What changed in this filing

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Item 1. Financial Statements

2022-05-03 compared with 2021-11-03 · 192 added, 325 removed, 465 unchanged (53% of the section changed)

3 unchanged sentences

(Dollars in millions, except per share amounts)

September 30,

2022 December 31,

25 unchanged sentences

Non-controlling interests—redeemable 341.5 330.2

Redeemable preferred stock - Series A;

shares authorized - 310,000 ;

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

redemption value - $ — and $ 434.5 , respectively

Stockholders' equity:

6 unchanged sentences

Additional paid-in capital 1,625.2 1,622.3

Accumulated other comprehensive loss ( 47.9 ) ( 61.0 )

Accumulated other comprehensive income (loss) 25.3 ( 31.5 )

Retained deficit ( 490.5 ) ( 502.7 )

8 unchanged sentences

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

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

2021 2020 2021 2020

Three Months Ended March 31,

Revenues $ 596.2 $ 512.4

8 unchanged sentences

Depreciation and amortization 27.4 25.7

Income from equity investments ( 2.9 ) ( 3.1 ) ( 8.5 ) ( 7.6 )

Loss on disposals and deconsolidations, net 1.9 0.7 2.0 7.1

Transaction and integration costs 7.1 5.3

Impairment charges — 33.5 — 33.5

Grant funds ( 1.2 ) ( 15.1 )

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

Gain on disposals and deconsolidations, net ( 0.1 ) ( 0.9 )

Equity in earnings of unconsolidated affiliates ( 3.1 ) ( 2.6 )

Litigation settlement ( 32.8 ) —

Other income ( 0.5 ) — ( 3.3 ) ( 1.7 )

Total operating expenses 495.6 477.6 1,427.5 1,225.1

Other income, net ( 2.4 ) —

Operating income 100.4 64.3

Interest expense, net ( 56.3 ) ( 53.3 )

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

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

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

Income before income taxes 44.1 11.0

Income tax expense ( 1.3 ) ( 0.2 )

Net income 42.8 10.8

Net income attributable to non-controlling interests ( 30.6 ) ( 31.8 )

Net loss attributable to Surgery Partners, Inc.

Net income (loss) attributable to Surgery Partners, Inc.

12.2 ( 21.0 )

Amounts attributable to participating securities — ( 10.3 )

Net loss attributable to common stockholders $ ( 22.9 ) $ ( 71.6 ) $ ( 81.1 ) $ ( 150.8 )

Net loss per share attributable to common stockholders

Net income (loss) attributable to common stockholders $ 12.2 $ ( 31.3 )

Net income (loss) per share attributable to common stockholders

Basic $ 0.14 $ ( 0.57 )

3 unchanged sentences

90,272 54,773

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

(1) The impact of potentially dilutive securities for the three months ended March 31, 2021 was not considered because the effect would be anti-dilutive.

See notes to unaudited condensed consolidated financial statements.

2 unchanged sentences

(Unaudited, dollars in millions)

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

2021 2020 2021 2020

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

Other comprehensive income (loss), net of tax:

Three Months Ended March 31,

Net income $ 42.8 $ 10.8

Other comprehensive income, net of tax:

Derivative activity 56.8 6.4

Comprehensive income (loss) 14.7 ( 31.0 ) 40.9 ( 61.2 )

Comprehensive income 99.6 17.2

Comprehensive income attributable to non-controlling interests ( 30.6 ) ( 31.8 )

Comprehensive loss attributable to Surgery Partners, Inc.

Comprehensive income (loss) attributable to Surgery Partners, Inc.

$ 69.0 $ ( 14.6 )

4 unchanged sentences

Common Stock Additional

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

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

Non-Redeemable Total

9 unchanged sentences

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

Net (loss) income — — — — ( 26.9 ) 22.0 ( 4.9 )

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

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

Other comprehensive income — — — 0.2 — — 0.2

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

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

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

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

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

Other comprehensive income — — — 6.5 — — 6.5

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

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

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

See notes to unaudited condensed consolidated financial statements.

SURGERY PARTNERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited, dollars in millions, shares in thousands)

Common Stock Additional

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

Non-Redeemable Total

Shares Amount

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

Net (loss) income — — — — ( 27.5 ) 13.6 ( 13.9 )

Equity-based compensation 1,219 — 2.8 — — — 2.8

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

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

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

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

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

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

Equity-based compensation 33 — 3.8 — — — 3.8

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

Other comprehensive income — — — 7.3 — — 7.3

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

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

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

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

Net income — — — — 12.2 20.0 32.2

Equity-based compensation 572 — 7.7 — — — 7.7

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

Other comprehensive income — — — 56.8 — — 56.8

1 unchanged sentence

Distributions to non-controlling interests—non-redeemable holders — — — — — ( 24.6 ) ( 24.6 )

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

Balance at March 31, 2022 89,905 $ 0.9 $ 1,625.2 $ 25.3 $ ( 490.5 ) $ 851.7 $ 2,012.6

See notes to unaudited condensed consolidated financial statements.

2 unchanged sentences

(Unaudited, dollars in millions)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flows from operating activities:

Net income (loss) $ 27.8 $ ( 46.6 )

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

Net income $ 42.8 $ 10.8

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

Depreciation and amortization 27.4 25.7

1 unchanged sentence

Equity-based compensation expense 3.7 5.2

Loss on disposals and deconsolidations, net 2.0 7.1

Impairment charges — 33.5

Loss on debt extinguishment 9.1 —

Gain on disposals and deconsolidations, net ( 0.1 ) ( 0.9 )

Deferred income taxes 1.0 ( 0.1 )

Income from equity investments, net of distributions received 0.2 ( 1.0 )

Equity in earnings of unconsolidated affiliates, net of distributions received ( 0.9 ) ( 0.2 )

Non-cash lease expense 8.6 9.8

2 unchanged sentences

Medicare accelerated payments and deferred governmental grants ( 18.0 ) ( 7.2 )

DOJ settlement payments ( 32.2 ) —

Other operating assets and liabilities 7.2 1.6

4 unchanged sentences

Proceeds from disposals of facilities and other assets — 2.3

Proceeds from sales of equity investments 11.5 —

Other investing activities ( 9.3 ) —

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

Net cash used in investing activities ( 47.1 ) ( 14.3 )

Cash flows from financing activities:

6 unchanged sentences

Distributions to non-controlling interest holders ( 36.2 ) ( 31.3 )

Receipts (payments) related to ownership transactions with non-controlling interest holders 2.4 ( 27.3 )

(Payments) receipts related to ownership transactions with non-controlling interest holders ( 3.1 ) 1.0

Other financing activities 0.7 ( 8.0 )

Net cash provided by financing activities 86.5 112.5

Net increase in cash, cash equivalents and restricted cash 12.2 357.3

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

Cash, cash equivalents and restricted cash at end of period $ 330.4 $ 450.3

Net cash (used in) provided by financing activities ( 43.7 ) 187.8

Net (decrease) increase in cash and cash equivalents ( 11.0 ) 223.7

Cash and cash equivalents at beginning of period 389.9 318.2

Cash and cash equivalents at end of period $ 378.9 $ 541.9

See notes to unaudited condensed consolidated financial statements.

8 unchanged sentences

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

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

As of March 31, 2022, the Company owned or operated a portfolio of 127 surgical facilities, comprised of 109 ASCs and 18 surgical hospitals in 31 states.

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

9 unchanged sentences

All significant intercompany balances and transactions are eliminated in consolidation.

Reclassifications

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

Use of Estimates

3 unchanged sentences

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 United States economy and financial markets.

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

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

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

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.

The Company cannot provide any certainty regarding the length and severity of the impact of the COVID-19 pandemic on its business operations and financial performance.

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.

1 unchanged sentence

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

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

The Company did no t receive any grant funds during the three months ended September 30, 2021.

The Company has received approximately $ 87 million of the grant funds distributed under the CARES Act and other governmental assistance programs, including approximately $ 1 million during the three months ended March 31, 2022.

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

This guidance sets forth the allowable methods for quantifying eligible healthcare related expenses and lost revenues.

eligible healthcare related expenses and lost revenues.

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

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

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

Based on guidance, the Company estimates approximately $ 1.2 million and $ 15.1 million of grant funds received qualified for recognition as a reduction in operating expenses for the three months ended March 31, 2022 and 2021, respectively.

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

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

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.

2 unchanged sentences

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

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

During the three months ended March 31, 2022, approximately $ 18 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 condensed consolidated statements of cash flows.

2 unchanged sentences

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

As of September 30, 2021 and December 31, 2020, the current portion of deferred accelerated payments was approximately $ 80 million and $ 95 million, respectively, and is included as a component of Medicare accelerated payments and deferred governmental grants in the condensed consolidated balance sheets.

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

As of March 31, 2022 and December 31, 2021, the remaining deferred accelerated payments was approximately $ 42 million and $ 60 million, respectively, which was included as a component of Medicare accelerated payments and deferred governmental grants in the condensed consolidated balance sheets.

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

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

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

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

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

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

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 both March 31, 2022 and December 31, 2021, the Company had deferred approximately $ 8.5 million, which was included as a component of accrued payroll and benefits in the condensed consolidated balance sheets.

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

Variable Interest Entities

2 unchanged sentences

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

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

The total assets (excluding goodwill and intangible assets, net) of the consolidated VIEs included in the accompanying condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020 were $ 26.7 million and $ 27.7 million, respectively, and the total liabilities of the consolidated VIEs were $ 19.1 million and $ 21.1 million, respectively.

As of March 31, 2022, the Company's consolidated VIEs include six surgical facilities and five physician practices.

The total assets (excluding goodwill and intangible assets, net) of the consolidated VIEs included in the accompanying condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021 were $ 71.4 million and $ 48.1 million, respectively, and the total liabilities of the consolidated VIEs were $ 46.7 million and $ 20.1 million, respectively.

Fair Value of Financial Instruments

5 unchanged sentences

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

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Carrying Amount Fair Value

September 30,

2022 December 31,

2020 September 30,

2021 March 31,

2022 December 31,

12 unchanged sentences

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

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

2021 2020 2021 2020

Three Months Ended March 31,

Patient service revenues:

18 unchanged sentences

Other service revenues.

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 three and nine months ended September 30, 2020, other service revenues also includes optical service revenues, which consisted of handling charges billed to the members of the Company's optical products purchasing organization.

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Three Months Ended September 30,

Amount % Amount %

Patient service revenues:

Private insurance $ 271.4 49.2 % $ 257.4 52.6 %

Government 248.0 45.0 % 188.8 38.5 %

Self-pay 15.9 2.9 % 19.4 4.0 %

16.1 2.9 % 24.2 4.9 %

Total patient service revenues 551.4 100.0 % 489.8 100.0 %

Other service revenues 7.8 6.3

Total revenues $ 559.2 $ 496.1

Nine Months Ended September 30,

Three Months Ended March 31,

Amount % Amount %

8 unchanged sentences

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

Cash, Cash Equivalents and Restricted Cash

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

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

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

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

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

Accounts Receivable

4 unchanged sentences

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

9 unchanged sentences

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

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

"Acquisitions."

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

A summary of the Company's acquisitions and dispositions for the three months ended March 31, 2022 is included in Note 2.

"Acquisitions and Disposals."

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A summary of activity related to goodwill for the three months ended March 31, 2022 is as follows (in millions):

Balance at December 31, 2021 $ 3,911.8

Acquisitions, including post acquisition adjustments 43.4

Divestitures and deconsolidations ( 0.1 )

Balance at September 30, 2021 $ 3,613.6

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

On the basis of available evidence as of September 30, 2021, no indicators of impairment were identified.

Disposals and deconsolidations ( 29.4 )

Balance at March 31, 2022 $ 3,925.8

A detailed evaluation of potential impairment indicators was performed as of March 31, 2022, which specifically considered the ongoing impact of the COVID-19 pandemic.

On the basis of available evidence as of March 31, 2022, no indicators of impairment were identified.

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

10 unchanged sentences

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

Three Months Ended March 31,

Balance at beginning of period $ 330.2 $ 306.8

Net income attributable to non-controlling interests—redeemable 10.6 10.7

Acquisition (disposal) of shares of non-controlling interests, net—redeemable 2.4 ( 7.9 )

Acquisition of shares of non-controlling interests, net—redeemable 12.3 1.2

Distributions to non-controlling interest—redeemable holders ( 11.6 ) ( 10.5 )

7 unchanged sentences

The carrying value of the net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions.

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

all or a portion of our deferred tax assets.

Our income tax expense in future periods will be reduced or increased to the extent of offsetting decreases or increases, respectively, in our valuation allowance in the period when the change in circumstances occurs.

4 unchanged sentences

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

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

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

For the nine months ended September 30, 2020, the effective tax rate differed from 21% primarily due to (a) discrete tax benefits of $ 6.9 million attributable to the release of federal and state valuation allowances on the Company’s Internal Revenue Code Section 163(j) interest carryforwards as a result of the increase in deductible interest expense allowed under the CARES Act, and $ 5.0 million attributable to a portion of the payments under the Settlement Agreement, as defined in Note 9.

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

The Company's effective tax rate was 2.9 % for the three months ended March 31, 2022 compared to 1.8 % for the three months ended March 31, 2021.

For the three months ended March 31, 2022, the effective tax rate differed from 21% primarily due to earnings attributable to non-controlling interests, an increase in the Company’s valuation allowance attributable to interest expense limitations, and discrete tax benefits of (a) $ 4.6 million related to the vesting of restricted stock awards, (b) $ 1.8 million attributable to non-recurring earnings’ impact on the Company’s valuation allowance, and (c) $ 1.0 million related to entity divestitures.

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

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

Recent Accounting Pronouncements

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

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

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

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

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

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The cash consideration was funded through available resources.

Acquisitions and Disposals

During the three months ended March 31, 2022, the Company acquired a controlling interest in two surgical facilities, one of which was merged into an existing surgical facility, for aggregate cash consideration of $ 31.1 million, net of cash acquired, and non-cash consideration of $ 2.6 million.

The cash consideration was funded through available resources and the non-cash consideration consisted of a non-controlling interest in one of the Company's existing surgical facilities.

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

8 unchanged sentences

Right-of-use operating lease assets 20.7

Other long-term assets 0.1

Current liabilities ( 5.5 )

Long-term debt ( 0.1 )

Right-of-use operating lease liabilities ( 19.8 )

1 unchanged sentence

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

During the nine months ended September 30, 2021, no significant changes were made to the purchase price allocation of assets and liabilities, existing at the date of acquisition, related to individual acquisitions completed in 2020.

During the three months ended March 31, 2022, 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 2021.

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

The results of operations of the acquisitions were included in the Company’s results of operations beginning on the dates of acquisition and were not considered significant for the nine months ended September 30, 2021.

Disposals and Deconsolidations

During the three months ended March 31, 2022, the Company sold its interests in a surgical facility, which was previously accounted for as an equity method investment, for net cash proceeds of $ 11.5 million, and recognized a pre-tax loss of $ 0.4 million included in loss on disposals and deconsolidations, net in the condensed consolidated statements of operations for the three months ended March 31, 2022.

During the three months ended March 31, 2022, the Company contributed its interests in two surgical facilities as non-cash consideration for non-controlling interests in two new separate entities.

As a result of these transactions, the Company lost control of the previously controlled surgical facilities but retains a non-controlling interest in each, resulting in the deconsolidation of the previously consolidated entities.

The remaining non-controlling interests were accounted for as equity method investments, and initially measured and recorded at fair value as of the dates of the transactions.

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

The fair value determination was based on a combination of multiple valuation methods, which included discounted cash flow and market value approach, which incorporates estimates of future earnings and market valuation multiples for certain guideline companies.

The preliminary fair value of the investments of $ 9.8 million was recorded as a component of investments in and advances to affiliates in the accompanying condensed consolidated balance sheets.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

based on the preliminary valuation, the transactions resulted in a pretax net loss on deconsolidations of $ 5.6 million, which is included in gain on disposals and deconsolidations, net, in the accompanying condensed consolidated statement of operations for the three months ended March 31, 2022.

The gains were determined based on the difference between the fair value of the Company's retained interests in the entities and the carrying values of both the tangible and intangible assets of the entities immediately prior to the transactions.

Long-Term Debt

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

September 30,

2022 December 31,

9 unchanged sentences

Total long-term debt $ 3,025.2 $ 2,878.4

(1) Includes unamortized fair value discount of $ 3.1 million and $ 3.7 million as of September 30, 2021 and December 31, 2020, respectively.

(1) Includes unamortized fair value discount of $ 2.8 million and $ 3.0 million as of March 31, 2022 and December 31, 2021, respectively.

The increase in finance lease obligations is a result of the modification of certain existing facility real estate leases that were previously classified as operating leases.

"Leases" for further discussion.

Revolving Credit Facility

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

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

As of September 30, 2021,

As of March 31, 2022, the Company's availability on its revolving credit facility (the "Revolver") was $ 203.0 million (including outstanding letters of credit of $ 7.0 million).

There were no outstanding borrowings under the Revolver as of both March 31, 2022 and December 31, 2021 .

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

Sixth Amendment to Credit Agreement

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

The sixth amendment provides for, among other things, a new tranche of term loans under the Credit Agreement in an aggregate original principal amount of approximately $ 1.545 billion (the “New Term Loans”), which New Term Loans replace or refinance in full all of the existing term loans outstanding under the Credit Agreement.

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

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

The New Term Loans are subject to quarterly amortization in an aggregate original principal amount of approximately 1.00 % per annum.

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

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

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

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

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

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 (in millions):

Classification in Consolidated Balance Sheets March 31, 2022 December 31, 2021

Operating lease assets Right-of-use operating lease assets $ 277.4 $ 324.1

Finance lease assets Property and equipment, net of accumulated depreciation 467.6 329.6

Total leased assets $ 745.0 $ 653.7

Operating lease liabilities:

Current Other current liabilities $ 35.2 $ 40.1

Long-term Right-of-use operating lease liabilities 272.1 315.6

Total operating lease liabilities 307.3 355.7

Finance lease liabilities:

Current Current maturities of long-term debt 22.9 19.0

Long-term Long-term debt, less current maturities 484.8 345.6

Total finance lease liabilities 507.7 364.6

Total lease liabilities $ 815.0 $ 720.3

During the three months ended March 31, 2022, the Company extended certain existing facility real estate leases, resulting in the reclassification of the leases from operating to finance.

The modifications resulted in an increase to finance lease liabilities and assets of $ 146.5 million and $ 145.0 million, respectively, including the reclassification of existing operating lease liabilities and assets of $ 60.8 million and $ 59.3 million, respectively.

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

Nine Months Ended September 30,

Three Months Ended March 31,

Operating lease costs $ 16.1 $ 18.6

5 unchanged sentences

Total lease costs $ 39.6 $ 37.2

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Nine Months Ended September 30,

Three Months Ended March 31,

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

5 unchanged sentences

Finance leases $ 89.3 $ 1.4

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Redeemable Preferred Stock

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

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

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

(the “Certificate of Designation”), the Company 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 condensed consolidated statements of cash flows.

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

Balance at December 31, 2020 $ 434.5

Dividends accrued 10.3

Dividends declared ( 5.1 )

Redeemable preferred stock conversion to common stock ( 439.7 )

Balance at September 30, 2021 $ —

Derivatives and Hedging Activities

5 unchanged sentences

Over the next 12 months, the Company estimates that an additional $ 12.0 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 effectively extend the termination date to March 31, 2025.

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

As of March 31, 2022, the Company had nine interest rate swaps with a total net hedged notional amount of $ 1.2 billion and two interest rate caps with a total hedged notional amount of $ 329.8 million.

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.

1 unchanged sentence

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

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

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

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

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

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

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

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

The interest rate caps each have a termination date of March 31, 2025.

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

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

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

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The cash flows related to the portion treated as debt are classified as financing activities in the condensed consolidated statements of cash flows while the portion treated as an at-market derivative are classified as operating activities.

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

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

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

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

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

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 168.8 Active — NA March 31, 2025

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

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

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

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

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

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

Interest rate cap September 30, 2021 164.9 Active 166.8 Active March 31, 2025

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

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

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

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

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

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

$ 1,529.8 $ 1,533.6

4 unchanged sentences

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

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Location Assets Liabilities Assets Liabilities

3 unchanged sentences

Derivatives in cash flow hedging relationships

Interest rate caps Other long-term assets 11.1 — 2.9 —

Interest rate swaps Other long-term assets 51.4 — 8.2 —

Interest rate swaps Other long-term liabilities (1)

— 42.4 — 45.8

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

Total $ 67.2 $ 47.0 $ 23.6 $ 58.2

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) The balance as of March 31, 2022 and December 31, 2021 is related to the financing component of the pay-fixed, receive floating interest rate swaps.

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

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

Three Months Ended March 31,

Location 2022 2021

Derivatives not designated as hedging instruments

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

Loss recognized in income Other income, net $ ( 0.1 ) $ —

Derivatives in cash flow hedging relationships

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

Gain recognized in OCI (effective portion) $ ( 50.4 ) $ ( 0.9 )

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

Interest expense, net $ 6.4 $ 5.5

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

(1) Includes amortization of accumulated OCI related to de-designated and terminated interest rate swaps of $ 5.3 million for the three months ended March 31, 2022 with no related amortization for the three months ended March 31, 2021.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Earnings Per Share

4 unchanged sentences

shares in thousands):

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

2021 2020 2021 2020

Net loss attributable to Surgery Partners, Inc.

Three Months Ended March 31,

Net income (loss) attributable to Surgery Partners, Inc.

$ 12.2 $ ( 21.0 )

amounts allocated to participating securities (1)

— ( 10.0 ) ( 10.3 ) ( 29.2 )

Net loss attributable to common stockholders $ ( 22.9 ) $ ( 71.6 ) $ ( 81.1 ) $ ( 150.8 )

Weighted average shares outstanding- basic and diluted (2)

Net income (loss) attributable to common stockholders $ 12.2 $ ( 31.3 )

Weighted average shares outstanding- basic 87,995 54,773

Weighted average shares outstanding- diluted (2)

90,272 54,773

Loss per share:

Basic and diluted (2)

Income (loss) per share:

Basic $ 0.14 $ ( 0.57 )

$ 0.14 $ ( 0.57 )

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

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

Stock options 1,634 1,728

Restricted shares 643 1,410

(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 presented was not considered because the effect would be anti-dilutive in each period.

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

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

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

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

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

"Redeemable Preferred Stock" for further discussion.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Includes dividends accrued for the Series A Preferred Stock for the three months ended March 31, 2021.

The Series A Preferred Stock did not participate in undistributed losses and was converted to common stock during the second quarter of 2021.

There were no participating securities for the three months ended March 31, 2022.

(2) The impact of potentially dilutive securities for the three months ended March 31, 2021, was not considered because the effect would be anti-dilutive.

Other Current Liabilities

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

September 30,

2022 December 31,

1 unchanged sentence

Interest payable 36.0 29.2

Cost report liabilities 28.5 16.9

Amounts due to patients and payors 32.7 26.0

Cost report liabilities 22.5 26.4

Tax receivable agreement liability 20.2 19.7

Accrued legal settlement (1)

Accrued expenses and other 74.5 68.6

Total $ 221.1 $ 210.0

(1) See Note 9.

"Commitments and Contingencies" for further discussion.

Commitments and Contingencies

3 unchanged sentences

Although management believes the coverage is sufficient for the Company's operations, some claims may potentially exceed the scope of coverage in effect.

Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance.

Plaintiffs in these matters may

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

request punitive or other damages that may not be covered by insurance.

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

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

Expected insurance recoveries of $ 10.5 million as of both September 30, 2021 and December 31, 2020, are included as a component of other current assets and other long-term assets in the condensed consolidated balance sheets.

Total professional, general and workers' compensation claim liabilities as of March 31, 2022 and December 31, 2021 were $ 18.9 million and $ 19.8 million, respectively.

Expected insurance recoveries of $ 8.7 million as of both March 31, 2022 and December 31, 2021, are included as a component of other current assets and other long-term assets in the condensed consolidated balance sheets.

Laws and Regulations

4 unchanged sentences

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

Government Settlement

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

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

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Stockholder Litigation

6 unchanged sentences

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

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

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

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

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

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

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

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

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

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

or the aiding and abetting claim asserted against Bain Capital.

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

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

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

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

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

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

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

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 became final and non-appealable on March 14, 2022.

The case is now closed.

Pursuant to the settlement, the Company received $ 32.8 million in March 2022, which was included in litigation settlement in the condensed consolidated statements of operations for the three months ended March 31, 2022.

Acquired Facilities

15 unchanged sentences

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

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

The calculation of amounts payable pursuant to the TRA is thus dependent on the maximum corporate federal income tax rate.

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

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

The amounts payable under the TRA are related to the Company’s projected realized tax savings

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Assuming the Company's tax rate is 24 %, calculated as the maximum corporate federal tax rate plus three percent, throughout the remaining term of the TRA, the Company estimates the total remaining amounts payable under the TRA was approximately $ 43.2 million as of both September 30, 2021 and December 31, 2020.

over the next five years and are not dependent on the Company’s actual tax savings over such period.

The calculation of amounts payable pursuant to the TRA is thus dependent on the maximum corporate federal income tax rate.

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

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

Assuming the Company's tax rate is 24 %, calculated as the maximum corporate federal tax rate plus three percent, throughout the remaining term of the TRA, the Company estimates the total remaining amounts payable under the TRA was approximately $ 22.0 million as of both March 31, 2022 and December 31, 2021.

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

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

The current portion of the liability was $ 21.2 million as of both September 30, 2021 and December 31, 2020, and is included as a component of other current liabilities in the condensed consolidated balance sheets.

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

The carrying value of the liability under the TRA, reflecting the discount, was $ 20.2 million and $ 19.7 million as of March 31, 2022 and December 31, 2021, respectively, and is included as a component of other current liabilities in the condensed consolidated balance sheets.

Segment Reporting

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

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

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

The Optical Services segment for the three and nine months ended September 30, 2020 reflected in the table below consisted of an optical products group purchasing organization, which was sold on December 31, 2020.

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

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

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

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

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

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

2021 2020 2021 2020

Three Months Ended March 31,

Surgical Facility Services $ 578.8 $ 495.8

Ancillary Services 17.4 16.6

Optical Services — 0.8 — 2.1

Total $ 596.2 $ 512.4

2 unchanged sentences

Ancillary Services 0.1 ( 0.9 )

Optical Services — 0.4 — 1.0

All other ( 24.0 ) ( 21.2 )

1 unchanged sentence

Reconciliation of Adjusted EBITDA:

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

Income before income taxes $ 44.1 $ 11.0

Net income attributable to non-controlling interests ( 30.6 ) ( 31.8 )

3 unchanged sentences

Transaction, integration and acquisition costs (1)

10.2 7.5 31.0 30.2

Impairment charges — 33.5 — 33.5

Loss on disposals and deconsolidations, net 1.9 0.7 2.0 7.1

Litigation settlement and other litigation costs (2)

2.5 1.1 4.3 4.9

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

Gain on escrow release (3)

— — — ( 0.8 )

Hurricane-related operating losses (4)

Gain on disposals and deconsolidations, net ( 0.1 ) ( 0.9 )

(Gain) loss on litigation settlement and other litigation costs (2)

Adjusted EBITDA $ 77.1 $ 72.9

(1) This amount includes transaction and integration costs of $ 7.1 million and $ 5.3 million for the three months ended March 31, 2022 and 2021, respectively.

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

(2) This amount includes other litigation costs of $ 2.0 million and $ 1.0 million for the three months ended March 31, 2022 and 2021, respectively.

This amount also includes gain on litigation settlement of $ 32.8 million for the three months ended March 31, 2022, with no comparable activity in the 2021 period.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

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

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

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

September 30,

2022 December 31,

3 unchanged sentences

Total assets $ 6,289.5 $ 6,117.6

Nine Months Ended September 30,

Three Months Ended March 31,

Cash purchases of property and equipment:

4 unchanged sentences

Subsequent Events

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

In April 2022, the Company acquired non-controlling interests in three surgical facilities and four in-development de novo surgical facilities for a combined purchase price of $ 48.6 million.

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

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

What changed 10-Q

Item 1. Financial Statements