UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20192020
or
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number:  001-37576

Surgery Partners, Inc.
(Exact name of registrant as specified in its charter)

Delaware47-3620923
(State or other jurisdiction of

incorporation or organization)
(I.R.S. Employer

Identification No.)


310 Seven Springs Way, Suite 500
Brentwood, Tennessee 37027
(Address of principal executive offices and zip code)
(615) 234-5900
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareSGRYThe Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  x No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer o
Accelerated filer x
☒
Non-accelerated filer o
Smaller reporting company o
☐
Emerging growth company o
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o☐  No  x
As of November 1, 2019,July 30, 2020, there were 49,506,287 50,551,483shares of the registrant’s common stock outstanding.



SURGERY PARTNERS, INC.
FORM 10-Q
TABLE OF CONTENTS

Page
PART I - FINANCIAL INFORMATION
Item 1.
Page
PART I - FINANCIAL INFORMATION1
Item 1.
1
Condensed Consolidated Balance Sheets (Unaudited)
1
2
3
4
65
76
Item 2.
2320
Item 3.
3231
Item 4.
3231
PART II - OTHER INFORMATION
Item 1.
33
Item 1.
Legal Proceedings1A.
33
Item 1A.
Risk Factors2.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
3534
Item 3.
35
Item 4.
35
Item 5.
35
Item 6.
Exhibits
36
Signatures
37




Table of Contents
PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements
SURGERY PARTNERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, dollars in millions, except per share amounts)

June 30,
2020		December 31,
2019
ASSETS
Current assets:
Cash and cash equivalents$326.3  $92.7  
Accounts receivable310.9  326.9  
Inventories49.0  46.3  
Prepaid expenses23.3  17.8  
Other current assets37.0  41.8  
Total current assets746.5  525.5  
Property and equipment, net of accumulated depreciation of $152.0 and $110.7, respectively504.3  523.3  
Goodwill and other intangible assets, net3,454.6  3,449.7  
Investments in and advances to affiliates91.1  93.2  
Right-of-use operating lease assets311.7  297.7  
Long-term deferred tax assets114.8  98.7  
Other long-term assets21.7  30.8  
Total assets$5,244.7  $5,018.9  
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable$104.7  $96.7  
Accrued payroll and benefits57.9  54.2  
Medicare accelerated payments and deferred governmental grants124.7  —  
Other current liabilities220.4  191.2  
Current maturities of long-term debt63.5  56.0  
Total current liabilities571.2  398.1  
Long-term debt, less current maturities2,622.5  2,524.7  
Right-of-use operating lease liabilities298.9  283.1  
Other long-term liabilities127.3  113.6  
Non-controlling interests—redeemable314.7  321.0  
Redeemable preferred stock - Series A; shares authorized, issued and outstanding - 310,000; redemption value - $414.2 and $395.0, respectively414.2  395.0  
Stockholders' equity:
Preferred stock, $0.01 par value; shares authorized - 20,000,000; shares issued or outstanding - NaN—  —  
Common stock, $0.01 par value; shares authorized - 300,000,000; shares issued and outstanding - 50,551,483 and 49,298,940, respectively0.5  0.5  
Other stockholders' equity203.9  296.3  
Total Surgery Partners, Inc. stockholders' equity204.4  296.8  
Non-controlling interests—non-redeemable691.5  686.6  
Total stockholders' equity895.9  983.4  
Total liabilities and stockholders' equity$5,244.7  $5,018.9  
  September 30,
2019		 December 31,
2018
ASSETS    
Current assets:    
Cash and cash equivalents $111.3
 $184.3
Accounts receivable 303.1
 307.6
Inventories 44.4
 43.4
Prepaid expenses and other current assets 59.1
 53.0
Total current assets 517.9
 588.3
Property and equipment, net of accumulated depreciation of $97.9 and $56.1, respectively 408.2
 426.3
Intangible assets, net 52.6
 54.3
Goodwill 3,405.6
 3,382.8
Investments in and advances to affiliates 93.0
 78.5
Long-term deferred tax assets 96.1
 109.2
Other long-term assets 344.1
 36.9
Total assets $4,917.5
 $4,676.3
     
LIABILITIES AND STOCKHOLDERS' EQUITY    
Current liabilities:    
Accounts payable $85.1
 $83.3
Accrued payroll and benefits 45.9
 55.2
Other current liabilities 199.2
 155.2
Current maturities of long-term debt 51.3
 55.6
Total current liabilities 381.5
 349.3
Long-term debt, less current maturities 2,403.0
 2,270.9
Other long-term liabilities 426.3
 271.3
     
Non-controlling interests—redeemable 314.5
 326.6
Redeemable preferred stock - Series A; shares authorized, issued and outstanding - 310,000; redemption value - $385.7 and $359.3, respectively 385.7
 359.3
     
Stockholders' equity:    
Preferred stock, $0.01 par value; shares authorized - 20,000,000; shares issued or outstanding - none —
 —
Common stock, $0.01 par value; shares authorized - 300,000,000; shares issued and outstanding - 49,506,287 and 48,869,204, respectively 0.5
 0.5
Additional paid-in capital 670.3
 673.5
Accumulated other comprehensive loss (57.5) (22.4)
Retained deficit (284.6) (247.0)
Total Surgery Partners, Inc. stockholders' equity 328.7
 404.6
Non-controlling interests—non-redeemable 677.8
 694.3
Total stockholders' equity 1,006.5
 1,098.9
Total liabilities and stockholders' equity $4,917.5
 $4,676.3


See notes to unaudited condensed consolidated financial statements.



1
Table of Contents

SURGERY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, dollars in millions, except per share amounts, shares in thousands)

Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Revenues$374.7  $445.4  $815.7  $862.2  
Operating expenses:
Salaries and benefits116.1  132.7  256.5  261.9  
Supplies110.1  123.4  239.4  238.4  
Professional and medical fees45.3  36.4  92.1  71.5  
Lease expense21.5  21.0  42.8  41.6  
Other operating expenses26.3  26.9  54.7  53.1  
Cost of revenues319.3  340.4  685.5  666.5  
General and administrative expenses25.3  23.3  48.1  45.0  
Depreciation and amortization23.4  19.1  45.2  37.9  
Income from equity investments(2.5) (2.2) (4.5) (4.2) 
Loss (gain) on disposals and deconsolidations, net2.9  (8.2) 6.4  (7.6) 
Transaction and integration costs4.9  6.2  10.4  8.2  
Grant funds(43.1) —  (43.1) —  
Litigation settlement—  —  1.2  —  
Loss on debt extinguishment—  11.7  —  11.7  
Other income(0.2) (0.4) (1.7) (0.4) 
Total operating expenses330.0  389.9  747.5  757.1  
Operating income44.7  55.5  68.2  105.1  
Tax receivable agreement expense—  —  —  (2.4) 
Interest expense, net(49.2) (46.4) (96.3) (88.4) 
(Loss) income before income taxes(4.5) 9.1  (28.1) 14.3  
Income tax (benefit) expense(0.6) 1.0  (15.8) 2.7  
Net (loss) income(3.9) 8.1  (12.3) 11.6  
Less: Net income attributable to non-controlling interests(28.6) (27.9) (47.7) (51.5) 
Net loss attributable to Surgery Partners, Inc.(32.5) (19.8) (60.0) (39.9) 
Less: Amounts attributable to participating securities(9.7) (8.8) (19.2) (17.3) 
Net loss attributable to common stockholders$(42.2) $(28.6) $(79.2) $(57.2) 
Net loss per share attributable to common stockholders
Basic$(0.86) $(0.59) $(1.63) $(1.19) 
Diluted (1)
$(0.86) $(0.59) $(1.63) $(1.19) 
Weighted average common shares outstanding
Basic48,840  48,291  48,661  48,241  
Diluted (1)
48,840  48,291  48,661  48,241  
  Three Months Ended September 30, Nine Months Ended September 30,
  2019 2018 2019 2018
         
Revenues $452.0
 $432.4
 $1,314.2
 $1,280.3
Operating expenses:        
Salaries and benefits 139.3
 131.4
 401.2
 395.2
Supplies 126.2
 120.1
 364.6
 355.7
Professional and medical fees 38.5
 34.9
 110.0
 107.3
Lease expense 21.4
 21.7
 63.0
 64.9
Other operating expenses 27.7
 26.2
 80.8
 78.6
Cost of revenues 353.1
 334.3
 1,019.6
 1,001.7
General and administrative expenses 19.9
 19.4
 64.9
 69.7
Depreciation and amortization 18.4
 17.0
 56.3
 49.4
Income from equity investments (2.4) (1.9) (6.6) (6.3)
Loss (gain) on disposals and deconsolidations, net 0.6
 12.6
 (7.0) 15.9
Transaction and integration costs 3.4
 7.1
 11.6
 23.8
Loss on debt extinguishment —
 —
 11.7
 —
Other income —
 (1.1) (0.4) (3.6)
Total operating expenses 393.0
 387.4
 1,150.1
 1,150.6
Operating income 59.0
 45.0
 164.1
 129.7
Tax receivable agreement expense —
 —
 (2.4) —
Interest expense, net (45.7) (37.2) (134.1) (107.3)
Income before income taxes 13.3
 7.8
 27.6
 22.4
Income tax expense 2.4
 5.8
 5.1
 10.9
Net income 10.9
 2.0
 22.5
 11.5
Less: Net income attributable to non-controlling interests (26.6) (23.0) (78.1) (69.5)
Net loss attributable to Surgery Partners, Inc. (15.7) (21.0) (55.6) (58.0)
Less: Amounts attributable to participating securities (9.1) (8.2) (26.4) (23.9)
Net loss attributable to common stockholders $(24.8) $(29.2) $(82.0) $(81.9)
         
Net loss per share attributable to common stockholders       

Basic $(0.51) $(0.61) $(1.70) $(1.71)
Diluted (1)
 $(0.51) $(0.61) $(1.70) $(1.71)
Weighted average common shares outstanding        
Basic 48,310
 48,038
 48,265
 48,020
Diluted (1)
 48,310
 48,038
 48,265
 48,020
(1)The impact of potentially dilutive securities for all periods presented was not considered because the effect would be anti-dilutive in those periods.


See notes to unaudited condensed consolidated financial statements.





2
Table of Contents

SURGERY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, dollars in millions)

Three Months Ended June 30,Six Months Ended June 30,
 Three Months Ended September 30, Nine Months Ended September 30,2020201920202019
 2019 2018 2019 2018
        
Net income $10.9
 $2.0
 $22.5
 $11.5
Other comprehensive income, net of tax:        
Net (loss) incomeNet (loss) income$(3.9) $8.1  $(12.3) $11.6  
Other comprehensive income (loss), net of tax:Other comprehensive income (loss), net of tax:
Derivative activity (6.8) (1.4) (35.1) (1.4)Derivative activity7.3  (16.8) (17.9) (28.3) 
Comprehensive income (loss) 4.1
 0.6
 (12.6) 10.1
Comprehensive income (loss)3.4  (8.7) (30.2) (16.7) 
Less: Comprehensive income attributable to non-controlling interests (26.6) (23.0) (78.1) (69.5)Less: Comprehensive income attributable to non-controlling interests(28.6) (27.9) (47.7) (51.5) 
Comprehensive loss attributable to Surgery Partners, Inc. $(22.5) $(22.4) $(90.7) $(59.4)Comprehensive loss attributable to Surgery Partners, Inc.$(25.2) $(36.6) $(77.9) $(68.2) 
See notes to unaudited condensed consolidated financial statements.





3
Table of Contents

SURGERY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited, dollars in millions, shares in thousands)

Common StockAdditional
Paid-in Capital		Accumulated Other Comprehensive LossRetained DeficitNon-Controlling Interests—
Non-Redeemable		Total
SharesAmount
Balance at December 31, 201848,869  $0.5  $673.5  $(22.4) $(247.0) $694.3  $1,098.9  
Net (loss) income—  —  —  —  (20.1) 16.0  (4.1) 
Equity-based compensation517  —  0.9  —  —  —  0.9  
Preferred dividends—  —  (8.5) —  —  —  (8.5) 
Other comprehensive loss—  —  —  (11.5) —  —  (11.5) 
Net effect of adoption of new accounting standard—  —  —  —  18.0  —  18.0  
Acquisition and disposal of shares of non-controlling interests, net (1)
—  —  8.0  —  —  6.1  14.1  
Distributions to non-controlling interests—non-redeemable holders—  —  —  —  —  (23.5) (23.5) 
Balance at March 31, 201949,386  0.5  673.9  (33.9) (249.1) 692.9  1,084.3  
Net (loss) income—  —  —  —  (19.8) 18.7  (1.1) 
Equity-based compensation117  —  3.1  —  —  —  3.1  
Preferred dividends—  —  (8.8) —  —  —  (8.8) 
Other comprehensive loss—  —  —  (16.8) —  —  (16.8) 
Acquisition and disposal of shares of non-controlling interests, net (1)
—  —  9.6  —  —  (7.6) 2.0  
Distributions to non-controlling interests—non-redeemable holders—  —  —  —  —  (17.7) (17.7) 
Balance at June 30, 201949,503  $0.5  $677.8  $(50.7) $(268.9) $686.3  $1,045.0  
Balance at December 31, 201949,299  $0.5  $662.7  $(50.7) $(315.7) $686.6  $983.4  
Net (loss) income—  —  —  —  (27.5) 13.6  (13.9) 
Equity-based compensation1,219  —  2.8  —  —  —  2.8  
Preferred dividends—  —  (9.5) —  —  —  (9.5) 
Other comprehensive loss—  —  —  (25.2) —  —  (25.2) 
Acquisition and disposal of shares of non-controlling interests, net (1)
—  —  (0.7) —  —  1.4  0.7  
Distributions to non-controlling interests—non-redeemable holders—  —  —  —  —  (14.9) (14.9) 
Balance at March 31, 202050,518  0.5  655.3  (75.9) (343.2) 686.7  923.4  
Net (loss) income—  —  —  —  (32.5) 22.8  (9.7) 
Equity-based compensation33  —  3.8  —  —  —  3.8  
Preferred dividends—  —  (9.7) —  —  —  (9.7) 
Other comprehensive income—  —  —  7.3  —  —  7.3  
Acquisition and disposal of shares of non-controlling interests, net (1)
—  —  (1.2) —  —  2.9  1.7  
Distributions to non-controlling interests—non-redeemable holders—  —  —  —  —  (20.9) (20.9) 
Balance at June 30, 202050,551  $0.5  $648.2  $(68.6) $(375.7) $691.5  $895.9  
(1)Includes post acquisition date adjustments.
 Common Stock 
Additional
Paid-in Capital
 Accumulated Other Comprehensive Loss Retained Deficit 
Non-Controlling Interests—
Non-Redeemable
 Total
 Shares Amount 
              
Balance at December 31, 201848,869
 $0.5
 $673.5
 $(22.4) $(247.0) $694.3
 $1,098.9
Net (loss) income—
 —
 —
 —
 (20.1) 16.0
 (4.1)
Equity-based compensation517
 —
 0.9
 —
 —
 —
 0.9
Preferred dividends—
 —
 (8.5) —
 —
 —
 (8.5)
Other comprehensive loss—
 —
 —
 (11.5) —
 —
 (11.5)
Net effect of adoption of new accounting standard (see Note 1)—
 —
 —
 —
 18.0
 —
 18.0
Acquisition and disposal of shares of non-controlling interests, net (1)
—
 —
 8.0
 —
 —
 6.1
 14.1
Distributions to non-controlling interests—non-redeemable holders—
 —
 —
 —
 —
 (23.5) (23.5)
Balance at March 31, 201949,386
 0.5
 673.9
 (33.9) (249.1) 692.9
 1,084.3
Net (loss) income—
 —
 —
 —
 (19.8) 18.7
 (1.1)
Equity-based compensation117
 —
 3.1
 —
 —
 —
 3.1
Preferred dividends—
 —
 (8.8) —
 —
 —
 (8.8)
Other comprehensive loss—
 —
 —
 (16.8) —
 —
 (16.8)
Acquisition and disposal of shares of non-controlling interests, net (1)
—
 —
 9.6
 —
 —
 (7.6) 2.0
Distributions to non-controlling interests—non-redeemable holders—
 —
 —
 —
 —
 (17.7) (17.7)
Balance at June 30, 201949,503
 0.5
 677.8
 (50.7) (268.9) 686.3
 1,045.0
Net (loss) income—
 —
 —
 —
 (15.7) 19.3
 3.6
Equity-based compensation3
 —
 2.7
 —
 —
 —
 2.7
Preferred dividends—
 —
 (9.1) —
 —
 —
 (9.1)
Other comprehensive loss—
 —
 —
 (6.8) —
 —
 (6.8)
Acquisition and disposal of shares of non-controlling interests, net (1)
—
 —
 (1.1) —
 —
 (7.9) (9.0)
Distributions to non-controlling interests—non-redeemable holders—
 —
 —
 —
 —
 (19.9) (19.9)
Balance at September 30, 201949,506
 $0.5
 $670.3
 $(57.5) $(284.6) $677.8
 $1,006.5
(1)
Includes post acquisition date adjustments.


See notes to unaudited condensed consolidated financial statements.


















4
Table of Contents

SURGERY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited, dollars in millions, shares in thousands)

 Common Stock 
Additional
Paid-in Capital
 Accumulated Other Comprehensive Loss Retained Deficit 
Non-Controlling Interests—
Non-Redeemable
 Total
 Shares Amount 
              
Balance at December 31, 201748,687
 $0.5
 $695.5
 $—
 $(41.3) $681.9
 $1,336.6
Net (loss) income—
 —
 —
 —
 (17.5) 15.9
 (1.6)
Equity-based compensation368
 —
 1.3
 —
 —
 —
 1.3
Preferred dividends—
 —
 (7.8) —
 —
 —
 (7.8)
Repurchase of shares(157) —
 (2.0) —
 —
 —
 (2.0)
Acquisition and disposal of shares of non-controlling interests, net (1)
—
 —
 2.0
 —
 —
 (1.2) 0.8
Distributions to non-controlling interests—non-redeemable holders—
 —
 —
 —
 —
 (22.5) (22.5)
Balance at March 31, 201848,898
 0.5
 689.0
 —
 (58.8) 674.1
 1,304.8
Net (loss) income—
 —
 —
 —
 (19.5) 16.6
 (2.9)
Equity-based compensation4
 —
 2.5
 —
 —
 —
 2.5
Preferred dividends—
 —
 (7.9) —
 —
 —
 (7.9)
Acquisition and disposal of shares of non-controlling interests, net (1)
—
 —
 (7.7) —
 —
 (17.5) (25.2)
Distributions to non-controlling interests—non-redeemable holders—
 —
 —
 —
 —
 (16.8) (16.8)
Balance at June 30, 201848,902
 0.5
 675.9
 —
 (78.3) 656.4
 1,254.5
Net (loss) income—
 —
 —
 —
 (21.0) 16.4
 (4.6)
Equity-based compensation(10) —
 1.4
 —
 —
 —
 1.4
Preferred dividends—
 —
 (8.3) —
 —
 —
 (8.3)
Other comprehensive loss—
 —
 —
 (1.4) —
 —
 (1.4)
Acquisition and disposal of shares of non-controlling interests, net (1)
—
 —
 2.3
 —
 —
 3.1
 5.4
Distributions to non-controlling interests—non-redeemable holders—
 —
 —
 —
 —
 (18.2) (18.2)
Balance at September 30, 201848,892
 $0.5
 $671.3
 $(1.4) $(99.3) $657.7
 $1,228.8
(1)
Includes post acquisition date adjustments.

See notes to unaudited condensed consolidated financial statements.























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SURGERY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, dollars in millions)

 Nine Months Ended September 30,Six Months Ended June 30,
 2019 201820202019
Cash flows from operating activities:    Cash flows from operating activities:
Net income $22.5
 $11.5
Adjustments to reconcile net income to net cash provided by operating activities:    
Net (loss) incomeNet (loss) income$(12.3) $11.6  
Adjustments to reconcile net (loss) income to net cash provided by operating activities:Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization 56.3
 49.4
Depreciation and amortization45.2  37.9  
Non-cash interest expense (income), net 0.6
 (1.0)Non-cash interest expense (income), net2.2  0.1  
Equity-based compensation expense 7.6
 6.3
Equity-based compensation expense6.9  4.9  
(Gain) loss on disposals and deconsolidations, net (7.0) 15.9
Loss (gain) on disposals and deconsolidations, netLoss (gain) on disposals and deconsolidations, net6.4  (7.6) 
Loss on debt extinguishment 11.7
 —
Loss on debt extinguishment—  11.7  
Deferred income taxes 4.1
 9.5
Deferred income taxes(16.4) 2.0  
Income from equity investments, net of distributions received 0.5
 (0.2)
Amortization of right-of-use operating lease assets 28.8
 —
(Loss) income from equity investments, net of distributions received(Loss) income from equity investments, net of distributions received(0.2) 0.1  
Non-cash lease expenseNon-cash lease expense20.1  19.6  
Changes in operating assets and liabilities, net of acquisitions and divestitures:    Changes in operating assets and liabilities, net of acquisitions and divestitures:
Accounts receivable 7.7
 2.1
Accounts receivable16.3  6.9  
Medicare accelerated payments and deferred governmental grantsMedicare accelerated payments and deferred governmental grants124.7  —  
Other operating assets and liabilities (28.7) 5.6
Other operating assets and liabilities18.2  (40.0) 
Net cash provided by operating activities 104.1
 99.1
Net cash provided by operating activities211.1  47.2  
    
Cash flows from investing activities:    Cash flows from investing activities:
Purchases of property and equipment (50.2) (26.6)Purchases of property and equipment(19.9) (31.8) 
Payments for acquisitions, net of cash acquired (13.8) (55.2)Payments for acquisitions, net of cash acquired(12.4) (13.2) 
Proceeds from disposals of facilities and other assets 17.6
 18.0
Proceeds from disposals of facilities and other assets9.4  17.6  
Purchases of equity investments (15.2) —
Purchases of equity investments—  (15.2) 
Other investing activities (0.2) (2.8)Other investing activities0.4  (0.3) 
Net cash used in investing activities (61.8) (66.6)Net cash used in investing activities(22.5) (42.9) 
    
Cash flows from financing activities:    Cash flows from financing activities:
Principal payments on long-term debt (436.1) (94.9)Principal payments on long-term debt(182.8) (422.8) 
Borrowings of long-term debt 442.5
 62.8
Borrowings of long-term debt288.2  438.9  
Payments of debt issuance costs (8.8) —
Payments of debt issuance costs(6.5) (8.8) 
Payment of premium on debt extinguishment (17.8) —
Payment of premium on debt extinguishment—  (17.8) 
Payments of preferred dividends —
 (7.8)
Distributions to non-controlling interest holders (89.5) (80.1)Distributions to non-controlling interest holders(51.7) (60.9) 
Payments related to ownership transactions with non-controlling interest holders (4.6) (0.5)
Repurchase of shares —
 (2.0)
(Payments) receipts related to ownership transactions with non-controlling interest holders(Payments) receipts related to ownership transactions with non-controlling interest holders(1.9) 1.2  
Other financing activities (1.0) (5.8)Other financing activities(0.3) (1.0) 
Net cash used in financing activities (115.3) (128.3)
Net decrease in cash, cash equivalents and restricted cash (73.0) (95.8)
Net cash provided by (used in) financing activitiesNet cash provided by (used in) financing activities45.0  (71.2) 
Net increase (decrease) in cash, cash equivalents and restricted cashNet increase (decrease) in cash, cash equivalents and restricted cash233.6  (66.9) 
Cash, cash equivalents and restricted cash at beginning of period 184.6
 175.2
Cash, cash equivalents and restricted cash at beginning of period93.0  184.6  
Cash, cash equivalents and restricted cash at end of period $111.6
 $79.4
Cash, cash equivalents and restricted cash at end of period$326.6  $117.7  
See notes to unaudited condensed consolidated financial statements.



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SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



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, gastroenterology, general surgery, ophthalmology, orthopedics and pain management. 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 a diagnostic laboratory, multi-specialty physician practices, urgent care facilities, anesthesia services and optical 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 SeptemberJune 30, 2019,2020, the Company owned or operated a portfolio of 128127 surgical facilities, comprised of 113111 ASCs and 1516 surgical hospitals in 3130 states. The Company owns these facilities in partnership with physicians and, in some cases, healthcarehealth care systems in the markets and communities it serves. The Company owned a majority interest in 8685 of the surgical facilities and consolidated 107 of these facilities for financial reporting purposes.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation of the Company's financial position and results of operations have been included. The Company’s fiscal year ends on December 31 and interim results are not necessarily indicative of results for a full year or any other interim period. The information contained in these condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2019 (the "2019 Annual Report on Form 10-K").
The condensed 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.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed 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.
COVID-19 Pandemic
The COVID-19 global pandemic has significantly affected the Company's facilities, employees, patients, communities, business operations and financial performance, as well as the United States economy and financial markets. Beginning mid-March, the COVID-19 pandemic began to negatively affect the Company's net revenue and business operations. Due in part to local, state and federal guidelines as well as recommendations from major medical societies, social distancing and self-quarantines in response to the COVID-19 pandemic, surgical case volumes across most of the Company's surgical facilities were significantly impacted in the second quarter. The impact of COVID-19 on the Company's surgical facilities varies based on the market in which the facility operates, the type of surgical facility and the procedures that are typically performed. Although the Company cannot provide any certainty regarding the length and severity of the impact of the COVID-19 pandemic, surgical case volumes gradually improved throughout the second quarter as states began to re-open and allow for non-emergent procedures. The Company's operating structure naturally enables some flexibility in the cost structure according to the volume of surgical procedures performed, including much of its cost of revenues. In addition to the natural variability of these costs, the Company and its partners in the surgical facilities have undertaken additional steps to preserve financial flexibility. Beginning in mid-March, and into the second quarter, the Company took actions that included significantly reducing cash operating expenses and deferring non-essential expenditures at the height of the crisis.
CARES Act
The Company is continuing to closely monitor legislative actions at the federal, state and local levels including the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and other governmental assistance that might be available in response to the COVID-19 pandemic. As part of the CARES Act, the United States government initially announced that it would offer $100 billion of relief to eligible health care providers. On April 7, 2020, Centers for Medicare and Medicaid Services ("CMS") officials indicated they would distribute $30 billion of direct grants to hospitals, ASCs and other health care providers based on how much they bill Medicare. Payments received from these grants are not required to be repaid provided the recipients attest to and comply with certain terms and conditions, including limitations on balance billing and not using funds received from the grants to reimburse expenses or losses that other

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SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
sources are obligated to reimburse.The Company received approximately $48 million of the grant funds distributed under the CARES Act and other governmental assistance programs during the six months ended June 30, 2020. Based on an analysis of the compliance and reporting requirements and the impact of the COVID-19 pandemic on our operating results through the end of the second quarter, approximately $43.1 million was recognized as a reduction in operating expenses under the caption Grant funds in the condensed consolidated statements of operations for the three and six months ended June 30, 2020. The recognition of amounts received is conditioned upon certification that payment will be used to prevent, prepare for and respond to the COVID-19 pandemic and shall reimburse the recipient only for healthcare related expenses or lost revenues that are attributable to the COVID-19 pandemic. Amounts are recognized as a reduction to operating costs and expenses only to the extent the Company is reasonably assured that underlying conditions are met. Amounts received, but not recognized as a reduction to operating expenses as of June 30, 2020, are reflected as a component of Medicare accelerated payments and deferred governmental grants in the condensed consolidated balance sheets as of June 30, 2020, and such unrecognized amounts may be recognized as a reduction in operating expenses in future periods if the underlying conditions for recognition are met. Additionally, approximately $4 million in rural grant funds were received in July 2020 which did not qualify for recognition during the three months ended June 30, 2020.
As a way to increase cash flow to Medicare providers impacted by the COVID-19 pandemic, the CARES Act expanded the Medicare Accelerated and Advance Payment Program, which allows for most providers and suppliers, including the Company’s surgical hospitals and ASCs. ASCs can request up to 100% of the Medicare Fee-for-Service payment amount for a three-month period. Hospitals can request up to 100% of the payment amount for a six-month period, with certain critical access hospitals able to request up to 125% of the payment for a six-month period. Repayment of advance payments will commence 120 days after the date the payment is issued and will be effectuated via an automatic 100% offset against future claims payments. Hospitals will have one year from the date the payment is received to repay the advance payments; all other providers will have 210 days to repay the advance payment. The program currently requires that any outstanding balance remaining after 12 months must be repaid by the provider or be subjected to a 10.25% annual interest rate. The Company received approximately $120 million of accelerated payments during the six months ended June 30, 2020. These accelerated payments received were deferred and included as a component of Medicare accelerated payments and deferred governmental grants in the condensed consolidated balance sheets as of June 30, 2020. The Company does not expect to receive additional Medicare accelerated payments.
The CARES Act also provides for the deferral of the Company's portion of social security payroll taxes for the remainder of 2020. Under the CARES Act, half of the deferred amount will have to be paid in each of December 2021 and December 2022. The Company began deferring the social security payroll tax match in April 2020. As of June 30, 2020, the Company has deferred approximately $4.3 million, included as a component of accrued payroll and benefits in the condensed consolidated balance sheets as of June 30, 2020.
Variable Interest Entities
The condensed consolidated financial statements include the accounts of variable interest entities ("VIE") in which the Company is the primary beneficiary under the provisions of the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification 810, Consolidation."Consolidation". The Company has the power to direct the activities that most significantly impact a VIEs 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 SeptemberJune 30, 2019,2020, the Company's consolidated VIEs include four4 surgical facilities, three3 anesthesia practices and three3 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 SeptemberJune 30, 20192020 and December 31, 2018,2019, were $31.5$35.9 million and $11.2$36.2 million, respectively, and the total liabilities of the consolidated VIEs were $23.4$26.2 million and $3.6$25.2 million, respectively.
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability. The Company uses fair value measurements based on inputs classified into the following hierarchy:
•Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities (Level 1), inputsliabilities.
•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 either directly or indirectly observable (Level 2), or unobservablenot active.
•Level 3: Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, (Level 3), depending on the nature of the item being valued.
The carrying amounts reported in the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, restricted invested assets and accounts payable approximate their fair values under Level 3 calculations.

inputs.


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SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

A summary of the carrying amounts and estimated fair values of the Company's long-term debt follows (in millions):
 Carrying Amount Fair ValueCarrying AmountFair Value
 September 30,
2019		 December 31,
2018		 September 30,
2019		 December 31,
2018		June 30,
2020		December 31,
2019		June 30,
2020		December 31,
2019
        
Senior secured term loan $1,437.2
 $1,447.9
 $1,401.3
 $1,382.8
Senior secured term loan$1,546.9  $1,434.1  $1,373.9  $1,434.1  
8.875% senior unsecured notes due 2021 $—
 $406.7
 $—
 $407.2
6.750% senior unsecured notes due 2025 $370.0
 $370.0
 $333.5
 $320.5
6.750% senior unsecured notes due 2025$370.0  $370.0  $338.6  $368.2  
10.000% senior unsecured notes due 2027 $430.0
 $—
 $436.5
 $—
10.000% senior unsecured notes due 2027$430.0  $430.0  $435.9  $471.4  
The fair values in the table above were based on a Level 2 inputs using quoted prices for identical liabilities in inactive markets. The carrying amounts related to the Company's other long-term debt obligations, including finance lease obligations, approximate their fair values under Level 3 calculations.inputs.
The Company has entered into certain interest rate swap agreements (see Note 6. "Derivatives and Hedging Activities"). The fair value of these derivative instruments was $57.5$68.6 million and $22.4$50.7 million at SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively, and was included in other long-term liabilities in the condensed consolidated balance sheets. The fair value of these derivative financial instruments was based on a quoted market price, or a Level 2 computation.input.
Revenues
The Company's revenues generally relate to contracts with patients in which the performance obligations are to provide healthcarehealth care services. The Company recognizes revenues in the period in which our obligations to provide health care services are satisfied and reports the amount that reflects the consideration the Company expects to be entitled to.to receive. The contractual relationships with patients, in most cases, also involve a third-party payor (e.g., Medicare, Medicaid managed care health plans, employers and commercialprivate insurance companies,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:
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Patient service revenues:
   Surgical facilities revenues95.0 %94.1 %94.8 %94.0 %
   Ancillary services revenues3.5 %4.6 %3.7 %4.7 %
98.5 %98.7 %98.5 %98.7 %
Other service revenues:
   Optical services revenues0.1 %0.2 %0.2 %0.2 %
   Other revenues1.4 %1.1 %1.3 %1.1 %
1.5 %1.3 %1.5 %1.3 %
Total revenues100.0 %100.0 %100.0 %100.0 %
  Three Months Ended September 30, Nine Months Ended September 30,
  2019 2018 2019 2018
Patient service revenues:        
   Surgical facilities revenues 93.9% 93.2% 94.0% 93.2%
   Ancillary services revenues 4.4% 4.7% 4.6% 4.8%
  98.3% 97.9% 98.6% 98.0%
Other service revenues:        
   Optical services revenues 0.2% 0.6% 0.2% 0.6%
   Other revenues 1.5% 1.5% 1.2% 1.4%
  1.7% 2.1% 1.4% 2.0%
Total revenues 100.0% 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 healthcarehealth 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.
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.


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SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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,

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SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
its discount policies and historical experience. Changes in estimated contractual adjustments and discounts are recorded in the period of change.
Other service revenues.Optical service revenues consist of handling charges billed to the members of the Company's optical products purchasing organization. The Company's optical products purchasing organization negotiates volume buying discounts with optical products manufacturers. The buying discounts and any handling charges billed to the members of the buying group represent the revenue recognized for financial reporting purposes. The Company satisfies the performance obligation and recognizes revenue when the orders are shipped to members. The Company bases its estimates for sales returns and discounts on historical experience and has not experienced significant fluctuations between estimated and actual return activity and discounts given.
Other revenues include management and administrative service fees derived from the non-consolidated facilities that the Company accounts for under the equity method, management of surgical facilities in which it does not own an interest, and management services provided to physician practices for which the Company is not required to provide capital or additional assets. These agreements typically require the Company to provide recurring management services over a multi-year period, which are billed and collected on a monthly basis. The fees derived from these management arrangements are based on a predetermined percentage of the revenues of each facility or practice and are recognized in the period in which management services are rendered and billed.
The following table sets forth patient service revenues by type of payor and as a percentage of total patient service revenues for the Company's consolidated surgical facilities (dollars in millions):
Three Months Ended June 30,
20202019
Amount%Amount%
Patient service revenues:
Private insurance$199.2  54.0 %$230.5  52.4 %
Government140.8  38.1 %178.1  40.5 %
Self-pay11.2  3.0 %9.5  2.2 %
Other (1)
17.9  4.9 %21.4  4.9 %
Total patient service revenues369.1  100.0 %439.5  100.0 %
Other service revenues:
Optical services revenues0.5  1.0  
Other revenues5.1  4.9  
Total revenues$374.7  $445.4  
Six Months Ended June 30,
20202019
Amount%Amount%
Patient service revenues:
Private insurance$425.2  52.9 %$445.8  52.4 %
Government316.6  39.4 %343.0  40.3 %
Self-pay24.0  3.0 %20.3  2.4 %
Other (1)
37.9  4.7 %41.2  4.9 %
Total patient service revenues803.7  100.0 %850.3  100.0 %
Other service revenues:
Optical services revenues1.3  2.1  
Other revenues10.7  9.8  
Total revenues$815.7  $862.2  
  Three Months Ended September 30,
  2019 2018
  Amount % Amount %
Patient service revenues:        
Private insurance $236.3
 53.2% $224.5
 53.1%
Government 175.4
 39.5% 162.4
 38.4%
Self-pay 11.8
 2.7% 12.4
 2.9%
Other (1)
 21.0
 4.6% 23.8
 5.6%
Total patient service revenues 444.5
 100.0% 423.1
 100.0%
Other service revenues:        
Optical services revenues 0.9
   2.7
  
Other revenues 6.6
   6.6
  
Total revenues $452.0
   $432.4
  
(1)Other is comprised of anesthesia service agreements, automobile liability, letters of protection and other payor types.
  Nine Months Ended September 30,
  2019 2018
  Amount % Amount %
Patient service revenues:        
Private insurance $682.1
 52.7% $668.7
 53.3%
Government 518.4
 40.0% 483.4
 38.6%
Self-pay 32.1
 2.5% 38.3
 3.1%
Other (1)
 62.2
 4.8% 62.7
 5.0%
Total patient service revenues 1,294.8
 100.0% 1,253.1
 100.0%
Other service revenues:        
Optical services revenues 3.0
   8.5
  
Other revenues 16.4
   18.7
  
Total revenues $1,314.2
   $1,280.3
  
(1)Other is comprised of anesthesia service agreements, automobile liability, letters of protection and other payor types.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company maintains its cash and cash equivalent balances at high credit quality financial institutions.



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SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Cash, cash equivalents and restricted cash reported within the consolidated statement of cash flows includes $0.3 million of restricted investments, which are reflected in other long-term assets in the consolidated balance sheet at both SeptemberJune 30, 20192020 and December 31, 2018.2019. These restricted investments represent restricted cash held in accordance with the provisions of a long-term operating lease agreement held as security for performance under the Company's covenants and obligations within the agreement through January 2024.
Accounts Receivable and Allowances for Contractual Adjustments and Doubtful Accounts
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 facilities’ cash collections and contractual write-offs, 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), managed care health plans, commercialprivate insurance companies,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. As of SeptemberJune 30, 20192020 and December 31, 2018,2019, the Company had a net third-party Medicaid settlements liability of $7.9$13.0 million and $4.8$5.6 million, respectively, included in other current liabilities in the condensed consolidated balance sheets.
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 operating systems used to manage patient accounts provide for an aging schedule in 30-day increments, by payor, physician and patient. The Company analyzes accounts receivable at each of its surgical facilities to ensure the proper collection and aged category. The operating systems generate reports that assist in the collection efforts by prioritizing patient accounts. Collection efforts include direct contact with third-party payors or patients, written correspondence and the use of legal or collection agency assistance, as required.
The receivables related to the Company's optical products purchasing organization are recognized separately from patient accounts receivable, as discussed above, and are included in other current assets in the condensed consolidated balance sheets. Such receivables were $9.2$8.2 million and $8.5$8.6 million at Septemberas of June 30, 20192020 and December 31, 2018,2019, respectively.
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. Additions to goodwill include amounts resulting from new business combinations and incremental ownership purchases in the Company's subsidiaries. A summary of the Company's acquisitions and dispositions for the ninesix months ended SeptemberJune 30, 20192020 is included in Note 2. "Acquisitions."Acquisitions and Disposals."
A summary of activity related to goodwill for the ninesix months ended SeptemberJune 30, 20192020 is as follows (in millions):
Balance at December 31, 2019$3,402.4 
Acquisitions, including post acquisition adjustments20.7 
Divestitures and deconsolidations(14.2)
Balance at June 30, 2020$3,408.9 
A detailed evaluation of potential impairment indicators was performed as of June 30, 2020, which specifically considered the decline in the fair market value of the Company’s outstanding senior secured term loan and unsecured notes and common stock during the six months ended June 30, 2020 as a result of the COVID-19 pandemic. Volatility was observed in the prices of the Company’s outstanding debt securities and common stock and the decline in surgical case volumes following the emergence of COVID-19 was also considered, all of which have improved throughout the second quarter as states began to re-open and allow for non-emergent procedures. On the basis of available evidence as of June 30, 2020, 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 decline in the Company’s stock price and the fair value of its long-term debt, lower than expected surgical case volumes, higher market interest rates or increased operating costs. Such changes impacting the calculation of fair value, the risks of which are amplified by the COVID-19 pandemic, could result in a material impairment charge in the future.

10
Balance at December 31, 2018 $3,382.8
Acquisitions, including post acquisition adjustments 22.8
Balance at September 30, 2019 $3,405.6
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SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Derivative Instruments and Hedging Activities
The Company records all derivatives on the balance sheet at fair value. 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.


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SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 condensed consolidated balance sheets.
A summary of activity related to the non-controlling interests—redeemable for the six months ended June 30, 2020 and 2019 is as follows (in millions):
20202019
Balance at beginning of period$321.0  $326.6  
Net income attributable to non-controlling interests—redeemable11.3  16.8  
Acquisition and disposal of shares of non-controlling interests, net—redeemable(1.7) (7.7) 
Distributions to non-controlling interest—redeemable holders(15.9) (19.7) 
Balance at end of period$314.7  $316.0  
Balance at December 31, 2018 $326.6
Net income attributable to non-controlling interests—redeemable 24.1
Acquisition and disposal of shares of non-controlling interests, net—redeemable (1)
 (7.8)
Distributions to non-controlling interest—redeemable holders (28.4)
Balance at September 30, 2019 $314.5
(1)Includes post acquisition date adjustments.
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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If a carryforward exists, the Company makes a determination as to whether the carryforward will be utilized in the future. A valuation allowance is established for certain carryforwards when their recoverability is deemed to be uncertain. The carrying value of the net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. If our expectations for future operating results on a consolidated basis or at the state jurisdiction level vary from actual results due to changes in healthcarehealth care regulations, general economic conditions, or other factors, we may need to adjust the valuation allowance, for all or a portion of our deferred tax assets. Our income tax expense in future periods will be reduced or increased to the extent of offsetting decreases or increases, respectively, in our valuation allowance in the period when the change in circumstances occurs. These changes could have a significant impact on our future earnings.
The Company and certain of its subsidiaries file a consolidated federal income tax return. The partnerships, limited liability companies, and certain non-consolidated physician practice corporations also file separate income tax returns. The Company's allocable portion of each partnership's and limited liability company's income or loss is included in taxable income of the Company. The remaining income or loss of each partnership and limited liability company is allocated to the other owners.
Recent Accounting Pronouncements
In February 2016,The Company's effective tax rate was 56.2% for the FASB issued ASU 2016-02, "Leases," (the "Lease Accounting Standard").six months ended June 30, 2020 compared to 18.9% for the six months ended June 30, 2019. The core principalhigher effective tax rate for the 2020 period was primarily due to discrete tax benefits of approximately $6.9 million attributable to the release of federal and state valuation allowances on the Company’s IRC Section 163(j) interest carryforwards as a result of the Lease Accounting Standard isincrease in deductible interest expense allowed under the CARES Act, and $5.0 million attributable to increase transparencya portion of the payments under the Settlement Agreement, as defined in Note 9. "Commitments and comparability among organizations by requiring the recognition of right-of-use lease assets and liabilities on the balance sheet and disclosing key information. The most prominent among the changes from this ASU is the recognition of right-of-use assets and lease liabilities by lessees for those leasesContingencies," being classified as operating leases. The Company’s accounting"restitution" for finance leases remained substantially unchanged from its prior accounting for capital leases. The disclosure objective is to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
The Company adopted the Lease Accounting Standard effective January 1, 2019, using a modified retrospective transition approach. Under this approach, the Company elected to recognize and measure leases under the new standard in the period of adoption, with a cumulative-effect adjustment recorded to equity on its condensed consolidated balance sheets, along withincome tax purposes. Based upon the application of certain available practical expedients including an exclusion for short-term leases andinterim accounting for leases atguidance, the portfolio level where appropriate. The cumulative effecttax rate as a percentage of net income after income attributable to non-controlling interests will vary based upon the accounting change recognized upon adoption was $18.0 million reflected as an adjustmentrelative net income from period to retained deficit in our condensed consolidated balance sheets.
The Company has implemented internal controls and key system functionality to establish governance and oversight over the implementation, and to ensure the Company’s financial statements and related footnotes are complete and accurate and are adequately reviewed by members of management. The newly implemented internal control changes related to leases include new systems and software implementation, updated accounting and disclosure policies, and redesigned financial reporting internal controls over governance, oversight and reviews. Additionally, the Company has expanded data gathering procedures to comply with the additional disclosure requirements and ongoing contract review requirements.

period.


11
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SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Recent Accounting Pronouncements
During the six months ended June 30, 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-04 Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the six months ended June 30, 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future London Interbank Offered Rate ("LIBOR") indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
In June 2016, the FASB issued ASU2016-13,ASU 2016-13, Financial Instruments - Credit Losses, which introduced a new model for recognizing credit losses on financial instruments based on an estimate of the current expected credit losses. The new current expected credit losses (“CECL”) model generally calls for the immediate recognition of all expected credit losses and applies to financial instruments and other assets, includingwhich is primarily applicable to accounts receivable and other financial assets measured at amortized cost, debt securities and other financial assets. This guidance replacesfor the current incurred loss model for measuring expected credit losses, requires expected losses on available-for-sale debt securities to be recognized through an allowance for credit losses rather than as reductions in the amortized cost of the securities, and provides for additional disclosure requirements.Company. This ASU iswas effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted.the Company on January 1, 2020. The Company is currently evaluating the impact that adoption of this ASU willdid not have a material impact on its consolidated financial position and results of operations.
2. Acquisitions and Disposals
Acquisitions
During the ninesix months ended SeptemberJune 30, 2019,2020, the Company acquired a controlling interest in onea surgical facility in a clinicnew market and a controlling interest 3 surgical facilities in existing markets, that waswere merged into an existing facility and a physician practicefacilities for total aggregate consideration of $26.7 million, including cash consideration of $20.1$12.4 million, net of cash acquired.acquired, and non-cash consideration of $2.0 million. The remaindernon-cash consideration consisted of a non-controlling interest in one of the consideration related to the forgiveness of certain amounts due to the Company from the acquired clinic.Company's existing surgical facilities. The cash consideration was funded through cash from operations. The total consideration was allocated to the assets acquired and liabilities assumed based upon the respective acquisition date fair values. The aggregate amounts preliminarily recognized for each major class of assets acquired and liabilities assumed for the acquisitions are as follows (in millions):
Total consideration (1)
 $26.7
Fair value of non-controlling interests 8.3
Aggregate acquisition date fair value $35.0
Net assets acquired:  
Current assets $5.0
Property and equipment 1.8
Goodwill 22.8
Other long-term assets (2)
 37.7
Current liabilities (3.9)
Long-term debt, less current maturities (0.2)
Other long-term liabilities (28.2)
Aggregate acquisition date fair value $35.0
(1)Total considerationIn connection with the clinic acquisition, the Company acquired the remaining$14.9 
Fair value of non-controlling interests in one of it's existing consolidated surgical facilities. As such, $6.3 million of the cash consideration for the clinic6.7 
Aggregate acquisition was classified as a financing activity and presented in payments related to ownership transactions with non-controlling interest holders in the Condensed Consolidated Statements of Cash Flows.date fair value$21.6 
Net assets acquired:
(2)Current assetsThe$1.5 
Property and equipment1.7 
Goodwill19.8 
Right-of-use operating lease assets acquired includes the9.0 
Current liabilities(1.7)
Right-of-use operating lease liabilities(8.7)
Aggregate acquisition date fair value of a non-controlling investment held by the acquired clinic in one of the Company's consolidated surgical facilities of $8.8 million. This investment asset was subsequently eliminated in consolidation.$21.6 
The fair values assigned to certain assets acquired and liabilities assumed by the Company have been estimated on a preliminary basis and are subject to change as new facts and circumstances emerge that were present at the date of acquisition. During the ninesix months ended SeptemberJune 30, 2019,2020, 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 2018.2019. The goodwill acquired was primarily allocated to the Company's reportable segments as follows: $14.3 million to surgical facility services and $8.5 million to ancillary services.reportable segment. The results of operations of the acquisitions were included in the Company’s results of operations beginning on the dates of acquisition and were not considered significant for the ninesix months ended SeptemberJune 30, 2019.2020.
Other Acquisitions and DispositionsDisposals
During the ninesix months ended SeptemberJune 30, 2019,2020, the Company acquired a non-controlling interestsold its interests in four surgical facilities for a cash investment2 surgery centers, one of $14.0 million. The non-controlling interestwhich was previously accounted for as an equity method investment, and recorded as a componentfor net cash proceeds of investments in$9.4 million, and advances to affiliates in the accompanying condensed consolidated balance sheets.
During the nine months ended September 30, 2019, the Company disposed of previously owned real property associated with one of its existing non-consolidated surgical facilities. In connection with the sale, the Company recognized a $10.9net pre-tax loss of $3.1 million pretax gain included in loss (gain) on disposals and deconsolidations, net in the accompanying condensed consolidated statementsstatement of operations. The sale did not impactoperations for the Company's investment in the surgical facility, which continues to be accounted for as an equity method investment.

six months ended June 30, 2020.


12
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SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3. Long-Term Debt
A summary of long-term debt is as follows (in millions):
June 30,
2020		December 31,
2019
Senior secured term loan (1)
$1,546.9  $1,434.1  
Senior secured revolving credit facility—  —  
6.750% senior unsecured notes due 2025370.0  370.0  
10.000% senior unsecured notes due 2027430.0  430.0  
Notes payable and other secured loans111.6  104.0  
Finance lease obligations244.1  253.4  
Less: unamortized debt issuance costs(16.6) (10.8) 
Total debt2,686.0  2,580.7  
Less: Current maturities63.5  56.0  
Total long-term debt$2,622.5  $2,524.7  
  September 30,
2019		 December 31,
2018
     
Senior secured term loan (1)
 $1,437.2
 $1,447.9
Senior secured revolving credit facility —
 —
8.875% senior unsecured notes due 2021 (2)

—
 406.7
6.750% senior unsecured notes due 2025 370.0
 370.0
10.000% senior unsecured notes due 2027 430.0
 —
Notes payable and other secured loans 74.4
 79.4
Finance lease obligations (3)
 153.5
 25.4
Less: unamortized debt issuance costs (10.8) (2.9)
Total debt 2,454.3
 2,326.5
Less: Current maturities 51.3
 55.6
Total long-term debt $2,403.0
 $2,270.9
(1)
Includes unamortized fair value discount of $5.2 millionand$5.5 million as of September 30, 2019andDecember 31, 2018, respectively.
(2)Includes unamortized fair value premium of $6.7 million as of December 31, 2018. The premium was written-off upon redemption as discussed below.
(3)In connection with the adoption of the Lease Accounting Standard, the Company's capital lease obligations that existed as of December 31, 2018 were derecognized and included as a component of the finance lease obligations included in the table shown above. See Note 4. "Leases" for further discussion on the adoption of the Lease Accounting Standard. The increase in finance lease obligations upon adoption of the Lease Accounting Standard is due to the inclusion of certain financing obligations that were previously recognized as a component of other current and long-term liabilities as discussed further in Note 8. "Other Assets and Liabilities."
10.000% Senior Unsecured Notes due 2027(1)Includes unamortized fair value discount of $4.1 millionand $4.6 million as of June 30, 2020andDecember 31, 2019, respectively.
EffectiveThird Amendment to Credit Agreement
On April 11, 2019,16, 2020, SP Holdco I, Inc., a Delaware corporation (“Holdings”), and Surgery Center Holdings, Inc., a Delaware corporation (the “Borrower”), each a wholly-owned subsidiary of the Company, issuedentered into a third amendment to credit agreement governing their revolving credit facility (the “Revolver”), dated as of April 16, 2020 (the “Third Amendment”), with Jefferies Finance LLC, as administrative agent and collateral agent, and the other financial institutions party thereto, which amended and supplemented financial covenants applicable to the Revolver under the credit agreement, dated as of August 31, 2017, by and among the Borrower, Holdings, certain subsidiaries of the Borrower party thereto from time to time, Jefferies Finance LLC, as administrative agent and collateral agent, and the other financial institutions party thereto from time to time (as previously amended) (the “Credit Agreement”). Pursuant to the Third Amendment, the Company's requirement to comply with a maximum consolidated total net leverage ratio will be waived for the remainder of 2020. Additionally, for the first three quarters of 2021, the Third Amendment provides for an aggregate principal amountalternative calculation for the maximum consolidated total net leverage ratio where the trailing four quarter basis may be negatively impacted by the impacts of $430.0COVID-19. The Third Amendment became effective concurrently with the funding of the 2020 Incremental Term Loans on April 22, 2020, and are discussed in more detail below.
Second Incremental Term Loan Amendment
On April 22, 2020, Holdings and the Borrower, together with certain subsidiaries of the Borrower, entered into a second incremental term loan amendment, dated as of April 22, 2020 (the “Second Incremental Term Loan Amendment”), with Jefferies Finance LLC, as administrative agent and collateral agent, and the other financial institutions party thereto, which further amended and supplemented the Credit Agreement to provide for a $120.0 million of senior unsecured notes due April 15, 2027secured incremental term loan (the "2027 Unsecured Notes"“2020 Incremental Term Loans”). The 2027 Unsecured Notes2020 Incremental Term Loans were fully drawn on April 22, 2020 and bear interest at thea rate of 10.000% per annum payable semi-annually on April 15equal to (x) LIBOR plus a margin of 8.00% 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, (iii) one-month LIBOR plus 1.00% per annum and October 15(iv) 2.00% per annum) plus a margin of each year, beginning on October 15, 2019.7.00% per annum. The 2027 Unsecured Notes are2020 Incremental Term Loans were incurred as a senior unsecured obligationseparate tranche of Surgery Center Holdings, Inc.term loans under the Credit Agreement, and are guaranteed on a senior unsecured basis by each of Surgery Center Holdings, Inc.'s existingsubject to maturity, amortization and future domestic wholly-owned restricted subsidiaries that guaranteesmandatory prepayment provisions consistent with the existing senior secured term loan and revolving credit facility (subject to certain exceptions).
The Company may redeem up to 40%terms loans outstanding under the Credit Agreement. Voluntary prepayments of the aggregate principal amount of the 2027 Unsecured Notes at any time prior to April 15, 2022, with the net cash proceeds of certain equity issuances at a redemption price equal to 110.000% of the principal amount of notes to be redeemed, plus accrued and unpaid interest to, but excluding, the date of redemption.
The Company may redeem the 2027 Unsecured Notes,2020 Incremental Term Loans are permitted, in whole or in part, at anywith prior notice, without premium or penalty (except LIBOR breakage costs and a make-whole and call premium, as applicable, in the case of certain prepayments or events within a specified period of time prior to April 15, 2022, at a redemption price equal to 100% of the principal amount of notes to be redeemed plus the applicable premium, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company may redeem the 2027 Unsecured Notes, in whole or in part, at any time on or after April 15, 2022, at the redemption prices22, 2020, as set forth below (expressedin the Second Incremental Term Loan Amendment).
On March 18, 2020, the Company drew down its available capacity under the Revolver, as a percentageprecautionary measure in order to increase liquidity and preserve financial flexibility in light of current uncertainty resulting from the principal amount of notes to be redeemed), plus accrued and unpaid interest, if any, to, but excluding,COVID-19 pandemic. During the date of redemption:
April 15, 2022 to April 14, 2023105.000%
April 15, 2023 to April 14, 2024102.500%
April 15, 2024 and thereafter100.000%
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 101.000% of the aggregate principal amount of notes, plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase.
The indenture governing the 2027 Unsecured Notes contains customary affirmative and negative covenants, which, among other things, limit the Company’s ability to incur additional debt, pay dividends, create or assume liens, effect transactions with its affiliates, guarantee payment of certain debt securities, sell assets, merge, consolidate, enter into acquisitions and effect sale and leaseback transactions.
In connection with the offering of the 2027 Unsecured Notes,second quarter, the Company recorded debt issuance costs of $8.8 million.


13
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SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8.875% Senior Unsecured Notes due 2021
In connection with issuance of the 2027 Unsecured Notes as discussed above, the Company redeemed all of the then existing senior unsecured notes due 2021 ("2021 Unsecured Notes"). The redemption price was equal to 104.438% offully repaid the outstanding principal amount plus accrued and unpaid interest. In connection with the redemption, the Company recorded a debt extinguishment loss of $11.7 million, included in loss on debt extinguishment in the condensed consolidated statements of operations for the nine months ended September 30, 2019. The loss includes the redemption premium paid partially offset by the write-off of the unamortized fair value premium as of the redemption date.
Senior Secured Revolving Credit Facility
In connection with the completion of the issuance of the 2027 Unsecured Notes, the outstanding commitments under the Company's senior secured revolving credit facility ("Revolver") were increased by $45.0 million pursuant to an incremental amendment to the credit agreement governing its revolving credit facility.balance. As of both SeptemberJune 30, 2019 and December 31, 2018, the Company had no outstanding borrowing on the Revolver. As of September 30, 2019,2020, the Company's availability on the Revolver was $115.2$113.2 million (including outstanding letters of credit of $4.8$6.8 million).
4. Leases
On January 1, 2019, the Company adopted the Lease Accounting Standard using the modified retrospective transition approach by applying the new standard to all leases existing at that date. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under the new guidance, while prior period amounts have not been adjusted.
The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward its historical lease identification, lease classification and initial direct costs for any leases that existed prior to January 1, 2019. The Company also elected the accounting policy practical expedient to exclude leases with an initial term of twelve months or less from the balance sheet. Additionally, for certain leases, the Company applied a portfolio approach to effectively account for the operating lease right-of-use assets and liabilities.
The Company determines if an arrangement is a lease at inception. Right-of-use assets and liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, the Company considers only payments that are fixed and determinable at the time of commencement. Variable components of lease payments fluctuating with a future index or rate, as well as those related to common area maintenance costs, are not included in determining lease payments and are expensed as incurred. As most leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate is a hypothetical rate based on the Company's understanding of what its credit rating would be. 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. Real estate lease agreements typically have initial terms of ten years and may include one or more optionsDue to renew. Certain leases also include options to purchase the leased property. The useful life of assets and leasehold improvements are limited byCOVID-19 pandemic, the expected lease term, unless there is a transfer of title or purchase option reasonablyCompany received concessions for certain of exercise.its leases primarily consisting of deferral of rental payments. The majority ofCompany has elected to account for these COVID-19 related concessions as though 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, typically ranging from five to seven years.



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SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

enforceable rights and obligations for those concessions are explicit within the underlying contract. The following table presentsCompany accounts for the componentsdeferred rentals as a component of the Company's right-of-use assets andother current liabilities related to leases, their classification inwithin the condensed consolidated balance sheets,sheets. In a few instances the weighted-averageCompany modified the terms of the lease termsin exchange for lease concessions. These modifications resulted in an increase to the Company's right-of-use operating lease assets and discount rates at Septemberliabilities of $23.2 million during the three and six months ended June 30, 2019 (in millions):
  Classification in Condensed Consolidated Balance Sheets September 30, 2019
Assets:    
Operating lease assets Other long-term assets $311.7
Finance lease assets Property and equipment, net of accumulated depreciation 147.2
Total leased assets   $458.9
     
Liabilities:    
Operating lease liabilities:    
Current Other current liabilities $35.8
Long-term Other long-term liabilities 281.4
Total operating lease liabilities   317.2
Finance lease liabilities:    
Current Current maturities of long-term debt 13.9
Long-term Long-term debt, less current maturities 139.6
Total finance lease liabilities   153.5
Total lease liabilities 
 $470.7
     
Weighted-average remaining lease term:    
Operating leases   8.9 years
Finance leases   12.7 years
Weighted-average discount rate:    
Operating leases   10.4%
Finance leases   10.2%
2020.
The following table presents the components of the Company's lease expense and their classification in the condensed consolidated statement of operations for the nine months ended September 30, 2019 (in millions):
  Classification in Condensed Consolidated Statement of Operations Nine Months Ended September 30, 2019
     
Operating lease costs Lease expense and general and administrative expenses $50.8
Finance lease costs:    
Amortization of leased assets Depreciation and amortization 15.3
Interest on lease liabilities Interest expense, net 10.9
Total finance lease costs   26.2
Variable and short-term lease costs Lease expense and general and administrative expenses 10.6
Total lease costs   $87.6
During the nine months ended September 30, 2019, the Company incurred lease costs of $15.1 million under operating lease agreements with physician investors who are related parties. During the nine months ended September 30, 2019, the Company paid rent of $4.8 million under a finance lease agreement with a lessor who is a related party. 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.


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SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Six Months Ended June 30,
20202019
Operating lease costs$36.3  $34.4  
Finance lease costs:
Amortization of leased assets12.0  9.3  
Interest on lease liabilities10.4  7.3  
Total finance lease costs22.4  16.6  
Variable and short-term lease costs8.3  6.0  
Total lease costs$67.0  $57.0  
The following table presents supplemental cash flow information for the nine months ended September 30, 2019 (dollars in millions):
Six Months Ended June 30,
20202019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases$33.7  $32.8  
Operating cash outflows from finance leases$10.4  $7.3  
Financing cash outflows from finance leases$8.3  $5.2  
Right-of-use assets obtained in exchange for lease obligations:
Operating leases$37.5  $5.0  
Finance leases$8.5  $5.0  
  Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:  
Operating cash outflows from operating leases $48.7
Operating cash outflows from finance leases $10.9
Financing cash outflows from finance leases $9.4
   
Right-of-use assets obtained in exchange for lease obligations:  
Operating leases $48.0
Finance leases $9.1
Future maturities of lease liabilities at September 30, 2019 are presented in the following table (in millions):
  Operating Leases Finance Leases
     
2019 $21.9
 $9.4
2020 65.1
 27.8
2021 59.9
 25.7
2022 54.9
 22.6
2023 51.7
 20.1
Thereafter 246.6
 194.6
Total lease payments 500.1
 300.2
Less: imputed interest (182.9) (146.7)
Total lease obligations $317.2
 $153.5
Future maturities of lease liabilities at December 31, 2018, prior to the adoption of the Lease Accounting Standard, are presented in the following table (in millions):
  
Operating Leases (1)
 Capital Leases
     
2019 $81.5
 $8.8
2020 75.6
 6.7
2021 66.7
 4.7
2022 61.3
 2.9
2023 57.2
 1.5
Thereafter 470.2
 4.3
Total lease payments $812.5
 28.9
Less: imputed interest   (3.5)
Capital lease obligations   $25.4
(1)Includes financing obligations payable to the lessors of certain land, buildings and improvements that arose due to the Company's continued involvement with the leased assets under the sale-leaseback guidance in effect prior to the adoption of the Lease Accounting Standard. As of December 31, 2018, the current portion of the financing obligations was $7.0 million and was included in other current liabilities in the consolidated balance sheets. The long-term portion of the finance obligations was $149.8 million and was included as other long-term liabilities in the consolidated balance sheets.
5. Redeemable Preferred Stock
On August 31, 2017, the Company issued 310,000 shares of Series A Preferred Stock to Bain Capital Private Equity, L.P. at a purchase price of $1,000 per share for an aggregate purchase price of $310.0 million.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

A summary of activity related to the Series A Preferred Stock follows (in millions):
Balance at December 31, 2018 $359.3
Dividends accrued (there were no cash dividends declared) 26.4
Balance at September 30, 2019 $385.7
Balance at December 31, 2019$395.0 
Dividends accrued (there were no cash dividends declared)19.2 
Balance at June 30, 2020$414.2 
There were no0 unpaid cash dividends declared at both SeptemberJune 30, 20192020 and December 31, 2018.2019. The aggregate and per share amounts of unpaid cumulative preferred dividends as of SeptemberJune 30, 20192020 was $60.1$88.6 million and $194.00,$285.89, respectively.
6. Derivatives and Hedging Activities
Cash Flow Hedges of Interest Rate Risk
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 as part of its interest rate risk management strategy. During 2019,2020, such derivatives have been used to hedge the variable cash flows associated with existing variable-rate debt.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income ("OCI") and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings, as documented at hedge inception in accordance with the Company’s accounting policy election. Amounts reported in accumulated other comprehensive incomeOCI related to derivatives will be reclassified to interest expense as interest payments are made on the

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Company’s variable-rate debt. Over the next 12 months, the Company estimates that an additional $14.2$21.7 million will be reclassified as an increase to interest expense.
As of SeptemberJune 30, 2019,2020, the Company had four4 interest rate swaps with a current notional amount of $1.2 billion and a termination date of November 30, 2023. The derivatives are recorded at fair value (see Note 1. "Organization and Summary of Accounting Policies") and classified as a long-term liability included in other long-term liabilities in the condensed consolidated balance sheets.
The following table presents the pre-tax effect of the interest rate swaps on the Company's accumulated other comprehensive income ("OCI")OCI and condensed consolidated statement of operations for the three and nine months ended September 30, 2019 (dollars in(in millions):
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Derivatives in cash flow hedging relationships
(Gain) loss recognized in OCI (effective portion)$(1.7) $18.3  $26.9  $31.1  
Loss reclassified from accumulated OCI to interest expense (effective portion)$5.6  $1.5  $9.0  $2.8  
  Three Months Ended September 30, Nine Months Ended September 30,
  2019 2018 2019 2018
Derivatives in cash flow hedging relationships        
Loss recognized in OCI (effective portion) $8.5
 $1.4
 $39.6
 $1.4
Loss reclassified from accumulated OCI to interest expense (effective portion) $1.7
 $—
 $4.5
 $—
7. 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.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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):
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Numerator:
Net loss attributable to Surgery Partners, Inc.$(32.5) $(19.8) $(60.0) $(39.9) 
Less: amounts allocated to participating securities (1)
(9.7) (8.8) (19.2) (17.3) 
Net loss attributable to common stockholders$(42.2) $(28.6) $(79.2) $(57.2) 
Denominator:
Weighted average shares outstanding- basic and diluted (2)
48,840  48,291  48,661  48,241  
Loss per share:
Basic and diluted (2)
$(0.86) $(0.59) $(1.63) $(1.19) 
Dilutive securities outstanding not included in the computation of loss per share as their effect is antidilutive:
Stock options—  —  42  —  
Restricted shares530  25  545  27  
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
Numerator:       
Net loss attributable to Surgery Partners, Inc.$(15.7) $(21.0) $(55.6) $(58.0)
Less: amounts allocated to participating securities (1)
(9.1) (8.2) (26.4) (23.9)
Net loss attributable to common stockholders$(24.8) $(29.2) $(82.0) $(81.9)
        
Denominator:       
Weighted average shares outstanding- basic and diluted (2)
48,310
 48,038
 48,265
 48,020
        
Loss per share:       
Basic and diluted (2)
$(0.51) $(0.61) $(1.70) $(1.71)
        
Dilutive securities outstanding not included in the computation of loss per share as their effect is antidilutive:       
Stock options—
 145
 —
 154
Restricted shares10
 134
 24
 141
Convertible preferred stockN/A
 N/A
 N/A
 N/A
(1)(1)Includes dividends accrued during all periods for the Series A Preferred Stock. The Series A Preferred Stock does not participate in undistributed losses.
(2)The impact of potentially dilutive securities for all periods presented was not considered because the effect would be anti-dilutive in each period.
Share Repurchase Transactions
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 obligateparticipate in undistributed losses.
(2)The impact of potentially dilutive securities for all periods presented was not considered because the repurchase of any shares and the Company may repurchase shares of common stock at any time without prior notice. The share repurchases willeffect would be madeanti-dilutive 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.
There were no share repurchases under the share repurchase program during the nine months ended September 30, 2019. During the nine months ended September 30, 2018, the Company repurchased 156.8 thousand shares of its common stock at an average price of $12.64 per share through market purchases. At September 30, 2019, the Company had $46.0 million of repurchase authorization available under the December 2017 authorization.
8. Other Assets and Liabilities
Other Long-Term Assets
A summary of other long-term assets is as follows (in millions):each period.

15
  September 30,
2019		 December 31,
2018
     
Right-of-use operating lease assets $311.7
 $—
Other 32.4
 36.9
Total $344.1
 $36.9


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8. Other Current Liabilities
A summary of other current liabilities is as follows (in millions):
June 30,
2020		December 31,
2019
Right-of-use operating lease liabilities$37.8  $37.3  
Accrued legal settlement (1)
32.3  35.1  
Interest payable22.0  21.8  
Amounts due to patients and payors19.7  16.5  
Accrued expenses and other108.6  80.5  
Total$220.4  $191.2  
  September 30,
2019		 December 31,
2018
     
Accrued legal settlement $42.3
 $42.3
Right-of-use operating lease liabilities 35.8
 —
Interest payable 26.6
 20.8
Amounts due to patients and payors 18.0
 20.0
Accrued expenses and other 76.5
 72.1
Total $199.2
 $155.2
(1)See Note 9. "Commitments and Contingencies" for further discussion.
Other Long-Term Liabilities
A summary of other long-term liabilities is as follows (in millions):
  September 30,
2019		 December 31,
2018
     
Right-of-use operating lease liabilities $281.4
 $—
Facility lease obligations —
 149.8
Other 144.9
 121.5
Total $426.3
 $271.3
At December 31, 2018, the Company had financing obligations payable to the lessors of certain land, buildings and improvements that arose due to the Company's continued involvement with the leased assets under the sale-leaseback guidance in effect prior to the adoption of the Lease Accounting Standard. These obligations were included as facility lease obligations in other long-term liabilities at December 31, 2018 in the table above. Upon adoption of the Lease Accounting Standard on January 1, 2019, the Company reevaluated the classification of these financing arrangements utilizing the new accounting requirements for sale-leasebacks, and concluded that each of these financing arrangements continue to not qualify for sale treatment and therefore should continue to be recognized on the balance sheet as finance leases under the new guidance. Further, the Company has an ongoing development agreement to construct a new hospital, which costs were recognized as incurred as a deferred financing obligation included in facility lease obligations at December 31, 2018. Upon reevaluation, the Company concluded that it does not control the assets under construction and therefore the obligation and related asset were derecognized from the balance sheets upon adoption of the Lease Accounting Standard. The lease related to this new hospital is expected to commence in late 2019 when construction is completed.
9. 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 liability and professionalworkers' compensation liability insurance in excess of self-insured retentions, on a claims-made basis 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. The Company also maintains workers' compensation insurance, subject to a deductible. 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.
Insurance Reserves
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 periodic actuarially determined estimates. The reserves are estimated 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 condensed consolidated balance sheets. Total professional, general and workers' compensation claim liabilities as of SeptemberJune 30, 20192020 and December 31, 20182019 were $19.5$21.0 million and $18.2$19.4 million, respectively. The balances includeCompany had expected insurance recoveries of $11.8 million and $12.0$12.1 million as of Septemberboth June 30, 20192020 and December 31, 2018, respectively.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2019.
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 actionsanctions including fines, penalties, and exclusion from the Medicare, Medicaid and other federal healthcarehealth 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.
On October 23, 2017, the Company received several civil investigative demands ("CIDs") from the federal government under the False Claims Act (“FCA”(the "FCA") for documents and information dating back to January 1, 2010 relating to the medical necessity of certain drug tests conducted by the Company’s physicians and submitted to laboratories owned and operated by the Company. In addition, the Company has beenwas informed by the Centers for Medicare and Medicaid Services ("CMS")CMS that payments to its diagnostic laboratory, Logan Laboratories, have beenLLC ("Logan Labs"), a toxicology laboratory based in Tampa, Florida, that provides urine testing services, were suspended for a period of time, pending further investigationinvestigations by CMS. CMS lifted the suspension as of December 18, 2019. On January 23, 2020, the United States District Court for the Middle District of Florida unsealed the Complaint in the case of Cho et al. ex rel. United States v. Surgery Partners et al., which we understand to be related to the investigation that gave rise to the CIDs.
On April 14, 2020, Logan Labs 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 (collectively, the "U.S. Parties") and certain other parties to resolve the pending DOJ investigation. As part of the Settlement Agreement, the DOJ asserted that certain urine tests ordered by Tampa Pain’s physicians and conducted at Tampa Pain and Logan Labs for patients receiving opioid therapy to manage pain were not medically necessary and the resulting claims submitted to the U.S. Parties violated the federal False Claims Act (the "Covered Conduct").
Under the terms of the Settlement Agreement, the Companies will pay a total of $40.0 million plus accrued interest from March 14, 2019, at the rate of 2.75% per annum to the U.S. Parties and participating states. The Settlement Amount is expected to be paid on the

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
following schedule: the forfeiture of $7.5 million of approved, paid claims currently held in suspense by the U.S. Parties and the payment of $1.8 million plus accrued interest within 20 business days of the date of the Settlement Agreement and the payment of $30.7 million plus accrued interest on April 1, 2021. The Company has been providing information to the government in response to the CIDs and currently has a non-binding agreement in principle with the DOJ on the financial terms of a settlement with the goal of resolving these matters. Based on those discussions, which are still ongoing, the Companypreviously recorded a litigation-related charge of $46.0 million relating to these mattersan anticipated resolution of the Covered Conduct on the consolidated statements of operations for the year ended December 31, 2018. TheFor the three months ended March 31, 2020, the Company believes that this reserve is sufficient to cover a potential resolution with the government relating to these matters, including legal expensesrecorded an additional litigation-related charge of $1.2 million relating to the settlement that have not previously been recordedresolution of the Covered Conduct on the condensed consolidated statement of operations.
Under the Settlement Agreement, the U.S. Parties agree to release the Companies from any civil or administrative monetary liability arising from the Covered Conduct. Additionally, under the Settlement Agreement, the OIG agrees, conditioned upon the Companies’ full payment of the Settlement Amount, and in operating expenses. consideration of Logan Labs’ and Tampa Pain’s obligations under their respective Corporate Integrity Agreements (as defined and described below), to release its permissive exclusion rights and refrain from instituting any administrative action seeking to exclude the Companies from participating in Medicare, Medicaid or other Federal health care programs as a result of the Covered Conduct.
The ultimate timing, amount and/or final termsSettlement Agreement contains no admissions of any such resolution may differ materially from those anticipatedliability on the part of the Companies or the Company mayCompany.
In connection with the resolution of this matter and in exchange for the OIG’s agreement not be able to reach a resolution at all. It is reasonably possible thatexclude the Company will incur additional losses above the amount reserved, but the Company is not able to estimate such amounts at this time. See Item 1A “Risk Factors”Companies from participating in the Company's Annual Reportfederal health care programs, on Form 10-K forApril 14, 2020, Tampa Pain entered into a five-year corporate integrity agreement with the year ended December 31, 2018 underOIG and Logan Labs entered into a three-year corporate integrity agreement with the heading “Risk Factors - Risks Related to Government Regulation - Companies withinOIG (together, the healthcare industry, including us, continue to be the subject of federal and state audits and investigations, including actions for false and other improper claims“Corporate Integrity Agreements”).” 
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 healthcarehealth care laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral 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 healthcarehealth 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”"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., 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 three3 percent. The amounts payable under the TRA are related to the Company’s projected realized tax savings over the next sixfive 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, and such


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

inability is a result of the terms of credit agreements and other debt documents that are materially more restrictive than those existing as of September 30, 2015, such payments will be deferred and will accrue interest at a rate of the LIBOR plus 500 basis points until paid. If the terms of such 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 effectiveCompany's tax rate is 24%, calculated as the maximum corporate federal tax rate plus three3 percent, throughout the remaining term of the TRA, the Company estimates that the total remaining amounts payable under the TRA was approximately $68.2 million and $64.6$60.1 million as of Septemberboth June 30, 20192020 and December 31, 2018, respectively.2019. As a result of the amendment to the TRA, the Company was required to value the

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
liability under the TRA by discounting the fixed payment schedule using the Company’s incremental borrowing rate. The carrying value of the liability under the TRA, reflecting the discount, was $55.3$51.2 million and $48.5$48.7 million as of SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. The current portion of the liability was $8.0 million and $7.6$16.9 million as of Septemberboth June 30, 20192020 and December 31, 2018, respectively,2019, and wasis included as a component of other current liabilities in the condensed consolidated balance sheet.sheets. The long-term portion wasis included as a component of other long-term liabilities in the condensed consolidated balance sheets.
10. Segment Reporting
The Company operates in three3 major lines of business that are also the Company's reportable operating segments - the operation of surgical facilities, the operation of ancillary services and the operation of optical services. The surgical facility services segment consists of the operation of ASCs and surgical hospitals and includes anesthesia services. The ancillary services segment consists of a diagnostic laboratory and multi-specialty physician practices. The optical services segment consists of an optical products group purchasing organization. "All other" primarily consists of the Company's corporate general and administrative functions.
The following tables present financial information for each reportable segment (in millions):
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Revenues:
Surgical facility services$361.0  $424.0  $784.2  $819.8  
Ancillary services13.2  20.4  30.2  40.3  
Optical services0.5  1.0  1.3  2.1  
Total$374.7  $445.4  $815.7  $862.2  
Adjusted EBITDA:
Surgical facility services$80.0  $78.4  $147.2  $146.8  
Ancillary services(1.3) 1.4  (3.3) 2.6  
Optical services0.2  0.4  0.6  0.9  
All other(20.7) (19.0) (39.8) (38.3) 
Total$58.2  $61.2  $104.7  $112.0  
Reconciliation of Adjusted EBITDA:
(Loss) income before income taxes$(4.5) $9.1  $(28.1) $14.3  
Net income attributable to non-controlling interests(28.6) (27.9) (47.7) (51.5) 
Depreciation and amortization23.4  19.1  45.2  37.9  
Interest expense, net49.2  46.4  96.3  88.4  
Equity-based compensation expense3.4  3.0  6.9  4.9  
Transaction, integration and acquisition costs (1)
10.1  8.0  22.7  11.5  
Loss on debt extinguishment—  11.7  —  11.7  
Loss (gain) on disposals and deconsolidations, net2.9  (8.2) 6.4  (7.6) 
Litigation settlement and other litigation costs (2)
2.3  —  3.8  —  
Gain on escrow release (3)
—  —  (0.8) —  
Tax receivable agreement expense—  —  —  2.4  
Adjusted EBITDA$58.2  $61.2  $104.7  $112.0  

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

 2019 2018 2019 2018
Revenues:        
Surgical facility services $431.1
 $410.2
 $1,250.9
 $1,211.5
Ancillary services 20.0
 19.6
 60.3
 60.4
Optical services 0.9
 2.6
 3.0
 8.4
Total $452.0
 $432.4
 $1,314.2
 $1,280.3
         
Adjusted EBITDA:        
Surgical facility services $77.1
 $74.5
 $223.9
 $216.5
Ancillary services 0.9
 0.9
 3.5
 2.9
Optical services 0.4
 0.6
 1.3
 2.1
All other (16.2) (17.0) (54.5) (60.1)
Total $62.2
 $59.0
 $174.2
 $161.4
         
Adjusted EBITDA: $62.2
 $59.0
 $174.2
 $161.4
Net income attributable to non-controlling interests 26.6
 23.0
 78.1
 69.5
Depreciation and amortization (18.4) (17.0) (56.3) (49.4)
Interest expense, net (45.7) (37.2) (134.1) (107.3)
Equity-based compensation expense (2.7) (1.5) (7.6) (6.3)
Transaction, integration and acquisition costs (1)
 (5.3) (7.5) (16.8) (25.4)
(Loss) gain on disposals and deconsolidations, net (0.6) (12.6) 7.0
 (15.9)
Litigation costs (2.8) —
 (2.8) —
Loss on debt extinguishment —
 —
 (11.7) —
Tax receivable agreement expense —
 —
 (2.4) —
Contingent acquisition compensation expense —
 (0.5) —
 (1.5)
Reserve adjustments (2)
 —
 2.1
 —
 (2.7)
Income before income taxes $13.3
 $7.8
 $27.6
 $22.4
(1)This amount includes transaction and integration costs of $4.9 million and $6.2 million for the three months ended June 30, 2020 and 2019, respectively. This amount further includes other acquisition costs and start-up costs related to a de novo surgical hospital of $5.2 million and $1.8 million for the three months ended June 30, 2020 and 2019, respectively.

This amount includes transaction and integration costs of $10.4 million and $8.2 million for the six months ended June 30, 2020 and 2019, respectively. This amount further includes other acquisition costs and start-up costs related to a de novo surgical hospital of $12.3 million and $3.3 million for the six months ended June 30, 2020 and 2019, respectively.
(2)This amount includes other litigation costs of $2.3 million for the three months ended June 30, 2020, with no comparable costs in the same 2019 period.
This amount includes litigation settlement costs of $1.2 million and other litigation costs of $2.6 million for the six months ended June 30, 2020, with no comparable costs in the same 2019 period.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(3)Included in other income in the condensed consolidated statement of operations for the six months ended June 30, 2020, with no comparable gain in the same 2019 period.
(1)For the three months ended September 30, 2019 and 2018, this amount includes transaction and integration costs of $3.4 million and $7.1 million, respectively, and acquisition costs of $0.5 million and $0.4 million, respectively. This amount further includes start-up costs related to a de novo surgical hospital of $1.4 million for the three months ended September 30, 2019, with no comparable costs in the 2018 period. For the nine months ended September 30, 2019 and 2018, this amount includes transaction and integration costs of $11.6 million and $23.8 million, respectively, and acquisition costs of $2.0 million and $1.6 million, respectively. This amount further includes start-up costs related to a de novo surgical hospital of $3.2 million for the nine months ended September 30, 2019, with no comparable costs in the 2018 period.
(2)This amount represents adjustments to revenue in connection with applying consistent policies across the combined company as a result of the integration of Surgery Partners and a previously acquired entity.
June 30,
2020		December 31,
2019
Assets:
Surgical facility services$4,751.5  $4,580.4  
Ancillary services70.2  69.6  
Optical services17.6  17.7  
All other405.4  351.2  
Total assets$5,244.7  $5,018.9  
Six Months Ended June 30,
20202019
Cash purchases of property and equipment:
Surgical facility services$16.8  $25.3  
Ancillary services0.1  0.3  
All other3.0  6.2  
Total cash purchases of property and equipment$19.9  $31.8  
11. Subsequent Events
On July 20, 2020, the Company entered into a definitive agreement to sell certain assets related to its anesthesia business. The transaction is expected to close within 60 to 90 days.
As previously disclosed in a Current Report on Form 8-K filed on July 31, 2020, on July 30, 2020, the Company completed the issuance and sale of $115.0 million in aggregate principal amount of senior unsecured notes due 2027 at 100.75% of the principal amount. The notes were issued as part of the same series as the existing 2027 Unsecured Notes originally issued in April 2019, and have the same terms. The notes bear interest at an annual rate of 10.000% per year, payable semi-annually on April 15 and October 15 of each year, beginning on October 15, 2020.

19
  September 30,
2019		 December 31,
2018
Assets:    
Surgical facility services $4,505.4
 $4,204.3
Ancillary services 80.2
 52.7
Optical services 21.2
 20.1
All other 310.7
 399.2
Total assets $4,917.5
 $4,676.3
  Nine Months Ended September 30,
  2019 2018
Cash purchases of property and equipment, net:    
Surgical facility services $42.8
 $21.6
Ancillary services 0.5
 0.3
All other 6.9
 4.7
Total cash purchases of property and equipment, net $50.2
 $26.6


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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this report and included in our 2019 Annual Report on Form 10-K for the year ended December 31, 2018.10-K. Unless the context otherwise indicates, the terms "Surgery Partners," "we," "us," "our" or the "Company," as used herein, refer to Surgery Partners, Inc. and its subsidiaries. Unless the context implies otherwise, the term “affiliates” means direct and indirect subsidiaries of Surgery Partners, Inc., and partnerships and joint ventures in which such subsidiaries are partners. The terms “facilities” or “hospitals” refer to entities owned and operated by affiliates of Surgery Partners, Inc. and the term “employees” refers to employees of affiliates of Surgery Partners, Inc.
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements, which are based on our current expectations, estimates and assumptions about future events. All statements other than statements of current or historical fact contained in this report are forward-looking statements. These statements include, but are not limited to, statements regarding our future financial position, business strategy, budgets, effective tax rate, projected costs and plans and objectives of management for future operations. The words "projections," "believe," "continue," "drive," "estimate," "expect," "intend," "may," "plan," "will," "could," "would" and similar expressions are generally intended to identify forward-looking statements. These statements involve risks, uncertainties and other factors that may cause actual results to differ from the expectations expressed in the statements. Many of these factors are beyond our ability to control or predict. These factors include, without limitation, the duration and severity of the COVID-19 outbreak in the United States and the regions in which we operate, the impact to the state and local economies of prolonged shelter in place orders and the pandemic generally, our ability to respond nimbly to challenging economic conditions, the unpredictability of our case volume both in the current environment and if and when restrictions are eased, our ability to preserve or raise sufficient funds to continue operations throughout this period of uncertainty, including through our in-process asset sales, which may not occur during this period of uncertainty, if at all, the impact of our cost-cutting measures on our future performance, our ability to defer payments, including certain lease payments, our ability to cause distributions from our subsidiaries, the responsiveness of our payors, including Medicaid and Medicare, to the challenging operating conditions, including their willingness and ability to continue paying in a timely manner and to advance payments in a timely manner, if at all; our ability to execute on our operational and strategic initiatives; the timing and impact of our portfolio optimization efforts; our ability to continue to improve same-facility volume and revenue growth on the timeline anticipated, if at all; our ability to successfully integrate acquisitions; the anticipated impact and timing of our ongoing efficiency efforts, including insurance consolidations and completed headcount actions, as well as our ongoing procurement and revenue cycle efforts; the impact of adverse weather conditions and other events outside of our control; whether or not a settlement is reached with the  government relating to the previously disclosed investigation, the terms of any such settlement and the ongoing cost of complying with the terms of any such settlement; and the risks and uncertainties set forth under the heading "Risk Factors" in this report, our 2019 Annual Report on Form 10-K filed withand our Quarterly Report on Form 10-Q for the Securities and Exchange Commission onthree months ended March 15, 201931, 2020, and discussed from time to time in our reports filed with the SEC.
Considering these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur, and actual results could differ materially from those anticipated or implied in the forward-looking statements. When you consider these forward-looking statements, you should keep in mind these risk factors and other cautionary statements in this report.
These forward-looking statements speak only as of the date made. Other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise.
Executive Overview
Total revenues for the thirdsecond quarter of 2019 increased 4.5%2020 decreased 15.9% to $452.0$374.7 million from $432.4$445.4 million for the thirdsecond quarter of 2018. The implementation of a recent accounting standard on revenue recognition lowered total revenues in the third quarter of 2019 and 2018 by $6.3 million and $11.6 million, respectively.2019. Same-facility revenues for the thirdsecond quarter of 2019 increased 9.7%2020 decreased 18.6% from the same period last year, with a 6.7%32.4% increase in revenue per case andoffset by a 2.8% increase38.6% decrease in same-facility cases. Ascases (there were the same number of business days in both periods). The overall decrease in revenues is attributable to the impacts of COVID-19 that the Company began experiencing in mid-March, which is described in further detail below in the section titled "Impact of COVID-19." Same-facility revenue per case growth was driven by a resultfavorable surgical case mix as lower acuity cases were some of our targeted net revenue improvement initiatives, the three months ended September 30, 2019 representedfirst to decline as the fifth consecutiveCOVID-19 crisis developed. For the second quarter of same-facility case volume growth. For2020, the third quarter of 2019, theCompany’s net loss attributable to common stockholders and Adjusted EBITDA was $24.8$42.2 million and $58.2 million, respectively, compared to $29.2$28.6 million for the same period last year. For the third quarter of 2019, Adjusted EBITDA increased 5.4% to $62.2 million compared to $59.0and $61.2 million for the same period last year. A reconciliation of non-GAAP financial measures appears below under "Certain Non-GAAP Metrics." The increase in net loss attributable to common stockholders and the decrease in Adjusted EBITDA are attributable to the decline in surgical cases due to the impacts of COVID-19 as discussed further below.
We had cash and cash equivalents of $111.3$326.3 million and $115.2$113.2 million of borrowing capacity under our revolving credit facility at SeptemberJune 30, 2019.2020. Net operating cash inflows, including operating cash flows less distributions to non-controlling interests, were $28.3$154.2 million for the thirdsecond quarter of 2019.2020.
Impact of COVID-19
The COVID-19 global pandemic is significantly affecting our facilities, employees, patients, communities, business operations and financial performance, as well as the United States economy and financial markets. On March 18, 2020, we reported that we had withdrawn our previously announced full-year 2020 outlook and on April 15, 2020, we filed a Current Report on Form 8-K providing additional disclosure about the impact of the pandemic on our operations. The COVID-19 crisis is still rapidly evolving and much of its impact

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remains unknown and difficult to predict; however, it materially impacted our financial performance for the second quarter of 2020, and potentially could negatively impact our financial performance for the year ending December 31, 2020 or longer.
We are taking or supporting measures to try to slow the spread and minimize the impact of the virus. Many of these measures are adversely impacting our business and likely will have an adverse impact on our financial results that we currently are not able to quantify. For example, due in part to local, state and federal guidelines as well as recommendations from major medical societies, social distancing and self-quarantines in response to the COVID-19 pandemic, we cancelled or postponed a substantial percentage of the elective procedures scheduled at our facilities and reduced operating hours at a significant number of our facilities. As a result, our facilities experienced lower surgical case volume, which was more significant at the beginning of the second quarter and has improved gradually as states re-open and allow for non-emergent procedures. The impact on our surgical facilities varies based on the market in which the facility operates, the type of surgical facility and the procedures that are typically performed. It is difficult to predict the duration of this lower surgical case volume and, while restrictions are starting to be eased, we cannot predict the timing of the potential recapture of cancelled or postponed procedures, if any.
The Company's operating structure naturally enables some flexibility in the cost structure according to the volume of surgical procedures performed, including much of its cost of revenues. In addition to the natural variability of these costs, the Company and its partners in the surgical facilities have undertaken additional steps to preserve financial flexibility. Beginning in mid-March, and into the second quarter, the Company took actions that included significantly reducing cash operating expenses and deferring non-essential expenditures at the height of the crisis. These measures were gradually reduced throughout the second quarter as surgical case volumes improved. Even after taking into account our actions intended to increase financial flexibility (including actions that management estimates have lowered cash operating expenses), the volume reductions we are experiencing have resulted in materially higher losses and material decreases in Adjusted EBITDA during the second quarter of 2020 and may potentially continue to focus on improvingdo so for subsequent quarters. We cannot predict if or when utilization may return to pre-pandemic levels.
On March 18, 2020, we drew down our same-facility performance, selectively acquiring established facilitiesavailable capacity under the Revolver, as a precautionary measure in order to increase liquidity and developing new facilities.preserve financial flexibility in light of uncertainty resulting from the COVID-19 pandemic. During the ninesecond quarter, we fully repaid the outstanding balance. On April 22, 2020, we entered into a second incremental term loan amendment, which amended and supplemented the existing credit agreement, to provide for an incremental borrowing of $120.0 million. The incremental amounts were fully drawn on April 22, 2020. See Note 3. "Long-Term Debt" to our condensed consolidated financial statements included elsewhere in this report for a further discussion of the second incremental term loan amendment. Also, on July 30, 2020, we issued an additional $115.0 million aggregate principal amount of 10.000% senior unsecured notes due 2027 at 100.75% of the principal amount. The notes were issued as part of the same series as the 2027 Unsecured Notes originally issued in April 2019. See Note 11. "Subsequent Events" to our condensed consolidated financial statements included elsewhere in this report for a further discussion of the senior unsecured notes. Additionally, as a result of the CARES Act and other governmental assistance programs, during the six months ended SeptemberJune 30, 2019, we completed2020, the acquisitionsCompany received approximately $48 million in direct grant funding and approximately $120 million in accelerated Medicare payments, each of a surgical facility, a clinic that was merged into an existing facilitywhich is described in more detail in Note 1. “Organization and a physician practice for an aggregate cash investmentSummary of $20.8 million. Additionally, during the nine months ended September 30, 2019, we acquired a non-controlling interest in four surgical facilities for a cash investment of $14.0 million. The non-controlling interest was accounted for as an equity method investment and recorded as a component of investments in and advancesAccounting Polices - COVID-19 Pandemic” to affiliates in the accompanyingour condensed consolidated balance sheets.financial statements included elsewhere in this report.
The Company is continuing to monitor legislative actions at federal and state levels including the impact of the CARES Act and other governmental assistance that might be available.
Furthermore, please see "Capital Resources" and "Summary" under the heading "Liquidity and Capital Resources" below for more information about the impact of the COVID-19 pandemic on the Company.
Regulatory Developments in Response to COVID-19
Numerous recent legislative and regulatory actions have been taken in an attempt to provide businesses, including health care providers, with relief from the negative impacts of the COVID-19 pandemic. The legislative and regulatory responses to the COVID-19 pandemic generally impact many of the statutes, regulations and policies summarized or discussed throughout this report and in our 2019 Annual Report on Form 10-K.
CARES Act
On October 8, 2019, CMS andMarch 27, 2020, the OfficeCARES Act was signed into law. The CARES Act is intended to provide over $2 trillion in stimulus benefits for the U.S. economy in order to offset the negative economic impact of the Inspector General of the U.S. Department of Health and Human Services issued proposed rules that would modify the federal physician referral statute, or Stark Law, regulations and the federal anti-kickback and civil monetary penalty for beneficiary inducement statutes and regulations. The intent of the proposed rules is to reduce over-burdensome and unnecessary regulatory barriers to value-based compensation models and accelerate the transformation of theCOVID-19 public health care system into one that better promotes the coordination of care among providers.emergency. Among other things, the proposed rules would createCARES Act includes support for small businesses, expands unemployment benefits, and provides $500 billion for loans, loan guarantees, and other investments for or in U.S. businesses.
The CARES Act contains a number of provisions that are intended to assist health care providers as they combat the effects of the COVID-19 public health emergency. The healthcare-specific provisions include:
•the temporary suspension of Medicare sequestration from May 1, 2020, to December 31, 2020;
•an appropriation of $100 billion to the Public Health and Social Services Emergency Fund for a new anti-kickbackprogram to reimburse, through grants or other mechanisms, eligible health care providers and beneficiary inducement

other approved entities for COVID-19-related expenses or lost revenues;


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•the expansion of CMS’ Accelerated and Advance Payment Program; and
statute safe harbors•waivers or temporary suspension of certain regulatory requirements.
Paycheck Protection Program and Stark Law exceptions for certain value based arrangementsHealth Care Enhancement Act
On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the "New PPP Act") was signed into law. Among other things, the New PPP Act allocates $75 billion to Medicare and arrangements that involve the donation of cybersecurity technology. In addition, the proposed rules would also provide additional guidance on several key requirements, including fair market valueMedicaid participating hospitals and commercial reasonableness, that must be met in order for physicians andother health care providers to complyhelp offset COVID-19 related losses and expenses. The $75 billion allocated under the New PPP Act is in addition to the $100 billion allocated to health care providers for the same purposes in the CARES Act. The New PPP Act funds were disbursed to providers under terms and conditions that are similar to the CARES Act funds.
Waivers or Temporary Suspension of Certain Regulatory Requirements
In addition to the financial and other relief that has been provided by the federal government through the CARES Act and other legislation that has been passed by Congress, CMS and many state governments have also issued a number of waivers and temporary suspensions of health care facility licensure, certification, and reimbursement requirements in order to provide hospitals, ambulatory surgery centers, physicians, and other health care providers with increased flexibility to meet the challenges presented by the COVID-19 public health emergency. For example, CMS has temporarily waived the enforcement of certain requirements of the Medicare conditions of participation and implemented a "hospitals without walls" program that would enable hospitals to treat patients in temporary locations and enable ASCs to temporarily enroll in Medicare as hospitals. CMS has also temporarily waived many provisions of the Stark Law. We cannot predict the final formlaw, including those provisions of the rulesStark law that may be adopted, or ifprohibit our hospitals with physician ownership from expanding capacity. Many states have also suspended the proposed rules will be adoptedenforcement of certain regulatory requirements to ensure that health care providers have sufficient capacity to treat COVID-19 patients. These regulatory changes are temporary, with most slated to expire at all, nor can we predict the impact thatend of the final rules would have on our surgery centers and hospitals.declared COVID-19 public health emergency.
Revenues
Our revenues consist of patient service revenues and other service revenues. Patient service revenues consist of revenue from our surgical facility services and ancillary services segments. Specifically, patient service revenues include fees for surgical or diagnostic procedures performed at surgical facilities that we consolidate for financial reporting purposes, as well as for patient visits to our physician practices, anesthesia services, pharmacy services and diagnostic screens ordered by our physicians. Other service revenues consist of discounts and handling charges billed to the members of our optical products purchasing organization. Other service revenues also include management and administrative service fees derived from our non-consolidated facilities that we account for under the equity method, management of surgical facilities and physician practices in which we do not own an interest and management services we provide to physician practices for which we are not required to provide capital or additional assets.
The following table summarizes our revenues by service type as a percentage of total revenues for the periods indicated:
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Patient service revenues:
Surgical facilities revenues95.0 %94.1 %94.8 %94.0 %
Ancillary services revenues3.5 %4.6 %3.7 %4.7 %
98.5 %98.7 %98.5 %98.7 %
Other service revenues:
Optical services revenues0.1 %0.2 %0.2 %0.2 %
Other1.4 %1.1 %1.3 %1.1 %
1.5 %1.3 %1.5 %1.3 %
Total revenues100.0 %100.0 %100.0 %100.0 %

22
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
Patient service revenues:       
Surgical facilities revenues93.9% 93.2% 94.0% 93.2%
Ancillary services revenues4.4% 4.7% 4.6% 4.8%
 98.3% 97.9% 98.6% 98.0%
Other service revenues:       
Optical services revenues0.2% 0.6% 0.2% 0.6%
Other1.5% 1.5% 1.2% 1.4%
 1.7% 2.1% 1.4% 2.0%
Total revenues100.0% 100.0% 100.0% 100.0%
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Payor Mix
The following table sets forth by type of payor the percentage of our patient service revenues generated at the surgical facilities which we consolidate for financial reporting purposes in the periods indicated:
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Private insurance payors54.0 %52.4 %52.9 %52.4 %
Government payors38.1 %40.5 %39.4 %40.3 %
Self-pay payors3.0 %2.2 %3.0 %2.4 %
Other payors (1)
4.9 %4.9 %4.7 %4.9 %
Total100.0 %100.0 %100.0 %100.0 %
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
        
Private insurance payors53.2% 53.1% 52.7% 53.3%
Government payors39.5% 38.4% 40.0% 38.6%
Self-pay payors2.7% 2.9% 2.5% 3.1%
Other payors (1)
4.6% 5.6% 4.8% 5.0%
Total100.0% 100.0% 100.0% 100.0%
(1)Other is comprised of anesthesia service agreements, automobile liability, letters of protection and other payor types.
(1)Other is comprised of anesthesia service agreements, automobile liability, letters of protection and other payor types.
Surgical Case Mix
We primarily operate multi-specialty surgical facilities where physicians perform a variety of procedures in various specialties. We believe this diversification helps to protect us from adverse pricing and utilization trends in any individual procedure type and results in greater consistency in our case volume.


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The following table sets forth the percentage of cases in each specialty performed at the surgical facilities which we consolidate for financial reporting purposes for the periods indicated:
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Orthopedic and pain management44.0 %36.9 %40.9 %37.2 %
Ophthalmology23.1 %24.8 %24.7 %24.2 %
Gastrointestinal15.8 %21.2 %18.2 %21.2 %
General surgery3.5 %2.9 %3.3 %3.0 %
Other13.6 %14.2 %12.9 %14.4 %
Total100.0 %100.0 %100.0 %100.0 %
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
        
Gastrointestinal20.9% 22.0% 21.0% 21.6%
General surgery2.9% 2.9% 2.9% 3.0%
Ophthalmology25.5% 25.4% 24.7% 25.7%
Orthopedic and pain management36.7% 37.6% 37.1% 37.4%
Other14.0% 12.1% 14.3% 12.3%
Total100.0% 100.0% 100.0% 100.0%
Case Growth
Same-facility Information
Same-facility information includes cases and revenues from our consolidated and non-consolidated surgical facilities (excluding facilities acquired in new markets or divested during the current and prior period).

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

2019 2018 2019 2018

       
Cases138,414
 134,620
 410,473
 401,626
Case growth2.8% N/A
 2.2% N/A
Revenue per case$3,268
 $3,064
 $3,205
 $3,045
Revenue per case growth6.7% N/A
 5.3% N/A
Number of work days in the period64
 63
 191
 191
Case growth (days adjusted)1.2% N/A
 2.2% N/A
Revenue growth (days adjusted)7.9% N/A
 7.6% N/A
Number of facilities110
 110
 109
 109
Accounts Receivable
Our patient service revenues and other receivables from third-party payors are recorded net of estimated implicit price concessions which are estimated based on the historical trend of our surgical facilities’ cash collections and contractual write-offs, established fee schedules, relationships with payors and procedure statistics. While changes in estimated reimbursement from third-party payors remain a possibility, we expect that any such changes would be minimal and, therefore, would not have a material effect on our financial condition or results of operations.
Our collection policies and procedures are based on the type of payor, size of claim and estimated collection percentage for each patient account. The operating systems used to manage our patient accounts provide for an aging schedule in 30-day increments, by payor, physician and patient. We analyze accounts receivable at each of our surgical facilities to ensure the proper collection and aged category. The operating systems generate reports that assist in the collection efforts by prioritizing patient accounts. Collection efforts include direct contact with insurance carriers or patients, written correspondence and the use of legal or collection agency assistance, as required. Our days sales outstanding were 62 days for the nine months ended September 30, 2019 and 63 days for the year ended December 31, 2018.
Critical Accounting Policies
A summary of significant accounting policies is disclosed in our 20182019 Annual Report on Form 10-K under the caption “Critical Accounting Policies” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations section. There have been no material changes in the nature of our critical accounting policies or the application of those policies since December 31, 2018.

2019.


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Results of Operations
Three Months Ended SeptemberJune 30, 20192020 Compared to Three Months Ended SeptemberJune 30, 20182019
The following table summarizes certain results from the statements of operations for the three months ended SeptemberJune 30, 20192020 and 20182019 (dollars in millions):
Three Months Ended June 30,
20202019
Revenues$374.7  $445.4  
Operating expenses:
Cost of revenues319.3  340.4  
General and administrative expenses25.3  23.3  
Depreciation and amortization23.4  19.1  
Income from equity investments(2.5) (2.2) 
Loss (gain) on disposals and deconsolidations, net2.9  (8.2) 
Transaction and integration costs4.9  6.2  
Grant funds(43.1) —  
Loss on debt extinguishment—  11.7  
Other income(0.2) (0.4) 
Total operating expenses330.0  389.9  
Operating income44.7  55.5  
Interest expense, net(49.2) (46.4) 
(Loss) income before income taxes(4.5) 9.1  
Income tax (benefit) expense(0.6) 1.0  
Net (loss) income(3.9) 8.1  
Less: Net income attributable to non-controlling interests(28.6) (27.9) 
Net loss attributable to Surgery Partners, Inc.$(32.5) $(19.8) 
  Three Months Ended September 30,
  2019 2018
     
Revenues $452.0
 $432.4
Operating expenses:    
Cost of revenues 353.1
 334.3
General and administrative expenses 19.9
 19.4
Depreciation and amortization 18.4
 17.0
Income from equity investments (2.4) (1.9)
Loss on disposals and deconsolidations, net 0.6
 12.6
Transaction and integration costs 3.4
 7.1
Other income —
 (1.1)
Total operating expenses 393.0
 387.4
Operating income 59.0
 45.0
Interest expense, net (45.7) (37.2)
Income before income taxes 13.3
 7.8
Income tax expense 2.4
 5.8
Net income 10.9
 2.0
Less: Net income attributable to non-controlling interests (26.6) (23.0)
Net loss attributable to Surgery Partners, Inc. $(15.7) $(21.0)
Overview. During the three months ended SeptemberJune 30, 2019,2020, our revenues increased 4.5%decreased 15.9% to $452.0$374.7 million compared to $432.4$445.4 million for the three months ended SeptemberJune 30, 2018.2019. We incurred a net loss attributable to Surgery Partners, Inc. of $15.7$32.5 million for the 2020 period, compared to $19.8 million for the 2019 period, comparedprimarily attributable to $21.0 million for the 2018 period.decline in surgical case volume that began in mid-March due to the COVID-19 pandemic.
Revenues. Revenues for the three months ended SeptemberJune 30, 20192020 compared to the three months ended SeptemberJune 30, 20182019 were as follows (dollars in millions):
 Three Months Ended September 30,Three Months Ended June 30,
 2019 201820202019
    
Patient service revenues $444.5
 $423.1
Patient service revenues$369.1  $439.5  
Optical service revenues 0.9
 2.7
Optical service revenues0.5  1.0  
Other service revenues 6.6
 6.6
Other service revenues5.1  4.9  
Total revenues $452.0
 $432.4
Total revenues$374.7  $445.4  
Patient service revenues increased 5.1%decreased 16.0% to $444.5$369.1 million for the three months ended SeptemberJune 30, 20192020 compared to $423.1$439.5 million for the three months ended SeptemberJune 30, 2018.2019. The growthdecrease of 5.1%16.0% was primarily driven by a 38.6% decrease in same-facility case growthvolume primarily due to the impacts of 2.8% andCOVID-19 that began in mid-March, partially offset by a 32.4% increase in revenue per case. Same-facility revenue per case growth was driven by a favorable surgical case mix as lower acuity cases were some of 6.7% duethe first to targeted net revenue per case improvement initiatives. The 2018 period includes patient service revenues associated with disposed facilities that are not included indecline as the 2019 period.COVID-19 crisis developed.
Cost of Revenues. Cost of revenues were $353.1$319.3 million for the three months ended SeptemberJune 30, 20192020 compared to $334.3$340.4 million for the three months ended SeptemberJune 30, 2018.2019. The increasedecrease in costs were primarily attributable to our 2019 and 2018 acquisitions and an increase in supply costs associated with higher acuity surgical case volume.the impacts of the COVID-19 pandemic. As a percentage of revenues, cost of revenues increased to 78.1%85.2% for the 2020 period compared to 76.4% for the 2019 period compared to 77.3% for the 2018 period.
General and Administrative Expenses. General and administrative expenses were $19.9$25.3 million for the three months ended SeptemberJune 30, 20192020 compared to $19.4$23.3 million for the three months ended SeptemberJune 30, 2018.2019. As a percentage of revenues, general and administrative

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expenses decreasedincreased to 4.4%6.8% for the 2020 period compared to 5.2% for the 2019 period compared to 4.5% for the 2018 period. The decreaseincrease as a percentage of revenues is primarily the result of the decline in revenues driven by the decline in surgical case volume that began in mid-March due to reduced costs as we complete our planned investment in our corporate infrastructure and integration of corporate office functions related to acquisitions we completed in 2017.the COVID-19 pandemic.


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Depreciation and Amortization. Depreciation and amortization was $18.4$23.4 million and $17.0$19.1 million for the three months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. As a percentage of revenues, depreciation and amortization expenses was 4.1%6.2% for the 20192020 period compared to 3.9%4.3% for the 20182019 period. The increase is primarily due to increased capital investments and integration of acquisitions weand a de novo hospital completed in 2018.2019.
Loss (Gain) on Disposals and Deconsolidations, Net. The net loss on disposals and deconsolidations was $0.6$2.9 million for the 20192020 period, related to disposals of other long-lived assets. The net lossgain on disposals and deconsolidations was $12.6$8.2 million for the 20182019 period, including a net loss of $8.0$10.9 million gain on the sale of previously owned real property associated with one of our non-consolidated surgical facilities and $4.6facility equity method investments, offset by a loss of $2.7 million on disposals of other long-lived assets.
Transaction and Integration Costs. We incurred $3.4$4.9 million of transaction and integration costs for the three months ended SeptemberJune 30, 20192020 compared to $7.1$6.2 million for the three months ended SeptemberJune 30, 2018. The decrease primarily relates to reduced reorganization costs as we complete our planned investment in our infrastructure and the integration of acquisitions we completed in 2017.2019.
Interest Expense, Net. Interest expense, net, increased 22.8%, to $45.7Grant Funds. Grant funds were $43.1 million for the three months ended SeptemberJune 30, 2020. The funds were received based on relief available to eligible health care providers under the provisions of the CARES Act, which is described in further detail above in the section titled "Impact of COVID-19” and in Note 1. “Organization and Summary of Accounting Polices - COVID-19 Pandemic” to our condensed consolidated financial statements included elsewhere in this report. There were no grant funds received for the 2019 comparedperiod.
Loss on Debt Extinguishment. We incurred a debt extinguishment loss of $11.7 million in connection with issuance of the 2027 Unsecured Notes during the three months ended June 30, 2019. There was no similar loss during the three months ended June 30, 2020. The loss includes the redemption premium paid to $37.2redeem the 2021 Unsecured Notes partially offset by the write-off of the unamortized fair value premium as of the redemption date.
Interest Expense, Net. Interest expense, net, increased to $49.2 million for the three months ended SeptemberJune 30, 2018.2020 compared to $46.4 million for the three months ended June 30, 2019. The increase primarily relates to the $180.0 million senior secured incremental term loan,2020 Incremental Term Loans, which were fully drawn on April 22, 2020 as well as interest on the Revolver during the period it was fully funded on October 23, 2018 and the issuance of $430.0 million in senior unsecured notes effective April 11, 2019.drawn. As a percentage of revenues, interest expense, net was 10.1%13.1% for the 2020 period compared to 10.4% for the 2019 period compared to 8.6% for the 2018 period.
Income Tax (Benefit) Expense.  The income tax expensebenefit was $2.4 million and $5.8$0.6 million for the three months ended SeptemberJune 30, 2020 compared to expense of $1.0 million for the 2019 and 2018, respectively.period. The effective tax rate was 18.0%13.3% for the three months ended SeptemberJune 30, 20192020 compared to 74.3%11.0% for the three months ended SeptemberJune 30, 2018. The higher effective tax rate for the 2018 period was primarily due to additional tax expense recorded as discrete items related to (a) gain on various divestitures and (b) revaluing certain deferred tax assets and liabilities as a result of enacted legislation changes that reduced corporate income tax rates. As a result of the Tax Cuts and Jobs Act of 2017 (the "Tax Act"), effective January 1, 2018, the Company’s effective tax rate for both 2019 and 2018 is impacted by limitations on the amount of interest expense the Company can ultimately realize. The interest expense limitation results in a deferred tax asset for which the Company maintains a valuation allowance to report the related deferred tax asset at its net realizable value.2019. 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.
Net Income Attributable to Non-Controlling Interests. Net income attributable to non-controlling interests was $26.6$28.6 million for the three months ended SeptemberJune 30, 20192020 compared to $23.0$27.9 million for the three months ended SeptemberJune 30, 2018.2019. As a percentage of revenues, net income attributable to non-controlling interests was 5.9%7.6% in the 20192020 period and 5.3%6.3% for the 20182019 period.



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NineSix Months Ended SeptemberJune 30, 20192020 Compared to NineSix Months Ended SeptemberJune 30, 20182019
The following table summarizes certain results from the statements of operations for the ninesix months ended SeptemberJune 30, 20192020 and 20182019 (dollars in millions):
Six Months Ended June 30,
20202019
Revenues$815.7  $862.2  
Operating expenses:
Cost of revenues685.5  666.5  
General and administrative expenses48.1  45.0  
Depreciation and amortization45.2  37.9  
Income from equity investments(4.5) (4.2) 
Loss (gain) on disposals and deconsolidations, net6.4  (7.6) 
Transaction and integration costs10.4  8.2  
Grant funds(43.1) —  
Litigation settlement1.2  —  
Loss on debt extinguishment—  11.7  
Other income(1.7) (0.4) 
Total operating expenses747.5  757.1  
Operating income68.2  105.1  
Tax receivable agreement expense—  (2.4) 
Interest expense, net(96.3) (88.4) 
(Loss) income before income taxes(28.1) 14.3  
Income tax (benefit) expense(15.8) 2.7  
Net (loss) income(12.3) 11.6  
Less: Net income attributable to non-controlling interests(47.7) (51.5) 
Net loss attributable to Surgery Partners, Inc.$(60.0) $(39.9) 
  Nine Months Ended September 30,
  2019 2018
     
Revenues $1,314.2
 $1,280.3
Operating expenses:    
Cost of revenues 1,019.6
 1,001.7
General and administrative expenses 64.9
 69.7
Depreciation and amortization 56.3
 49.4
Income from equity investments (6.6) (6.3)
(Gain) loss on disposals and deconsolidations, net (7.0) 15.9
Transaction and integration costs 11.6
 23.8
Loss on debt extinguishment 11.7
 —
Other income (0.4) (3.6)
Total operating expenses 1,150.1
 1,150.6
Operating income 164.1
 129.7
Tax receivable agreement expense (2.4) —
Interest expense, net (134.1) (107.3)
Income before income taxes 27.6
 22.4
Income tax expense 5.1
 10.9
Net income 22.5
 11.5
Less: Net income attributable to non-controlling interests (78.1) (69.5)
Net loss attributable to Surgery Partners, Inc. $(55.6) $(58.0)
Overview. During the ninesix months ended SeptemberJune 30, 2019,2020, our revenues increased 2.6%decreased 5.4% to $1,314.2$815.7 million compared to $1,280.3$862.2 million for the ninesix months ended SeptemberJune 30, 2018.2019. We incurred a net loss attributable to Surgery Partners, Inc. of $55.6$60.0 million for the 2020 period, compared to $39.9 million for the 2019 period, comparedprimarily attributable to $58.0 million for the 2018 period.decline in surgical case volume that began in mid-March due to the COVID-19 pandemic.
Revenues. Revenues for the ninesix months ended SeptemberJune 30, 20192020 compared to the ninesix months ended SeptemberJune 30, 20182019 were as follows (dollars in millions):
 Nine Months Ended September 30,Six Months Ended June 30,
 2019 201820202019
    
Patient service revenues $1,294.8
 $1,253.1
Patient service revenues$803.7  $850.3  
Optical service revenues 3.0
 8.5
Optical service revenues1.3  2.1  
Other service revenues 16.4
 18.7
Other service revenues10.7  9.8  
Total revenues $1,314.2
 $1,280.3
Total revenues$815.7  $862.2  
Patient service revenues increased 3.3%decreased 5.5% to $1,294.8$803.7 million for the ninesix months ended SeptemberJune 30, 20192020 compared to $1,253.1$850.3 million for the ninesix months ended SeptemberJune 30, 2018.2019. The three months ended September 30, 2019 represented the fifth consecutive quarterdecrease of 5.5% was driven by a 23.7% decrease in same-facility case volume growth, which has resultedprimarily due to the impacts of COVID-19 that began in 2.2% same-facility case growth for the nine months ended September 30, 2019. Additionally, our targeted netmid-March, partially offset by a 32.4% increase in revenue improvement initiatives have resulted in 5.3% same-facilityper case. Same-facility revenue per case growth forwas driven by a favorable surgical case mix as lower acuity cases were some of the same nine month period. The 2018 period includes patient service revenues associated with disposed facilities that are not included infirst to decline as the 2019 period.COVID-19 crisis developed.
Cost of Revenues. Cost of revenues were $1,019.6$685.5 million for the ninesix months ended SeptemberJune 30, 20192020 compared to $1,001.7$666.5 million for the ninesix months ended SeptemberJune 30, 2018.2019. The increase in costs were primarily attributable to our 20192020 and 20182019 acquisitions and an increase in supply costs associated with higher acuity surgical case volume.volumes. As a percentage of revenues, cost of revenues were 77.6%increased to 84.0% for the 2020 period compared to 77.3% for the 2019 period and 78.2% for the 2018 period.

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General and Administrative Expenses. General and administrative expenses were $64.9$48.1 million for the ninesix months ended SeptemberJune 30, 20192020 compared to $69.7$45.0 million for the ninesix months ended SeptemberJune 30, 2018. The decrease is primarily due to reduced costs as we complete our planned investment in our corporate infrastructure and integration of corporate office functions related to acquisitions we


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completed in 2017.2019. As a percentage of revenues, general and administrative expenses decreasedwas 5.9% for the 2020 period compared to 4.9%5.2% for the 2019 period compared to 5.4% for the 2018 period.
Depreciation and Amortization. Depreciation and amortization was $56.3$45.2 million and $49.4$37.9 million for the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. As a percentage of revenues, depreciation and amortization expenses was 4.3%5.5% for the 20192020 period compared to 3.9%4.4% for the 20182019 period. The increase is primarily due to increased capital investments and integration of acquisitions weand a de novo hospital completed in 2018.2019.
Loss (Gain) Loss on Disposals and Deconsolidations, Net. The net loss on disposals and deconsolidations was $6.4 million for the 2020 period, including a net loss of $3.1 million on the sale of interests in surgical facilities and $3.3 million related to disposals of other long-lived assets. The net gain on disposals and deconsolidations was $7.0$7.6 million for the 2019 period, including a $10.9 million gain on the sale of previously owned real property associated with one of our non-consolidated surgical facility equity method investments, offset by a loss of $3.9 million onrelated to disposals of other long-lived assets. The net loss on disposals and deconsolidations was $15.9 million for the 2018 period, including a net loss of $9.5 million on the sale of surgical and other facilities and $7.5 million on disposals of other long-lived assets, offset by a net gain of $1.1 million on the deconsolidation of a surgical facility.
Transaction and Integration Costs. We incurred $11.6$10.4 million of transaction and integration costs for the ninesix months ended SeptemberJune 30, 20192020 compared to $23.8$8.2 million for the ninesix months ended SeptemberJune 30, 2018.2019. The decreaseincrease primarily relates to reduced reorganization costs as we complete our planned investmentfor ongoing development initiatives, divestitures completed in our infrastructure2020 and the integration of acquisitions we completed in 2017.2020 and 2019.
Grant Funds. Grant funds were $43.1 million for the six months ended June 30, 2020. The funds were received based on relief available to eligible health care providers under the provisions of the CARES Act, which is described in further detail above in the section titled "Impact of COVID-19” and in Note 1. “Organization and Summary of Accounting Polices - COVID-19 Pandemic” to our condensed consolidated financial statements included elsewhere in this report. There were no grant funds received for the 2019 period.
Litigation settlement. Litigation settlement costs were $1.2 million for the six months ended June 30, 2020, related to the resolution of the government investigation, as discussed in Note 9. "Commitments and Contingencies" to our condensed consolidated financial statements included elsewhere in this report. There were no litigation costs for the 2019 period.
Loss on Debt Extinguishment. During the nine months ended September 30, 2019, we We incurred a debt extinguishment loss of $11.7 million in connection with issuance of the 2027 Unsecured Notes.Notes during the six months ended June 30, 2019. There was no debt extinguishment loss during the three months ended June 30, 2020. The loss includes the redemption premium paid to redeem the 2021 Unsecured Notes partially offset by the write-off of the unamortized fair value premium as of the redemption date.
Interest Expense, Net. Interest expense, net, increased 25.0%, to $134.1$96.3 million for the ninesix months ended SeptemberJune 30, 20192020, compared to $107.3$88.4 million for the ninesix months ended SeptemberJune 30, 2018.2019. The increase primarily relates to the $180.0 million senior secured incremental term loan, which was fully funded on October 23, 2018 and the issuance of $430.0 million in senior unsecured notes effective April 11, 2019. As a percentage of revenues, interest expense, net increasedwas 11.8% for the 2020 period compared to 10.2%10.3% for the 2019 period compared to 8.4% for the 2018 period.
Income Tax (Benefit) Expense.  The income tax benefit was $15.8 million and expense was $5.1 million and $10.9$2.7 million for the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. The effective tax rate was 18.5%56.2% for the ninesix months ended SeptemberJune 30, 20192020 compared to 48.6%18.9% for the ninesix months ended SeptemberJune 30, 2018.2019. The higher effective tax rate for the 20182020 period was primarily due to additionaldiscrete tax expense recorded as discrete items relatedbenefits of approximately $11.9 million attributable to (a) gainthe release of federal and state valuation allowances on various divestitures and (b) revaluing certain deferred tax assets and liabilitiesthe Company’s IRC Section 163(j) interest carryforwards as a result of enacted legislation changesthe increase in deductible interest expense allowed under the CARES Act; and (b) the Settlement Agreement, as discussed in Note 9. "Commitments and Contingencies" to our condensed consolidated financial statements included elsewhere in this report, which provided that reduced corporatea portion of the final settlement amount was "restitution" for income tax rates. As a result of the Tax Act, effective January 1, 2018, the Company’s effective tax rate for both 2019 and 2018 is impacted by limitations on the amount of interest expense the Company can ultimately realize. The interest expense limitation results in a deferred tax asset for which the Company maintains a valuation allowance to report the related deferred tax asset at its net realizable value.purposes. 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.
Net Income Attributable to Non-Controlling Interests. Net income attributable to non-controlling interests was $78.1$47.7 million for the ninesix months ended SeptemberJune 30, 20192020 compared to $69.5$51.5 million for the ninesix months ended SeptemberJune 30, 2018.2019. As a percentage of revenues, net income attributable to non-controlling interests was 5.9%5.8% in the 20192020 period and 5.4%6.0% for the 20182019 period.
Liquidity and Capital Resources
Operating Activities
The primary source of our operating cash flow is the collection of accounts receivable from federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercialprivate insurance companies and individuals. During the ninesix months ended SeptemberJune 30, 2019,2020, our cash flow provided by operating activities was $104.1$211.1 million compared to $99.1$47.2 million in the ninesix months ended SeptemberJune 30, 20182019 primarily dueattributable to stimulus funds received under the timingCARES Act as well as actions taken to significantly reduce cash operating expenses and defer non-essential expenditures at the height of certain payroll and trade payable payments.the crisis.
Investing Activities
Net cash used in investing activities during the ninesix months ended SeptemberJune 30, 20192020, was $61.8$22.5 million, which included $50.2$19.9 million related to purchases of property and equipment. We paid $12.4 million in cash for acquisitions (net of cash acquired), which included a surgical facility in a new market and three surgical facilities in existing markets that were merged into existing facilities. Additionally, we received cash proceeds of $9.4 million related to the sale of our interests in two surgery centers, one of which was previously accounted for as an additional $13.8equity method investment.

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Net cash used in investing activities during the six months ended June 30, 2019 was $42.9 million, which included $31.8 million related to purchases of property and equipment. We paid $13.2 million in cash for acquisitions (net of cash acquired), which primarily included a surgical facility a clinic that was merged into an existing facility and a physician practice. Further, we paid $15.2 million in cash for a non-controlling interest in four surgical facilities accounted for as equity method investments and we received cash proceeds of $17.6 million related to the sale of previously owned real property associated with one of our non-consolidated equity method investments.
Net cash used in investing activities during the nine months ended September 30, 2018 was $66.6 million, which included $26.6 million related to purchases of property and equipment. We paid approximately $55.2 million (net of cash acquired) related to acquisitions, which primarily included four surgical facilities, one of which was merged into an existing facility and multiple physician practices. Further, we sold our controlling interests in four surgical facilities, retaining a non-controlling interest in one, and our optical laboratory for cash proceeds of $18.0 million.


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investments
Financing Activities
Net cash used inprovided by financing activities during the ninesix months ended SeptemberJune 30, 20192020 was $115.3$45.0 million. During this period, we made distributions to non-controlling interest holders of $89.5$51.7 million and payments related to ownership transactions with consolidated affiliates of $4.6$1.9 million. Additionally, we made repayments on our long-term debt of $182.8 million, which was offset by borrowings of $288.2 million.
Net cash used in financing activities during the six months ended June 30, 2019 was $71.2 million. During this period, we made distributions to non-controlling interest holders of $60.9 million and received cash related to ownership transactions with consolidated affiliates of $1.2 million. Further, we made repayments on our long-term debt of $436.1$422.8 million, which was offset by borrowings of $442.5$438.9 million. In connection with the issuance of the 2027 Unsecured Notes and redemption of the existing 2021 Unsecured Notes, we paid debt issuance costs of $8.8 million and paid a redemption premium of $17.8 million.
Net cash used in financing activities during the nine months ended September 30, 2018 was $128.3 million. During this period, we made distributions to non-controlling interest holders of $80.1 million and payments related to ownership transactions with consolidated affiliates of $0.5 million. Further, we made repayments on our long-term debt of $94.9 million offset by borrowings of $62.8 million. In addition, we made preferred dividend payments of $7.8 million and repurchased $2.0 million of our common stock pursuant to our $50 million repurchase program announced on December 15, 2017.
Debt
As of SeptemberJune 30, 2019,2020, the carrying value of our total indebtedness was $2.454$2.686 billion, which includes unamortized fair value discount of $5.2$4.1 million and unamortized deferred financing costs of $10.8$16.6 million.
Term Loan and Revolving Credit Facility
WeAs of June 30, 2020, we had term loan borrowings with a carrying value of $1.437$1.547 billion, consisting of outstanding aggregate principal of $1.442$1.551 billion and unamortized fair value discount of $5.2$4.1 million (the "Term Loan") as of September 30, 2019.. The Term Loan matures on August 31, 2024. The Term Loan amortizes in equal quarterly installments of 0.25% of the aggregate original principal amount of the Term Loan.
We have a revolving credit facilityRevolver providing for revolving borrowings of up to $120.0 million (the "Revolver" and, together with the Term Loan, the "2017 Senior Secured Credit Facilities").million. The Revolver will mature on August 31, 2022. As of SeptemberJune 30, 2019,2020, our availability on the Revolver was $115.2$113.2 million (including outstanding letters of credit of $4.8$6.8 million).
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, we may request one or more additional incremental term loan facilities or one or more increases in the commitments on the Revolver.
The 2017 SeniorRevolver and the Term Loan, together the "Senior Secured Credit FacilitiesFacilities" bear interest at a rate per annum equal to (x) LIBOR plus a margin ranging from 3.00% to 3.25% per annum, depending on our first lien net leverage ratio 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 (solely with respect to the Term Loan, the alternate base rate shall not be less than 2.00% per annum)) plus a margin ranging from 2.00% to 2.25% per annum. In addition, we are required to pay a commitment fee of 0.50% per annum in respect of unused commitments on the Revolver.
On April 22, 2020, we entered into a second incremental term loan amendment, which amended and supplemented the existing credit agreement, to provide for an incremental borrowing of $120.0 million. The incremental amounts were fully drawn on April 22, 2020, and are included in the term loan borrowings discussed above.
On April 16, 2020, we entered into a third amendment to our credit agreement, which amended and supplemented financial covenants applicable to the Revolver under the credit agreement. Pursuant to the third amendment, the Company's requirement to comply with a maximum consolidated total net leverage ratio will be waived for the remainder of 2020. Additionally, for the first three quarters of 2021, the third amendment provides for an alternative calculation for the maximum consolidated total net leverage ratio where the trailing four quarter basis may be negatively impacted by the impacts of COVID-19. The third amendment became effective concurrently with the funding of the incremental term loans on April 22, 2020, discussed above.
Senior Unsecured Notes
On April 11, 2019, we completed the issuance and sale ofWe have $430.0 million in gross proceedsaggregate principal amount of senior unsecured notes due April 15, 2027 (the "2027 Unsecured Notes.Notes"). The 2027 Unsecured Notes bear interest at the rate of 10.000% per year, payable semi-annually on April 15 and October 15 of each year, beginning on October 15, 2019. In connection with issuanceyear.
On July 30, 2020, we issued an additional $115.0 million aggregate principal amount of 10.000% senior unsecured notes due 2027 at 100.75% of the principal amount. The notes were issued as part of the same series as the 2027 Unsecured Notes we redeemedoriginally issued in whole the then existing 2021 Unsecured Notes. The redemption price was equalApril 2019. See Note 11. "Subsequent Events" to 104.438% of the outstanding principal amount plus accrued and unpaid interest. Refer to Note 3. "Long-Term Debt" to the Condensed Consolidated Financial Statementsour condensed consolidated financial statements included elsewhere in this report for a further discussion.discussion of the senior unsecured notes.
We have $370.0 million aggregate principal amount of senior unsecured notes due July 1, 2025 outstanding (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.

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Other Debt
We and certain of our subsidiaries have other debt consisting of outstanding bank indebtedness of $74.4$111.6 million, 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 of $153.5$244.1 million for which we are liable to various vendors for several property and equipment leases classified as finance leases.
Capital Resources
In addition to cash flows from operations, available cash and capacity on our Revolver, other sources of capital include funds we have received under the CARES Act as well as continued access to the capital markets.
As previously noted in Note 1. "Organization and Summary of Accounting Policies" to our condensed consolidated financial statements included elsewhere in this report, as of June 30, 2020, we received relief via the CARES Act, including approximately $48 million in direct grant payments and approximately $120 million of accelerated payments pursuant to the Medicare Accelerated and Advance Payment Program. The direct grant payments are not required to be repaid, subject to certain terms and conditions, while payments received under the Medicare Accelerated and Advance Payment Program are required to be repaid. Additionally, the CARES Act permits the deferral of payment of the social security payroll tax match for the remainder of 2020, with half of the deferred amount due December 2021 and the other half due December 2022. As of June 30, 2020, the Company has deferred approximately $4.3 million, included as a component of accrued payroll and benefits in the condensed consolidated balance sheets as of June 30, 2020. We believe that deferral of the social security payroll tax match, which we began doing in April 2020, along with the funds received under the CARES Act as noted above, have positively impacted our cash flows from operations during 2020.
Summary
The COVID-19 pandemic has resulted in, and may continue to result in, significant disruptions of financial and capital markets, which could reduce our ability to access capital and negatively affect our liquidity in the future. Additionally, while we have received grants and accelerated payments under the CARES Act and other government assistance programs and may receive additional amounts in the future, there is no assurance regarding the extent to which anticipated negative impacts arising from the COVID-19 pandemic will be offset by amounts and benefits received under the CARES Act or future legislation.
Although we have seen continued improvement in surgical case volumes as states begin to re-open and allow for non-emergent procedures, broad economic factors resulting from the current COVID-19 pandemic, including increasing unemployment rates and reduced consumer spending, could negatively affect our payor mix, increase the relative proportion of lower margin services we provide and reduce patient volumes, as well as diminish our ability to collect outstanding receivables. Business closings and layoffs in the areas in which we operate may lead to increases in the uninsured and underinsured populations and adversely affect demand for our services, as well as the ability of payors to pay for services as rendered. Any increase in the amount or deterioration in the collectability of patient accounts receivable will adversely affect our cash flows and results of operations, requiring an increased level of working capital. If general economic conditions continue to deteriorate or remain uncertain for an extended period of time, our liquidity and ability to repay our outstanding debt may be harmed.
Based on our current level of operations, we believe cash flow from operations, and available cash, available capacity on our Revolver, the incremental term loan borrowings and recent issuance of new notes discussed above, funds we have received under the CARES Act, funds we may receive in the future and continued access to capital markets, together with available borrowings on the Revolver,cost cutting steps taken in response to the impact of COVID-19, as discussed in Item 1A. "Risk Factors" elsewhere in this report, will be adequate to meet our short-term (i.e., 12 months) liquidity needs.
Certain Non-GAAP Metrics
Adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered in isolation or as a substitute for net income, operating income or any other measure calculated in accordance with GAAP. The items excluded from this non-GAAP metric are significant components in understanding and evaluating our financial performance. We believe such adjustments are appropriate, as the magnitude and frequency of such items can vary significantly and are not related to the assessment of normal operating performance. Our calculation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.


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When we use the term "Adjusted EBITDA," we are referring to income before income taxes, adjusted for net income attributable to non-controlling interests, depreciation and amortization, interest expense, net, equity-based compensation expense, contingent acquisition compensation expense, transaction, integration and acquisition costs, certain litigation costs, reserve adjustments, net loss (gain) on disposals and deconsolidations, litigation settlement and other litigation costs, gain on escrow release, loss on debt extinguishment and tax receivable agreement expense. We use Adjusted EBITDA as a measure of financial performance. Adjusted EBITDA is a key measure used by our management to assess operating performance, make business decisions and allocate resources.

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The following table reconciles Adjusted EBITDA to (loss) income before income taxes, the most directly comparable GAAP financial measure (in millions and unaudited):
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Condensed Consolidated Statements of Operations Data:
(Loss) income before income taxes$(4.5) $9.1  $(28.1) $14.3  
Plus (minus):
Net income attributable to non-controlling interests(28.6) (27.9) (47.7) (51.5) 
Depreciation and amortization23.4  19.1  45.2  37.9  
Interest expense, net49.2  46.4  96.3  88.4  
Equity-based compensation expense3.4  3.0  6.9  4.9  
Transaction, integration and acquisition costs (1)
10.1  8.0  22.7  11.5  
Loss (gain) on disposals and deconsolidations, net2.9  (8.2) 6.4  (7.6) 
Litigation settlement and other litigation costs (2)
2.3  —  3.8  —  
Gain on escrow release (3)
—  —  (0.8) —  
Loss on debt extinguishment—  11.7  —  11.7  
Tax receivable agreement expense—  —  —  2.4  
Adjusted EBITDA$58.2  $61.2  $104.7  $112.0  
  Three Months Ended September 30, Nine Months Ended September 30,
  2019 2018 2019 2018
Condensed Consolidated Statements of Operations Data:        
Income before income taxes $13.3
 $7.8
 $27.6
 $22.4
Plus (minus):        
Net income attributable to non-controlling interests (26.6) (23.0) (78.1) (69.5)
Depreciation and amortization 18.4
 17.0
 56.3
 49.4
Interest expense, net 45.7
 37.2
 134.1
 107.3
Equity-based compensation expense 2.7
 1.5
 7.6
 6.3
Transaction, integration and acquisition costs (1)
 5.3
 7.5
 16.8
 25.4
Loss (gain) on disposals and deconsolidations, net 0.6
 12.6
 (7.0) 15.9
Litigation costs 2.8
 —
 2.8
 —
Loss on debt extinguishment —
 —
 11.7
 —
Tax receivable agreement expense —
 —
 2.4
 —
Contingent acquisition compensation expense —
 0.5
 —
 1.5
Reserve adjustments (2)
 —
 (2.1) —
 2.7
Adjusted EBITDA $62.2
 $59.0
 $174.2
 $161.4
(1)For the three months ended June 30, 2020 and 2019, this amount includes transaction and integration costs of $4.9 million and $6.2 million, respectively, and acquisition and start-up costs related to a de novo surgical hospital of $5.2 million and $1.8 million, respectively. For the six months ended June 30, 2020 and 2019, this amount includes transaction and integration costs of $10.4 million and $8.2 million, respectively, and acquisition and start-up costs related to a de novo surgical hospital of $12.3 million and $3.3 million, respectively.
(1)For the three months ended September 30, 2019 and 2018, this amount includes transaction and integration costs of $3.4 million and $7.1 million, respectively, and acquisition costs of $0.5 million and $0.4 million, respectively. This amount further includes start-up costs related to a de novo surgical hospital of $1.4 million for the three months ended September 30, 2019, with no comparable costs in the 2018 period. For the nine months ended September 30, 2019 and 2018, this amount includes transaction and integration costs of $11.6 million and $23.8 million, respectively, and acquisition costs of $2.0 million and $1.6 million, respectively. This amount further includes start-up costs related to a de novo surgical hospital of $3.2 million for the nine months ended September 30, 2019, with no comparable costs in the 2018 period.
(2)This amount represents adjustments to revenue in order to apply consistent policies to businesses acquired by Surgery Partners in prior periods.
(2)For the three months ended June 30, 2020, this amount includes other litigation costs of $2.3 million, with no comparable costs in the same 2019 period. For the six months ended June 30, 2020, this amount includes litigation settlements of $1.2 million and other litigation costs of $2.6 million, with no comparable costs in the same 2019 period.
(3)Included in other income in the condensed consolidated statement of operations for the six months ended June 30, 2020, with no comparable gain in the same 2019 period.
We use Credit Agreement EBITDA as a measure of liquidity and to determine our compliance under certain covenants pursuant to our credit facilities. Credit Agreement EBITDA is determined on a trailing twelve-month basis. We have included it because we believe that it provides investors with additional information about our ability to incur and service debt and make capital expenditures. Credit Agreement EBITDA is not a measurement of liquidity under GAAP and should not be considered in isolation or as a substitute for any other measure calculated in accordance with GAAP. The items excluded from Credit Agreement EBITDA are significant components in understanding and evaluating our liquidity. Our calculation of Credit Agreement EBITDA may not be comparable to similarly titled measures reported by other companies.
When we use the term “Credit Agreement EBITDA,” we are referring to Adjusted EBITDA, as defined above, further adjusted for other items related to our historical financial performance during the trailing twelve month period, including loss on litigation settlement. Also included areacquisitions and synergies. These adjustments for acquisitions, which do not relate to our historical financial performance and instead relate to estimates compiled by our management and calculated in conformance with the definition of “Consolidated EBITDA” used in the credit agreements governing our credit facilities.



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The following table reconciles Credit Agreement EBITDA to cash flows from operating activities, the most directly comparable GAAP financial measure (in millions and unaudited):
  Twelve Months Ended September 30, 2019
   
Cash flows from operating activities $149.6
Plus (minus):  
Non-cash interest income, net (0.2)
Non-cash lease expense (28.8)
Deferred income taxes (19.9)
Income from equity investments, net of distributions received (0.9)
Changes in operating assets and liabilities, net of acquisitions and divestitures (4.5)
Income tax expense 20.7
Net income attributable to non-controlling interests (118.7)
Interest expense, net 173.8
Transaction, integration and acquisition costs 25.3
Litigation costs 2.8
Loss on litigation settlement 46.0
Tax receivable agreement expense 2.4
Acquisitions (1)
 43.0
Credit Agreement EBITDA $290.6
(1)This includes revenueTwelve Months Ended June 30, 2020
Cash flows from operating activities$293.4 
Plus (minus):
Non-cash interest income, net(4.6)
Non-cash lease expense(40.5)
Deferred income taxes9.9 
Changes in operating assets and liabilities, net of acquisitions and divestitures(123.5)
Income tax expense(9.0)
Net income attributable to non-controlling interests(116.1)
Interest expense, net186.8 
Transaction, integration and acquisition costs47.3 
Litigation settlement and other litigation costs8.4 
Gain on escrow release(0.8)
Acquisitions and synergies from other business initiatives and an adjustment for the effects of adopting the new lease accounting standard, as defined in the credit agreement.(1)
72.5 
Credit Agreement EBITDA$323.8 
(1)Represents impact of acquisitions as if each acquisition had occurred on July 1, 2019. Further this includes revenue synergies from other business initiatives, de novo facilities and an adjustment for the effects of adopting the new lease accounting standard, as defined in the credit agreement governing the Senior Secured Credit Facilities.
Recent Accounting Pronouncements
Please refer to Note 1. "Organization and Summary of Accounting Policies" to our condensed consolidated financial statements included elsewhere in this report for a discussion of the impact of the adoption of recently issued accounting standards.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risk primarily from exposure to changes in interest rates based on our financing, investing and cash management activities. We utilize a balanced mix of maturities along with both fixed rate and variable rate debt to manage our exposures to changes in interest rates. Additionally, we periodically enter into interest rate swap agreements to manage our exposure to interest rate fluctuations. Our interest rate swap agreements involve the exchange of fixed and variable rate interest payments between two parties, based on common notional principal amounts and maturity dates. The notional amounts of the swap agreements represent balances used to calculate the exchange of cash flows and are not our assets or liabilities. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions. The interest payments under these agreements are settled on a net basis. These derivatives have been recognized in the financial statements at their respective fair values. Changes in the fair value of these derivatives, which are designated as cash flow hedges, are included in other comprehensive income.
Our variable rate debt instruments are primarily indexed to the prime rate or LIBOR. Interest rate changes would result in gains or losses in the market value of our fixed rate debt portfolio due to differences in market interest rates and the rates at the inception of the debt agreements. Based on our indebtedness and the effect of our interest rate swap agreements at SeptemberJune 30, 2019,2020, a 100 basis point interest rate change would impact our net earnings and cash flow by approximately $2.5$3.5 million annually. Although there can be no assurances that interest rates will not change significantly, we do not expect changes in interest rates to have a material effect on our net earnings or cash flows in 20192020 based on our indebtedness at SeptemberJune 30, 2019.2020.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
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 Securities and Exchange Act of 1934, as amended) as of SeptemberJune 30, 2019.2020. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective.



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Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended SeptemberJune 30, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Stockholder Litigation.Litigation. On December 4, 2017, a purported Company stockholder filed an action in the Delaware Court of Chancery (the “Delaware Action”"Delaware Action"). That action is captioned Klein 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”"Directors"); (ii) H.I.G. Capital, LLC and certain of its affiliates (collectively, “H.I.G.”"H.I.G."); and (iii) Bain Capital Private Equity, L.P. and certain of its affiliates (collectively, “Bain Capital”"Bain Capital" and, together with the Directors and H.I.G., the “Defendants”"Defendants"). The plaintiff asserted derivative claims on behalf of the Company, which is a nominal defendant in the Delaware Action, as well as putatively direct claims on behalf of a purported class of Company stockholders. The plaintiff in the Delaware Action asserted that the Defendants breached their fiduciary duties in connection with the transactions in which (i) the Company acquired National Surgical Healthcare; (ii) Bain Capital acquired preferred equity in the Company; and (iii) Bain Capital acquired H.I.G.’s's equity stake in the Company, and that, in the alternative, Bain Capital aided and abetted those purported breaches. The plaintiff also asserted an unjust enrichment claim against Bain Capital.
On January 2, 2018, the Defendants moved to dismiss the plaintiff’s complaint. On December 19, 2018, the Court of Chancery issued a decision on that motion. Following that decision, all of the Directors have been dismissed from the Delaware Action. The Court did not dismiss the plaintiff’s breach of fiduciary duty claim against H.I.G. or the aiding and abetting claim asserted against Bain Capital. However, the Court dismissed the plaintiff’s breach of fiduciary duty and unjust enrichment claims against Bain Capital. In addition, the Court dismissed all of the plaintiff’s claims that were asserted on behalf of a putative class of Company stockholders. Accordingly, all of the plaintiff’s remaining claims in the Delaware Action are asserted derivatively on the Company’s behalf. The plaintiff has continued to pursue those derivative claims, and the parties to the Delaware Action are engaged in discovery.
Government Investigation. On October 23, 2017, the Company received several civil investigative demands (“CIDs”)CIDs from the federal government under the False Claims Act (“FCA”)FCA for documents and information dating back to January 1, 2010 relating to the medical necessity of certain drug tests conducted by the Company’s physicians and submitted to laboratories owned and operated by the Company. In addition, the Company has beenwas informed by the CMS that payments to its diagnostic laboratory, Logan Laboratories, have beenLabs were suspended for a period of time, pending further investigation by CMS.
The Company has been providing information CMS lifted the suspension as of December 18, 2019. On January 23, 2020, the United States District Court for the Middle District of Florida unsealed the Complaint in the case of Cho et al. ex rel. United States v. Surgery Partners et al., which was related to the government in responseinvestigation that gave rise to the CIDsCIDs.
On April 14, 2020, Logan Labs and currently has a non-binding agreement in principleTampa Pain entered into the Settlement Agreement with the DOJUnited States of America. See Note 9. "Commitments and Contingencies" to our condensed consolidated financial statements included elsewhere in this report for further discussion on the financial terms of a settlement with the goal of resolving these matters. Based on those discussions, which are still ongoing, we recorded a litigation-related charge of $46.0 million relating to these matters on the consolidated statements of operations for the year ended December 31, 2018. We believe that this reserve is sufficient to cover a potential resolution with the government relating to these matters, including legal expenses relating to the settlement that have not previously been recorded in our operating expenses. The ultimate timing, amount and/or final terms of any such resolution may differ materially from those anticipated or we may not be able to reach a resolution at all. It is reasonably possible that we will incur additional losses above the amount reserved, but we are not able to estimate such amounts at this time. See Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 under the heading “Risk Factors - Risks Related to Government Regulation - Companies within the healthcare industry, including us, continue to be the subject of federal and state audits and investigations, including actions for false and other improper claims.” Settlement Agreement.
Other Litigation. In addition, we are, from time to time, subject to claims and suits, or threats of claims or suits, relating to our business, including claims for damages for personal injuries, breach of management contracts and employment related claims. In certain of these actions, plaintiffs request payment for damages, including punitive damages, which may not be covered by insurance or may otherwise have a material adverse effect on our business or results of operations.
See Note 9. "Commitments and Contingencies" for additional information regarding pending legal proceedings, which information is incorporated herein by reference.
Item 1A. Risk Factors
There have been no material changes with respect to the risk factors discussed in theour 2019 Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, except for the following:
The COVID-19 global pandemic continues to significantly affect our operations, business and financial condition, and our liquidity could continue to be negatively impacted further if the United States economy remains unstable for a significant amount of time or it takes an extended period for patient volumes at our facilities to recover to pre-COVID-19 pandemic levels.
The COVID-19 pandemic is significantly affecting our facilities, employees, patients, communities, business operations and financial performance, as well as the United States economy and financial markets. On March 18, 2020, we reported that we had withdrawn our previously announced full-year 2020 outlook and on April 15, 2020, we filed a Current Report on Form 8-K providing additional disclosure about the impact of the pandemic on our operations. The COVID-19 crisis is still rapidly evolving and much of its impact remains unknown and difficult to predict; however, it has adversely affected our business operations in recent months, has materially impacted our financial performance for the second quarter of 2020, and potentially could negatively impact our financial performance for the year endedending December 31, 2018.2020 or longer.

We are taking or supporting measures to try to slow the spread and minimize the impact of the virus. Many of these measures are adversely impacting our business and likely will have an adverse impact on our financial results that we are not currently able to quantify. For example, due in part to local, state and federal guidelines as well as recommendations from major medical societies regarding social distancing and self-quarantines in response to the COVID-19 pandemic, we cancelled or postponed a substantial percentage of the elective procedures scheduled at our facilities and reduced operating hours at a significant number of our facilities. As a result, our facilities experienced significantly lower surgical case volume, which was more significant at the beginning of the second quarter and has improved gradually as states re-open and allow for non-emergent procedures. The impact on our surgical facilities varies based on the market in


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which the facility operates, the type of surgical facility and the procedures that are typically performed. It is difficult to predict the duration of this lower surgical case volume and, while governmental restrictions are beginning to ease in certain areas of the United States, other areas are experiencing a surge in COVID-19 cases and are imposing or considering the imposition of additional restrictions in response. We cannot predict the timing of the potential recapture of cancelled or postponed procedures, if any.
Even after taking into account actions that we are taking intended to increase financial flexibility, the volume reductions we are experiencing have resulted in materially higher losses and material decreases in Adjusted EBITDA during the second quarter of 2020 and may potentially continue to do so for subsequent quarters. We cannot predict if or when utilization may return to pre-pandemic levels. Additionally, some of our actions to increase liquidity could result in increased expenses, reduced employee morale, labor unrest and work stoppages or other workforce disruptions.
We are experiencing, and could continue to experience, supply chain disruptions, including shortages, delays, and could experience significant price increases, in equipment, pharmaceuticals and medical supplies, particularly personal protective equipment or PPE. Staffing, equipment, and pharmaceutical and medical supplies shortages may also impact our ability to serve patients at our facilities.
Broad economic factors resulting from the current COVID-19 pandemic, including increasing unemployment rates and reduced consumer spending, could also negatively affect our payor mix, increase the relative proportion of lower margin services we provide and reduce patient volumes, as well as diminish our ability to collect outstanding receivables. Business closings and layoffs in the areas in which we operate may lead to increases in the uninsured and underinsured populations and adversely affect demand for our services, as well as the ability of patients and other payors to pay for services as rendered. Any increase in the amount or deterioration in the collectability of patient accounts receivable will adversely affect our cash flows and results of operations, requiring an increased level of working capital. If general economic conditions continue to deteriorate or remain uncertain or diminished for an extended period of time, our liquidity and ability to repay our outstanding debt may be harmed.
In addition, our results and financial condition may be further adversely affected by future federal or state laws, regulations, orders, or other governmental or regulatory actions addressing the current COVID-19 pandemic or the United States health care system, which, if adopted, could result in direct or indirect restrictions to our business, financial condition, results of operations and cash flow.
Furthermore, the COVID-19 pandemic has caused disruption in the financial markets and the businesses of financial institutions. These factors have caused a slowdown in the decision-making of these institutions, which may affect the timing on which we may obtain any additional funding. As a result of these factors, there can be no assurance that we will be able to access additional funds on terms acceptable to us, if at all.
The foregoing and other continued disruptions to our business as a result of the COVID-19 pandemic (including the potential resurgences of COVID-19 in jurisdictions currently engaged in reopening) have had and are likely to continue to have a material adverse effect on our business and could have a material adverse effect on our results of operations, financial condition, cash flows and our ability to service our indebtedness. Additionally, the COVID-19 pandemic (including governmental responses, broad economic impacts and market disruptions) has heightened the materiality of certain other risk factors described in our 2019 Annual Report on Form 10-K.
Finally, although we have received grants and accelerated payments under the CARES Act, we are reviewing and intend to seek any additional available benefits in the future under the CARES Act, the New PPP Act or any future legislation passed that could benefit us. We cannot predict the manner in which such future benefits will be allocated or administered, and we cannot assure you that we will be able to access such benefits in a timely manner or at all. Certain of the programs we seek to access under the CARES Act have not previously been administered on the present scale or at all. Government or third party program administrators may be unable to cope with the volume of applications in the near term and any future benefits we receive may impose additional conditions and restrictions on our operations or may otherwise provide less relief than we contemplate. Accessing these programs and our response to the COVID-19 pandemic have required our management team to devote extensive resources and is likely to continue to do so in the near future, which may negatively affect our ability to implement our business plan and respond to opportunities.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information related to our repurchases of common stock for the periods indicated:
Total Number of Shares Purchased (1)Average Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced ProgramsApproximate Dollar Value of Shares that May Yet Be Purchased Under the Program
(dollars in millions, except per share amounts)
April 1, 2020 to April 30, 2020—  $—  —  $46.0  
May 1, 2020 to May 31, 2020236  $10.82  —  $46.0  
June 1, 2020 to June 30, 2020783  $10.47  —  $46.0  
Total1,019  $10.55  —  $46.0  
(1)Shares delivered to or withheld by us in connection with employee payroll tax withholding upon exercise or vesting of stock awards.

34
  Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Programs (2) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program
(dollars in millions, except per share amounts)        
July 1, 2019 to July 31, 2019 26,013
 $7.98
 —
 $46.0
August 1, 2019 to August 31, 2019 16,291
 $6.97
 —
 $46.0
September 1, 2019 to September 30, 2019 2,027
 $7.40
 —
 $46.0
Total 44,331
 $7.58
 —
 $46.0
(1)
Shares delivered to or withheld by us in connection with employee payroll tax withholding upon exercise or vesting of stock awards.
(2)
Made pursuant to the $50 million share repurchase program authorized by our Board of Directors on December 15, 2017. 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.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.







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Item 6. Exhibits
No.Description
No.10.1Description
10.2
31.110.3
10.4
10.5
31.1
31.2
32.1
101.INSInline 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.SCHInline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LABInline XBRL Taxonomy Extension Label Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
104The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline XBRL (included in Exhibit 101).



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SIGNATURES
Pursuant to the requirements 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.
SURGERY PARTNERS, INC.
By:
/s/ Thomas F. Cowhey
Thomas F. Cowhey
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 6, 2019

August 5, 2020


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