

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

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

Additionally, the Company closed its diagnostic laboratory and recognized a net pre-tax loss of $ 3.5 million included in loss on disposals and deconsolidations, net in the consolidated statement of operations for the year ended December 31, 2020.

During the year ended December 31, 2021, the Company sold its interests in three surgery centers, one physician practice and certain other assets for combined net cash proceeds of $ 6.0 million, and recognized a net pre-tax gain of $ 4.0 million included in loss on disposals, net in the consolidated statement of operations for the year ended December 31, 2021.

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

Additionally, the Company closed its diagnostic laboratory and recognized a net pre-tax loss of $ 3.5 million included in loss on disposals, net in the consolidated statement of operations for the year ended December 31, 2020.

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

In connection with the sale, the Company recognized a $ 10.9 million pretax gain included in loss (gain) on disposals and deconsolidations, net in the accompanying consolidated statements of operations.

In connection with the sale, the Company recognized a $ 10.9 million pretax gain included in loss (gain) on disposals, net in the accompanying consolidated statements of operations.

The sale did not impact the Company's investment in the surgical facility, which continues to be accounted for as an equity method investment.

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

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

Property and Equipment

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

During 2020, the Company identified three reporting units, which include the following:

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

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

During 2021, the Company identified two reporting units, which include the following:

1) Surgical Facilities and 2) Ancillary Services.

Prior to 2021, the Company had a third reporting unit, Alliance, which was a component of the Optical Services operating segment.

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

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

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

In determining the fair value under the market approaches, the analysis includes a control premium, which was based on observable market data and a review of selected

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

transactions of companies that operate in the Company's sector.

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

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

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

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

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

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

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

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

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

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

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

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

As of October 1, 2021, prior to its annual impairment testing, all of the Company's goodwill was allocated to the Surgical Facilities reporting unit.

As of the October 1, 2021 valuation, the fair value for the Surgical Facilities reporting unit was substantially in excess of its carrying value.

The fair value of the Surgical Facilities reporting unit as of October 1, 2021 was determined using the income and market approach as discussed above.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Subsequent to the date of our annual impairment test, the Company considered its operating results for the fourth quarter of 2021, macroeconomic, industry and market conditions, and other market indicators including its market capitalization.

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

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

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

In 2021, there were no non-cash impairment charges.

During the year ended December 31, 2020, as a result of its impairment testing, the Company recorded non-cash impairment charges of $ 28.6 million and $ 4.9 million related to the Ancillary Services and Alliance reporting units, respectively.

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

A summary of the changes in the carrying amount of goodwill follows (in millions):

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Acquisitions, including post acquisition adjustments 447.0 154.7

Disposals and deconsolidations ( 55.6 ) ( 0.2 )

Disposals ( 3.2 ) ( 55.6 )

Impairments — ( 33.5 )

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Total intangible assets $ 63.2 $ ( 19.5 ) $ 43.7 $ 63.5 $ ( 16.6 ) $ 46.9

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

During the year ended December 31, 2021, the Company disposed of its management rights associated with one of its existing non-consolidated surgical facilities, resulting in a $ 2.8 million pretax loss included in loss on disposals, net in the consolidated statement of operations for the year ended December 31, 2021.

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

1 unchanged sentence

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

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

Amortization expense for intangible assets was $ 4.3 million for both of the years ended December 31, 2021 and 2020, and $ 4.6 million for the year ended December 31, 2019.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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Senior Secured Credit Facilities

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

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

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

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

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

As of both December 31, 2020 and 2019, the Company had no outstanding borrowing on the Revolver.

The Company has a credit agreement (the "Credit Agreement") providing for a $ 1.545 billion senior secured term loan (the "Term Loan") and a $ 210.0 million senior secured revolving credit facility (the "Revolver" and together with the Term Loan, the “Senior Secured Credit Facilities").

During 2021, the Company entered into amendments to the Credit Agreement, which provided for (i) a new tranche of term loans that replaced or refinanced all of the existing term loans outstanding under the Credit Agreement, (ii) provided for an extension of the Term Loan and Revolver, (iii) and increased the outstanding commitments under the Revolver (the "2021 Amendments").

As of both December 31, 2021 and 2020, the Company had no outstanding borrowings on the Revolver.

As of December 31, 2021, the Company's availability on the Revolver was $ 203.0 million (including outstanding letters of credit of $ 7.0 million).

The Term Loan will mature on August 31, 2024 and the Revolver will mature on August 31, 2022.

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

The Term Loan will 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 Revolver matures on February 1, 2026.

The Senior Secured Credit Facilities will bear interest at a rate per annum equal to (x) LIBOR plus a margin of 3.75 % per annum (LIBOR with respect to the Term Loan 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 Term Loan shall be subject to a floor of 1.75 %)) plus a margin of 2.75 % per annum.

The Term Loan is subject to quarterly amortization in an aggregate original principal amount of approximately 1.00 % per annum.

Voluntary prepayments of the 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).

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

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

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

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

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

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

Such financial maintenance covenant is subject to an equity cure.

The Credit Agreement includes customary negative covenants restricting or limiting the ability of the Company and its restricted subsidiaries, to, among other things, sell assets, alter its business, engage in mergers, acquisitions and other business combinations, declare dividends or redeem or repurchase equity interests, incur additional indebtedness or guarantees, make loans and investments, incur liens, enter into transactions with affiliates, prepay certain junior debt, and modify or waive certain material agreements and organizational documents, in each case, subject to customary and other agreed upon exceptions.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

and organizational documents, in each case, subject to customary and other agreed upon exceptions.

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

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

Pursuant to the third amendment, the Company's requirement to comply with a maximum consolidated total net leverage ratio was waived for the remainder of 2020.

Additionally, for the first three quarters of 2021, the third amendment provides for an alternative calculation for the maximum consolidated total net leverage ratio where the trailing four quarter basis may be negatively impacted by the impacts of the COVID-19 pandemic.

The third amendment became effective concurrently with the funding of the 2020 Incremental Term Loans on April 22, 2020, and are discussed in more detail above.

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

As of December 31, 2021, the Company was in compliance with the covenants contained in the Credit Agreement.

1 unchanged sentence

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

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

In connection with the 2021 Amendments, 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 consolidated statement of operations for the year ended December 31, 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 Term Loan modification.

During 2020, in connection with incremental term loan borrowings, the Company recorded debt issuance costs and discount of $ 6.5 million for the year ended December 31, 2020.

6.750 % Senior Unsecured Notes due 2025

3 unchanged sentences

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

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

July 1, 2020 to June 30, 2021 103.375 %

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

July 1, 2021 to June 30, 2022 101.688 %

3 unchanged sentences

The 2025 Unsecured Notes contain customary affirmative and negative covenants, which, among other things, limit the Company’s ability to incur additional debt, pay dividends, create or assume liens, effect transactions with its affiliates, guarantee payment of certain debt securities, sell assets, merge, consolidate, enter into acquisitions and effect sale and leaseback transactions.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

10.000 % Senior Unsecured Notes due 2027

9 unchanged sentences

April 15, 2024 and thereafter 100.000 %

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

If Surgery Center Holdings, Inc.

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

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

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

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

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

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

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

These modifications resulted in an increase to the Company's right-of-use operating lease assets and liabilities of $ 27.4 million during the year ended December 31, 2020.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table presents the components of the Company's right-of-use assets and liabilities related to leases and their classification in the consolidated balance sheets at December 31, 2021 and 2020 (in millions):

12 unchanged sentences

Total lease liabilities $ 720.3 $ 621.3

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table presents the weighted-average lease terms and discount rates at December 31, 2021 and 2020 (in millions):

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During the years ended December 31, 2021 and 2020, the Company incurred lease costs of $ 25.8 million and $ 22.8 million, respectively, under operating lease agreements with physician investors who are related parties.

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

During the years ended December 31, 2021 and 2020, the Company paid rent of $ 17.4 million and $ 6.9 million, respectively, under finance lease agreements with a lessor who is a related party.

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

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

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table presents supplemental cash flow information for the years ended December 31, 2021 and 2020 (dollars in millions):

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Total lease obligations $ 355.7 $ 364.6

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Redeemable Preferred Stock

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

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

(the "Series A Certificate of Designation"), at any time at the option of the holder.

In addition, 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 Series A 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 20 out of 30 consecutive trading days prior to such date, equals or exceeds $ 42.00 per share.

The Company cannot redeem the Series A Preferred Stock prior to the fifth anniversary of its issuance and thereafter, may redeem all, but not less than all, of the Series A Preferred Stock for cash pursuant to and subject to the terms and conditions of the Series A Certificate of Designation.

The holders of Series A Preferred Stock may cause the Company to redeem the Series A Preferred Stock upon the occurrence of certain change of control transactions of the Company or the common stock ceasing to be listed or quoted on a trading market.

The Company adjusts the carrying amount of the Series A Preferred Stock to equal the redemption value at the end of each reporting period as if it were also the redemption date.

Changes in the redemption value are recognized immediately as they occur.

The Series A Preferred Stock ranks senior to the common stock and any other capital stock of the Company with respect to dividends, redemption and any other rights upon the liquidation, dissolution or winding up of the Company, and the holders thereof are entitled to vote with the holders of common stock, together as a single class, on all matters submitted to a vote of the Company’s stockholders.

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

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

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 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 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 consolidated statements of cash flows.

The following table presents a summary of activity related to the redeemable preferred stock for the years ended December 31, 2021 and 2020 (in millions):

Balance at beginning of period $ 434.5 $ 395.0

Dividends accrued (there were no cash dividends declared)

Dividends accrued 10.3 39.5

Dividends declared ( 5.1 ) —

Redeemable preferred stock conversion to common stock ( 439.7 ) —

Balance at end of period $ — $ 434.5

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

The aggregate and per share amounts of unpaid cumulative preferred dividends as of December 31, 2020 and 2019 were $ 109.0 million and $ 351.54 , and $ 69.5 million and $ 224.09 , respectively.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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.

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

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

Over the next 12 months, the Company estimates that an additional $ 26.2 million will be reclassified as an increase to interest expense.

In May 2021, the Company entered into additional interest rate swap agreements to match the terms of the new Term Loan and have an effective termination date of March 31, 2025.

As of December 31, 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.

Concurrently with the May 2021 transactions, the four previously existing interest rate swap positions were amended, de-designated or terminated and replaced with the 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 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 do 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 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 consolidated statements of cash flows while the 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 consolidated cash flows.

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

As of December 31, 2021, the Company had two interest rate caps with a total hedged notional amount of $ 333.6 million, and each has a termination date of March 31, 2025.

Within the Company’s 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 consolidated statements of cash flows.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

Year Ended December 31,

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

December 31, 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

Interest rate cap September 30, 2021 166.8 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

$ 1,533.6 $ 1,200.0

Our interest rate swap agreements, excluding the portion treated as debt, are recognized at fair value in the 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 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 consolidated balance sheets (in millions):

December 31, 2021 December 31, 2020

Location Assets Liabilities Assets Liabilities

Derivatives not designated as hedging instruments

Interest rate swaps Other long-term assets $ 12.5 $ — $ — $ —

Interest rate swaps Other long-term liabilities — 12.4 — —

Derivatives in cash flow hedging relationships

Loss recognized in OCI (effective portion) $ 30.5 $ 35.8 $ 23.1

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

Interest rate caps Other long-term assets 2.9 — — —

Interest rate swaps Other long-term assets 8.2 — — —

Interest rate swaps Other long-term liabilities (1)

— 45.8 — 61.0

Total $ 23.6 $ 58.2 $ — $ 61.0

(1) The balance as of December 31, 2021 is related to the financing component of the pay-fixed, receive floating interest rate swaps.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Year Ended December 31,

Location 2021 2020 2019

Derivatives not designated as hedging instruments

Gain recognized in income Other income $ 0.1 $ — $ —

Derivatives in cash flow hedging relationships

(Gain) loss recognized in OCI (effective portion) $ ( 4.8 ) $ 30.5 $ 35.8

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

Interest expense, net $ 24.7 $ 20.2 $ 7.5

(1) Includes amortization of accumulated OCI related to de-designated and terminated interest rate swaps of $ 14.0 million for the year ended December 31, 2021.

There was no comparable amortization in prior year periods.

Earnings Per Share

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Restricted shares 1,452 981 67

(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.

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

Share Repurchase Transactions

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Public Offerings

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

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

On February 1, 2021, the Company completed the public offering pursuant to which the Company sold 8,625,000 shares of common stock (including the January Firm Shares and the option shares), resulting in gross proceeds of $ 260.9 million.

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

On November 8, 2021, the Company entered into an underwriting agreement relating to a public offering of 6,000,000 shares (the “November Firm Shares”) of the Company’s common stock, $ 0.01 par value per share, at a price to the public of $ 46.50 per share.

In addition, the Company granted the underwriters an option to purchase up to an additional 900,000 shares of common stock at the same price per share as the November Firm Shares.

On November 12, 2021, the Company completed the public offering pursuant to which the Company sold 6,900,000 shares of common stock (including the November Firm Shares and the option shares), resulting in gross proceeds of $ 320.9 million.

In connection with the offering, the Company incurred underwriting discounts, commissions and other related costs of $ 14.9 million, which were recognized as a direct reduction of proceeds received.

Preferred Conversion

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.

Share Repurchase Authorization

On December 15, 2017, the Company's Board of Directors authorized a share repurchase program of up to $ 50.0 million of the Company's issued and outstanding common stock from time to time.

3 unchanged sentences

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

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

At December 31, 2021, the Company had $ 46.0 million of repurchase authorization available under the December 2017 authorization.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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The Company made income tax payments of $ 1.5 million, $ 1.7 million and $ 1.6 million for the years ended December 31, 2021, 2020 and 2019, respectively.

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

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Year Ended December 31,

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State 1.1 0.4 4.8

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

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Total income tax expense (benefit) $ 10.5 $ ( 20.1 ) $ 9.5

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

federal statutory rate of 21% (2021, 2020 and 2019) follows (in millions):

1 unchanged sentence

2021 2020 2019

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

Tax expense (benefit) at U.S.federal statutory rate $ 17.1 $ ( 4.0 ) $ 11.5

State income tax, net of U.S.

10 unchanged sentences

Litigation settlement — ( 3.7 ) —

Adjustments to unrealized attributes 2.3 — —

Other 0.1 1.0 ( 0.9 )

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

Total income tax expense (benefit) $ 10.5 $ ( 20.1 ) $ 9.5

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

11 unchanged sentences

Right of use 51.1 50.6

Affiliate indebtedness receivable — 6.8

Other deferred assets 11.1 16.4

9 unchanged sentences

Net deferred tax assets $ 114.4 $ 124.8

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company had federal NOL carryforwards of $ 573.0 million as of December 31, 2021, of which $ 478.3 million expire between 2029 and 2037.

The remaining federal NOL carryforwards, which were generated subsequent to 2017, do not expire.

The remaining federal NOL carryforwards, which were generated after 2017, do not expire.

The Company had state NOL carryforwards of $ 594.9 million as of December 31, 2021, which expire between 2022 and 2041.

The Company had capital loss carryforwards of $ 6.2 million as of December 31, 2020, which expire between 2021 and 2023.

The Company had federal and state credit carryforwards of $ 0.7 million as of December 31, 2020.

The federal credits do not expire, and the state credits expire between 2021 and 2031.

The Company had IRC Section 163(j) interest limitation carryforwards of $ 278.4 million as of December 31, 2020, which do not expire.

The Company had Section 163(j) interest limitation carryforwards of $ 397.5 million as of December 31, 2021, which do not expire.

The Company has recorded a valuation allowance against deferred tax assets at December 31, 2021 and 2020 totaling $ 113.0 million and $ 91.1 million, respectively, which represents an increase of $ 21.9 million.

The valuation allowance continues to be provided for certain deferred tax assets for which the Company believes it is more likely than not that the tax benefits will not be realized, which are primarily Section 163(j) interest carryforwards, certain state NOLs and capital loss carryforwards.

Approximately $ 14.4 million of the valuation allowance as of December 31, 2021 is recorded against deferred tax assets attributable to interest rate swap liabilities that, if subsequently recognized, will be credits directly to contributed capital.

The Company has evaluated the realizability of its deferred tax assets based on sources of positive and negative evidence, and determined that it is more likely than not that the NOL carryforwards will be realized.

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These changes could have a significant impact on the Company's future earnings.

Included in the increase in the valuation allowance for the year ended December 31, 2020 was an increase of approximately $ 2.8 million that was recorded to additional-paid-in-capital as the result of the tax effect of the interest rate swap liability.

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

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

A reconciliation of the beginning and ending liability for gross unrecognized tax benefits for the years ended December 31, 2021 and 2020 is as follows (in millions):

3 unchanged sentences

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

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

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

For the years ended December 31, 2021 and 2020, the Company had approximately $ 0.1 million of accrued interest and penalties related to uncertain tax positions.

The total amount of accrued liabilities related to uncertain tax positions that would affect the Company's effective tax rate, if recognized, is $ 0.1 million as of December 31, 2021 and 2020.

The reserves are included in long-term taxes payable in the consolidated balance sheet as of December 31, 2021.

2 unchanged sentences

The Company’s policy is to recognize compensation expense using the straight line method over the relevant vesting period for units that vest based on time.

The Surgery Partners, Inc.

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

Equity-based awards are granted pursuant to the Surgery Partners, Inc.

2015 Omnibus Incentive Plan, as amended and restated effective January 1, 2020 ("2015 Omnibus Incentive Plan").

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

4 unchanged sentences

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

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

During the years ended December 31, 2021 and 2020, the Company granted 182,964 and 854,367 performance-based restricted stock units ("PSUs") subject to the achievement of a combination of performance conditions, respectively.

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During the years ended December 31, 2021 and 2020, 776,988 and 309,692 of the PSUs previously granted were deemed to have been earned, respectively.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Restricted and Performance Share-Based Activity

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Outstanding at December 31, 2021 1,655,396 $ 11.55

Stock Options and Stock Appreciation Rights

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

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

Stock Options

The Company granted 2,256,500 stock options during the year ended December 31, 2019.

No stock options were granted during the years ended December 31, 2021 and 2020.

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

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Forfeitures are recognized as incurred.

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

(i) fifty percent ( 50 %) of the stock option awards will vest in five equal annual installments on each of the first five anniversaries of the date of grant, (ii) twenty-five percent ( 25 %) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $ 25.00 over a period of sixty ( 60 ) consecutive trading days, and (iii) twenty-five percent ( 25 %) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $ 35.00 over a period of sixty ( 60 ) consecutive trading days, in each case, generally subject to continued employment on each vesting date.

Forfeitures are recognized as incurred.

On December 16, 2018, the Company cancelled 200,000 stock options and replaced them with 200,000 stock-settled stock appreciation right awards (the "SAR Awards").

These were the only SAR Awards granted as of December 31, 2020.

The SAR Awards had a base price equal to the exercise price of the cancelled stock options.

Fifty percent ( 50 %) of the SAR Awards will vest in five equal annual installments on each of the first five anniversaries of the date of grant, generally subject to continued employment on each vesting date.

Twenty-five percent ( 25 %) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $ 25.00 over a period of sixty ( 60 ) consecutive trading days, and twenty-five percent ( 25 %) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $ 35.00 over a period of sixty ( 60 ) consecutive trading days, in each case, generally subject to continued employment on each vesting date.

Forfeitures are recognized as incurred.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Option/SAR Valuation

In applying the Monte Carlo simulation model to value both the stock options and SAR Awards, the Company used the following assumptions:

Option Valuation

In applying the Monte Carlo simulation model to value the stock options, the Company used the following assumptions:

▪ Risk-free interest rate .

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

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

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

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

No stock options were granted during the years ended December 31, 2021 and 2020.

Expected volatility 60 %

Risk-free interest rate 2.30 % - 2.40 %

2.50 % - 2.90 %

Expected dividends —

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Fair value of stock options granted $ 4.83 - $ 6.41

$ 8.48 - $ 9.44

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

Stock Option and Stock Appreciation Rights Activity

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

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

Stock Option Activity

A summary of stock option activity for the years ended December 31, 2021, 2020, and 2019 follows:

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

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

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

Granted 2,256,500 13.00 9.2

Exercised ( 4,199 ) 20.24 5.8

Forfeited/Cancelled ( 4,473 ) 19.00 4.8

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(1) Of the outstanding stock options, 1,588,186 were exercisable as of December 31, 2021.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Stock Appreciation Rights

As of December 31, 2021, there were 200,000 stock-settled stock appreciation right awards (the "SAR Awards") outstanding.

These SAR Awards were granted on December 16, 2018.

These were the only SAR Awards granted as of December 31, 2021.

The SAR Awards have an exercise price of $ 12.90 , and a remaining contractual term of 6.0 years.

Forfeitures are recognized as incurred.

Of the outstanding SAR Awards, 120,000 were exercisable as of December 31, 2021.

Other information pertaining to equity-based compensation

At December 31, 2020, unrecognized compensation cost related to unvested shares was approximately $ 20.2 million.

Unrecognized compensation cost will be expensed annually based on the number of shares that vest during the year.

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

At December 31, 2021, unrecognized compensation cost related to unvested shares, stock options and SAR Awards was approximately $ 19.3 million.

Unrecognized compensation cost will be expensed annually based on the number of shares, stock options and SAR Awards that vest during the year.

The Company records equity-based compensation expense to recognize the fair value of the restricted shares, stock options and SAR Awards granted over the relevant vesting period.

The Company recorded equity-based compensation expense of $ 17.4 million, $ 13.2 million and $ 10.2 million for the years ended December 31, 2021, 2020 and 2019, respectively.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Employee Benefit Plans

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Employer contributions vest incrementally over a period of five years .

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

The Company's contributions were $ 9.7 million, $ 7.2 million and $ 7.6 million for the years ended December 31, 2021, 2020, and 2019, respectively.

Other Current Liabilities

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Interest payable 29.2 24.5

Tax receivable agreement liability 21.2 16.9

Amounts due to patients and payors 20.9 16.5

Cost report liabilities 26.4 16.9

Amounts due to patients and payors 26.0 20.9

Tax receivable agreement liability 19.7 21.2

Accrued expenses and other 68.6 62.1

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

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

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

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

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

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

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.

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 to the Delaware Action negotiated a final stipulation of settlement (the “Settlement Stipulation”), which governs the terms of the settlement of the Delaware Action, and which they filed with the Court of Chancery on November 22, 2021.

On February 11, 2022, the Court of Chancery approved the settlement of the Delaware Action as memorialized in the Settlement Stipulation.

That decision will become final and non-appealable on March 14, 2022.

The case will then be closed.

Because the plaintiff in the Delaware Action asserted only derivative claims on the Company’s behalf, the Company was the beneficiary of the settlement approved by the Court of Chancery.

Acquired Facilities

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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 CONSOLIDATED FINANCIAL STATEMENTS (continued)

Potential Physician Investor Liability

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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 $ 22.0 million and $ 43.2 million as of December 31, 2021 and 2020, respectively.

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 a discount, was $ 19.7 million and $ 37.0 million as of December 31, 2021 and 2020, respectively.

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

The current portion of the liability was $ 19.7 million and $ 21.2 million as of December 31, 2021 and 2020, respectively, and is included as a component of other current liabilities in the consolidated balance sheets.

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

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

consolidated balance sheets.

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

Segment Reporting

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

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

The Ancillary Services segment consists of multi-specialty physician practices and a diagnostic laboratory, which was closed during the third quarter of 2020.

The Optical Services segment consists of an optical products group purchasing organization, which was sold on December 31, 2020, as discussed in Note 2.

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

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

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

The Ancillary Services segment consists of multi-specialty physician practices.

Prior to 2021, the Ancillary Services segment also included a diagnostic laboratory, which was closed during the third quarter of 2020.

The Optical Services segment for the years ended December 31, 2020 and 2019 reflected in the table below consisted of an optical products group purchasing organization, which was sold on December 31, 2020.

The "All other" line item primarily consists of amounts attributable to the Company's corporate general and administrative functions.

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

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Reconciliation of Adjusted EBITDA:

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

Income (loss) before income taxes $ 81.2 $ ( 18.8 ) $ 54.6

Net income attributable to non-controlling interests ( 141.6 ) ( 117.4 ) ( 119.9 )

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Equity-based compensation expense 17.4 13.2 10.2

Transaction, integration and acquisition costs (1)

Transaction and integration related costs (1)

46.1 38.2 36.1

Impairment charges 33.5 7.9 74.4

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

Loss (gain) on disposals, net 2.2 5.7 ( 4.4 )

Litigation settlement and other litigation costs (2)

Reserve adjustments (3)

Contingent acquisition compensation expense — — 1.5

Impairment charges — 33.5 7.9

Gain on escrow release (3)

Loss on debt extinguishment 9.1 — 11.7

Hurricane-related impacts (4)

Tax receivable agreement expense — — 2.4

Adjusted EBITDA $ 339.6 $ 256.6 $ 258.6

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

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

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

(1) For the year ended December 31, 2021, this amount includes transaction and integration costs of $ 39.8 million and start-up costs related to a de novo surgical hospital of $ 6.3 million.

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

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

(2) This amount includes litigation settlement costs of $ 1.2 million and $ 0.2 million for the years ended December 31, 2020 and 2019, respectively, with no comparable costs in 2021.

This amount also includes other litigation costs of $ 5.6 million, $ 5.2 million and $ 4.4 million for the years ended December 31, 2021, 2020 and 2019, respectively.

(3) Included in other income in the consolidated statement of operations for the year ended December 31, 2020, with no comparable gain in 2021 and 2019.

(4) Reflects the impact of insurance proceeds received net of operating losses incurred in the six months ended December 31, 2021, at a surgical facility that was closed following Hurricane Ida.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

Surgical Facility Services $ 5,552.8 $ 4,962.4

Ancillary Services 47.5 35.0

Optical Services — 17.7

All other 517.3 415.8

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Subsequent Events

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

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

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

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

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

During January 2022, the Company purchased a controlling interest in an ASC and practice for $ 30.6 million.

The Company funded the cash 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.

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

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(Principal Financial and Accounting Officer) March 1, 2022

/s/ Thomas F.

Executive Chairman of the Board March 1, 2022

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/s/ Clifford G.

Director March 1, 2022

/s/ Patricia A.

Maryland, Dr.PH

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

What changed 10-K

Item 9A. Controls and Procedures