What changed in this filing

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Item 1. Financial Statements

2022-08-02 compared with 2022-05-03 · 195 added, 180 removed, 477 unchanged (44% of the section changed)

49 unchanged sentences

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

Three Months Ended March 31,

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

2022 2021 2022 2021

Revenues $ 615.4 $ 543.3 $ 1,211.6 $ 1,055.7

10 unchanged sentences

Grant funds ( 0.1 ) ( 4.9 ) ( 1.3 ) ( 20.0 )

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

Loss on disposals and deconsolidations, net 1.1 1.0 1.0 0.1

Equity in earnings of unconsolidated affiliates ( 2.6 ) ( 3.0 ) ( 5.7 ) ( 5.6 )

Litigation settlement — — ( 32.8 ) —

Loss on debt extinguishment — 9.6 — 9.6

Other income, net ( 2.6 ) ( 2.8 ) ( 5.0 ) ( 2.8 )

538.9 483.8 1,034.7 931.9

Operating income 76.5 59.5 176.9 123.8

1 unchanged sentence

Income before income taxes 19.6 6.1 63.7 17.1

Income tax expense ( 1.3 ) ( 0.2 )

Income tax (expense) benefit ( 4.3 ) 2.7 ( 5.6 ) 2.5

Net income 15.3 8.8 58.1 19.6

Net income attributable to non-controlling interests ( 33.7 ) ( 35.7 ) ( 64.3 ) ( 67.5 )

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

Net loss attributable to Surgery Partners, Inc.

( 18.4 ) ( 26.9 ) ( 6.2 ) ( 47.9 )

Amounts attributable to participating securities — — — ( 10.3 )

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

Net income (loss) per share attributable to common stockholders

Net loss attributable to common stockholders $ ( 18.4 ) $ ( 26.9 ) $ ( 6.2 ) $ ( 58.2 )

Net loss per share attributable to common stockholders

Basic $ ( 0.21 ) $ ( 0.39 ) $ ( 0.07 ) $ ( 0.94 )

3 unchanged sentences

88,900 69,267 88,450 62,060

(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.

(1) The impact of potentially dilutive securities for all periods presented 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 March 31,

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

2022 2021 2022 2021

Net income $ 15.3 $ 8.8 $ 58.1 $ 19.6

10 unchanged sentences

Common Stock Additional

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

Paid-in Capital Accumulated Other Comprehensive (Loss) Income 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

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

5 unchanged sentences

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

Net (loss) income — — — — ( 18.4 ) 22.7 4.3

Equity-based compensation 30 — 4.4 — — — 4.4

Other comprehensive income — — — 19.0 — — 19.0

Acquisition and disposal of shares of non-controlling interests, net — — ( 10.8 ) — — 38.7 27.9

Distributions to non-controlling interests—non-redeemable holders — — — — — ( 27.7 ) ( 27.7 )

Balance at June 30, 2022 89,935 $ 0.9 $ 1,618.8 $ 44.3 $ ( 508.9 ) $ 885.4 $ 2,040.5

See notes to unaudited condensed consolidated financial statements.

2 unchanged sentences

(Unaudited, dollars in millions)

Three Months Ended March 31,

Six Months Ended June 30,

Cash flows from operating activities:

4 unchanged sentences

Equity-based compensation expense 8.0 9.3

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

Loss on disposals and deconsolidations, net 1.0 0.1

Loss on debt extinguishment — 9.6

Deferred income taxes 4.9 ( 3.2 )

4 unchanged sentences

Medicare accelerated payments and deferred governmental grants ( 40.2 ) ( 28.8 )

DOJ settlement payments — ( 32.2 )

Other operating assets and liabilities 0.2 5.0

4 unchanged sentences

Proceeds from disposals of facilities and other assets — 2.5

Purchases of equity investments ( 65.8 ) —

Proceeds from sales of equity investments 11.5 —

5 unchanged sentences

Payments of debt issuance costs — ( 8.7 )

Payment of premium on debt extinguishment — ( 2.4 )

Proceeds from equity offering — 260.9

18 unchanged sentences

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

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

As of June 30, 2022, the Company owned or operated a portfolio of 133 surgical facilities, comprised of 115 ASCs and 18 surgical hospitals in 32 states.

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

13 unchanged sentences

Actual results could differ from those estimates.

COVID-19 Pandemic

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.

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 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

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 $ 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.

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 March 31, 2022 and December 31, 2021.

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 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 condensed consolidated balance sheets.

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.

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 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 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

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

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

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

As of 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

The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability.

The Company uses fair value measurements based on inputs classified into the following hierarchy:

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

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

These may include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

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

2022 December 31,

2021 March 31,

2022 December 31,

Senior secured term loan $ 1,527.0 $ 1,530.7 $ 1,504.1 $ 1,530.7

6.750 % senior unsecured notes due 2025

$ 370.0 $ 370.0 $ 367.2 $ 371.9

10.000 % senior unsecured notes due 2027

$ 545.0 $ 545.0 $ 570.2 $ 577.0

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

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

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

3 unchanged sentences

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Three Months Ended March 31,

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

2022 2021 2022 2021

Patient service revenues:

21 unchanged sentences

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

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

Three Months Ended June 30,

Amount % Amount %

Patient service revenues:

Private insurance $ 309.5 51.0 % $ 273.0 50.9 %

Government 258.1 42.5 % 226.2 42.2 %

Self-pay 16.5 2.7 % 17.8 3.3 %

23.2 3.8 % 18.9 3.6 %

Total patient service revenues 607.3 100.0 % 535.9 100.0 %

Other service revenues 8.1 7.4

Total revenues $ 615.4 $ 543.3

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended March 31,

Six Months Ended June 30,

Amount % Amount %

8 unchanged sentences

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

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.

Accounts Receivable

13 unchanged sentences

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

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

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

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

"Acquisitions and Disposals."

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

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

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

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

If a carryforward exists, the Company makes a determination as to whether the carryforward will be utilized in the future.

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

The carrying value of the net deferred tax assets 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.

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.

These changes could have a significant impact on our future earnings.

The Company and certain of its subsidiaries file a consolidated federal income tax return.

The partnerships, limited liability companies, and certain non-consolidated physician practice corporations also file separate income tax returns.

The Company's allocable portion of each partnership's and limited liability company's income or loss is included in taxable income of the Company.

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

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):

The Company's effective tax rate was 8.8 % for the six months ended June 30, 2022 compared to ( 14.6 )% for the six months ended June 30, 2021.

For the six months ended June 30, 2022, the effective tax rate differed from the federal corporate tax rate of 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 six months ended June 30, 2021, the effective tax rate differed from 21% due to tax benefits of $ 4.1 million related to the vesting of restricted stock awards, as well as a $ 3.0 million tax benefit related to entity divestitures.

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.

Goodwill represents the excess of the fair value of the consideration provided in an acquisition plus the fair value of any non-controlling interests over the fair value of net assets acquired and is not amortized.

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

A summary of the Company's acquisitions and disposals for the six months ended June 30, 2022 is included in Note 2.

"Acquisitions and Disposals."

A summary of activity related to goodwill for the six months ended June 30, 2022 is as follows (in millions):

Balance at December 31, 2021 $ 3,911.8

1 unchanged sentence

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.

Balance at June 30, 2022 $ 3,993.1

A detailed evaluation of potential impairment indicators was performed as of June 30, 2022, which specifically considered the ongoing impact of the COVID-19 pandemic, recent increases in interest rates, inflation risk and market volatility.

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

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

Such changes impacting the calculation of fair value could result in a material impairment charge in the future.

Derivative Instruments and Hedging Activities

8 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 is as follows (in millions):

Three Months Ended March 31,

Six Months Ended June 30,

Balance at beginning of period $ 330.2 $ 306.8

3 unchanged sentences

Balance at end of period $ 341.8 $ 312.8

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

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

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

If a carryforward exists, the Company makes a determination as to whether the carryforward will be utilized in the future.

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

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

Medicare Accelerated Payments and Deferred Governmental Grants

The Company has received grant funds distributed under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) and other governmental assistance programs, including approximately $ 1 million during the six months ended June 30, 2022.

Grant funds received during the three months ended June 30, 2022 were minimal.

During the three and six months ended June 30, 2021, the Company received grant funds of approximately $ 1 million and $ 8 million, respectively.

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

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

The Company estimates $ 0.1 million and $ 1.3 million of grant funds received qualified for recognition as a reduction in operating expenses for the three and six months ended June 30, 2022, respectively.

During the three and six months ended June 30, 2021, $ 4.9 million and $ 20.0 million, respectively, was recognized as a reduction in operating expenses.

As of both June 30, 2022 and December 31, 2021, approximately $ 4 million of unrecognized grant funds received was reflected within the condensed consolidated balance sheets.

The Company received accelerated payments under the Medicare Accelerated and Advance Payment Program.

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

During the three and six months ended June 30, 2022, approximately $ 25 million and $ 43 million, respectively, has been repaid in accordance with the terms of the program.

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

As of June 30, 2022 and December 31, 2021, the remaining deferred accelerated payments was approximately $ 17 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 Company’s accounting policies for relief received under the CARES Act and other governmental assistance programs, including the recognition of grant funds, is unchanged from the policies described in Note 1 to the Company’s consolidated financial statements included in the 2021 Annual Report on Form 10-K.

Fair Value of Financial Instruments

The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability.

The Company uses fair value measurements based on inputs classified into the following hierarchy:

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

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

These may include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

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.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

all or a portion of our deferred tax assets.

These changes could have a significant impact on our future earnings.

The Company and certain of its subsidiaries file a consolidated federal income tax return.

The partnerships, limited liability companies, and certain non-consolidated physician practice corporations also file separate income tax returns.

The Company's allocable portion of each partnership's and limited liability company's income or loss is included in taxable income of the Company.

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 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.

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

Carrying Amount Fair Value

2022 December 31,

2021 June 30,

2022 December 31,

Senior secured term loan $ 1,523.3 $ 1,530.7 $ 1,439.5 $ 1,530.7

6.750 % senior unsecured notes due 2025

$ 370.0 $ 370.0 $ 339.0 $ 371.9

10.000 % senior unsecured notes due 2027

$ 545.0 $ 545.0 $ 531.4 $ 577.0

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

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

Variable Interest Entities

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

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

As of June 30, 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 June 30, 2022 and December 31, 2021 were $ 69.7 million and $ 48.1 million, respectively, and the total liabilities of the consolidated VIEs were $ 44.0 million and $ 20.1 million, respectively.

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.

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

Total consideration $ 34.7

Fair value of non-controlling interests 10.6

Aggregate acquisition date fair value $ 45.3

Net assets acquired:

Current assets $ 5.3

Property and equipment 1.9

Goodwill 42.7

Right-of-use operating lease assets 20.7

Current liabilities ( 5.5 )

Right-of-use operating lease liabilities ( 19.8 )

Aggregate acquisition date fair value $ 45.3

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

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

During the six months ended June 30, 2022, the Company acquired a controlling interest in four surgical facilities, two of which were merged into existing surgical facilities, for aggregate cash consideration of $ 74.9 million, net of cash acquired, and non-cash consideration of $ 2.6 million, which consisted of a non-controlling interest in one of the Company's existing surgical facilities.

In connection with the acquisitions the Company preliminarily recognized non-controlling interests of $ 41.5 million and goodwill of $ 114.4 million.

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

In connection with the acquisitions the Company preliminarily recognized non-controlling interests of $ 7.5 million and goodwill of $ 20.0 million.

During the six months ended June 30, 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.

Other Acquisitions

During the six months ended June 30, 2022, the Company acquired non-controlling interests in five surgical facilities and four in-development de novo surgical facilities for an aggregate cash purchase price of $ 65.8 million.

The non-controlling interests were accounted for as equity method investments and recorded as a component of investments in and advances to affiliates in the accompanying condensed consolidated balance sheets.

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.

During the six months ended June 30, 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.

The Company recognized a pre-tax loss on the sale of $ 0.4 million included in loss on disposals and deconsolidations, net in the condensed consolidated statements of operations for the six months ended June 30, 2022.

During the six months ended June 30, 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.

3 unchanged sentences

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.

Further, based on the preliminary valuation, the transactions resulted in a pretax net loss on deconsolidations of $ 5.6 million, which is included in loss on disposals and deconsolidations, net, in the accompanying condensed consolidated statement of operations for the six months ended June 30,

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.

The net loss was 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

11 unchanged sentences

Total long-term debt $ 3,019.4 $ 2,878.4

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

(1) Includes unamortized fair value discount of $ 2.7 million and $ 3.0 million as of June 30, 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.

1 unchanged sentence

Revolving Credit Facility

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 .

As of June 30, 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 June 30, 2022 and December 31, 2021 .

SURGERY PARTNERS, INC.

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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

Classification in Consolidated Balance Sheets June 30, 2022 December 31, 2021

Operating lease assets Right-of-use operating lease assets $ 277.8 $ 324.1

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Total lease liabilities $ 811.8 $ 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.

During the six months ended June 30, 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):

Three Months Ended March 31,

Six Months Ended June 30,

Operating lease costs $ 32.7 $ 37.5

8 unchanged sentences

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

Three Months Ended March 31,

Six Months Ended June 30,

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

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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 an additional $ 12.0 million will be reclassified as an increase to interest expense.

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.

Over the next 12 months, the Company estimates that an additional $ 7.2 million will be reclassified as a decrease to interest expense.

As of June 30, 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 $ 325.9 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.

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

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

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

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

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Location Assets Liabilities Assets Liabilities

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Total $ 78.9 $ 41.7 $ 23.6 $ 58.2

(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.

(1) The balance as of June 30, 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 March 31,

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

Location 2022 2021 2022 2021

Derivatives not designated as hedging instruments

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

(Gain) loss recognized in income Other income, net $ — $ ( 0.2 ) $ 0.1 $ ( 0.2 )

Derivatives in cash flow hedging relationships

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

Gain (loss) recognized in OCI (effective portion) $ 12.7 $ ( 5.8 ) $ 63.1 $ ( 4.9 )

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

Interest expense, net $ 6.3 $ 6.0 $ 12.7 $ 11.5

(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

(1) Includes amortization of accumulated OCI related to de-designated and terminated interest rate swaps of $ 5.3 million and $ 3.2 million for the three months ended June 30, 2022 and 2021, respectively.

Includes amortization of accumulated OCI related to de-designated and terminated interest rate swaps of $ 10.6 million and $ 3.2 million for the six months ended June 30, 2022 and 2021, respectively.

Earnings Per Share

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shares in thousands):

Three Months Ended March 31,

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

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

2022 2021 2022 2021

Net loss attributable to Surgery Partners, Inc.

$ ( 18.4 ) $ ( 26.9 ) $ ( 6.2 ) $ ( 47.9 )

amounts allocated to participating securities (1)

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

— — — ( 10.3 )

Net loss attributable to common stockholders $ ( 18.4 ) $ ( 26.9 ) $ ( 6.2 ) $ ( 58.2 )

Weighted average shares outstanding- basic 88,900 69,267 88,450 62,060

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88,900 69,267 88,450 62,060

Income (loss) per share:

Loss per share:

Basic $ ( 0.21 ) $ ( 0.39 ) $ ( 0.07 ) $ ( 0.94 )

$ ( 0.21 ) $ ( 0.39 ) $ ( 0.07 ) $ ( 0.94 )

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

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

Stock options 1,559 2,016 1,599 1,901

Restricted shares 628 1,484 644 1,451

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

(1) Includes dividends accrued for the Series A Preferred Stock for the six months ended June 30, 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.

There were no participating securities for the three and six months ended June 30, 2022 and the three months ended June 30, 2021.

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

Other Current Liabilities

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Total $ 221.8 $ 210.0

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Commitments and Contingencies

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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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Plaintiffs in these matters may 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 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.

Total professional, general and workers' compensation claim liabilities as of June 30, 2022 and December 31, 2021 were $ 18.2 million and $ 19.8 million, respectively.

Expected insurance recoveries of $ 8.7 million as of both June 30, 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

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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

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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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Potential Physician Investor Liability

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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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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.

1 unchanged sentence

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 $ 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.

The carrying value of the liability under the TRA, reflecting the discount, was $ 20.7 million and $ 19.7 million as of June 30, 2022 and December 31, 2021, respectively.

The current portion of the liability was $ 20.2 million and $ 19.7 million as of June 30, 2022 and December 31, 2021, respectively, and is included as a component of other current liabilities in the condensed consolidated balance sheets.

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Segment Reporting

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

Three Months Ended March 31,

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

2022 2021 2022 2021

Surgical Facility Services $ 597.9 $ 525.8 $ 1,176.7 $ 1,021.6

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Transaction, integration and acquisition costs (1)

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

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

8.2 11.4 15.3 20.8

Loss on disposals and deconsolidations, net 1.1 1.0 1.0 0.1

Loss (gain) on litigation settlement and other litigation costs (2)

1.7 0.8 ( 29.1 ) 1.8

Loss on debt extinguishment — 9.6 — 9.6

Adjusted EBITDA $ 86.1 $ 75.9 $ 163.2 $ 148.8

(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 $ 8.2 million and $ 9.2 million for the three months ended June 30, 2022 and 2021, respectively.

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

This amount includes transaction and integration costs of $ 15.3 million and $ 14.5 million for the six months ended June 30, 2022 and 2021, respectively.

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

(2) This amount includes other litigation costs of $ 1.7 million and $ 0.8 million for the three months ended June 30, 2022 and 2021, respectively.

This amount includes other litigation costs of $ 3.7 million and $ 1.8 million for the six months ended June 30, 2022 and 2021, respectively.

This amount also includes gain on litigation settlement of $ 32.8 million for the six months ended June 30, 2022.

2022 December 31,

3 unchanged sentences

Total assets $ 6,291.6 $ 6,117.6

Three Months Ended March 31,

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30,

Cash purchases of property and equipment:

4 unchanged sentences

Subsequent Events

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.

In July 2022, the Company acquired non-controlling interests in two surgical facilities and three in-development de novo surgical facilities for a combined purchase price of $ 29.3 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