What changed in this filing

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Item 1. Financial Statements

2023-08-01 compared with 2023-05-02 · 162 added, 137 removed, 475 unchanged (39% of the section changed)

48 unchanged sentences

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

Three Months Ended March 31,

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

2023 2022 2023 2022

Revenues $ 667.6 $ 615.4 $ 1,333.8 $ 1,211.6

10 unchanged sentences

Grant funds — ( 0.1 ) ( 1.1 ) ( 1.3 )

Net loss (gain) on disposals, consolidations and deconsolidations 10.5 ( 0.1 )

Net (gain) loss on disposals, consolidations and deconsolidations ( 8.8 ) 1.1 1.7 1.0

Equity in earnings of unconsolidated affiliates ( 2.6 ) ( 2.6 ) ( 5.9 ) ( 5.7 )

Litigation settlements 1.5 — 4.5 ( 32.8 )

Other expense (income), net 0.3 ( 2.4 )

Other income, net ( 1.2 ) ( 2.6 ) ( 0.9 ) ( 5.0 )

570.0 538.9 1,189.8 1,034.7

Operating income 97.6 76.5 144.0 176.9

Interest expense, net ( 47.7 ) ( 56.9 ) ( 94.5 ) ( 113.2 )

(Loss) income before income taxes ( 0.4 ) 44.1

Income before income taxes 49.9 19.6 49.5 63.7

Income tax benefit (expense) 7.8 ( 4.3 ) 9.4 ( 5.6 )

1 unchanged sentence

Net income attributable to non-controlling interests ( 38.8 ) ( 33.7 ) ( 64.9 ) ( 64.3 )

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

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

$ 18.9 $ ( 18.4 ) $ ( 6.0 ) $ ( 6.2 )

Net (loss) income per share attributable to common stockholders

Net income (loss) per share attributable to common stockholders

Basic $ 0.15 $ ( 0.21 ) $ ( 0.05 ) $ ( 0.07 )

3 unchanged sentences

127,370 88,900 125,463 88,450

(1) The impact of potentially dilutive securities for the three months ended March 31, 2023 was not considered because the effect would be anti-dilutive.

(1) The impact of potentially dilutive securities for the three months ended June 30, 2022 and the six months ended June 30, 2023 and 2022, was not considered because the effect would be anti-dilutive.

See notes to unaudited condensed consolidated financial statements.

2 unchanged sentences

(Unaudited, dollars in millions)

Three Months Ended March 31,

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

2023 2022 2023 2022

Net income $ 57.7 $ 15.3 $ 58.9 $ 58.1

Other comprehensive (loss) income, net of tax:

Other comprehensive income, net of tax:

Derivative activity, net of tax of $ 0

13.9 19.0 2.6 75.8

Comprehensive (loss) income ( 10.1 ) 99.6

Comprehensive income 71.6 34.3 61.5 133.9

Comprehensive income attributable to non-controlling interests ( 38.8 ) ( 33.7 ) ( 64.9 ) ( 64.3 )

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

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

$ 32.8 $ 0.6 $ ( 3.4 ) $ 69.6

14 unchanged sentences

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

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

Equity-based compensation 30 — 4.4 — — — 4.4

Other comprehensive income — — — 19.0 — — 19.0

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

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

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

Balance at December 31, 2022 125,961 $ 1.3 $ 2,478.0 $ 76.2 $ ( 557.3 ) $ 942.7 $ 2,940.9

5 unchanged sentences

Balance at March 31, 2023 126,480 $ 1.3 $ 2,478.1 $ 64.9 $ ( 582.3 ) $ 980.5 $ 2,942.5

Net income — — — — 19.0 27.6 46.6

Equity-based compensation 13 — 4.5 — — — 4.5

Other comprehensive income — — — 13.9 — — 13.9

Acquisition and disposal of shares of non-controlling interests, net — — 18.8 — — ( 19.7 ) ( 0.9 )

Distributions to non-controlling interests—non-redeemable holders — — — — — ( 23.8 ) ( 23.8 )

Balance at June 30, 2023 126,493 $ 1.3 $ 2,501.4 $ 78.8 $ ( 563.3 ) $ 964.6 $ 2,982.8

See notes to unaudited condensed consolidated financial statements.

2 unchanged sentences

(Unaudited, dollars in millions)

Three Months Ended March 31,

Six Months Ended June 30,

Cash flows from operating activities:

5 unchanged sentences

Equity-based compensation expense 8.8 8.0

Net loss (gain) on disposals, consolidations and deconsolidations 10.5 ( 0.1 )

Net loss on disposals, consolidations and deconsolidations 1.7 1.0

Deferred income taxes ( 11.5 ) 4.9

34 unchanged sentences

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

As of March 31, 2023, the Company owned or operated a portfolio of 145 surgical facilities, comprised of 127 ASCs and 18 surgical hospitals in 31 states.

As of June 30, 2023, the Company owned or operated a portfolio of 152 surgical facilities, comprised of 134 ASCs and 18 surgical hospitals in 32 states.

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

21 unchanged sentences

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

Three Months Ended March 31,

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

2023 2022 2023 2022

Patient service revenues:

22 unchanged sentences

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

Three Months Ended March 31,

Three Months Ended June 30,

Amount % Amount %

7 unchanged sentences

Total revenues $ 667.6 $ 615.4

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30,

Amount % Amount %

Patient service revenues:

Private insurance $ 677.2 51.5 % $ 608.6 50.9 %

Government 566.0 43.1 % 507.0 42.4 %

Self-pay 32.7 2.5 % 33.2 2.8 %

38.5 2.9 % 46.2 3.9 %

Total patient service revenues 1,314.4 100.0 % 1,195.0 100.0 %

Other service revenues 19.4 16.6

Total revenues $ 1,333.8 $ 1,211.6

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

1 unchanged sentence

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

24 unchanged sentences

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

The Company's effective tax rate was 400.0 % for the three months ended March 31, 2023 compared to 2.9 % for the three months ended March 31, 2022.

For the three months ended March 31, 2023, the effective tax rate differed from the federal corporate tax rate of 21% primarily due to earnings attributable to non-controlling interests, an increase in the Company’s valuation allowance attributable to interest expense limitations, and a discrete tax benefit of $ 1.8 million related to the vesting of restricted stock awards.

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company's effective tax rate was ( 19.0 )% for the six months ended June 30, 2023 compared to 8.8 % for the six months ended June 30, 2022.

For the six months ended June 30, 2023, the effective tax rate differed from the federal corporate tax rate of 21% primarily due to earnings attributable to non-controlling interests, an increase in the Company’s valuation allowance attributable to interest expense limitations, and discrete tax benefits of (i) $ 1.8 million related to the vesting of restricted stock awards, and (ii) $ 15.9 million related to entity divestitures.

For the six months ended June 30, 2022, the effective tax rate differed from 21% primarily due to earnings attributable to non-controlling interests, an increase in the Company’s valuation allowance attributable to interest expense limitations, and discrete tax benefits of (i) $ 4.6 million related to the vesting of restricted stock awards, (ii) $ 1.8 million attributable to non-recurring earnings’ impact on the Company’s valuation allowance, and (iii) $ 1.0 million related to entity divestitures.

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

1 unchanged sentence

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

A summary of the Company's acquisitions and disposals for the three months ended March 31, 2023 is included in Note 2.

A summary of the Company's acquisitions and disposals for the six months ended June 30, 2023 is included in Note 2.

"Acquisitions and Disposals."

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A summary of activity related to goodwill for the three months ended March 31, 2023 is as follows (in millions):

A summary of activity related to goodwill for the six months ended June 30, 2023 is as follows (in millions):

Balance at December 31, 2022 $ 4,137.1

1 unchanged sentence

Disposals ( 35.8 )

Balance at March 31, 2023 $ 4,217.3

A detailed evaluation of potential impairment indicators was performed as of March 31, 2023, which specifically considered recent increases in interest rates, inflation risk and market volatility.

On the basis of available evidence as of March 31, 2023, no indicators of impairment were identified.

Balance at June 30, 2023 $ 4,235.9

A detailed evaluation of potential impairment indicators was performed as of June 30, 2023, which specifically considered recent increases in interest rates, inflation risk and market volatility.

On the basis of available evidence as of June 30, 2023, no indicators of impairment were identified.

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

10 unchanged sentences

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Three Months Ended March 31,

Six Months Ended June 30,

Balance at beginning of period $ 342.0 $ 330.2

5 unchanged sentences

The Company received grant funds distributed under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) and other governmental assistance programs.

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

The Company estimates $ 1.1 million and $ 1.2 million of grant funds received qualified for recognition as a reduction in operating expenses for the three months ended March 31, 2023 and 2022, respectively.

There were no remaining unrecognized grant funds as of March 31, 2023.

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

During the three and six months ended June 30, 2023, the Company recognized grant funds received as a reduction in operating expenses in the amount of none and $ 1.1 million, respectively.

During the three and six months ended June 30, 2022, the Company recognized grant funds received as a reduction in operating expenses in the amount of $ 0.1 million and $ 1.3 million, respectively.

There were no remaining unrecognized grant funds as of June 30, 2023.

As of December 31, 2022 approximately $ 3 million of unrecognized grant funds received was reflected as a component of other current liabilities within the condensed consolidated balance sheets.

1 unchanged sentence

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

As of March 31, 2023 and December 31, 2022, the remaining deferred accelerated payments was minimal.

During the three months ended March 31, 2022, approximately $ 18 million was repaid in

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

accordance with the terms of the program.

As of June 30, 2023 and December 31, 2022, the remaining deferred accelerated payments was minimal.

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

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

11 unchanged sentences

2023 December 31,

2022 March 31,

2022 June 30,

2023 December 31,

6 unchanged sentences

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.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Variable Interest Entities

2 unchanged sentences

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

As of March 31, 2023, the Company's consolidated VIEs include seven surgical facilities and five physician practices.

The total assets (excluding goodwill and intangible assets, net) of the consolidated VIEs included in the accompanying condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022 were $ 69.9 million and $ 64.9 million, respectively, and the total liabilities of the consolidated VIEs were $ 44.5 million and $ 40.9 million, respectively.

As of June 30, 2023, the Company's consolidated VIEs consisted of seven surgical facilities and five physician practices.

The total assets (excluding goodwill and intangible assets, net) of the consolidated VIEs included in the accompanying condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022 were $ 65.6 million and $ 64.9 million, respectively, and the total liabilities of the consolidated VIEs were $ 38.4 million and $ 40.9 million, respectively.

Acquisitions and Disposals

During the three months ended March 31, 2023:

During the six months ended June 30, 2023:

• The Company acquired a controlling interest in a surgical facility and a physician practice for aggregate cash consideration of $ 17.9 million, net of cash acquired, and non-cash consideration of $ 1.3 million, which consisted of a non-controlling interest in one of the Company's existing surgical facilities.

In connection with these acquisitions, the Company preliminarily recognized non-controlling interests of $ 12.0 million and goodwill of $ 27.4 million.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

• The Company acquired a controlling interest in two surgical facilities which were previously accounted for as equity method investments for cash consideration of $ 24.5 million, net of cash acquired.

As a result of these transactions, the Company obtained control of the previously non-controlled surgical facilities, resulting in the consolidation of the previously non-consolidated entities.

The previously held non-controlling were remeasured and recorded at fair value as of the dates of the transactions.

• The Company acquired a controlling interest in two surgical facilities and an in-development de novo surgical facility, which were previously accounted for as equity method investments, for aggregate cash consideration of $ 26.9 million, net of cash acquired.

The Company also amended the operating agreement of a previously non-controlled surgical facility resulting in the Company obtaining a controlling interest in the facility.

These transactions resulted in the consolidation of the previously non-consolidated entities.

The previously held non-controlling interests were remeasured and recorded at fair value as of the dates of the transactions.

The fair value measurement utilizes Level 3 inputs, which includes unobservable data.

The acquisition date fair value of the previously held non-controlling interests was $ 27.3 million.

As a result of stepping up its ownership interest, the Company recognized a loss of $ 2.9 million included in net loss (gain) on disposals, consolidations and deconsolidations in the condensed consolidated statements of operations for the three months ended March 31, 2023.

As a result of increasing its ownership interest, the Company recognized a net loss of $ 7.1 million included in net (gain) loss on disposals, consolidations and deconsolidations in the condensed consolidated statements of operations for the six months ended June 30, 2023.

The net loss was determined based on the difference between the fair value of the Company's previously held non-controlling interests in the entities and the carrying values immediately prior to the transactions.

In connection with the acquisitions, the Company preliminarily recognized non-controlling interests of $ 34.2 million and goodwill of $ 65.6 million.

• The Company acquired non-controlling interests in an existing surgical facility and an in-development de novo surgical facility for an aggregate cash purchase price of $ 12.4 million, of which $ 2.8 million was deferred and will be paid in April 2023.

In connection with the consolidation of these facilities, the Company preliminarily recognized non-controlling interests of $ 55.2 million and goodwill of $ 106.3 million.

• The Company acquired non-controlling interests in four surgical facilities and two in-development de novo surgical facilities for aggregate cash consideration of $ 48.4 million.

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

In April 2023, the Company obtained control of an existing non-controlled surgical facility due to an amendment to the facility operating agreement, resulting in the consolidation of the previously non-consolidated entity.

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

The Company also paid cash consideration of $ 20.0 million to acquire management rights from the prior management service provider related to three of the aforementioned surgical facilities.

Management rights agreements are accounted for and recorded as a component of intangible assets, net in the accompanying condensed consolidated balance sheets.

The cash paid to acquire the management rights is presented as a component of other investing activities on the condensed consolidated statements of cash flows.

During the six months ended June 30, 2022:

• The Company acquired a controlling interest in four surgical facilities, two of which were merged into existing surgical facilities, for aggregate cash consideration of $ 74.9 million, net of cash acquired, and non-cash consideration of $ 2.6 million, which consisted of a non-controlling interest in one of the Company's existing surgical facilities.

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

During the three months ended March 31, 2023, 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 2022.

During the three months ended March 31, 2023, the Company sold its interests in a surgical facility for a cash sales price of $ 8.8 million, a portion of which was held in escrow pursuant to the purchase agreement.

In connection with the sale, the Company recognized a pre-tax gain of $ 0.2 million included in net loss (gain) on disposals, consolidations and deconsolidations in the condensed consolidated statements of operations for the three months ended March 31, 2023.

During the three months ended March 31, 2022:

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

• The Company acquired non-controlling interests in five surgical facilities and four in-development de novo surgical facilities for aggregate cash consideration of $ 65.8 million.

During the six months ended June 30, 2023:

• The Company sold its interests in four surgical facilities for aggregate net cash proceeds of $ 30.4 million, a portion of which was held in escrow pursuant to the purchase agreements for such transactions.

In connection with these transactions, the Company recognized a pre-tax gain of $ 26.7 million included in net (gain) loss on disposals, consolidations and deconsolidations in the condensed consolidated statements of operations for the six months ended June 30, 2023.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

• The Company disposed of its non-controlling interests in a surgical facility and in-development de novo surgical facility, which were previously accounted for as equity method investments, for cash proceeds of $ 1.5 million.

In connection with these transactions, the Company recognized a pre-tax loss of $ 13.7 million included in net (gain) loss on disposals, consolidations and deconsolidations in the condensed consolidated statements of operations for the six months ended June 30, 2023.

During the six months ended June 30, 2022:

• The Company sold its interests in a surgical facility, which was previously accounted for as an equity method investment, for net cash proceeds of $ 11.5 million, and recognized a pre-tax loss of $ 0.4 million included in net (gain) loss on disposals and consolidations in the condensed consolidated statements of operations for the six months ended June 30, 2022.

• The Company contributed its interests in two surgical facilities as non-cash consideration for non-controlling interests in two new separate entities.

4 unchanged sentences

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 condensed consolidated balance sheets.

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

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Long-Term Debt

11 unchanged sentences

Total long-term debt $ 2,504.8 $ 2,559.0

(1) Includes unamortized fair value discount of $ 2.0 million and $ 2.1 million as of March 31, 2023 and December 31, 2022, respectively.

Revolving Credit Facility

On January 13, 2023, the Company entered into an amendment to the credit agreement governing its revolving credit facility (the "Revolver"), which amended and supplemented the credit agreement, dated as of August 31, 2017 (the "Credit Agreement"), to provide a $ 203.8 million increase in the outstanding commitments under the Revolver.

As of March 31, 2023, the Company's availability on its Revolver was $ 545.9 million (including outstanding letters of credit of $ 7.9 million).

There were no outstanding borrowings under the Revolver as of both March 31, 2023 and December 31, 2022.

(1) Includes unamortized fair value discount of $ 1.9 million and $ 2.1 million as of June 30, 2023 and December 31, 2022, respectively.

On January 13, 2023, the Company entered into an amendment to its credit agreement, dated as of August 31, 2017 (the "Credit Agreement"), to provide a $ 203.8 million increase in the outstanding commitments under its revolving credit facility (the "Revolver").

As of June 30, 2023, the Company's availability on its Revolver was $ 545.9 million (including outstanding letters of credit of $ 7.9 million).

There were no outstanding borrowings under the Revolver as of both June 30, 2023 and December 31, 2022.

On June 8, 2023, the Company entered into an amendment to the Credit Agreement to transition the interest benchmark from LIBOR to the Secured Overnight Financing Rate ("SOFR") effective July 1, 2023.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

1 unchanged sentence

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

Classification in Consolidated Balance Sheets March 31, 2023 December 31, 2022

Classification in Consolidated Balance Sheets June 30, 2023 December 31, 2022

Operating lease assets Right-of-use operating lease assets $ 267.2 $ 279.1

10 unchanged sentences

Total lease liabilities $ 826.2 $ 893.6

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Three Months Ended March 31,

Six Months Ended June 30,

Operating lease costs $ 33.2 $ 32.7

5 unchanged sentences

Total lease costs $ 85.7 $ 79.8

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Three Months Ended March 31,

Six Months Ended June 30,

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

10 unchanged sentences

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

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

11 unchanged sentences

$ 1,364.1 $ 1,518.2

As of March 31, 2023, the Company had nine interest rate swaps with a total net notional amount of $ 1.2 billion.

As of June 30, 2023, 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 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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 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 March 31, 2023, the Company had two interest rate caps designated in cash flow hedging relationships with a total notional amount of $ 166.1 million.

As of June 30, 2023, the Company had two interest rate caps designated in cash flow hedging relationships with a total notional amount of $ 164.1 million.

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

During the three months ended March 31, 2023, the Company partially terminated a previously undesignated portion of one of its interest rate caps.

In connection with the termination, the Company received $ 8.6 million, which is included as a component of operating activities in the condensed consolidated statements of cash flows for the three months ended March 31, 2023.

During the six months ended June 30, 2023, the Company partially terminated a previously undesignated portion of one of its interest rate caps.

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.

2 unchanged sentences

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

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

Cash settlements related to the undesignated swaps will

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

offset and are classified as operating activities in the condensed consolidated cash flows.

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

1 unchanged sentence

Our interest rate swap agreements, excluding the portion treated as debt, are recognized at fair value in the condensed 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 fair value of the interest rate caps is 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.

4 unchanged sentences

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Location Assets Liabilities Assets Liabilities

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

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Three Months Ended March 31,

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

Location 2023 2022 2023 2022

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Derivatives in cash flow hedging relationships

(Loss) gain recognized in OCI (effective portion) $ ( 5.2 ) $ 50.4

Gain recognized in OCI (effective portion) $ 21.9 $ 12.7 $ 16.7 $ 63.1

(Gain) loss reclassified from accumulated OCI into income (effective portion) (1)

Interest expense, net $ ( 8.0 ) $ 6.3 $ ( 14.1 ) $ 12.7

(1) Includes amortization of accumulated OCI related to de-designated and terminated interest rate swaps of $ 5.4 million and $ 5.3 million for the three months ended March 31, 2023 and 2022, respectively.

(1) Includes amortization of accumulated OCI related to de-designated and terminated interest rate swaps of $ 5.3 million for each of the three months ended June 30, 2023 and 2022, respectively.

Includes amortization of accumulated OCI related to de-designated and terminated interest rate swaps of $ 10.7 million and $ 10.6 million for the six months ended June 30, 2023 and 2022, respectively.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Earnings Per Share

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shares in thousands):

Three Months Ended March 31,

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

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

2023 2022 2023 2022

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

$ 18.9 $ ( 18.4 ) $ ( 6.0 ) $ ( 6.2 )

Weighted average shares outstanding- basic 125,718 88,900 125,463 88,450

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127,370 88,900 125,463 88,450

(Loss) income per share:

Income (loss) per share:

Basic $ 0.15 $ ( 0.21 ) $ ( 0.05 ) $ ( 0.07 )

$ 0.15 $ ( 0.21 ) $ ( 0.05 ) $ ( 0.07 )

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

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

Stock options — 1,559 1,407 1,599

Restricted shares — 628 147 644

(1) The impact of potentially dilutive securities for the three months ended March 31, 2023, was not considered because the effect would be anti-dilutive.

Other Current Liabilities

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Total $ 198.1 $ 210.1

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Commitments and Contingencies

Professional, General and Workers' Compensation Liability Risks

Professional, General, Workers' Compensation and Cyber 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.

The Company maintains professional, general, workers' compensation and cyber 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.

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

Total professional, general and workers' compensation claim liabilities as of March 31, 2023 and December 31, 2022 were $ 22.1 million and $ 20.8 million, respectively.

Expected insurance recoveries of $ 12.7 million as of both March 31, 2023 and December 31, 2022 are included as a component of other current assets and other long-term assets in the condensed 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.

Total professional, general and workers' compensation claim liabilities as of June 30, 2023 and December 31, 2022 were $ 22.5 million and $ 20.8 million, respectively.

Expected insurance recoveries of $ 12.7 million as of both June 30, 2023 and December 31, 2022 are included as a component of other current assets and other long-term assets in the condensed consolidated balance sheets.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In May 2023, we experienced a cybersecurity incident that temporarily disrupted certain facilities in our Idaho market.

We estimate that this incident had an adverse pre-tax impact of approximately $ 5 million during the three months ended June 30, 2023.

This estimate includes lost revenue from the associated business interruption and other related expenses.

We have filed a claim with the insurance carrier related to this incident.

No insurance recoveries were recognized during the three months ended June 30, 2023.

Stockholder Litigation

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The case is now closed.

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

Acquired Facilities

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.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Segment Reporting

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

Three Months Ended March 31,

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

2023 2022 2023 2022

Surgical Facility Services $ 650.2 $ 597.9 $ 1,299.2 $ 1,176.7

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Reconciliation of Adjusted EBITDA:

(Loss) income before income taxes $ ( 0.4 ) $ 44.1

Income before income taxes $ 49.9 $ 19.6 $ 49.5 $ 63.7

Net income attributable to non-controlling interests ( 38.8 ) ( 33.7 ) ( 64.9 ) ( 64.3 )

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Transaction, integration and acquisition costs (1)

Net loss (gain) on disposals, consolidations and deconsolidations (2)

13.0 8.2 25.8 15.3

Net (gain) loss on disposals, consolidations and deconsolidations ( 8.8 ) 1.1 1.7 1.0

Litigation settlements and regulatory change impact (2)

1.7 1.7 9.7 ( 29.1 )

Undesignated derivative activity — — 0.6 —

Adjusted EBITDA $ 100.2 $ 86.1 $ 190.3 $ 163.2

(1) This amount includes transaction and integration costs of $ 12.5 million and $ 7.1 million for the three months ended March 31, 2023 and 2022, respectively.

This amount further includes start-up costs related to de novo surgical facilities of $ 0.3 million for the three months ended March 31, 2023, with no comparable costs for the three months ended March 31, 2022.

(2) Includes an $ 8.5 million loss for the three months ended March 31, 2023 related to a surgical facility with a book value of the asset group in excess of the fair value based on a letter of intent.

(3) This amount includes a litigation settlement loss of $ 3.0 million and a gain of $ 32.8 million for the three months ended March 31, 2023 and 2022, respectively.

This amount also includes other litigation costs of $ 0.6 million and $ 2.0 million for the three months ended March 31, 2023 and 2022, respectively.

Additionally, the three months ended March 31, 2023, includes $ 4.4 million related to the impact of recent changes in Florida law regarding the use of letters of protection.

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) This amount includes transaction and integration costs of $ 12.0 million and $ 8.2 million for the three months ended June 30, 2023 and 2022, respectively.

This amount further includes start-up costs related to de novo surgical facilities of $ 1.0 million for the three months ended June 30, 2023, with no comparable costs for the three months ended June 30, 2022.

This amount includes transaction and integration costs of $ 24.5 million and $ 15.3 million for the six months ended June 30, 2023 and 2022, respectively.

This amount further includes start-up costs related to de novo surgical facilities of $ 1.3 million for the six months ended June 30, 2023, with no comparable costs for the six months ended June 30, 2022.

(2) This amount includes a litigation settlement loss of $ 1.5 million for the three months ended June 30, 2023, with no comparable costs for the three months ended June 30, 2022.

This amount also includes other litigation costs of $ 0.2 million and $ 1.7 million for the three months ended June 30, 2023 and 2022, respectively.

This amount includes a litigation settlement loss of $ 4.5 million and a gain of $ 32.8 million for the six months ended June 30, 2023 and 2022, respectively.

This amount also includes other litigation costs of $ 0.8 million and $ 3.7 million for the six months ended June 30, 2023 and 2022, respectively.

Additionally, the six months ended June 30, 2023, includes $ 4.4 million related to the impact of recent changes in Florida law regarding the use of letters of protection.

(3) This amount includes estimates for the net impact of a cyber event and losses from a divested business.

2023 December 31,

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Total assets $ 6,620.6 $ 6,682.1

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended March 31,

Six Months Ended June 30,

Cash purchases of property and equipment:

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Total cash purchases of property and equipment $ 50.1 $ 40.6

Subsequent Events

In April 2023, the Company completed the sale of two surgical facilities for cash proceeds of $ 23.0 million.

In April 2023, the Company acquired non-controlling interests in an in-development de novo surgical facility for a purchase price of $ 6.1 million.

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

What changed 10-Q

Item 1. Financial Statements