Surgery Partners, Inc. 10-K

Item 9A. Controls and Procedures Disclosure Controls and Procedures and Limitations on the Effectiveness of Controls 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. 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. Management’s Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate "internal control over financial reporting" (as such term is defined in Rule 13a-15(f) under the Exchange Act) for the Company. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions and disposition of assets; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures are made only in accordance with management and board authorizations; and providing reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with GAAP. Because of the inherent limitations in any internal control, no matter how well designed, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2022. The assessment was based on criteria established in the framework Internal Control-Integrated Framework (2013) , issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, management, including the Chief Executive Officer and Chief Financial Officer, determined that our internal control over financial reporting was effective as of December 31, 2022. Deloitte & Touche LLP, the Company's independent registered public accounting firm, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2022. Their attestation report is included below in this Item 9A. 50 Table of Contents Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d‑15(d) of the Exchange Act that occurred during the quarter ended December 31, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 51 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Surgery Partners, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Surgery Partners, Inc. and subsidiaries (the “Company”) as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2022, of the Company and our report dated March 1, 2023, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting . Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP Nashville, TN March 1, 2023 52 Table of Contents Item 9B. Other Information None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. 53 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance The information called for by Item 10 is incorporated herein by reference to the definitive Proxy Statement of the Company relating to the 2023 Annual Meeting of Stockholders (the "Definitive Proxy Statement"), which the Company intends to file within 120 days after the close of its fiscal year ended December 31, 2022. Item 11. Executive Compensation The information called for by Item 11 is incorporated herein by reference to the Definitive Proxy Statement. Item 12. 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. Item 13. 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. Item 14. Principal Accounting Fees and Services The information called for by Item 14 is incorporated herein by reference to the Definitive Proxy Statement. 54 Table of Contents PART IV Item 15. Exhibits and Financial Statement Schedules (a) Financial Statements and Financial Statement Schedules (1) Financial Statements Our Consolidated Financial Statements and Notes thereto are set forth starting on page F-1 of this Annual Report on Form 10-K. (2) Financial Statement Schedules 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. (b) Exhibits: No. Description 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. 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). 4.3 First Supplemental Indenture, by and among Surgery Center Holdings, Inc., Wilmington Trust, National Association, as Trustee, and certain other parties thereto, dated August 31, 2017 (incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed September 1, 2017). 4.4 Indenture by and among Surgery Center Holdings, Inc., the guarantors from time to time party thereto and Wilmington Trust, National Association, dated April 11, 2019 (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed April 12, 2019). 4.5 Second Supplemental Indenture, dated July 30, 2020, among Surgery Center Holdings, Inc., the guarantors party thereto and Wilmington Trust, National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed July 31, 2020). 10.1 Office Lease Agreement dated November 17, 2015 between Highwoods Realty Limited Partnership and Surgery Partners, Inc. (incorporated herein by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K filed March 11, 2016). 10.2 First Amendment to Lease Agreement, dated August 29, 2016, between Highwood Realty Limited Partnership and Surgery Partners, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed November 10, 2016). 10.3 Second Amendment to Lease Agreement, dated April 26, 2017, between Highwoods Realty Limited Partnership and Surgery Partners, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed May 10, 2017). 10.4 Amended and Restated Registration Rights Agreement by and among Surgery Partners, Inc., certain stockholders of Surgery Partners, Inc. 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).* 10.7 Incremental Term Loan Amendment, dated as of October 23, 2018 with Jefferies, SP Holdco I, Inc., Surgery Center Holdings, Inc. and certain other parties thereto (incorporated herein by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K filed March 15, 2019). 10.8 Amendment to the Credit Agreement, by and among SP Holdco I, Inc., Surgery Center Holdings, Inc., Jefferies Finance LLC and the other guarantors and lenders party thereto, dated March 25, 2019 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 25, 2019). 10.9 Third Amendment to the Credit Agreement, dated as of April 16, 2020, by and among SP Holdco I, Inc., Surgery Center Holdings, Inc., Jefferies Finance LLC and the other lenders party thereto (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed April 22, 2020). 10.10 Second Incremental Term Loan Amendment, dated as of April 22, 2020, by and among SP Holdco I, Inc., Surgery Center Holdings, Inc., Jefferies Finance LLC and the other guarantors and lenders party thereto (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed April 22, 2020). 10.11 Fifth Amendment to Credit Agreement, dated as of January 27, 2021, by and among SP Holdco I, Inc., Surgery Center Holdings, Inc. Jefferies Finance LLC and the other guarantors and lenders party thereto (incorporated herein by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K filed March 10, 2021). 55 Table of Contents 10.12 Sixth Amendment to the Credit Agreement, dated as of May 3, 2021, by and among SP Holdco I, Inc., Surgery Center Holdings, Inc., the other Guarantors party thereto, Jefferies Finance LLC and the other lenders party thereto (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 5, 2021). 10.13 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. Surgery Centers, LLC and certain other stockholders party thereto (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed November 13, 2015). 10.17 Amendment No. 1 to Income Tax Receivable Agreement, by and between Surgery Partners, Inc. and H.I.G. Surgery Centers, LLC (in its capacity as the Stockholders Representative), dated May 9, 2017 (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed May 11, 2017). 10.18 Form of TRA Waiver and Assignment Agreement (incorporated herein by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K filed March 16, 2018). 10.19 (a) Form of Indemnification Agreement (incorporated herein by reference to Exhibit 10.14 to Amendment No. 1 to the Company's Registration Statement on Form S-1, filed September 14, 2015). 10.20 (a) Surgery Partners, Inc. 2015 Omnibus Incentive Plan, as amended and restated effective January 1, 2020 (incorporated herein by reference as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed August 5, 2020). 10.21 (a) First Amendment to the Surgery Partners, Inc. 2015 Omnibus Incentive Plan, as amended and restated effective January 1, 2020 (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed August 4, 2021). 10.22 (a) Surgery Partners, Inc. Cash Incentive Plan, as amended and restated effective January 1, 2020 (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed August 5, 2020). 10.23 (a) Symbion, Inc. Supplemental Executive Retirement Plan, Effective May 1, 2005 (incorporated herein by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1, Amended, filed September 21, 2015). 10.24 (a) Form of Non-Statutory Stock Option Agreement under the 2015 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed November 13, 2015). 10.25 (a) Form of Non-Employee Director Non-Statutory Stock Option Agreement under the Surgery Partners, Inc. 2015 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q filed November 13, 2015). 10.26 (a) Form of Restricted Stock Agreement under the Surgery Partners, Inc. 2015 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q filed November 13, 2015). 10.27 (a) Form of Restricted Stock Award Agreement under the 2015 Surgery Partners, Inc. Omnibus Incentive Plan (incorporated herein by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed March 15, 2016). 10.28 (a) Form of Performance Stock Unit Award Agreement under the Surgery Partners, Inc. 2015 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed July 5, 2016). 10.29 (a) Form of Non-Employee Director Restricted Stock Award Agreement under the Surgery Partners, Inc. 2015 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed April 3, 2017). 10.30 (a) Form of Stock-Settled Stock Appreciation Right Agreement under the Surgery Partners, Inc. 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). 10.31 (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). 10.33 (a) Amendment No. 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). 10.34 (a) Employment Agreement, dated February 11, 2019, by and between Surgery Partners, Inc., Surgery Partners, LLC and J. Eric Evans (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 12, 2019). 10.35 (a) Amendment No. 1 to Employment Agreement by and between Surgery Partners, Inc., Surgery Partners, LLC and J. 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). 10.36 (a) Amended and Restated Employment Agreement, dated March 8, 2022, by and between Surgery Partners, Inc. and Anthony W. 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 10.3 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. and David T. Doherty (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 10, 2022). 10.39 (a) Employment Agreement, dated November 23, 2021, by and between Surgery Partners, Inc. 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). 56 Table of Contents 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. 23.1 Consent of Independent Registered Public Accounting Firm (Deloitte). 31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS Inline XBRL Taxonomy Extension Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, formatted in Inline XBRL (included in Exhibit 101). (a) Management Contract or Compensatory Plan or Arrangement. * Schedules and/or Exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish a supplemental copy of any omitted schedule or exhibit to the SEC upon request. Item 16. Form 10-K Summary None. 57 Table of Contents INDEX TO FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) F- 2 Consolidated Balance Sheets - December 31, 20 22 and 202 1 F- 4 Consolidated Statements of Operations - for the years ended December 31, 20 2 2 , 20 2 1 and 20 20 F- 5 Consolidated Statements of Comprehensive Income (Loss) - for the years ended December 31, 20 2 2 , 20 2 1 and 20 20 F- 6 Consolidated Statements of Stockholders' Equity - for the years ended December 31, 20 2 2 , 20 2 1 and 20 20 F- 7 Consolidated Statements of Cash Flows - for the years ended December 31, 20 2 2 , 20 2 1 and 20 20 F- 8 Notes to Consolidated Financial Statements F- 9 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Surgery Partners, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Surgery Partners, Inc. and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Accounts Receivable — Refer to Note 1 to the financial statements Critical Audit Matter Description Accounts receivable are recorded net of estimated price concessions at both surgical hospitals and ambulatory surgical centers. At surgical hospitals, the estimation process is based on historical trend of cash collections and contractual write-offs. The inputs used to determine the estimated price concessions are based on objective data. Management’s determination of the estimate is complex and involves their assessment of the appropriateness and relevancy of the inputs and methodology to record accounts receivable at the net realizable value. We identified surgical hospitals accounts receivable as a critical audit matter because of the significant estimates management makes to determine the 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. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to Company’s estimated price concessions for the surgical hospitals included the following, among others: • We tested the effectiveness of controls over accounts receivable, including management’s controls over the review of the price concessions and the verification of the accuracy and completeness of the data used in the assessment. • We evaluated management’s methodology and related assumptions, including cash collections, used in recording price concessions, by comparing actual results to management’s historical estimates. • We tested the underlying data related to the recognition of patient level charges and the subsequent activities, including cash collections and contractual write-offs. F-2 • We tested the mathematical accuracy of the estimates applied to period-end accounts receivable. • 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. /s/ Deloitte & Touche LLP Nashville, Tennessee March 1, 2023 We have served as the Company's auditor since 2018. F-3 Table of Contents SURGERY PARTNERS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in millions, except per share amounts) December 31, 2022 2021 ASSETS Current assets: Cash and cash equivalents $ 282.9 $ 389.9 Accounts receivable 456.3 430.2 Inventories 71.4 61.1 Prepaid expenses 31.4 25.6 Other current assets 79.0 39.3 Total current assets 921.0 946.1 Property and equipment, net 876.6 629.7 Intangible assets, net 42.3 43.7 Goodwill 4,137.1 3,911.8 Investments in and advances to affiliates 190.3 88.7 Right-of-use operating lease assets 279.1 324.1 Long-term deferred tax assets 91.5 114.4 Other long-term assets 144.2 59.1 Total assets $ 6,682.1 $ 6,117.6 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 151.6 $ 124.9 Accrued payroll and benefits 68.9 77.1 Medicare accelerated payments and deferred governmental grants 3.2 64.4 Other current liabilities 206.9 210.0 Current maturities of long-term debt 62.8 60.4 Total current liabilities 493.4 536.8 Long-term debt, less current maturities 2,559.0 2,878.4 Right-of-use operating lease liabilities 271.4 315.6 Other long-term liabilities 75.4 87.0 Non-controlling interests—redeemable 342.0 330.2 Stockholders' equity: Preferred stock, $ 0.01 par value; shares authorized - 20,310,000 ; shares issued or outstanding - none — — Common stock, $ 0.01 par value; shares authorized - 300,000,000 ; shares issued and outstanding - 125,960,834 and 89,332,557 , respectively 1.3 0.9 Additional paid-in capital 2,478.0 1,622.3 Accumulated other comprehensive income (loss) 76.2 ( 31.5 ) Retained deficit ( 557.3 ) ( 502.7 ) Total Surgery Partners, Inc. stockholders' equity 1,998.2 1,089.0 Non-controlling interests—non-redeemable 942.7 880.6 Total stockholders' equity 2,940.9 1,969.6 Total liabilities and stockholders' equity $ 6,682.1 $ 6,117.6 See notes to consolidated financial statements. F-4 Table of Contents SURGERY PARTNERS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in millions, except per share amounts; shares in thousands) Year Ended December 31, 2022 2021 2020 Revenues $ 2,539.3 $ 2,225.1 $ 1,860.1 Operating expenses: Salaries and benefits 746.4 644.3 550.3 Supplies 709.7 636.4 538.4 Professional and medical fees 269.2 230.0 191.4 Lease expense 82.4 90.6 87.4 Other operating expenses 156.7 132.4 112.8 Cost of revenues 1,964.4 1,733.7 1,480.3 General and administrative expenses 102.2 104.0 97.1 Depreciation and amortization 114.8 98.8 94.8 Transaction and integration costs 47.5 39.8 23.2 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 — 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 Interest expense, net ( 234.9 ) ( 221.0 ) ( 201.8 ) Income (loss) before income taxes 110.3 81.2 ( 18.8 ) Income tax (expense) benefit ( 23.3 ) ( 10.5 ) 20.1 Net income 87.0 70.7 1.3 Less: Net income attributable to non-controlling interests ( 141.6 ) ( 141.6 ) ( 117.4 ) Net loss attributable to Surgery Partners, Inc. ( 54.6 ) ( 70.9 ) ( 116.1 ) Less: Amounts attributable to participating securities — ( 10.3 ) ( 39.5 ) Net loss attributable to common stockholders $ ( 54.6 ) $ ( 81.2 ) $ ( 155.6 ) Net loss per share attributable to common stockholders - basic and diluted (1) $ ( 0.59 ) $ ( 1.12 ) $ ( 3.19 ) Weighted average common shares outstanding - basic and diluted (1) 91,952 72,427 48,776 (1) The impact of potentially dilutive securities for all periods were not considered because the effect would be anti-dilutive in those periods. See notes to consolidated financial statements. F-5 Table of Contents SURGERY PARTNERS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Dollars in millions) Year Ended December 31, 2022 2021 2020 Net income $ 87.0 $ 70.7 $ 1.3 Other comprehensive income (loss), net of tax: Derivative activity, net of tax of $ 0 107.7 29.5 ( 10.3 ) Comprehensive income (loss) 194.7 100.2 ( 9.0 ) Less: Comprehensive income attributable to non-controlling interests ( 141.6 ) ( 141.6 ) ( 117.4 ) Comprehensive income (loss) attributable to Surgery Partners, Inc. $ 53.1 $ ( 41.4 ) $ ( 126.4 ) See notes to consolidated financial statements. F-6 Table of Contents SURGERY PARTNERS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in millions; shares in thousands) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive (Loss) Income Retained Deficit Non-Controlling Interests— Non-Redeemable Total Shares Amount Balance as of December 31, 2019 49,299 $ 0.5 $ 662.7 $ ( 50.7 ) $ ( 315.7 ) $ 686.6 $ 983.4 Net (loss) income — — — — ( 116.1 ) 85.7 ( 30.4 ) Equity-based compensation 1,163 — 12.4 — — — 12.4 Preferred dividends — — ( 39.5 ) — — — ( 39.5 ) Other comprehensive loss — — — ( 10.3 ) — — ( 10.3 ) Acquisition and disposal of shares of non-controlling interests, net — — ( 27.7 ) — — 67.5 39.8 Distributions to non-controlling interests—non-redeemable holders — — — — — ( 73.1 ) ( 73.1 ) Other — — — — — ( 0.2 ) ( 0.2 ) Balance as of December 31, 2020 50,462 0.5 607.9 ( 61.0 ) ( 431.8 ) 766.5 882.1 Net (loss) income — — — — ( 70.9 ) 92.7 21.8 Equity-based compensation 737 — 9.0 — — — 9.0 Preferred dividends — — ( 10.3 ) — — — ( 10.3 ) Preferred share conversion 22,609 0.2 439.5 — — — 439.7 Equity offering 15,525 0.2 554.0 — — — 554.2 Other comprehensive 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 ) Balance as of December 31, 2021 89,333 0.9 1,622.3 ( 31.5 ) ( 502.7 ) 880.6 1,969.6 Net (loss) income — — — — ( 54.6 ) 97.1 42.5 Equity-based compensation 590 — 22.5 — — — 22.5 Equity offering 36,038 0.4 857.3 — — — 857.7 Other comprehensive income — — — 107.7 — — 107.7 Acquisition and disposal of shares of non-controlling interests, net — — ( 24.1 ) — — 68.7 44.6 Distributions to non-controlling interests—non-redeemable holders — — — — — ( 103.7 ) ( 103.7 ) Balance as of December 31, 2022 125,961 $ 1.3 $ 2,478.0 $ 76.2 $ ( 557.3 ) $ 942.7 $ 2,940.9 See notes to consolidated financial statements. F-7 Table of Contents SURGERY PARTNERS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in millions) Year Ended December 31, 2022 2021 2020 Cash flows from operating activities: Net income $ 87.0 $ 70.7 $ 1.3 Adjustments to reconcile net income to net cash provided by operating activities: 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 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 ) 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: Accounts receivable ( 35.3 ) ( 32.1 ) ( 46.6 ) Medicare accelerated payments and deferred governmental grants ( 58.4 ) ( 73.6 ) 135.2 DOJ settlement payments — ( 32.2 ) ( 4.0 ) Other operating assets and liabilities ( 67.0 ) ( 43.4 ) ( 8.7 ) Net cash provided by operating activities 158.8 87.1 246.9 Cash flows from investing activities: Purchases of property and equipment ( 80.6 ) ( 57.6 ) ( 42.9 ) Payments for acquisitions, net of cash acquired ( 146.4 ) ( 285.8 ) ( 104.6 ) Proceeds from disposals of facilities and other assets 12.9 6.0 58.5 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 Net cash used in investing activities ( 307.9 ) ( 331.7 ) ( 88.4 ) Cash flows from financing activities: Principal payments on long-term debt ( 862.0 ) ( 343.2 ) ( 216.3 ) Borrowings of long-term debt 217.8 299.4 429.4 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 ) — 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 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: Interest paid, net of interest income received 218.7 194.3 203.6 Cash paid for income taxes 1.8 1.5 1.7 Non-cash purchases of property and equipment 29.9 22.3 27.7 See notes to consolidated financial statements. F-8 Table of Contents SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Summary of Accounting Policies Organization 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. 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. The Company owned a majority interest in 93 of the surgical facilities and consolidated 118 of the facilities for financial reporting purposes. Basis of Presentation The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and footnotes. Examples include, but are not limited to, estimates of accounts receivable allowances, professional and general liabilities and the estimate of deferred tax assets or liabilities. Actual results could differ from those estimates. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, as well as interests in partnerships and limited liability companies controlled by the Company through its ownership of a majority voting interest or other rights granted to the Company by contract to manage and control the affiliate's business. All significant intercompany balances and transactions are eliminated in consolidation. Revenues 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 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. The payment arrangements with third-party payors for the services provided to the related patients typically specify payments at amounts less than the Company's standard charges. The Company continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms resulting from contract renegotiations and renewals. A summary of revenues by service type as a percentage of total revenues follows: Year Ended December 31, 2022 2021 2020 Patient service revenues: Surgical facilities revenues 95.8 % 95.7 % 95.3 % Ancillary services revenues 2.7 % 3.0 % 3.4 % Total patient service revenues 98.5 % 98.7 % 98.7 % Other service revenues 1.5 % 1.3 % 1.3 % Total revenues 100.0 % 100.0 % 100.0 % Patient service revenues. This revenue is related to charging facility fees in exchange for providing patient care. The fee charged for health care procedures performed in surgical facilities varies depending on the type of service provided, but usually includes all charges for usage of an operating room, a recovery room, special equipment, medical supplies, nursing staff and medications. The fee does not normally include professional fees charged by the patient’s surgeon, anesthesiologist or other attending physician, which are billed directly by such physicians to the patient or third-party payor. However, in several surgical facilities, the Company charges for anesthesia services. Ancillary service revenues include fees for patient visits to the Company's physician practices, pharmacy services and diagnostic tests ordered by physicians. F-9 Table of Contents SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Patient service revenues are recognized as performance obligations are satisfied. Performance obligations are based on the nature of services provided. Typically, the Company recognizes revenue at a point in time in which services are rendered and the Company has no obligation to provide further patient services. As the Company primarily performs outpatient procedures, performance obligations are generally satisfied same day and revenue is recognized on the date of service. The Company determines the transaction price based on gross charges for services provided, net of estimated contractual adjustments and discounts from third-party payors. The Company estimates its contractual adjustments and discounts based on contractual agreements, its discount policies and historical experience. Changes in estimated contractual adjustments and discounts are recorded in the period of change. 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, 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 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. 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): Year Ended December 31, 2022 2021 2020 Amount % Amount % Amount % Patient service revenues: Private insurance $ 1,288.0 51.5 % $ 1,110.1 50.6 % $ 989.9 53.9 % Government 1,059.2 42.3 % 949.9 43.3 % 708.5 38.6 % Self-pay 65.9 2.6 % 61.1 2.8 % 58.5 3.2 % Other (1) 89.0 3.6 % 73.9 3.3 % 79.2 4.3 % Total patient service revenues 2,502.1 100.0 % 2,195.0 100.0 % 1,836.1 100.0 % 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. (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 Accounts receivable from third-party payors are recorded net of estimated implicit price concessions, which are estimated based on the historical trend of the Company's surgical hospitals’ cash collections and contractual write-offs, and for the Company's surgical facilities in general, established fee schedules, relationships with payors and procedure statistics. While changes in estimated reimbursement from third-party payors remain a possibility, the Company expects that any such changes would be minimal and, therefore, would not have a material effect on its financial condition or results of operations. Accounts receivable consists of receivables from federal and state agencies (under the Medicare and Medicaid programs), private insurance organizations, employers and patients. Management recognizes that revenues and receivables from government agencies are significant to the Company's operations, but it does not believe that there is significant credit risk associated with these government agencies. Concentration of credit risk with respect to other payors is limited because of the large number of such payors. The Company recognizes that final reimbursement of accounts receivable is subject to final approval by each third-party payor. However, because the Company has contracts with its third-party payors and also verifies insurance coverage of the patient before medical services are rendered, the amounts that are pending approval from third-party payors are not considered significant. Amounts are classified outside of self-pay if the Company has an agreement with the third-party payor or has verified a patient’s coverage prior to services rendered. The Company's policy is to collect co-payments and deductibles prior to providing medical services. Patient services of the Company are primarily non-emergency, which allows the surgical facilities to control the procedures for which third-party reimbursement is sought and obtained. The Company does not require collateral from self-pay patients. The Company's collection policies and procedures are based on the type of payor, size of claim and estimated collection percentage for each patient account. The Company analyzes accounts receivable at each of its surgical facilities to ensure the proper collection and aged category. Collection efforts include direct contact with third-party payors or patients, written correspondence and the use of legal or collection agency assistance, as required. F-10 Table of Contents 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. If the projection indicates that the recorded amount of the long-lived asset is not expected to be recovered, the carrying value is reduced to estimated fair value. The cash flow projection and fair value represents management’s best estimate, using appropriate and customary assumptions, projections and methodologies, at the date of evaluation. For discussion on impairment for goodwill and indefinite-lived intangible assets, refer to Note 4. "Goodwill and Intangible Assets." Derivative Instruments and Hedging Activities The Company records all derivatives on the balance sheet at fair value and any financing elements treated as debt instruments are recorded at amortized cost. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. 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. Non-Controlling Interests The physician limited partners and physician minority members of the entities that the Company controls are responsible for the supervision and delivery of medical services. The governance rights of limited partners and minority members are restricted to those that protect their financial interests. Under certain partnership and operating agreements governing these partnerships and limited liability companies, the Company could be removed as the sole general partner or managing member for certain events such as material breach of the partnership or operating agreement, gross negligence or bankruptcy. These protective rights do not preclude consolidation of the respective partnerships and limited liability companies. Ownership interests in consolidated subsidiaries held by parties other than the Company are identified and generally presented in the consolidated financial statements within the equity section but separate from the Company's equity. However, in instances in which certain redemption features that are not solely within the control of the Company are present, classification of non-controlling interests outside of permanent equity is required. Consolidated net income attributable to the Company and to the non-controlling interests are identified and presented on the consolidated statements of operations; changes in ownership interests in which the Company retains a controlling interest are accounted for as equity transactions assuming the Company continues to consolidate related entities. Certain transactions with non-controlling interests are classified within financing activities in the consolidated statements of cash flows. The consolidated financial statements of the Company include all assets, liabilities, revenues and expenses of surgical facilities in which the Company has sufficient ownership and rights to allow the Company to consolidate the surgical facilities. Similar to its investments in non-consolidated affiliates, the Company regularly engages in the purchase and sale of ownership interests with respect to its consolidated subsidiaries that do not result in a change of control. Non-Controlling Interests — Redeemable. Each partnership and limited liability company through which the Company owns and operates its surgical facilities is governed by a partnership or operating agreement, respectively. In certain circumstances, the applicable partnership or operating agreements for the Company's surgical facilities provide that the facilities will purchase all of the physician limited partners’ or physician minority members’, as applicable, ownership if certain adverse regulatory events occur, such as it becoming illegal for the physician(s) to own an interest in a surgical facility, refer patients to a surgical facility or receive cash distributions from a surgical facility. The non-controlling interests — redeemable are reported outside of stockholders' equity in the consolidated balance sheets. A summary of activity related to the non-controlling interests—redeemable for the years ended December 31, 2022 and 2021 is as follows (in millions): December 31, 2022 2021 Balance at beginning of period $ 330.2 $ 306.8 Net income attributable to non-controlling interests—redeemable 44.5 48.9 Acquisition and disposal of shares of non-controlling interests, net—redeemable 10.4 17.9 Distributions to non-controlling interest —redeemable holders ( 43.1 ) ( 43.4 ) Balance at end of period $ 342.0 $ 330.2 F-11 Table of Contents 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 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. 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. 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. 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. 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. 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: • Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities. • Level 2: 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. • Level 3: 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. F-12 Table of Contents SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 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, 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 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. 2. 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. Acquisitions 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. F-13 Table of Contents 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. 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. 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. 3. Property and Equipment Property and equipment are stated at cost or, if obtained through acquisition, at fair value determined on the date of acquisition. Depreciation is recognized using the straight-line method over the estimated useful lives of the assets, generally 20 to 40 years for buildings and building improvements, three to five years for computers and software and five to seven years for furniture and equipment. Leasehold improvements are depreciated on a straight-line basis over the shorter of the lease term or the estimated useful life of the assets. Routine maintenance and repairs are expensed as incurred, while expenditures that increase capacities or extend useful lives are capitalized. The Company also leases certain facilities and equipment under finance leases. Assets held under finance leases are stated at the present value of lease payments at the inception of the related lease. Such assets are amortized on a straight-line basis over the lesser of the lease term or the remaining useful life of the leased asset. F-14 Table of Contents SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) A summary of property and equipment follows (in millions): December 31, 2022 2021 Land $ 11.1 $ 11.2 Buildings and improvements 164.0 131.3 Furniture and equipment 26.7 24.4 Computer and software 96.6 86.4 Medical equipment 263.1 221.0 Right-of-use finance lease assets 631.3 393.6 Construction in progress 58.1 34.1 Property and equipment, at cost 1,250.9 902.0 Less: Accumulated depreciation ( 374.3 ) ( 272.3 ) 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. See Note 6. "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. 4. Goodwill and Intangible Assets Goodwill 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 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. During 2022, the Company identified two reporting units, which include the following: 1) Surgical Facilities and 2) Ancillary Services. Prior to 2021, the Company had a third reporting unit, Alliance, which was a component of the Optical Services operating segment. On December 31, 2020, the Company sold the remaining assets of the Optical Services operating segment. The Company compares the carrying value of the net assets of the reporting unit to the estimated fair value of the reporting unit. 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. Determining fair value requires the exercise of significant judgment, including assumptions about appropriate discount rates, perpetual growth rates and the amount and timing of expected future cash flows. The significant judgments are typically based upon Level 3 inputs, generally defined as unobservable inputs representing the Company's own assumptions. The cash flows employed in the discounted cash flow analysis are based on the Company's most recent budgets and business plans aligned with provided guidance and, when applicable, various growth rates are assumed for years beyond the current business plan period. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting units. The variables within the discount rate, many of which are outside of the Company's control, provide the best estimate of all assumptions applied within the discounted cash flow model. There can be no assurance that operations will achieve the future cash flows reflected in the projections. F-15 Table of Contents SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) A summary of the changes in the carrying amount of goodwill follows (in millions): December 31, 2022 2021 Balance at beginning of period $ 3,911.8 $ 3,468.0 Acquisitions, including post acquisition adjustments 269.7 447.0 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, disposals and deconsolidations for the years ended December 31, 2022 and 2021 is included in Note 2. "Acquisitions and Dispositions." Intangible Assets 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 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 . 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. A summary of the components of intangible assets follows (in millions): December 31, 2022 December 31, 2021 Gross Carrying Amount Accumulated Amortization Net Gross Carrying Amount Accumulated Amortization Net Finite-lived intangible assets: Management rights agreements $ 23.9 $ ( 10.2 ) $ 13.7 $ 24.8 $ ( 9.4 ) $ 15.4 Other 28.5 ( 14.9 ) 13.6 19.6 ( 10.1 ) 9.5 Total finite-lived intangible assets 52.4 ( 25.1 ) 27.3 44.4 ( 19.5 ) 24.9 Indefinite-lived intangible assets 15.0 — 15.0 18.8 — 18.8 Total intangible assets $ 67.4 $ ( 25.1 ) $ 42.3 $ 63.2 $ ( 19.5 ) $ 43.7 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): 2023 $ 7.2 2024 6.0 2025 2.1 2026 1.8 2027 1.1 Thereafter 9.1 Total $ 27.3 F-16 Table of Contents SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. Long-Term Debt A summary of long-term debt follows (in millions): December 31, 2022 2021 Senior secured term loan (1) $ 1,370.0 $ 1,530.7 Senior secured revolving credit facility — — 6.750 % senior unsecured notes due 2025 185.0 370.0 10.000 % senior unsecured notes due 2027 320.0 545.0 Notes payable and other secured loans 171.3 145.0 Finance lease obligations 585.7 364.6 Less: Unamortized debt issuance costs ( 10.2 ) ( 16.5 ) Total debt 2,621.8 2,938.8 Less: Current maturities 62.8 60.4 Total long-term debt $ 2,559.0 $ 2,878.4 (1) Includes unamortized fair value discount of $ 2.1 million and $ 3.0 million as of December 31, 2022 and 2021, respectively Senior Secured Credit Facilities 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"). 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). 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 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). The Credit Agreement includes customary negative covenants restricting or limiting the ability of the Company and its restricted subsidiaries, to, among other things, sell assets, alter its business, engage in mergers, acquisitions and other business combinations, declare dividends or redeem or repurchase equity interests, incur additional indebtedness or guarantees, make loans and investments, incur liens, enter into transactions with affiliates, prepay certain junior debt, and modify or waive certain material agreements and organizational F-17 Table of Contents SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) documents, in each case, subject to customary and other agreed upon exceptions. The Credit Agreement also contains customary affirmative covenants and events of default. As of December 31, 2022, the Company was in compliance with the covenants contained in the Credit Agreement. 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 Effective June 30, 2017, the Company issued $ 370.0 million in gross proceeds of senior unsecured notes due July 1, 2025 (the "2025 Unsecured Notes"). The 2025 Unsecured Notes bear interest at the rate of 6.750 % per year, payable semi-annually on January 1 and July 1 of each year. The 2025 Unsecured Notes are a senior unsecured obligation of Surgery Center Holdings, Inc. 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 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. experiences a change in control under certain circumstances, it must offer to purchase the 2025 Unsecured Notes at a purchase price equal to 101.0 % of the principal amount, plus accrued and unpaid interest, if any, up to, but excluding, the date of repurchase. The 2025 Unsecured Notes contain customary affirmative and negative covenants, which, among other things, limit the Company’s ability to incur additional debt, pay dividends, create or assume liens, effect transactions with its affiliates, guarantee payment of certain debt securities, sell assets, merge, consolidate, enter into acquisitions and effect sale and leaseback transactions. 10.000 % Senior Unsecured Notes due 2027 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. 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 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: April 15, 2022 to April 14, 2023 105.000 % April 15, 2023 to April 14, 2024 102.500 % April 15, 2024 and thereafter 100.000 % 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 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. Other Debt 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 F-18 Table of Contents 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. See Note 6. "Leases" for further discussion. Maturities 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): 2023 $ 62.8 2024 49.7 2025 227.7 2026 1,404.4 2027 348.5 Thereafter 541.0 Total $ 2,634.1 6. Leases The Company determines if an arrangement is a lease at inception. Right-of-use assets represent the right to use the underlying assets for the lease term and the lease liabilities represent the obligation to make lease payments arising from the leases. Right-of-use assets and liabilities are recognized at commencement date based on the present value of future lease payments over the lease term, which includes only payments that are fixed and determinable at the time of commencement. When readily determinable, the Company uses the interest rate implicit in a lease to determine the present value of future lease payments. For leases where the implicit rate is not readily determinable, the Company's incremental borrowing rate is used. The Company calculates its incremental borrowing rate on a periodic basis using a third-party financial model that estimates the rate of interest the Company would have to pay to borrow an amount equal to the total lease payments on a collateralized basis over a term similar to the lease. The Company applies its incremental borrowing rate using a portfolio approach. The right-of-use asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. The Company's operating leases are primarily for real estate, including medical office buildings, and corporate and other administrative offices. The Company's finance leases are primarily for medical equipment and information technology and telecommunications assets. The Company's finance leases also include certain land, buildings and improvements as discussed in Note 3. "Property and Equipment." Real estate lease agreements typically have initial terms of ten years and may include one or more options to renew. Certain leases also include options to purchase the leased property. The useful life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. The majority of the Company's medical equipment leases have a bargain purchase option that is reasonably certain of exercise, so these assets are depreciated over their useful life. The Company's lease agreements do not contain any material residual value guarantees, restrictions or covenants. Certain of the Company's lease agreements require the Company to pay common area maintenance, repairs, property taxes and insurance costs, which are variable amounts based on actual costs incurred during each applicable period. Certain lease agreements also include escalating rent payments that are not fixed at commencement but are based on an index that is determined in future periods over the lease term based on changes in the Consumer Price Index or other measure of cost inflation. These variable components of lease payments are expensed as incurred and are not included in the determination of the right-of-use asset or lease liability. F-19 Table of Contents SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The following table presents the components of the Company's right-of-use assets and liabilities related to leases and their classification in the consolidated balance sheets at December 31, 2022 and 2021 (in millions): Classification in Consolidated Balance Sheets December 31, 2022 December 31, 2021 Assets: Operating lease assets Right-of-use operating lease assets $ 279.1 $ 324.1 Finance lease assets Property and equipment, net of accumulated depreciation 529.6 329.6 Total leased assets $ 808.7 $ 653.7 Liabilities: Operating lease liabilities: Current Other current liabilities $ 36.5 $ 40.1 Long-term Right-of-use operating lease liabilities 271.4 315.6 Total operating lease liabilities 307.9 355.7 Finance lease liabilities: Current Current maturities of long-term debt 20.9 19.0 Long-term Long-term debt, less current maturities 564.8 345.6 Total finance lease liabilities 585.7 364.6 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): December 31, 2022 December 31, 2021 Operating Leases Finance Leases Operating Leases Finance Leases Weighted-average remaining lease term 9.2 years 20.7 years 8.8 years 16.8 years Weight average discount rate 9.1 % 8.8 % 9.7 % 8.7 % The following table presents the components of the Company's lease expense and their classification in the consolidated statement of operations for the years ended December 31, 2022 and 2021 (in millions): December 31, 2022 December 31, 2021 Operating lease costs $ 65.5 $ 76.4 Finance lease costs: Amortization of leased assets 38.8 25.1 Interest on lease liabilities 42.7 27.4 Total finance lease costs 81.5 52.5 Variable and short-term lease costs 18.5 17.8 Total lease costs $ 165.5 $ 146.7 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, 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. F-20 Table of Contents SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The following table presents supplemental cash flow information for the years ended December 31, 2022 and 2021 (dollars in millions): December 31, 2022 December 31, 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash outflows from operating leases $ 63.2 $ 74.3 Operating cash outflows from finance leases 41.7 26.5 Financing cash outflows from finance leases 24.6 20.1 Right-of-use assets obtained in exchange for lease obligations: Operating leases 57.3 68.7 Finance leases 180.2 73.4 Future maturities of lease liabilities at December 31, 2022 are presented in the following table (in millions): Operating Leases Finance Leases 2023 $ 61.9 $ 68.7 2024 58.6 64.3 2025 53.1 62.2 2026 49.3 60.2 2027 41.1 58.5 Thereafter 192.1 1,099.4 Total lease payments 456.1 1,413.3 Less: imputed interest ( 148.2 ) ( 827.6 ) Total lease obligations $ 307.9 $ 585.7 7. Derivatives and Hedging Activities The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and interest rate caps as part of its interest rate risk management strategy. During 2022 and 2021, such derivatives have been used to hedge the variable cash flows associated with existing variable-rate debt. 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 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 F-21 Table of Contents 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. 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. Within the Company’s consolidated balance sheets, the financing elements treated as debt instruments described above are carried at amortized cost and the embedded at-market derivatives and the undesignated swaps are recorded at fair value. The cash flows related to the portion treated as debt are classified as financing activities in the consolidated statements of cash flows while the portion treated as an at-market derivative are classified as operating activities. Cash settlements related to the undesignated swaps will offset and are classified as operating activities in the consolidated cash flows. 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. The fair value of the interest rate caps are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected receipts on the caps are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. The interest rate caps are classified using Level 2 inputs within the fair value hierarchy. 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): December 31, 2022 December 31, 2021 Location Assets Liabilities Assets Liabilities 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 — Interest rate swaps Other long-term liabilities — 8.5 — 12.4 Derivatives in cash flow hedging relationships Interest rate caps Other long-term assets 10.4 — 2.9 — Interest rate swaps Other long-term assets 85.5 — 8.2 — Interest rate swaps Other long-term liabilities (1) — 31.9 — 45.8 Total $ 113.4 $ 40.4 $ 23.6 $ 58.2 (1) The balance is related to the financing component of the pay-fixed, receive floating interest rate swaps. F-22 Table of Contents SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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, Location 2022 2021 2020 Derivatives not designated as hedging instruments 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 Gain (loss) recognized in OCI (effective portion) $ 104.9 $ 4.8 $ ( 30.5 ) Loss reclassified from accumulated OCI into income (effective portion) (2) Interest expense, net $ 10.3 $ 24.7 $ 20.2 (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. 8. Earnings Per Share Basic and diluted earnings per share are calculated based on the weighted-average number of shares outstanding in each period and dilutive stock options, unvested shares and warrants, to the extent such securities exist and have a dilutive effect on earnings per share. The Company computes basic and diluted earnings per share using the two-class method. The two-class method of computing earnings per share is an earnings allocation method that determines earnings per share for common shares and participating securities according to their participation rights in dividends and undistributed earnings. A reconciliation of the numerator and denominator of basic and diluted earnings per share follows (dollars in millions, except per share amounts; shares in thousands): Year Ended December 31, 2022 2021 2020 Numerator: Net loss attributable to Surgery Partners, Inc. $ ( 54.6 ) $ ( 70.9 ) $ ( 116.1 ) Less: Amounts allocated to participating securities (1) — ( 10.3 ) ( 39.5 ) Net loss attributable to common stockholders $ ( 54.6 ) $ ( 81.2 ) $ ( 155.6 ) Denominator: Weighted average shares outstanding- basic and diluted (2) 91,952 72,427 48,776 Basic and diluted loss per share (2) $ ( 0.59 ) $ ( 1.12 ) $ ( 3.19 ) Dilutive securities outstanding not included in the computation of diluted loss per share as their effect is antidilutive: Stock options 1,459 1,920 712 Restricted shares 679 1,452 981 (1) Includes dividends accrued for the Series A Preferred Stock. 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. F-23 Table of Contents SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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. In addition, the Company granted the underwriters an option to purchase up to an additional 1,125,000 shares of common stock at the same price per share as the January 2021 Firm Shares. On February 1, 2021, the Company completed the public offering pursuant to which the Company sold 8,625,000 shares of common stock (including the January 2021 Firm Shares and the option shares), resulting in gross proceeds of $ 260.9 million. In connection with the offering, the Company incurred underwriting discounts, commissions and other related costs of $ 12.7 million, which were recognized as a direct reduction of proceeds received. On November 8, 2021, the Company entered into an underwriting agreement relating to a public offering of 6,000,000 shares (the “November 2021 Firm Shares”) of the Company’s common stock, $ 0.01 par value per share, at a price to the public of $ 46.50 per share. In addition, the Company granted the underwriters an option to purchase up to an additional 900,000 shares of common stock at the same price per share as the November 2021 Firm Shares. On November 12, 2021, the Company completed the public offering pursuant to which the Company sold 6,900,000 shares of common stock (including the November 2021 Firm Shares and the option shares), resulting in gross proceeds of $ 320.9 million. In connection with the offering, the Company incurred underwriting discounts, commissions and other related costs of $ 14.9 million, which were recognized as a direct reduction of proceeds received. Share Repurchase Authorization On December 15, 2017, the Company's Board of Directors authorized a share repurchase program of up to $ 50.0 million of the Company's issued and outstanding common stock from time to time. The timing and size of repurchases will be determined based on market conditions and other factors. The authorization does not obligate the repurchase of any shares and the Company may repurchase shares of common stock at any time without prior notice. The share repurchases will be made in accordance with applicable securities laws in open market or privately negotiated transactions. The authorization does not have a specified expiration date, and the share repurchase program may be suspended, recommenced or discontinued at any time or from time to time without prior notice. At December 31, 2022, the Company had $ 46.0 million of repurchase authorization available under the December 2017 authorization. 9. Income Taxes Income Taxes The Company uses the asset and liability method to account for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any change in tax rates that could impact deferred tax assets or liabilities are recognized in the same period the change occurs. 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 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. If these estimates and related assumptions change in the future, the Company may be required to adjust its deferred tax valuation allowances. The Company, or one or more of its subsidiaries, files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal income tax examinations for years prior to 2019 or state income tax examinations for years prior to 2018. The Company and certain of its subsidiaries file a consolidated federal income tax return. The partnerships, limited liability companies, and certain non-consolidated physician practice corporations also file separate income tax returns. The Company's allocable portion of each partnership's and limited liability company's income or loss is included in taxable income of the Company. The remaining income or loss of each partnership and limited liability company is allocated to the other owners. The Company made income tax payments of $ 1.8 million, $ 1.5 million and $ 1.7 million for the years ended December 31, 2022, 2021 and 2020, respectively. F-24 Table of Contents SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Income tax expense (benefit) is comprised of the following (in millions): Year Ended December 31, 2022 2021 2020 Current: Federal $ — $ — $ ( 0.2 ) State 1.5 1.5 1.9 Deferred: Federal 17.5 7.9 ( 22.2 ) State 4.3 1.1 0.4 Total income tax expense (benefit) $ 23.3 $ 10.5 $ ( 20.1 ) A reconciliation of the provision for income taxes as reported in the consolidated statements of operations and the amount of income tax expense (benefit) computed by multiplying consolidated income (loss) in each year by the U.S. federal statutory rate of 21% (2022, 2021 and 2020) follows (in millions): Year Ended December 31, 2022 2021 2020 Tax expense (benefit) at U.S.federal statutory rate $ 23.2 $ 17.1 $ ( 4.0 ) State income tax, net of U.S. federal tax benefit 6.0 2.3 2.4 Change in federal valuation allowance 29.1 20.9 4.1 Net income attributable to non-controlling interests ( 30.2 ) ( 29.9 ) ( 24.8 ) Stock option compensation ( 2.5 ) ( 1.7 ) 1.2 Differences related to divested facilities ( 1.4 ) ( 2.6 ) ( 0.7 ) Tax return reconciling differences ( 1.0 ) 1.3 — Change in effective tax rate ( 0.5 ) — ( 0.8 ) Tax Receivable Agreement liability 0.4 0.7 0.9 Goodwill impairment — — 4.3 Litigation settlement — — ( 3.7 ) Adjustments to unrealized attributes — 2.3 — Other 0.2 0.1 1.0 Total income tax expense (benefit) $ 23.3 $ 10.5 $ ( 20.1 ) F-25 Table of Contents SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The components of temporary differences and the approximate tax effects that give rise to the Company’s net deferred tax asset are as follows (in millions): December 31, 2022 2021 Deferred tax assets: Medical malpractice liability $ 4.1 $ 3.6 Accrued vacation and incentive compensation 3.1 3.0 Net operating loss carryforwards 146.0 152.1 Allowance for bad debts 2.9 3.0 Amortization of intangible assets — 1.2 Deferred financing costs 5.1 8.3 Section 163(j) interest 137.7 99.4 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 Total gross deferred tax assets 372.2 348.4 Less: Valuation allowance ( 114.7 ) ( 113.0 ) Total deferred tax assets 257.5 235.4 Deferred tax liabilities: Depreciation on property and equipment ( 2.0 ) ( 2.6 ) Basis differences of partnerships and joint ventures ( 87.4 ) ( 73.0 ) 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 ) Total deferred tax liabilities ( 166.0 ) ( 121.0 ) Net deferred tax assets $ 91.5 $ 114.4 The Company had federal NOL carryforwards of $ 540.9 million as of December 31, 2022, of which $ 446.2 million expire between 2030 and 2037. The remaining federal NOL carryforwards, which were generated after 2017, do not expire. The Company had state NOL carryforwards of $ 581.1 million as of December 31, 2022, which expire between 2023 and 2042. The Company had Section 163(j) interest limitation carryforwards of $ 555.8 million as of December 31, 2022, which do not expire. 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 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 and certain state NOL carryforwards. 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 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. F-26 Table of Contents SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) A reconciliation of the beginning and ending liability for gross unrecognized tax benefits for the years ended December 31, 2022 and 2021 is as follows (in millions): December 31, 2022 2021 Unrecognized tax benefits at beginning of year $ 0.1 $ 0.1 Additions for tax provisions of current year — — Unrecognized tax benefits at end of year $ 0.1 $ 0.1 The Company recognizes interest and penalties related to uncertain tax positions in its provision for income taxes in the consolidated statements of operations. For the years ended December 31, 2022 and 2021, the Company had approximately $ 0.1 million of accrued interest and penalties related to uncertain tax positions. The total amount of accrued liabilities related to uncertain tax positions that would affect the Company's effective tax rate, if recognized, is $ 0.1 million as of December 31, 2022 and 2021. The reserves are included in long-term taxes payable in the consolidated balance sheet as of December 31, 2022. 10. Equity-Based Compensation Transactions in which the Company receives employee and non-employee services in exchange for the Company’s equity instruments or liabilities that are based on the fair value of the Company’s equity securities or may be settled by the issuance of these securities are accounted for using a fair value method. The Company’s policy is to recognize compensation expense using the straight line method over the relevant vesting period for units that vest based on time. Equity-based awards are granted pursuant to the Surgery Partners, Inc. 2015 Omnibus Incentive Plan, as amended and restated effective January 1, 2020 ("2015 Omnibus Incentive Plan"). Under this plan, the Company can grant stock options, stock appreciation rights, restricted stock, unrestricted stock, stock units, performance awards, cash awards and other awards convertible into or otherwise based on shares of its common stock. As of December 31, 2022, 11,815,700 shares were authorized to be granted under the 2015 Omnibus Incentive Plan and 5,072,239 were available for future equity grants. Restricted and Performance Share-Based Awards During the years ended December 31, 2022 and 2021, the Company granted 257,291 and 232,097 restricted stock awards ("RSAs") to certain officers, employees and non-employee directors in accordance with the 2015 Omnibus Incentive Plan, respectively. Vesting and payment of these RSAs are generally subject to continuing service of the employee or non-employee director over the ratable vesting periods beginning one year from the date of grant to three or five years after the date of grant. The fair values of these RSAs were determined based on the closing price of the Company’s common stock on the trading date immediately prior to the grant date. During the years ended December 31, 2022 and 2021, the Company granted 203,549 and 182,964 performance-based restricted stock units ("PSUs") subject to the achievement of a combination of performance conditions, respectively. In addition to the achievement of the performance conditions, these PSUs are generally subject to the continuing service of the employee over the ratable vesting period from the earned date continuing for two years . For these PSUs, the number of shares payable at the end of the performance periods ranges from 0 % to 150 % of the targeted units based on the Company’s actual performance and/or market conditions results as compared to the targets. These PSUs are not considered outstanding until earned. During the years ended December 31, 2022 and 2021, 146,937 and 776,988 of the PSUs previously granted were deemed to have been earned, respectively. F-27 Table of Contents SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Restricted and Performance Share-Based Activity A summary of non-vested restricted share-based activity for the years ended December 31, 2022, 2021, and 2020 follows: Unvested Shares Weighted Average Grant Date Fair Value Outstanding at December 31, 2019 775,886 $ 13.78 Granted/Earned 1,387,059 6.87 Forfeited/Cancelled ( 162,635 ) 13.77 Vested ( 552,943 ) 12.78 Outstanding at December 31, 2020 1,447,367 $ 9.75 Granted/Earned 1,009,085 39.90 Forfeited/Cancelled ( 77,844 ) 47.40 Vested ( 723,212 ) 42.88 Outstanding at December 31, 2021 1,655,396 $ 11.55 Granted/Earned 404,287 47.38 Forfeited/Cancelled ( 116,485 ) 39.65 Vested ( 947,785 ) 51.28 Outstanding at December 31, 2022 995,413 $ 23.87 Stock Options 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 estimated fair value of options is amortized to expense on a straight-line basis over the options’ vesting period. Option Valuation In applying the Monte Carlo simulation model to value the stock options, the Company used the following assumptions: ▪ Risk-free interest rate . The risk-free interest rate is used as a component of the fair value of stock options to take into account the time value of money. For the risk-free interest rate, the Company uses the implied yield on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life, in years, of the options granted. ▪ Expected volatility . Volatility, for the purpose of share-based compensation, is a measurement of the amount that a share price has fluctuated. Expected volatility involves reviewing historical volatility and determining what, if any, change the share price will have in the future. The Company used historical stock price information of certain peer group companies for a period of time equal to the expected option life period to determine estimated volatility. ▪ Expected life, in years . A clear distinction is made between the expected life of an option and the contractual term of the option. The expected life of an option is considered the amount of time, in years, that an option is expected to be outstanding before it is exercised. Whereas, the contractual term of the stock option is the term an option is valid before it expires. ▪ Expected dividend yield . Since issuing dividends will affect the fair value of a stock option, GAAP requires companies to estimate future dividend yields or payments. The Company has not historically issued dividends and does not intend to issue dividends in the future. As a result, the Company does not apply a dividend yield component to its valuation. F-28 Table of Contents SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Stock Option Activity A summary of stock option activity for the years ended December 31, 2022, 2021, and 2020 follows: Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term (years) Outstanding at December 31, 2019 2,769,187 $ 13.02 9.0 Granted — Exercised ( 4,199 ) 20.24 5.8 Forfeited/Cancelled ( 4,473 ) 19.00 4.8 Outstanding at December 31, 2020 2,760,515 $ 12.88 8.0 Granted — Exercised ( 9,155 ) 6.28 7.7 Forfeited/Cancelled ( 366,500 ) 13.42 7.2 Outstanding at December 31, 2021 2,384,860 $ 12.82 7.0 Granted — Exercised ( 301,998 ) 13.42 6.2 Forfeited/Cancelled ( 134,502 ) 13.42 6.2 Outstanding at December 31, 2022 (1) 1,948,360 $ 12.69 5.9 (1) Of the outstanding stock options, 1,898,360 were exercisable as of December 31, 2022. Stock Appreciation Rights As of December 31, 2022, there were 200,000 stock-settled stock appreciation right awards (the "SAR Awards") outstanding. These SAR Awards were granted on December 16, 2018. These were the only SAR Awards granted as of December 31, 2022. The SAR Awards have an exercise price of $ 12.90 , and a remaining contractual term of 5.0 years. Fifty percent ( 50 %) of the SAR Awards will vest in five equal annual installments on each of the first five anniversaries of the date of grant, generally subject to continued employment on each vesting date. Twenty-five percent ( 25 %) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $ 25.00 over a period of sixty ( 60 ) consecutive trading days, and twenty-five percent ( 25 %) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $ 35.00 over a period of sixty ( 60 ) consecutive trading days, in each case, generally subject to continued employment on each vesting date. Forfeitures are recognized as incurred. Of the outstanding SAR Awards, 160,000 were exercisable as of December 31, 2022. Other information pertaining to equity-based compensation At December 31, 2022, unrecognized compensation cost related to unvested shares, stock options and SAR Awards was approximately $ 19.1 million. Unrecognized compensation cost will be expensed annually based on the number of shares, stock options and SAR Awards that vest during the year. The Company records equity-based compensation expense to recognize the fair value of the restricted shares, stock options and SAR Awards granted over the relevant vesting period. The Company recorded equity-based compensation expense of $ 18.4 million, $ 17.4 million and $ 13.2 million for the years ended December 31, 2022, 2021 and 2020, respectively. 11. Employee Benefit Plans Surgery Partners 401(k) Plan The Surgery Partners 401(k) Plan is a defined contribution plan whereby certain employees who have completed at least one month of service, including at least one hour of service during that period of time, are eligible to participate. Employees may enroll in the plan immediately upon completion of the minimum service requirement. The Surgery Partners 401(k) Plan allows eligible employees to make contributions of varying percentages or flat dollar amounts of their annual compensation, up to the maximum allowable amounts by the Internal Revenue Service ("IRS"). Eligible employees may or may not receive a match by the Company of their contributions. Employer contributions vest incrementally over a period of five years . 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. F-29 Table of Contents SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 12. Other Current Liabilities A summary of other current liabilities is as follows (in millions): December 31, 2022 2021 Right-of-use operating lease liabilities $ 36.5 $ 40.1 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 Accrued expenses and other 65.5 67.4 Total $ 206.9 $ 210.0 13. Commitments and Contingencies Professional, General and Workers' Compensation Liability Risks The Company is subject to claims and legal actions in the ordinary course of business, including claims relating to patient treatment, employment practices and personal injuries. The Company maintains professional, general and workers' compensation liability insurance in excess of self-insured retentions, through third party commercial insurance carriers. Although management believes the coverage is sufficient for the Company's operations, some claims may potentially exceed the scope of coverage in effect. Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance. The Company is not aware of any such proceedings that are reasonably possible to have a material adverse effect on the Company's business, financial position, results of operations or liquidity. Total professional, general and workers' compensation claim liabilities as of December 31, 2022 and 2021 were $ 20.8 million and $ 19.8 million, respectively. Expected insurance recoveries of $ 12.7 million and $ 8.7 million as of December 31, 2022 and 2021, respectively, are included as a component of other current assets and other long-term assets in the consolidated balance sheets. Laws and Regulations Laws and regulations governing the Company's business, including those relating to the Medicare and Medicaid programs, are complex and subject to interpretation. These laws and regulations govern every aspect of how the Company's surgical facilities conduct their operations, from licensing requirements to how and whether the Company's facilities may receive payments pursuant to the Medicare and Medicaid programs. Compliance with such laws and regulations can be subject to future government agency review and interpretation as well as legislative changes to such laws. Noncompliance with such laws and regulations may subject the Company to significant regulatory sanctions including fines, penalties, and exclusion from the Medicare, Medicaid and other federal health care programs. From time to time, governmental regulatory agencies will conduct inquiries of the Company's practices, including, but not limited to, the Company's compliance with federal and state fraud and abuse laws, billing practices and relationships with physicians. Government Settlement On April 14, 2020, Logan Laboratories, LLC ("Logan Labs"), a toxicology laboratory based in Tampa, Florida, that provides urine testing services and Tampa Pain Relief Centers, Inc. ("Tampa Pain" and, together with Logan Labs, the "Companies"), a pain management medical practice based in Tampa, Florida, both indirect wholly-owned subsidiaries of the Company, entered into a settlement agreement (the "Settlement Agreement") with the United States of America, acting through the United States Department of Justice (“DOJ”) and on behalf of the Office of Inspector General of the Department of Health and Human Services ("OIG"), the Defense Health Agency, acting on behalf of the TRICARE Program, the Office of Personnel Management, as the administrator of the Federal Employees Health Benefits Program, the Office of Workers Compensation Programs of the United States Department of Labor, which administers federal workers compensation claims for federal employees, including the United States Postal Service, and the United States Department of Veterans Affairs and certain other parties to resolve the pending DOJ investigation. Under the terms of the Settlement Agreement, the Companies paid $ 30.7 million plus accrued interest on April 1, 2021, representing the final payment related to the resolution of the DOJ investigation. Stockholder Litigation On December 4, 2017, a purported Company stockholder filed an action in the Delaware Court of Chancery (the "Delaware Action"). That action is captioned Witmer v. H.I.G. Capital, L.L.C., et al., C.A. No. 2017-0862. The plaintiff in the Delaware Action asserted claims against (i) certain current and former members of the Company’s Board of Directors (together, the "Directors"); (ii) H.I.G. Capital, LLC and certain of its affiliates (collectively, "H.I.G."); and (iii) Bain Capital Private Equity, L.P. and certain of its affiliates (collectively, "Bain Capital" and, together with the Directors and H.I.G., the "Defendants"). The parties to the Delaware Action negotiated a final stipulation of F-30 Table of Contents 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 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 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. There can be no assurance that any such matter will be covered by indemnification or, if covered, that the liability sustained will not exceed contractual limits or the financial capacity of the indemnifying party. The Company cannot predict whether federal or state statutory or regulatory provisions will be enacted that would prohibit or otherwise regulate relationships which the Company has established or may establish with other health care providers or have materially adverse effects on its business or revenues arising from such future actions. 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. Potential Physician Investor Liability A majority of the physician investors in the partnerships and limited liability companies which operate the Company's surgical facilities carry general and professional liability insurance on a claims-made basis. Each partnership or limited liability company may, however, be liable for damages to persons or property arising from occurrences at the surgical facilities. Although the various physician investors and other surgeons generally are required to obtain general and professional liability insurance with tail coverage that extends beyond the period of any claims-made policies, such individuals may not be able to obtain coverage in amounts sufficient to cover all potential liability. Since most insurance policies contain exclusions, the physician investors will not be insured against all possible occurrences. In the event of an uninsured or underinsured loss, the value of an investment in the partnership interests or limited liability company membership units and the amount of distributions could be adversely affected. Tax Receivable Agreement 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. 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. The amounts payable under the TRA are related to the Company’s projected realized tax savings over the next five years and are not dependent on the Company’s actual tax savings over such period. The calculation of amounts payable pursuant to the TRA is thus dependent on the maximum corporate federal income tax rate. To the extent that the Company is unable to make payments under the TRA, such payments will be deferred and will accrue interest at a rate of LIBOR plus 500 basis points until paid. If the terms of credit agreements and other debt documents cause the Company to be unable to make payments under the TRA and such terms are not materially more restrictive than those existing as of September 30, 2015, such payments will be deferred and will accrue interest at a rate of LIBOR plus 300 basis points until paid. Assuming the Company's tax rate is 24 %, calculated as the maximum corporate federal tax rate plus three percent, throughout the remaining term of the TRA, the Company estimates the total remaining amounts payable under the TRA was approximately $ 1.9 million and $ 22.0 million as of December 31, 2022 and 2021, respectively. As a result of the amendment to the TRA, the Company was required to value the liability under the TRA by discounting the fixed payment schedule using the Company’s incremental borrowing rate. The carrying value of the liability under the TRA, reflecting a discount, was $ 1.6 million and $ 19.7 million as of December 31, 2022 and 2021, respectively. The current portion of the liability was $ 1.3 million and $ 19.7 million as of December 31, 2022 and 2021, respectively, and is included as a component of other current liabilities in the consolidated balance sheets. The long-term portion is included as a component of other long-term liabilities in the consolidated balance sheets. F-31 Table of Contents SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 14. Segment Reporting The Company currently operates in two major lines of business that are also the Company's reportable operating segments - the operation of surgical facilities and the operation of ancillary services. The Surgical Facility Services segment includes the operation of ASCs, surgical hospitals and anesthesia services. The Ancillary Services segment consists of multi-specialty physician practices. Prior to 2021, the Ancillary Services segment also included a diagnostic laboratory, which was closed during the third quarter of 2020. The Optical Services segment for the 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. The following tables present financial information for each reportable segment (in millions): Year Ended December 31, 2022 2021 2020 Revenues: Surgical Facility Services $ 2,470.4 $ 2,157.8 $ 1,793.4 Ancillary Services 68.9 67.3 63.6 Optical Services — — 3.1 Total $ 2,539.3 $ 2,225.1 $ 1,860.1 Adjusted EBITDA: Surgical Facility Services $ 473.6 $ 422.0 $ 339.3 Ancillary Services ( 2.3 ) 1.7 ( 3.4 ) Optical Services — — 1.4 All other ( 91.1 ) ( 84.1 ) ( 80.7 ) Total $ 380.2 $ 339.6 $ 256.6 Reconciliation of Adjusted EBITDA: Income (loss) before income taxes $ 110.3 $ 81.2 $ ( 18.8 ) Net income attributable to non-controlling interests ( 141.6 ) ( 141.6 ) ( 117.4 ) 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, integration and acquisition costs (1) 48.6 46.1 38.2 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) ( 8.0 ) — — Hurricane-related impacts (4) 1.5 ( 0.2 ) — Impairment charges — — 33.5 Gain on escrow release (5) — — ( 0.8 ) Adjusted EBITDA $ 380.2 $ 339.6 $ 256.6 (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) 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. F-32 Table of Contents 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. December 31, 2022 2021 Assets: Surgical Facility Services $ 6,001.1 $ 5,552.8 Ancillary Services 41.7 47.5 All other 639.3 517.3 Total assets $ 6,682.1 $ 6,117.6 Year Ended December 31, 2022 2021 2020 Cash purchases of property and equipment: Surgical Facility Services $ 74.3 $ 55.0 $ 38.7 Ancillary Services 1.1 0.5 0.4 All other 5.2 2.1 3.8 Total cash purchases of property and equipment $ 80.6 $ 57.6 $ 42.9 15. Subsequent Events 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. F-33 Table of Contents SIGNATURES 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. SURGERY PARTNERS, INC. By: /s/ J. Eric Evans J. Eric Evans Chief Executive Officer (Principal Executive Officer) Date: March 1, 2023 Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURES TITLE DATE Chief Executive Officer, Director (Principal Executive Officer) March 1, 2023 /s/ J. Eric Evans J. Eric Evans Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) March 1, 2023 /s/ David T. Doherty David T. Doherty Chairman of the Board March 1, 2023 /s/ Wayne S. DeVeydt Wayne S. DeVeydt Director March 1, 2023 /s/ T. Devin O'Reilly T. Devin O'Reilly Director March 1, 2023 /s/ Teresa DeLuca Teresa DeLuca Director March 1, 2023 /s/ John A. Deane John A. Deane Director March 1, 2023 /s/ Brent Turner Brent Turner Director March 1, 2023 /s/ Andrew Kaplan Andrew Kaplan Director March 1, 2023 /s/ Clifford G. Adlerz Clifford G. Adlerz Director March 1, 2023 /s/ Blair E. Hendrix Blair E. Hendrix Director March 1, 2023 /s/ Patricia A. Maryland, Dr.PH Patricia A. Maryland, Dr.PH