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Item 9A. Controls and Procedures

2023-03-01 compared with 2022-03-01 · 326 added, 428 removed, 1019 unchanged (43% of the section changed)

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An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report.

Based on the evaluation of our disclosure controls and procedures conducted as of December 31, 2022, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

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Other Information

On February 25, 2022, George M.

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

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

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

Goodwin (the “Retirement Agreement”).

Pursuant to the terms of the Retirement Agreement, Mr.

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

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

Additionally, Mr.

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

Pursuant to the Retirement Agreement, Mr.

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

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

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

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

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Executive Compensation

The information called for by Item 11 is incorporated herein by reference to the Definitive Proxy Statement referenced above in Item 10.

The information called for by Item 11 is incorporated herein by reference to the Definitive Proxy Statement.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information called for by Item 12 is incorporated herein by reference to the Definitive Proxy Statement referenced above in Item 10.

The information called for by Item 12 is incorporated herein by reference to the Definitive Proxy Statement.

Certain Relationships and Related Transactions, and Director Independence

The information called for by Item 13 is incorporated herein by reference to the Definitive Proxy Statement referenced above in Item 10.

The information called for by Item 13 is incorporated herein by reference to the Definitive Proxy Statement.

Principal Accounting Fees and Services

The information called for by Item 14 is incorporated herein by reference to the Definitive Proxy Statement referenced above in Item 10.

The information called for by Item 14 is incorporated herein by reference to the Definitive Proxy Statement.

Exhibits and Financial Statement Schedules

(a) Financial Statements, Financial Statement Schedules and Exhibits

(a) Financial Statements and Financial Statement Schedules

(1) Financial Statements

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All financial schedules have been omitted either because they are not applicable or because the required information is provided in our Consolidated Financial Statements and Notes thereto, starting on page F-1 of this Annual Report on Form 10-K.

(3) Exhibits:

2.1 Agreement and Plan of Merger by and among Surgery Partners, Inc., SP Merger Sub, Inc., NSH Holdco, Inc.

and IPC / NSH, L.P., dated as of May 9, 2017 (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed May 11, 2017).*

2.2 Letter Amendment to Merger Agreement, by and among Surgery Partners, Inc., SP Merger Sub, Inc., NSH Holdco, Inc.

and IPC / NSH, L.P., dated as of July 7, 2017 (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed July 11, 2017).*

(b) Exhibits:

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

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

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

4.1 Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.

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

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and certain other parties thereto, dated August 31, 2017 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 1, 2017).

10.5 Amendment and Joinder to Amended and Restated Registration Rights Agreement, dated December 22, 2022, by and among Surgery Partners, Inc., BCPE Seminole Holdings LP, BCPE Seminole Holdings III, L.P.

and BCPE Seminole Holdings IV, L.P.

(incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 22, 2022).

10.6 Credit Agreement, by and among SP Holdco I, Inc., Surgery Center Holdings, Inc., Jefferies Finance LLC and the other guarantors and lenders party thereto, dated August 31, 2017 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed September 1, 2017).*

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

10.14 Eighth Amendment to the Credit Agreement, dated as of August 18, 2022, by and among SP Holdco I, Inc., Surgery Center Holdings, Inc., the other Guarantors party thereto, Jefferies Finance LLC and the other lenders party thereto (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed November 8, 2022).

10.15 Ninth Amendment to the Credit Agreement, dated as of January 13, 2023, by and among SP Holdco I, Inc., Surgery Center Holdings, Inc., the other Guarantors party thereto, Jefferies Finance LLC and the other lenders party thereto.

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

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2015 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed December 20, 2018).

10.28 (a) Amended and Restated Employment Agreement, dated April 13, 2017, by and between Surgery Partners, Inc., Symbion, Inc.

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

10.31 (a) Amended and Restated Employment Agreement, dated March 11, 2022, by and between Surgery Partners, Inc.

and Jennifer Baldock (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed May 3, 2022).

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

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1 to Employment Agreement by and between Surgery Partners, Inc., Surgery Partners, LLC and Wayne DeVeydt, dated January 13, 2020 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 13, 2020).

10.31 (a) Employment Agreement, dated March 9, 2018, by and between Surgery Partners, Inc.

and Thomas F.

Cowhey (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 12, 2018).

10.34 (a) Employment Agreement, dated February 11, 2019, by and between Surgery Partners, Inc., Surgery Partners, LLC and J.

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Eric Evans, dated January 13, 2020 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 13, 2020).

10.34 (a) Employment Agreement by and between Symbion, Inc.

and George M.

Goodwin, dated June 13, 2014 (incorporated herein by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on May 10, 2019).

10.35 (a) Employment Agreement, dated June 13, 2014, by and between Symbion, Inc.

10.36 (a) Amended and Restated Employment Agreement, dated March 8, 2022, by and between Surgery Partners, Inc.

and Anthony W.

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

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

Taparo (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed May 3, 2022).

10.37 (a) Amended and Restated Employment Agreement, dated March 8, 2022, by and between Surgery Partners, Inc.

and Bradley R.

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

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

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

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

Owens (incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed May 3, 2022).

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

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

and Marissa Brittenham .

and Marissa Brittenham (incorporated herein by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K filed on March 1, 2022).

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

and George M.

Goodwin (incorporated herein by reference to Exhibit 10.41 to the Company’s Annual Report on Form 10-K filed on March 1, 2022).

10.41 (a) Employment Agreement, dated July 25, 2022, by and between Surgery Partners, Inc.

and Harrison Bane.

21.1 List of Subsidiaries of the Registrant.

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

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

We identified surgical hospitals accounts receivable as a critical audit matter because of the significant estimates management makes to determine the price concession in estimating net accounts receivable at an amount equal to the actual consideration management expects to collect.

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

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

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

• We developed independent estimates of the price concessions using historical collections by payor and location and compared the independent estimates to the price concession estimate developed by management to evaluate accounts receivable.

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

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Non-controlling interests—redeemable 342.0 330.2

Redeemable preferred stock - Series A;

shares authorized - 310,000 ;

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

redemption value - none and $ 434.5 , respectively

Stockholders' equity:

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Additional paid-in capital 2,478.0 1,622.3

Accumulated other comprehensive loss ( 31.5 ) ( 61.0 )

Accumulated other comprehensive income (loss) 76.2 ( 31.5 )

Retained deficit ( 557.3 ) ( 502.7 )

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Depreciation and amortization 114.8 98.8 94.8

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

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

Transaction and integration costs 47.5 39.8 23.2

Impairment charges — 33.5 7.9

Grant funds ( 2.4 ) ( 37.9 ) ( 46.2 )

Loss on disposals and deconsolidations, net 11.1 2.2 5.7

Equity in earnings of unconsolidated affiliates ( 12.5 ) ( 11.3 ) ( 10.8 )

Litigation settlements ( 29.3 ) — 1.2

Loss on debt extinguishment 14.9 9.1 —

Litigation settlement — 1.2 0.2

Other income ( 15.5 ) ( 1.7 ) ( 1.4 )

Total operating expenses 1,922.9 1,677.1 1,595.5

Impairment charges — — 33.5

Other income, net ( 16.6 ) ( 15.5 ) ( 1.7 )

2,194.1 1,922.9 1,677.1

Operating income 345.2 302.2 183.0

Tax receivable agreement expense — — ( 2.4 )

Interest expense, net ( 234.9 ) ( 221.0 ) ( 201.8 )

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Other comprehensive income (loss), net of tax:

Derivative activity 29.5 ( 10.3 ) ( 28.3 )

Derivative activity, net of tax of $ 0

107.7 29.5 ( 10.3 )

Comprehensive income (loss) 194.7 100.2 ( 9.0 )

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

Comprehensive loss attributable to Surgery Partners, Inc.

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

$ 53.1 $ ( 41.4 ) $ ( 126.4 )

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Common Stock Additional

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

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

Non-Redeemable Total

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

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

Other — — — — — ( 0.2 ) ( 0.2 )

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

Other comprehensive loss — — — ( 10.3 ) — — ( 10.3 )

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

Equity offering 15,525 0.2 554.0 — — — 554.2

Other comprehensive income — — — 29.5 — — 29.5

Acquisition and disposal of shares of non-controlling interests, net — — 22.2 — — 109.0 131.2

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

Other — — — — — ( 0.2 ) ( 0.2 )

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

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Equity-based compensation 590 — 22.5 — — — 22.5

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

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

Equity offering 36,038 0.4 857.3 — — — 857.7

Other comprehensive loss — — — 29.5 — — 29.5

Other comprehensive income — — — 107.7 — — 107.7

Acquisition and disposal of shares of non-controlling interests, net — — ( 24.1 ) — — 68.7 44.6

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Depreciation and amortization 114.8 98.8 94.8

Non-cash lease expense 34.8 39.1 39.4

Non-cash interest expense, net 25.9 22.0 4.5

Equity-based compensation expense 18.4 17.4 13.2

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

Impairment charges — 33.5 7.9

Loss on disposals and deconsolidations, net 11.1 2.2 5.7

Loss on debt extinguishment 14.9 9.1 —

Deferred income taxes 21.9 8.9 ( 21.9 )

Income from equity investments, net of distributions received 0.2 0.5 0.3

Non-cash lease expense 39.1 39.4 40.0

Equity in earnings of unconsolidated affiliates, net of distributions received ( 1.8 ) 0.2 0.5

Impairment charges — — 33.5

Other non-cash income ( 7.5 ) — —

Changes in operating assets and liabilities, net of acquisitions and divestitures:

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Proceeds from disposals of facilities and other assets 12.9 6.0 58.5

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

Purchases of equity investments ( 95.1 ) — —

Proceeds from sales of equity investments 12.8 5.4 —

Other investing activities ( 11.5 ) 0.3 0.6

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Borrowings of long-term debt 217.8 299.4 429.4

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

Payment of premium on debt extinguishment ( 11.3 ) — —

Proceeds from equity offerings 882.9 581.8 —

Payments of equity offering costs ( 25.2 ) ( 27.6 ) —

Payment of premium on debt extinguishment — — ( 17.8 )

Distributions to non-controlling interest holders ( 146.8 ) ( 131.0 ) ( 109.6 )

Payments related to ownership transactions with non-controlling interest holders ( 3.4 ) ( 28.4 ) ( 27.4 )

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

Payments of preferred dividends — ( 5.1 ) —

Other financing activities ( 9.9 ) ( 17.9 ) ( 0.9 )

Net cash provided by (used in) financing activities 316.3 66.7 ( 135.9 )

Net increase (decrease) in cash, cash equivalents and restricted cash 71.7 225.2 ( 91.6 )

Cash, cash equivalents and restricted cash at beginning of period 318.2 93.0 184.6

Cash, cash equivalents and restricted cash at end of period $ 389.9 $ 318.2 $ 93.0

Net cash provided by financing activities 42.1 316.3 66.7

Net (decrease) increase in cash and cash equivalents ( 107.0 ) 71.7 225.2

Cash and cash equivalents at beginning of period 389.9 318.2 93.0

Cash and cash equivalents at end of period $ 282.9 $ 389.9 $ 318.2

Supplemental cash flow information:

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Organization and Summary of Accounting Policies

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

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

Surgery Partners, Inc., a Delaware corporation, acting through its subsidiaries, owns and operates a national network of surgical facilities and ancillary services.

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

The Company's surgical hospitals also provide services such as diagnostic imaging, laboratory, obstetrics, oncology, pharmacy, physical therapy and wound care.

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

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

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

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

Unless the context otherwise indicates, Surgery Partners, Inc.

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

As of December 31, 2022, the Company owned or operated a portfolio of 146 surgical facilities, comprised of 127 ASCs and 19 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.

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All significant intercompany balances and transactions are eliminated in consolidation.

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.

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

As a result of the COVID-19 pandemic, the Company has implemented new clinical safety measures to provide a safe environment for its patients, surgeons and employees.

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

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

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

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

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

The Company’s assessment of whether the terms and conditions for amounts received are reasonably assured of having been met considers, among other things, the CARES Act, the COVID-19 Economic Relief Bill, enacted on December 27, 2020, and all frequently asked questions and other interpretive guidance issued by the United States Department of Health and Human Services ("HHS"), including in the Provider Relief Fund Reporting Portal and associated user guides.

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

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

Based on this guidance, the Company estimates approximately $ 37.9 million of grant funds received qualified for recognition as a reduction in operating expenses for the year ended December 31, 2021.

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

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

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

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

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

The Company received approximately $ 120 million of accelerated payments during the year ended December 31, 2020.

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

During the year ended December 31, 2021, approximately $ 60 million has been repaid in accordance with the terms of the program.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Variable Interest Entities

The consolidated financial statements include the accounts of variable interest entities ("VIE") in which the Company is the primary beneficiary under the provisions of 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 December 31, 2021, the Company's consolidated VIEs include five surgical facilities and four physician practices.

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

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 consolidated balance sheets for cash and cash equivalents, accounts receivable, restricted invested assets and accounts payable approximate their fair values under Level 3 calculations.

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

Carrying Amount Fair Value

December 31, December 31,

2021 2020 2021 2020

Senior secured term loan $ 1,530.7 $ 1,539.4 $ 1,530.7 $ 1,533.4

6.750 % senior unsecured notes due 2025

$ 370.0 $ 370.0 $ 371.9 $ 376.0

10.000 % senior unsecured notes due 2027

$ 545.0 $ 545.0 $ 577.0 $ 596.8

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

The Company recognizes revenues in the period in which our obligations to provide health care services are satisfied and reports the amount that reflects the consideration the Company expects to be entitled to receive.

The Company recognizes revenues in the period in which its obligations to provide health care services are satisfied and reports the amount that reflects the consideration the Company expects to be entitled to receive.

The contractual relationships with patients, in most cases, also involve a third-party payor (e.g., Medicare, Medicaid and private insurance organizations, including plans offered through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided by or negotiated with the third-party payors.

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

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Patient service revenues are recognized as performance obligations are satisfied.

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Other service revenues.

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

These agreements typically require the Company to provide recurring management services over a multi-year period, which are billed and collected on a monthly basis.

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, management services provided to physician practices for which the Company is not required to provide capital or additional assets and other non-patient services.

The management agreements typically require the Company to provide recurring management services over a multi-year period, which are billed and collected on a monthly basis.

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

For the years ended December 31, 2020 and 2019, other service revenues also includes optical service revenues, which consisted of handling charges billed to the members of the Company's optical products purchasing organization.

For the year ended December 31, 2020, other service revenues also includes optical service revenues, which consisted of handling charges billed to the members of the Company's optical products purchasing organization.

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

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

9 unchanged sentences

Other service revenues (2)

37.2 30.1 24.0

Total revenues $ 2,539.3 $ 2,225.1 $ 1,860.1

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

Cash, Cash Equivalents and Restricted Cash

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 consolidated statement of cash flows includes $ 0.3 million of restricted investments, which are reflected in other long-term assets in the consolidated balance sheets.

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

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

(2) Includes amounts attributable to related parties of $ 15.7 million, $ 9.3 million and $ 9.9 million for the years ended December 31, 2022, 2021 and 2020, respectively.

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.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Impairment of Long-Lived Assets, Goodwill and Intangible Assets

The Company evaluates the carrying value of long-lived assets when impairment indicators are present or when circumstances indicate that impairment may exist.

The evaluation is performed at the lowest level of identifiable cash flow.

The Company performs an impairment test by preparing an expected undiscounted cash flow projection.

3 unchanged sentences

"Goodwill and Intangible Assets."

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Professional and General and Workers' Compensation Insurance

The Company maintains general liability and professional liability insurance in excess of self-insured retentions through third party commercial insurance carriers in amounts that management believes is sufficient for the Company's operations, although, potentially, some claims may exceed the scope of coverage in effect.

The professional liability insurance coverage is on a claims-made basis and the general liability insurance is on an occurrence basis.

The Company also maintains workers' compensation insurance, subject to a self-insured retention.

The Company expenses the costs under the self-insured retention exposure for general and professional liability and workers' compensation claims which relate to (i) claims made during the policy period, which are offset by insurance recoveries and (ii) an estimate of claims incurred but not yet reported that are expected to be reported after the policy period expires.

Reserves and provisions are based upon actuarially determined estimates using individual case-basis valuations and actuarial analysis.

Reserves for professional, general and workers' compensation claim liabilities are determined with no regard for expected insurance recoveries and are presented gross on the consolidated balance sheets.

Derivative Instruments and Hedging Activities

4 unchanged sentences

The Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

Investments in Unconsolidated Affiliates

Investments in unconsolidated affiliates in which the Company exerts significant influence but does not control or otherwise consolidate are accounted for using the equity method.

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

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

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

The Company’s share of the profits and losses from these investments is reported in income from equity investments in the accompanying consolidated statements of operations.

The Company monitors its investments for other-than-temporary impairment by considering factors such as current economic and market conditions and the operating performance of the investees and records reductions in carrying values when necessary.

Non-Controlling Interests

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

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

5 unchanged sentences

Balance at end of period $ 342.0 $ 330.2

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Cash and Cash Equivalents

The Company considers all highly liquid investments with remaining stated maturities 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.

Inventories, which consist primarily of medical and drug supplies, are stated at the lower of cost or market value.

Cost is determined using the first-in, first-out method.

Recent Accounting Pronouncements

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

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

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

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

Acquisitions and Disposals

The Company accounts for business combinations in accordance with the fundamental requirements of the acquisition method of accounting and under the premise that an acquirer can be identified for each business combination.

The acquirer is the entity that obtains control of one or more businesses in the business combination and the acquisition date is the date the acquirer achieves control.

The assets acquired, liabilities assumed and any non-controlling interests in the acquired business at the acquisition date are recognized at their fair values as of that date, and the direct costs incurred in connection with the business combination are recorded and expensed separately from the business combination.

Any goodwill recognized is determined as the excess of the fair value of the consideration conveyed plus the fair value of any non-controlling interests in the acquisition over the fair value of the net assets acquired.

Acquisitions in which the Company is able to exert significant influence but does not have control are accounted for using the equity method.

Acquired assets and assumed liabilities typically include, but are not limited to, fixed assets, intangible assets and right-of-use leases.

The valuations are based on appraisal reports, discounted cash flow analyses, actuarial analyses or other appropriate valuation techniques to determine the fair value of the assets acquired or liabilities assumed.

Fair value attributable to non-controlling interests is based on a Level 3 computation using significant inputs that are not observable in the market.

Key inputs used to determine the fair value include financial multiples used in the purchase of non-controlling interests, primarily from acquisitions of surgical facilities.

Such multiples, based on earnings, are used as a benchmark for the discount to be applied for the lack of control or marketability.

Fair value attributable to the property and equipment acquired is based on Level 3 computations using key inputs such as cost trend data and comparable asset sales.

Fair value attributable to the intangible assets acquired is based on Level 3 computations using key inputs such as the Company's internally-prepared financial projections.

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

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

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

The cash consideration was funded through available resources.

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

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

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

During the year ended December 31, 2021, no significant changes were made to the purchase price allocation of assets and liabilities, existing at the date of acquisition, related to individual acquisitions completed in 2020.

Investments in Unconsolidated Affiliates

Investments in unconsolidated affiliates in which the Company exerts significant influence but does not control or otherwise consolidate are accounted for using the equity method.

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

The Company had two such deconsolidations during the year ended December 31, 2022 but none during the year ended December 31, 2021.

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

The Company’s share of the profits and losses from these investments is reported in income from equity investments in the accompanying consolidated statements of operations.

Medicare Accelerated Payments and Deferred Governmental Grants

The Company received grant funds distributed under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) and other governmental assistance programs, including approximately $ 2 million and $ 27 million during the years ended December 31, 2022 and 2021, respectively.

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

Any currently 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 $ 2.4 million of grant funds received qualified for recognition as a reduction in operating expenses for the year ended December 31, 2022.

During the years ended December 31, 2021 and 2020, the Company recognized $ 37.9 million and $ 46.2 million, respectively, as a reduction in operating expenses.

As of December 31, 2022 and 2021, approximately $ 3 million and $ 4 million, respectively, of unrecognized grant funds received was reflected within the 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 consolidated balance sheets.

During each of the years ended December 31, 2022 and 2021, the Company repaid approximately $ 60 million in accordance with the terms of the program.

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

As of December 31, 2022, the remaining deferred accelerated payments was minimal.

As of December 31, 2021, the remaining deferred accelerated payments was approximately $ 60 million, which was included as a component of Medicare accelerated payments and deferred governmental grants in the 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 was paid in December 2022.

There was no remaining deferred balance as of December 31, 2022.

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

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 consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate their fair values under Level 3 calculations.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Total consideration $ 290.0 $ 120.1

Fair value of non-controlling interests 185.9 57.3

Aggregate acquisition date fair value $ 475.9 $ 177.4

Net assets acquired:

Current Assets $ 36.9 $ 24.3

Property and equipment 27.1 50.6

Intangible assets — 3.6

Goodwill 446.1 153.7

Right-of-use operating lease assets 17.1 15.4

Other long-term assets 4.6 0.2

Current liabilities ( 15.9 ) ( 16.4 )

Long-term debt ( 20.5 ) ( 40.0 )

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

Long-term liabilities ( 4.4 ) —

Aggregate acquisition date fair value $ 475.9 $ 177.4

The fair values assigned to certain assets acquired and liabilities assumed by the Company in 2021 have been estimated on a preliminary basis and are subject to change as new facts and circumstances emerge that were present at the date of acquisition.

The goodwill acquired in connection with the 2021 acquisitions was allocated to the Company's Surgical Facility Services reportable segment.

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

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

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

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

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

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

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

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

Carrying Amount Fair Value

December 31, December 31,

2022 2021 2022 2021

Senior secured term loan $ 1,370.0 $ 1,530.7 $ 1,359.7 $ 1,530.7

6.750 % senior unsecured notes due 2025

$ 185.0 $ 370.0 $ 183.4 $ 371.9

10.000 % senior unsecured notes due 2027

$ 320.0 $ 545.0 $ 326.8 $ 577.0

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

The carrying amounts related to the Company's other long-term debt obligations, including finance lease obligations, approximate their fair values 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 December 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 consolidated balance sheets as of December 31, 2022 and 2021, were $ 64.9 million and $ 48.1 million, respectively, and the total liabilities of the consolidated VIEs were $ 40.9 million and $ 20.1 million, respectively.

Professional and General and Workers' Compensation Insurance

The professional liability insurance coverage is on a claims-made basis and the general liability insurance is on an occurrence basis.

The Company also maintains workers' compensation insurance, subject to a self-insured retention.

Reserves and provisions are based upon actuarially determined estimates using individual case-basis valuations and actuarial analysis.

Acquisitions and Dispositions

The Company accounts for all transactions that represent business combinations using the acquisition method of accounting, where the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquired entity are recognized and measured at their fair values on the date the Company obtains control in the acquiree.

The fair values assigned to certain assets acquired and liabilities assumed that are not finalized for reporting periods following the acquisition date are estimated on a preliminary basis and are subject to adjustment as new facts and circumstances emerge that were present at the date of acquisition.

Such adjustments are recorded as soon as practical and within the measurement period (defined as the date through which all information required to identify and measure the consideration transferred, assets acquired, liabilities assumed and any non-controlling interests has been obtained, limited to one year from the acquisition date).

Goodwill is determined as the excess of the fair value of the consideration conveyed plus the fair value of any non-controlling interests in the acquisition over the fair value of the net assets acquired.

During the year ended December 31, 2022, the Company acquired controlling interests in seven surgical facilities, two of which were merged into existing facilities, and a physician practice for aggregate cash consideration of $ 146.4 million, net of cash acquired, non-cash consideration of $ 5.6 million and assumed debt of $ 39.4 million.

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

In connection with the acquisitions, the Company preliminarily recognized non-controlling interests of $ 89.1 million and goodwill of $ 271.7 million.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

During the year ended December 31, 2021, the Company acquired controlling interests in eight surgical facilities, two of which were merged into existing facilities, and two physician practices for aggregate cash consideration of $ 285.8 million, net of cash acquired.

In connection with the acquisitions, the Company preliminarily recognized non-controlling interests of $ 185.9 million and goodwill of $ 446.1 million.

During the year ended December 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.

Other Acquisitions

During the year ended December 31, 2022, the Company acquired non-controlling interests in seven surgical facilities and seven in-development de novo surgical facilities for an aggregate cash purchase price of $ 95.1 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 consolidated balance sheets.

Disposals and Deconsolidations

During the year ended December 31, 2022, the Company sold its interests in two surgical facilities, one of which was previously accounted for as an equity method investment, for net cash proceeds of $ 25.7 million.

In connection with the sales, the Company recognized a pre-tax loss of $ 4.5 million included in loss on disposals and deconsolidations, net in the consolidated statements of operations for the year ended December 31, 2022.

During the year ended December 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 fair value of the investments of $ 9.8 million was recorded as a component of investments in and advances to affiliates in the accompanying consolidated balance sheets.

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 consolidated statements of operations for the year ended December 31, 2022.

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.

During the year ended December 31, 2021, the Company sold its interests in three surgery centers, one physician practice and certain other assets for combined net cash proceeds of $ 6.0 million.

In connection with the sales, the Company recognized a net pre-tax gain of $ 4.0 million included in loss on disposals and deconsolidations, net in the consolidated statements of operations for the year ended December 31, 2021.

In connection with the sales, the Company recognized a net pre-tax gain of $ 5.2 million included in loss on disposals and deconsolidations, net in the consolidated statements of operations for the year ended December 31, 2020.

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

Property and Equipment

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Medical equipment 263.1 221.0

Right-of-use finance lease asset 393.6 298.4

Right-of-use finance lease assets 631.3 393.6

Construction in progress 58.1 34.1

2 unchanged sentences

Property and equipment, net $ 876.6 $ 629.7

The increase in right-of-use finance lease assets includes the impact of the modification of certain existing facility real estate leases that were previously classified as operating leases.

"Leases" for further discussion.

Depreciation expense was $ 112.1 million, $ 94.5 million and $ 90.5 million for the years ended December 31, 2022, 2021 and 2020, respectively.

1 unchanged sentence

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

The Company has indefinite-lived intangible assets related to the certificates of need held in jurisdictions where certain of its surgical facilities are located, Medicare licenses and certain management rights agreements.

The Company also has finite-lived intangible assets related to physician guarantee agreements, non-compete agreements, management rights agreements and customer relationships.

Physician income guarantees are amortized into salaries and benefits costs in the consolidated statements of operations over the commitment period of the contract, generally three to four years .

Non-compete agreements and management rights agreements are amortized into depreciation and amortization expense in the consolidated statements of operations over the service lives of the agreements, typically ranging from two to five years for non-compete agreements and 15 years for the management rights agreements.

Customer relationships are amortized into depreciation and amortization expense in the consolidated statements of operations over the estimated lives of the relationships, ranging from three to ten years .

The Company tests its goodwill and indefinite-lived intangible assets for impairment at least annually, as of October 1, or more frequently if certain indicators arise.

The Company tests its goodwill for impairment in the fourth quarter of each year, or more frequently if certain indicators arise.

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

1 unchanged sentence

1) Surgical Facilities and 2) Ancillary Services.

A detailed evaluation of potential impairment indicators was performed, which specifically considered the volatility observed in the prices of the Company’s outstanding debt securities and common stock, as well as surgical case volumes.

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

2 unchanged sentences

To determine the fair value of the reporting units, the Company obtained valuations at the reporting unit level prepared by third-party valuation specialists which typically utilizes a combination of the income and market approaches.

As of October 1, 2022, prior to its annual impairment testing, all of the Company's goodwill was allocated to the Surgical Facilities reporting unit.

As of the October 1, 2022 valuation, the fair value for the Surgical Facilities reporting unit was substantially in excess of its carrying value.

A detailed evaluation of potential impairment indicators was performed, which specifically considered recent increases in interest rates, inflation risk and market volatility.

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

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 could result in a material impairment charge in the future.

In 2022 and 2021, there were no non-cash impairment charges.

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

The fair values were determined using the adjusted book value for the Ancillary Services reporting unit and the discounted cash flow model for the Alliance reporting unit.

The discounted cash flow model is projected based on a year-by-year assessment that considers historical results, estimated market conditions, internal projections, and relevant publicly available statistics.

5 unchanged sentences

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

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

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

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

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

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

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

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

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

1 unchanged sentence

Acquisitions, including post acquisition adjustments 269.7 447.0

Disposals ( 3.2 ) ( 55.6 )

Impairments — ( 33.5 )

Disposals and deconsolidations ( 44.4 ) ( 3.2 )

Balance at end of period $ 4,137.1 $ 3,911.8

A summary of the Company's acquisitions and disposals for the years ended December 31, 2021 and 2020 is included in Note 2.

"Acquisitions and Disposals."

A summary of the Company's acquisitions, disposals and deconsolidations for the years ended December 31, 2022 and 2021 is included in Note 2.

"Acquisitions and Dispositions."

Intangible Assets

The Company tests these intangible assets for impairment in the fourth quarter of each year, or more frequently if certain indicators arise.

The Company also has finite-lived intangible assets related to physician guarantee agreements, non-compete agreements and management rights agreements.

Physician guarantees are amortized into salaries and benefits costs in the consolidated statements of operations over the commitment period of the contract, generally three to four years .

A summary of the components of intangible assets follows (in millions):

7 unchanged sentences

Total intangible assets $ 67.4 $ ( 25.1 ) $ 42.3 $ 63.2 $ ( 19.5 ) $ 43.7

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

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

As a result of the transaction, the Company determined the management rights agreement related to the acquired clinic no longer provided a future benefit.

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

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

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amortization expense for intangible assets was $ 6.4 million, $ 6.9 million and $ 4.8 million for of the years ended December 31, 2022, 2021 and 2020, respectively.

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

Thereafter 9.1

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Long-Term Debt

14 unchanged sentences

The Company has a credit agreement (the "Credit Agreement") providing for a $ 1.545 billion senior secured term loan (the "Term Loan") and a $ 350.0 million senior secured revolving credit facility (the "Revolver" and together with the Term Loan, the “Senior Secured Credit Facilities").

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

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

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

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

The Revolver matures on February 1, 2026.

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

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

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

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

During 2022, the Company entered into an amendment to the Credit Agreement, which increased the outstanding commitments under the Revolver.

The Term Loan will mature on August 31, 2026.

In connection with 2025 Notes Redemption (defined below), the Term Loan is no longer subject to accelerated maturity.

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

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

During 2022, the Company made a voluntary prepayment of $ 150.0 million without premium or penalty.

As a result of the prepayment, the Term Loan is no longer subject to quarterly amortization payments prior to maturity.

In connection with prepayment, the Company wrote-off a portion of unamortized debt issuance costs and discounts, resulting in a debt extinguishment loss of $ 1.0 million, included in loss on debt extinguishment in the accompanying consolidated statements of operations.

The Term Loan bears interest at a rate per annum equal to (x) LIBOR plus a margin of 3.75 % per annum (LIBOR 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 shall be subject to a floor of 1.75 %)) plus a margin of 2.75 % per annum.

The Revolver matures on February 1, 2026.

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

Such financial maintenance covenant is subject to an equity cure.

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

The Revolver bears interest at a non-default rate per annum equal to (x) SOFR (plus a customary SOFR adjustment) plus a margin of up to 3.25 % per annum or (y) an alternate base rate (which will be the highest of (i) the prime rate, (ii) 0.5 % per annum above the federal funds effective rate and (iii) one-month SOFR (plus a customary SOFR adjustment) plus 1.00 % per annum) plus a margin of up to 2.25 % per annum.

The margin applicable to the Revolver may be reduced depending on the first lien leverage ratio of the Company as defined in the Credit Agreement.

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

As of both December 31, 2022 and 2021, the Company had no outstanding borrowings on the Revolver.

As of December 31, 2022, the Company's availability on the Revolver was $ 342.0 million (including outstanding letters of credit of $ 8.0 million).

The Senior Secured Credit Facilities are guaranteed, on a joint and several basis, by SP Holdco I, Inc.

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

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

As of December 31, 2022, the Company was in compliance with the covenants contained in the Credit Agreement.

The Senior Secured Credit Facilities are guaranteed, on a joint and several basis, by SP Holdco I, Inc.

In connection with the 2021 Amendments, the Company recorded debt issuance costs and discount of $ 11.9 million, and a debt extinguishment loss of $ 9.1 million, included in loss on debt extinguishment in the accompanying consolidated statement of operations for the year ended December 31, 2021.

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

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

During 2021, in connection with certain amendments to the Credit Agreement, the Company recorded a debt extinguishment loss of $ 9.1 million, included in loss on debt extinguishment in the accompanying consolidated statements of operations for the year ended December 31, 2021, related to the partial write-off of unamortized debt issuance costs and discounts and a portion of debt issuance costs incurred with the amendments.

6.750 % Senior Unsecured Notes due 2025

3 unchanged sentences

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

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

July 1, 2021 to June 30, 2022 101.688 %

July 1, 2022 and thereafter 100.000 %

The Company may redeem the 2025 Unsecured Notes, in whole or in part, at any time, at 100.0 % of the principal amount to be redeemed, plus accrued and unpaid interest, if any, up to, but excluding, the date of redemption.

In December 2022, the Company redeemed $ 185.0 million of the 2025 Unsecured Notes (the "2025 Notes Redemption").

The redemption price was equal to 100.0 % of the principal amount redeemed plus accrued and unpaid interest of $ 6.2 million.

If Surgery Center Holdings, Inc.

2 unchanged sentences

10.000 % Senior Unsecured Notes due 2027

Effective April 11, 2019, the Company issued $ 430.0 million in an aggregate principal amount of senior unsecured notes due April 15, 2027 (the "2027 Unsecured Notes").

The 2027 Unsecured Notes bear interest at the rate of 10.000 % per annum, payable semi-annually on April 15 and October 15 of each year, beginning on October 15, 2019.

Effective April 11, 2019 and July 30, 2020, the Company issued $ 430.0 million and $ 115.0 million, respectively, in an aggregate principal amount of senior unsecured notes due April 15, 2027 (the "2027 Unsecured Notes").

The 2027 Unsecured Notes bear interest at the rate of 10.000 % per annum, payable semi-annually on April 15 and October 15 of each year.

The 2027 Unsecured Notes are a senior unsecured obligation of Surgery Center Holdings, Inc.

The Company may redeem up to 40 % of the aggregate principal amount of the 2027 Unsecured Notes at any time prior to April 15, 2022, with the net cash proceeds of certain equity issuances at a redemption price equal to 110.000 % of the principal amount of notes to be redeemed, plus accrued and unpaid interest to, but excluding, the date of redemption.

The Company may redeem the 2027 Unsecured Notes, in whole or in part, at any time prior to April 15, 2022, at a redemption price equal to 100 % of the principal amount of notes to be redeemed plus the applicable premium, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption.

The Company may redeem the 2027 Unsecured Notes, in whole or in part, at any time on or after April 15, 2022, at the redemption prices set forth below (expressed as a percentage of the principal amount of notes to be redeemed), plus accrued and unpaid interest, if any, up to, but excluding, the date of redemption:

2 unchanged sentences

April 15, 2024 and thereafter 100.000 %

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

In December 2022, the Company redeemed $ 225.0 million of the 2027 Unsecured Notes.

The redemption price was equal to 105.0 % of the principal amount redeemed plus accrued and unpaid interest of $ 4.7 million.

In connection with the redemption, the Company recorded a debt extinguishment loss of $ 13.9 million, included in loss on debt extinguishment in the consolidated statements of operations for the year ended December 31, 2022.

The loss includes the redemption premium paid and the write-off a portion of unamortized debt issuance costs.

If Surgery Center Holdings, Inc.

experiences a change of control under certain circumstances, it must offer to purchase the 2027 Unsecured Notes at a purchase price equal to 101.0 % of the aggregate principal amount of notes, plus accrued and unpaid interest, if any, up to, but excluding, the date of repurchase.

The indenture governing the 2027 Unsecured Notes contains customary affirmative and negative covenants, which, among other things, limit the Company’s ability to incur additional debt, pay dividends, create or assume liens, effect transactions with its affiliates, guarantee payment of certain debt securities, sell assets, merge, consolidate, enter into acquisitions and effect sale and leaseback transactions.

On July 30, 2020, the Company completed the issuance and sale of $ 115.0 million in aggregate principal amount of senior unsecured notes due 2027 at 100.75 % of the principal amount.

The notes were issued as part of the same series as the existing 2027 Unsecured Notes originally issued in April 2019, and have the same terms.

In connection with the notes issuance, the Company recorded debt issuance costs, net of issuance premium of $ 1.0 million.

The 2027 Unsecured Notes contain customary affirmative and negative covenants, which, among other things, limit the Company’s ability to incur additional debt, pay dividends, create or assume liens, effect transactions with its affiliates, guarantee payment of certain debt securities, sell assets, merge, consolidate, enter into acquisitions and effect sale and leaseback transactions.

Certain of the Company’s subsidiaries have outstanding indebtedness under notes payable and other secured loans, which is collateralized by the real estate and equipment owned by the surgical facilities to which the loans were made, and right-of-use finance lease obligations for which the Company is liable to various vendors for several property and equipment leases classified as finance leases.

The various bank indebtedness agreements contain covenants to maintain certain financial ratios and also restrict encumbrance of assets, creation of indebtedness, investing activities and payment of distributions.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

various bank indebtedness agreements contain covenants to maintain certain financial ratios and also restrict encumbrance of assets, creation of indebtedness, investing activities and payment of distributions.

At December 31, 2022, the Company was in compliance with its covenants contained in the credit agreements.

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

"Leases" for further discussion.

A summary of maturities for the Company's long-term debt, excluding unamortized debt issuance costs and the unamortized fair value discount discussed above, for the next five years and thereafter as of December 31, 2022 follows (in millions):

37 unchanged sentences

Total lease liabilities $ 893.6 $ 720.3

During the year ended December 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 $ 170.6 million and $ 169.1 million, respectively, including the reclassification of existing operating lease liabilities and assets of $ 65.7 million and $ 64.2 million, respectively.

The following table presents the weighted-average lease terms and discount rates at December 31, 2022 and 2021 (in millions):

13 unchanged sentences

During the years ended December 31, 2022 and 2021, the Company incurred lease costs of $ 19.6 million and $ 25.8 million, respectively, under operating lease agreements with physician investors who are related parties.

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

During the years ended December 31, 2022 and 2021, the Company paid rent of $ 26.3 million and $ 17.4 million, respectively, under finance lease agreements with physician investors and a lessor who are related parties.

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

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

The change from prior year is primarily a result of the modification of certain existing facility real estate leases that were reclassified from operating to finance as discussed above.

SURGERY PARTNERS, INC.

20 unchanged sentences

Total lease obligations $ 307.9 $ 585.7

Redeemable Preferred Stock

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

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

(the “Certificate of Designation”), the Company was permitted to require the conversion of all, but not less than all, of the Series A Preferred Stock pursuant to the terms and conditions of the Certificate of Designation, after the second anniversary of the date of issuance, if the volume weighted average closing price of the Common Stock for any twenty out of thirty consecutive trading days prior to such date, equals or exceeds $ 42.00 per share.

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

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

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

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

Balance at beginning of period $ 434.5 $ 395.0

Dividends accrued 10.3 39.5

Dividends declared ( 5.1 ) —

Redeemable preferred stock conversion to common stock ( 439.7 ) —

Balance at end of period $ — $ 434.5

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Derivatives and Hedging Activities

2 unchanged sentences

During 2022 and 2021, such derivatives have been used to hedge the variable cash flows associated with existing variable-rate debt.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income ("OCI") and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings, as documented at hedge inception in accordance with the Company’s accounting policy election.

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 $ 26.2 million will be reclassified as an increase to interest expense.

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

As of December 31, 2021, the Company had nine interest rate swaps with a total net hedged notional amount of $ 1.2 billion.

Of the nine interest rate swaps, three are pay-fixed, receive 1-Month LIBOR (subject to a minimum of 0.75 %) interest rate swaps designated in cash flow hedging relationships with a total notional amount of $ 1.2 billion and a termination date of March 31, 2025.

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

December 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 $ 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 159.1 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

$ 1,518.2 $ 1,533.6

As of December 31, 2022, the Company had nine interest rate swaps with a total net notional amount of $ 1.2 billion.

Of the nine interest rate swaps, three are pay-fixed, receive 1-Month LIBOR (subject to a minimum of 0.75 %) interest rate swaps designated in cash

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

flow hedging relationships with a total notional amount of $ 1.2 billion and a termination date of March 31, 2025.

The remaining six interest rate swaps are undesignated and consist of three pay-fixed, receive 1-Month LIBOR (subject to a minimum of 1.00 %) interest rate swaps and three pay 1-Month LIBOR (subject to a minimum of 1.00 %), receive-fixed interest rate swaps with a termination date of November 30, 2023.

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

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

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

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

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

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

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

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

As of December 31, 2022, the Company had two interest rate caps with a total notional amount of $ 318.2 million, of which, $ 170.0 million is designated in a cash flow hedging relationship and $ 148.2 million is undesignated.

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

In connection with the voluntary prepayment on the Term Loan in 2022 (see Note 5.

"Long-Term Debt), the Company de-designated a portion of one of its interest rate caps.

The amount of unrealized gains recorded in other comprehensive income ("OCI") related to the de-designated notional amount at the time of the de-designation was $ 7.5 million.

This amount was reclassified from accumulated OCI into income and is included as a component of other income in the consolidated statement of operations for the year ended December 31, 2022.

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

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.

2 unchanged sentences

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

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

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

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

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

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

December 31, 2021 December 31, 2020

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

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

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

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

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

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

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

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

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

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

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

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

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

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

$ 1,533.6 $ 1,200.0

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

The cash flows related to the interest rate caps, including the undesignated portion, are classified as operating activities in the consolidated statements of cash flows.

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

2 unchanged sentences

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

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated OCI and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings, as documented at hedge inception in accordance with the Company’s accounting policy election.

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 $ 30.4 million will be reclassified as an decrease to interest expense.

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

2 unchanged sentences

Derivatives not designated as hedging instruments

Interest rate caps Other long-term assets $ 9.0 $ — $ — $ —

Interest rate swaps Other long-term assets 8.5 — 12.5 —

6 unchanged sentences

Total $ 113.4 $ 40.4 $ 23.6 $ 58.2

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

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

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

Year Ended December 31,

2 unchanged sentences

Gain recognized in income Other income $ ( 0.4 ) $ ( 0.1 ) $ —

Gain reclassified from accumulated OCI into income (1)

Other income $ ( 7.5 ) $ — $ —

Derivatives in cash flow hedging relationships

2 unchanged sentences

Interest expense, net $ 10.3 $ 24.7 $ 20.2

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

There was no comparable amortization in prior year periods.

(1) Gain reclassified from accumulated OCI upon de-desigation of a portion of one of the Company's interest rate caps.

(2) Includes amortization of accumulated OCI related to de-designated and terminated interest rate swaps of $ 21.4 million and $ 14.0 million for the years ended December 31, 2022 and 2021, respectively.

There was no comparable amortization in 2020.

Earnings Per Share

19 unchanged sentences

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

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

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

There were no participating securities for the year ended December 31, 2022.

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

Public Offerings

On November 21, 2022, the Company effected a public offering of 23,469,388 shares (the “November 2022 Firm Shares”) of the Company’s common stock, $ 0.01 par value per share, at a price to the public of $ 24.50 per share.

In addition, the Company granted the underwriters an option to purchase up to an additional 3,520,408 shares of common stock and undertook a concurrent private placement to sell up to 9,183,673 shares of common stock at the same price per share as the November 2022 Firm Shares.

On November 23, 2022, the Company completed the public offering pursuant to which the Company sold 26,854,796 shares of common stock (including the November 2022 Firm Shares and 3,385,408 of the option shares), resulting in gross proceeds of $ 657.9 million.

In connection with the offering, the Company incurred underwriting discounts, commissions and other related costs of $ 23.0 million, which were recognized as a direct reduction of proceeds received.

On December 22, 2022, the Company completed the private placement pursuant to which the Company sold 9,183,673 shares of common stock, resulting in additional gross proceeds of $ 225.0 million.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Public Offerings

On January 27, 2021, the Company entered into an underwriting agreement relating to a public offering of 7,500,000 shares (the “January 2021 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.

6 unchanged sentences

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

Preferred Conversion

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

"Redeemable Preferred Stock" for further discussion.

Share Repurchase Authorization

10 unchanged sentences

If a net operating loss ("NOL") and/or interest limitation ("163(j)") carryforward exists, the Company makes a determination as to whether that NOL and/or 163(j) carryforward will be utilized in the future.

A valuation allowance is established for certain net operating loss and interest limitation carryforwards when their recoverability is deemed to be uncertain.

A valuation allowance is established for certain NOL and 163(j) 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.

26 unchanged sentences

federal tax benefit 6.0 2.3 2.4

Change in valuation allowance 20.9 4.1 13.6

Change in federal valuation allowance 29.1 20.9 4.1

Net income attributable to non-controlling interests ( 30.2 ) ( 29.9 ) ( 24.8 )

Changes in measurement of uncertain tax positions — — ( 0.1 )

Stock option compensation ( 2.5 ) ( 1.7 ) 1.2

16 unchanged sentences

Allowance for bad debts 2.9 3.0

Capital loss carryforwards — 1.7

Amortization of intangible assets — 1.2

1 unchanged sentence

Section 163(j) interest 137.7 99.4

Interest rate swap liability 15.0 15.8

Interest rate derivative liability 10.5 15.0

TRA liability 0.1 0.6

Right of use 52.5 51.1

Software development costs 1.0 —

Other deferred assets 9.2 11.1

6 unchanged sentences

Right of use ( 44.4 ) ( 44.2 )

Amortization of intangible assets ( 1.3 ) —

Interest rate derivative asset ( 29.5 ) —

Other deferred liabilities ( 1.4 ) ( 1.2 )

5 unchanged sentences

The Company had Section 163(j) interest limitation carryforwards of $ 555.8 million as of December 31, 2022, which do not expire.

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

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

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

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

The Company recorded a valuation allowance against deferred tax assets at December 31, 2022 and 2021 totaling $ 114.7 million and $ 113.0 million, respectively, which represents an increase of $ 1.7 million.

The current year change in the Company’s valuation allowance is comprised of an increase of $ 35.7 million recorded to income tax expense, offset by a decrease of $ 34.0 million attributable to changes in deferred taxes on the Company’s interest rate derivatives, which was recorded to other comprehensive income.

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

The determination was made based upon projections of future book and taxable income.

If the Company's 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, the Company may need to adjust the valuation allowance, for all or a portion of its deferred tax assets.

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

The Company's income tax expense and/or other comprehensive income in future periods will be reduced or increased to the extent of offsetting decreases or increases, respectively, in its valuation allowance in the period when the change in circumstances occurs.

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

3 unchanged sentences

Unrecognized tax benefits at beginning of year $ 0.1 $ 0.1

Reductions for tax positions of prior year — —

Additions for tax provisions of current year — —

Unrecognized tax benefits at end of year $ 0.1 $ 0.1

38 unchanged sentences

Stock Options

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

No stock options were granted during the years ended December 31, 2022, 2021 and 2020.

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

The stock options granted during the year ended December 31, 2019 are subject to the following performance and vesting criteria:

(i) one-third ( 33.3 %) of the award will vest in three equal annual installments on each of the first three anniversaries of December 31, 2019, (ii) one-third ( 33.3 %) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $ 25.00 over a period of thirty ( 30 ) consecutive trading days, and (iii) one-third ( 33.3 %) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $ 35.00 over a period of thirty ( 30 ) consecutive trading days, in each case, generally subject to continued employment on each vesting date.

Forfeitures are recognized as incurred.

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

Option Valuation

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

Expected volatility 60 %

Risk-free interest rate 2.30 % - 2.40 %

Expected dividends —

Average expected term (years) 4

Fair value of stock options granted $ 4.83 - $ 6.41

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

Stock Option Activity

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

Granted 2,256,500 13.00 9.2

Exercised ( 4,199 ) 20.24 5.8

Forfeited/Cancelled ( 4,473 ) 19.00 4.8

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The Company recorded equity-based compensation expense of $ 18.4 million, $ 17.4 million and $ 13.2 million for the years ended December 31, 2022, 2021 and 2020, respectively.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Employee Benefit Plans

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The Company's contributions were $ 11.1 million, $ 9.7 million and $ 7.2 million for the years ended December 31, 2022, 2021, and 2020, respectively.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Other Current Liabilities

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Right-of-use operating lease liabilities $ 36.5 $ 40.1

Accrued legal settlement (1)

Interest payable 29.2 24.5

Cost report liabilities 26.4 16.9

Amounts due to patients and payors 31.9 26.0

Acquisition escrow 28.8 1.2

Cost report liabilities 23.5 26.4

Interest payable 19.4 29.2

Tax receivable agreement liability 1.3 19.7

1 unchanged sentence

Total $ 206.9 $ 210.0

(1) See Note 14.

"Commitments and Contingencies" for further discussion.

Commitments and Contingencies

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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.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Government Settlement

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

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

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

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

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

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

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

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

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

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

or the aiding and abetting claim asserted against Bain Capital.

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

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

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

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

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

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

The parties to the Delaware Action negotiated a final stipulation of

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

The case will then be closed.

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

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 settlements in the consolidated statements of operations for the year ended December 31, 2022.

Acquired Facilities

The Company, through its wholly-owned subsidiaries or controlled partnerships and limited liability companies, has acquired and will continue to acquire surgical facilities with prior operating histories.

Such facilities may have unknown or contingent liabilities, including liabilities for failure to comply with health care laws and regulations, such as billing and reimbursement laws and regulations, the Stark Law, the Anti-Kickback Statute, the FCA, and similar fraud and abuse laws.

Such facilities may have unknown or contingent liabilities, including liabilities for failure to comply with health care laws and regulations, such as billing and reimbursement laws and regulations, the federal physician self-referral law, or Stark Law, the statute commonly known as the federal Anti-Kickback statute, the federal False Claims Act, and similar fraud and abuse laws.

Although the Company attempts to assure that no such liabilities exist, obtain indemnification from prospective sellers covering such matters and institute policies designed to conform centers to its standards following completion of acquisitions, there can be no assurance that the Company will not become liable for past activities that may later be asserted to be improper by private plaintiffs or government agencies.

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Management believes, however, that it will be able to adjust the Company's operations so as to be in compliance with any statutory or regulatory provision as may be applicable.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Potential Physician Investor Liability

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On May 9, 2017, the Company entered into an agreement to amend that certain Income Tax Receivable Agreement, dated September 30, 2015 (as amended, the "TRA"), by and between the Company, and the other parties referred to therein, which amendment became effective on August 31, 2017.

Pursuant to the amendment to the TRA, the Company agreed to make payments to H.I.G., the Company's former controlling shareholder, in its capacity as the stockholders representative pursuant to a fixed payment schedule.

Pursuant to the amendment to the TRA, the Company agreed to make payments to H.I.G.

Capital, LLC and certain of its affiliates (collectively, “H.I.G.”), the Company's former controlling shareholder, in its capacity as the stockholders representative pursuant to a fixed payment schedule.

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.

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

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

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

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

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

Depreciation and amortization 98.8 94.8 76.5

Interest expense, net 234.9 221.0 201.8

Depreciation and amortization 114.8 98.8 94.8

Equity-based compensation expense 18.4 17.4 13.2

Transaction and integration related costs (1)

Transaction, integration and acquisition costs (1)

48.6 46.1 38.2

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

Litigation settlement and other litigation costs (2)

Impairment charges — 33.5 7.9

Gain on escrow release (3)

Loss on disposals and deconsolidations, net 11.1 2.2 5.7

Litigation settlements and other litigation costs (2)

( 24.7 ) 5.6 6.4

Loss on debt extinguishment 14.9 9.1 —

Undesignated derivative activity (3)

Hurricane-related impacts (4)

Tax receivable agreement expense — — 2.4

1.5 ( 0.2 ) —

Impairment charges — — 33.5

Gain on escrow release (5)

Adjusted EBITDA $ 380.2 $ 339.6 $ 256.6

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

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

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

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

(1) This amount includes transaction and integration costs of $ 47.5 million, $ 39.8 million and $ 23.2 million for the years ended December 31, 2022, 2021 and 2020, respectively.

This amount further includes start-up costs related to de novo surgical facilities of $ 1.1 million, $ 6.3 million and $ 15.0 million for the years ended December 31, 2022, 2021 and 2020, respectively.

(2) This amount includes a net litigation settlements gain of $ 29.3 million and a loss of $ 1.2 million for the years ended December 31, 2022 and 2020, respectively, with no comparable costs in 2021.

This amount also includes other litigation costs of $ 4.6 million, $ 5.6 million and $ 5.2 million for the years ended December 31, 2022, 2021 and 2020, respectively.

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

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

(3) This amount includes the reclassification of $ 7.5 million of unrealized gains out of accumulated OCI into income related to the de-designation of a portion of one of the Company's interest rate caps.This amount further includes fair value changes of undesignated derivatives.

(4) Reflects losses incurred, net of insurance proceeds received at certain surgical facilities that were closed following Hurricane Ian in September 2022 and Hurricane Ida in September 2021.

SURGERY PARTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(5) Included in other income in the consolidated statement of operations for the year ended December 31, 2020, with no comparable gain in 2022 and 2021.

Surgical Facility Services $ 6,001.1 $ 5,552.8

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Subsequent Events

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

The Company funded the cash purchase price with available resources.

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

On January 3, 2023, the Company terminated a portion of one of its interest rate caps.

In connection with the termination, the Company received $ 8.6 million from the counterparty.

On January 13, 2023, the Company entered into an amendment to the Credit Agreement to provide an increase a $ 203.8 million increase in the outstanding commitments under the Revolver.

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

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(Principal Financial and Accounting Officer) March 1, 2023

Executive Chairman of the Board March 1, 2022

Chairman of the Board March 1, 2023

Director March 1, 2023

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

What changed 10-K

Item 9A. Controls and Procedures