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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
Form 10-Q
_____________________________________
(Mark One)
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
or
    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)
_____________________________________
Delaware 47-3620923
(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    No  
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   No  
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 ☒
 
Accelerated filer ☐
Non-accelerated filer ☐
 
Smaller reporting company 
Emerging growth company 
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No  
As of April 26, 2022, there were 89,904,299 shares of the registrant’s common stock outstanding.



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



PART I - FINANCIAL INFORMATION

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

(Unaudited)
March 31,
2022
December 31,
2021
ASSETS
Current assets:
Cash and cash equivalents$378.9 $389.9 
Accounts receivable
412.4 430.2 
Inventories62.9 61.1 
Prepaid expenses32.2 25.6 
Other current assets50.6 39.3 
Total current assets937.0 946.1 
Property and equipment, net of accumulated depreciation of $294.6 and $272.3, respectively
778.9 629.7 
Goodwill and other intangible assets, net3,967.8 3,955.5 
Investments in and advances to affiliates94.5 88.7 
Right-of-use operating lease assets277.4 324.1 
Long-term deferred tax assets113.9 114.4 
Other long-term assets120.0 59.1 
Total assets$6,289.5 $6,117.6 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable$122.9 $124.9 
Accrued payroll and benefits83.8 77.1 
Medicare accelerated payments and deferred governmental grants46.5 64.4 
Other current liabilities221.1 210.0 
Current maturities of long-term debt68.0 60.4 
Total current liabilities542.3 536.8 
Long-term debt, less current maturities3,025.2 2,878.4 
Right-of-use operating lease liabilities272.1 315.6 
Other long-term liabilities95.8 87.0 
Non-controlling interests—redeemable341.5 330.2 
Stockholders' equity:
Preferred stock, $0.01 par value; shares authorized - 20,310,000; shares issued or outstanding - none
  
Common stock, $0.01 par value; shares authorized - 300,000,000; shares issued and outstanding - 89,904,913 and 89,332,557, respectively
0.9 0.9 
Additional paid-in capital1,625.2 1,622.3 
Accumulated other comprehensive income (loss)25.3 (31.5)
Retained deficit(490.5)(502.7)
Total Surgery Partners, Inc. stockholders' equity1,160.9 1,089.0 
Non-controlling interests—non-redeemable851.7 880.6 
Total stockholders' equity2,012.6 1,969.6 
Total liabilities and stockholders' equity$6,289.5 $6,117.6 

See notes to unaudited condensed consolidated financial statements.

1

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

Three Months Ended March 31,
20222021
Revenues$596.2 $512.4 
Operating expenses:
Salaries and benefits178.9 151.7 
Supplies171.6 147.3 
Professional and medical fees63.6 55.5 
Lease expense20.0 22.8 
Other operating expenses37.3 31.6 
Cost of revenues471.4 408.9 
General and administrative expenses29.5 26.8 
Depreciation and amortization27.4 25.7 
Transaction and integration costs7.1 5.3 
Grant funds(1.2)(15.1)
Gain on disposals and deconsolidations, net(0.1)(0.9)
Equity in earnings of unconsolidated affiliates(3.1)(2.6)
Litigation settlement(32.8) 
Other income, net(2.4) 
495.8 448.1 
Operating income 100.4 64.3 
Interest expense, net(56.3)(53.3)
Income before income taxes44.1 11.0 
Income tax expense(1.3)(0.2)
Net income42.8 10.8 
Less: Net income attributable to non-controlling interests(30.6)(31.8)
Net income (loss) attributable to Surgery Partners, Inc.12.2 (21.0)
Less: Amounts attributable to participating securities (10.3)
Net income (loss) attributable to common stockholders$12.2 $(31.3)
Net income (loss) per share attributable to common stockholders
Basic$0.14 $(0.57)
Diluted (1)
$0.14 $(0.57)
Weighted average common shares outstanding
Basic 87,995 54,773 
Diluted (1)
90,272 54,773 
(1) The impact of potentially dilutive securities for the three months ended March 31, 2021 was not considered because the effect would be anti-dilutive.

See notes to unaudited condensed consolidated financial statements.


2

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

Three Months Ended March 31,
20222021
Net income$42.8 $10.8 
Other comprehensive income, net of tax:
Derivative activity56.8 6.4 
Comprehensive income99.6 17.2 
Less: Comprehensive income attributable to non-controlling interests(30.6)(31.8)
Comprehensive income (loss) attributable to Surgery Partners, Inc.$69.0 $(14.6)

See notes to unaudited condensed consolidated financial statements.


3

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

Common StockAdditional
Paid-in Capital
Accumulated Other Comprehensive Income (Loss)Retained DeficitNon-Controlling Interests—
Non-Redeemable
Total
SharesAmount
Balance at December 31, 202050,462 $0.5 $607.9 $(61.0)$(431.8)$766.5 $882.1 
Net (loss) income— — — — (21.0)21.1 0.1 
Equity-based compensation812 — (2.8)— — — (2.8)
Preferred dividends— — (10.3)— — — (10.3)
Equity offering8,625 0.1 248.2 — — — 248.3 
Other comprehensive income— — — 6.4 — — 6.4 
Acquisition and disposal of shares of non-controlling interests, net— — 0.3 — — 2.0 2.3 
Distributions to non-controlling interests—non-redeemable holders— — — — — (20.8)(20.8)
Balance at March 31, 202159,899 $0.6 $843.3 $(54.6)$(452.8)$768.8 $1,105.3 

Balance at December 31, 202189,333 $0.9 $1,622.3 $(31.5)$(502.7)$880.6 $1,969.6 
Net income— — — — 12.2 20.0 32.2 
Equity-based compensation572 — 7.7 — — — 7.7 
Other comprehensive income— — — 56.8 — — 56.8 
Acquisition and disposal of shares of non-controlling interests, net— — (4.8)— — (24.3)(29.1)
Distributions to non-controlling interests—non-redeemable holders— — — — — (24.6)(24.6)
Balance at March 31, 202289,905 $0.9 $1,625.2 $25.3 $(490.5)$851.7 $2,012.6 

See notes to unaudited condensed consolidated financial statements.

4

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

Three Months Ended March 31,
20222021
Cash flows from operating activities:
Net income$42.8 $10.8 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization27.4 25.7 
Non-cash interest expense, net6.1 1.6 
Equity-based compensation expense3.7 5.2 
Gain on disposals and deconsolidations, net(0.1)(0.9)
Deferred income taxes1.0 (0.1)
Equity in earnings of unconsolidated affiliates, net of distributions received(0.9)(0.2)
Non-cash lease expense8.6 9.8 
Changes in operating assets and liabilities, net of acquisitions and divestitures:
Accounts receivable2.0 3.9 
Medicare accelerated payments and deferred governmental grants(18.0)(7.2)
Other operating assets and liabilities7.2 1.6 
Net cash provided by operating activities79.8 50.2 
Cash flows from investing activities:
Purchases of property and equipment(18.2)(14.5)
Payments for acquisitions, net of cash acquired(31.1)(2.1)
Proceeds from disposals of facilities and other assets 2.3 
Proceeds from sales of equity investments11.5  
Other investing activities(9.3) 
Net cash used in investing activities(47.1)(14.3)
Cash flows from financing activities:
Principal payments on long-term debt(17.0)(16.6)
Borrowings of long-term debt11.9 0.6 
Payments of debt issuance costs (1.1)
Proceeds from equity offering 260.9 
Payments of equity offering costs (12.6)
Payment of preferred dividends (5.1)
Distributions to non-controlling interest holders(36.2)(31.3)
(Payments) receipts related to ownership transactions with non-controlling interest holders(3.1)1.0 
Other financing activities0.7 (8.0)
Net cash (used in) provided by financing activities(43.7)187.8 
Net (decrease) increase in cash and cash equivalents(11.0)223.7 
Cash and cash equivalents at beginning of period389.9 318.2 
Cash and cash equivalents at end of period$378.9 $541.9 
See notes to unaudited condensed consolidated financial statements.

5

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 multi-specialty physician practices, urgent care facilities and anesthesia services. Unless the context otherwise indicates, Surgery Partners, Inc. and its subsidiaries are referred to herein as "Surgery Partners," "we," "us," "our" or the "Company."
As of March 31, 2022, the Company owned or operated a portfolio of 127 surgical facilities, comprised of 109 ASCs and 18 surgical hospitals in 31 states. The Company owns these facilities in partnership with physicians and, in some cases, health care systems in the markets and communities it serves. The Company owned a majority interest in 85 of the surgical facilities and consolidated 108 of the 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 year ended December 31, 2021 (the "2021 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 pandemic has significantly affected the Company's facilities, employees, patients, communities, business operations and financial performance, as well as the United States economy and financial markets. The impact of the COVID-19 pandemic on the Company's surgical facilities varies based on the market in which the facility operates, the type of surgical facility and the procedures that are typically performed. The Company cannot provide any certainty regarding the length and severity of the impact of the COVID-19 pandemic on its business operations and financial performance. As a result of the COVID-19 pandemic, the Company has implemented new clinical safety measures to provide a safe environment for its patients, surgeons and employees.
CARES Act
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law to provide stimulus funding for the United States economy. As part of the CARES Act, the United States government announced that it would offer relief to eligible health care providers, including distribution of direct grants to hospitals, ASCs and other health care providers based on how much they bill Medicare. Payments received from these grants are not required to be repaid provided the recipients attest to and comply with certain terms and conditions, including limitations on balance billing and not using funds received from the grants to reimburse expenses or losses that other sources are obligated to reimburse. The Company has received approximately $87 million of the grant funds distributed under the CARES Act and other governmental assistance programs, including approximately $1 million during the three months ended March 31, 2022. The recognition of amounts received is conditioned upon attestation with terms and conditions that funds will be used for COVID-19 related healthcare expenses or lost revenues.
The Company’s assessment of whether the terms and conditions for amounts received are reasonably assured of having been met considers, among other things, the CARES Act, the COVID-19 Economic Relief Bill, enacted on December 27, 2020, and all frequently asked questions and other interpretive guidance issued by the United States Department of Health and Human Services ("HHS"), including in the Provider Relief Fund Reporting Portal and associated user guides. This guidance sets forth the allowable methods for quantifying

6

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
eligible healthcare related expenses and lost revenues. Only healthcare related expenses attributable to COVID-19 that another source has not reimbursed and is not obligated to reimburse are eligible to be claimed. Based on guidance, the Company estimates approximately $1.2 million and $15.1 million of grant funds received qualified for recognition as a reduction in operating expenses for the three months ended March 31, 2022 and 2021, respectively.
Amounts received, but not recognized as a reduction to operating expenses, are reflected as a component of Medicare accelerated payments and deferred governmental grants in the condensed consolidated balance sheets as of both March 31, 2022 and December 31, 2021. Any unrecognized amounts may be recognized as a reduction in operating expenses in subsequent periods if the underlying conditions for recognition are met. Additional guidance or new and amended interpretations of existing guidance on the terms and conditions of such payments may result in the Company’s inability to recognize certain payments, changes in the estimate of amounts recognized, or the derecognition of amounts previously recognized, which may be material.
As a way to increase cash flow to Medicare providers impacted by the COVID-19 pandemic, the CARES Act expanded the Medicare Accelerated and Advance Payment Program, which allowed for most providers and suppliers, including the Company’s surgical hospitals and ASCs to request an advance payment of anticipated Medicare revenues. The Company received approximately $120 million of accelerated payments during the year ended December 31, 2020. The payments received were deferred and included in the condensed consolidated balance sheets. During the three months ended March 31, 2022, approximately $18 million has been repaid in accordance with the terms of the program. These repayments are included as a component of the change in Medicare accelerated payments and deferred government grants in the condensed consolidated statements of cash flows. Under these terms, repayment started one year after the initial funding by offsetting 25% of new claims paid by CMS. After 11 months of repayment at this level, the repayments will increase to 50% of new claims paid by CMS for a period of six months. Any outstanding amounts due at the end of the repayment period are subject to interest at a rate of 4%. As of March 31, 2022 and December 31, 2021, the remaining deferred accelerated payments was approximately $42 million and $60 million, respectively, which was included as a component of Medicare accelerated payments and deferred governmental grants in the condensed consolidated balance sheets. The Company does not expect to receive additional Medicare accelerated payments.
The CARES Act also provided for the deferral of the Company's portion of social security payroll taxes during 2020. Under the CARES Act, half of the deferred amount was paid in December 2021 and the remaining portion will be paid in December 2022. As of both March 31, 2022 and December 31, 2021, the Company had deferred approximately $8.5 million, which was included as a component of accrued payroll and benefits in the condensed consolidated balance sheets.
The Company is continuing to closely monitor legislative actions and regulatory guidance at the federal, state and local levels with respect to the CARES Act as other governmental assistance might become available to the Company.
Variable Interest Entities
The condensed consolidated financial statements include the accounts of variable interest entities ("VIE") in which the Company is the primary beneficiary under the provisions of the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification 810, "Consolidation". The Company has the power to direct the activities that most significantly impact a VIE's economic performance. Additionally, the Company would absorb the majority of the expected losses from any of these entities should such expected losses occur. As of March 31, 2022, the Company's consolidated VIEs include six surgical facilities and five physician practices.
The total assets (excluding goodwill and intangible assets, net) of the consolidated VIEs included in the accompanying condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021 were $71.4 million and $48.1 million, respectively, and the total liabilities of the consolidated VIEs were $46.7 million and $20.1 million, respectively.
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability. The Company uses fair value measurements based on inputs classified into the following hierarchy:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These may include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, depending on the nature of the item being valued.
The carrying amounts reported in the 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.

7

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 AmountFair Value
March 31,
2022
December 31,
2021
March 31,
2022
December 31,
2021
Senior secured term loan$1,527.0 $1,530.7 $1,504.1 $1,530.7 
6.750% senior unsecured notes due 2025
$370.0 $370.0 $367.2 $371.9 
10.000% senior unsecured notes due 2027
$545.0 $545.0 $570.2 $577.0 
The fair values in the table above were based on Level 2 inputs using quoted prices for identical liabilities in inactive markets. The carrying amounts related to the Company's other long-term debt obligations, including finance lease obligations, approximate their fair values based on Level 3 inputs.
Revenues
The Company's revenues generally relate to contracts with patients in which the performance obligations are to provide health care services. The Company recognizes revenues in the period in which its obligations to provide health care services are satisfied and reports the amount that reflects the consideration the Company expects to be entitled to receive. The contractual relationships with patients, in most cases, also involve a third-party payor (e.g., Medicare, Medicaid and private insurance organizations, including plans offered through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided by or negotiated with the third-party payors. The payment arrangements with third-party payors for the services provided to the related patients typically specify payments at amounts less than the Company's standard charges. The Company continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms resulting from contract renegotiations and renewals.
A summary of revenues by service type as a percentage of total revenues follows:
Three Months Ended March 31,
20222021
Patient service revenues:
   Surgical facilities revenues95.7 %95.5 %
   Ancillary services revenues2.9 %3.2 %
Total patient service revenues98.6 %98.7 %
Other service revenues1.4 %1.3 %
Total revenues100.0 %100.0 %
Patient service revenues. This revenue is related to charging facility fees in exchange for providing patient care. The fee charged for health care procedures performed in surgical facilities varies depending on the type of service provided, but usually includes all charges for usage of an operating room, a recovery room, special equipment, medical supplies, nursing staff and medications. The fee does not normally include professional fees charged by the patient’s surgeon, anesthesiologist or other attending physician, which are billed directly by such physicians to the patient or third-party payor. However, in several surgical facilities, the Company charges for anesthesia services. Ancillary service revenues include fees for patient visits to the Company's physician practices, pharmacy services and diagnostic tests ordered by physicians.
Patient service revenues are recognized as performance obligations are satisfied. Performance obligations are based on the nature of services provided. Typically, the Company recognizes revenue at a point in time in which services are rendered and the Company has no obligation to provide further patient services. As the Company primarily performs outpatient procedures, performance obligations are generally satisfied same day and revenue is recognized on the date of service.
The Company determines the transaction price based on gross charges for services provided, net of estimated contractual adjustments and discounts from third-party payors. The Company estimates its contractual adjustments and discounts based on contractual agreements, its discount policies and historical experience. Changes in estimated contractual adjustments and discounts are recorded in the period of change.
Other service revenues. Other service revenues include management and administrative service fees derived from the non-consolidated facilities that the Company accounts for under the equity method, management of surgical facilities in which it does not own an interest, 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.

8

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table sets forth patient service revenues by type of payor and as a percentage of total patient service revenues for the Company's consolidated surgical facilities (dollars in millions):
Three Months Ended March 31,
20222021
Amount%Amount%
Patient service revenues:
Private insurance$300.2 51.1 %$246.1 48.7 %
Government249.0 42.4 %226.4 44.8 %
Self-pay16.8 2.9 %13.2 2.6 %
Other (1)
21.7 3.6 %20.0 3.9 %
Total patient service revenues587.7 100.0 %505.7 100.0 %
Other service revenues8.5 6.7 
Total revenues$596.2 $512.4 
(1)Other is comprised of anesthesia service agreements, automobile liability, letters of protection and other payor types.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company maintains its cash and cash equivalent balances at high credit quality financial institutions.
Accounts Receivable
Accounts receivable from third-party payors are recorded net of estimated implicit price concessions, which are estimated based on the historical trend of the Company's surgical hospitals’ cash collections and contractual write-offs, and for the Company's surgical facilities in general, established fee schedules, relationships with payors and procedure statistics. While changes in estimated reimbursement from third-party payors remain a possibility, the Company expects that any such changes would be minimal and, therefore, would not have a material effect on its financial condition or results of operations.
Accounts receivable consists of receivables from federal and state agencies (under the Medicare and Medicaid programs), private insurance organizations, employers and patients. Management recognizes that revenues and receivables from government agencies are significant to the Company's operations, but it does not believe that there is significant credit risk associated with these government agencies. Concentration of credit risk with respect to other payors is limited because of the large number of such payors.
The Company recognizes that final reimbursement of accounts receivable is subject to final approval by each third-party payor. However, because the Company has contracts with its third-party payors and also verifies insurance coverage of the patient before medical services are rendered, the amounts that are pending approval from third-party payors are not considered significant. Amounts are classified outside of self-pay if the Company has an agreement with the third-party payor or has verified a patient’s coverage prior to services rendered. The Company's policy is to collect co-payments and deductibles prior to providing medical services. Patient services of the Company are primarily non-emergency, which allows the surgical facilities to control the procedures for which third-party reimbursement is sought and obtained. The Company does not require collateral from self-pay patients.
The Company's collection policies and procedures are based on the type of payor, size of claim and estimated collection percentage for each patient account. The Company analyzes accounts receivable at each of its surgical facilities to ensure the proper collection and aged category. Collection efforts include direct contact with third-party payors or patients, written correspondence and the use of legal or collection agency assistance, as required.
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 three months ended March 31, 2022 is included in Note 2. "Acquisitions and Disposals."


9

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of activity related to goodwill for the three months ended March 31, 2022 is as follows (in millions):
Balance at December 31, 2021$3,911.8 
Acquisitions, including post acquisition adjustments43.4 
Disposals and deconsolidations(29.4)
Balance at March 31, 2022$3,925.8 
A detailed evaluation of potential impairment indicators was performed as of March 31, 2022, which specifically considered the ongoing impact of the COVID-19 pandemic. On the basis of available evidence as of March 31, 2022, no indicators of impairment were identified. Future estimates of fair value could be adversely affected if the actual outcome of one or more of the Company's assumptions changes materially in the future, including a material decline in the Company’s stock price and the fair value of its long-term debt, lower than expected surgical case volumes, higher market interest rates or increased operating costs. Such changes impacting the calculation of fair value, the risks of which are amplified by the COVID-19 pandemic, could result in a material impairment charge in the future.
Derivative Instruments and Hedging Activities
The Company records all derivatives on the balance sheet at fair value and any financing elements treated as debt instruments are recorded at amortized cost. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
The Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Non-Controlling Interests—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 interestsredeemable are reported outside of stockholders' equity in the condensed consolidated balance sheets.
A summary of activity related to non-controlling interests—redeemable is as follows (in millions):
Three Months Ended March 31,
20222021
Balance at beginning of period$330.2 $306.8 
Net income attributable to non-controlling interests—redeemable10.6 10.7 
Acquisition of shares of non-controlling interests, net—redeemable12.3 1.2 
Distributions to non-controlling interest—redeemable holders(11.6)(10.5)
Balance at end of period$341.5 $308.2 
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 health care regulations, general economic conditions, or other factors, we may need to adjust the valuation allowance, for

10

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
The Company's effective tax rate was 2.9% for the three months ended March 31, 2022 compared to 1.8% for the three months ended March 31, 2021. For the three months ended March 31, 2022, the effective tax rate differed from 21% primarily due to earnings attributable to non-controlling interests, an increase in the Company’s valuation allowance attributable to interest expense limitations, and discrete tax benefits of (a) $4.6 million related to the vesting of restricted stock awards, (b) $1.8 million attributable to non-recurring earnings’ impact on the Company’s valuation allowance, and (c) $1.0 million related to entity divestitures. For the three months ended March 31, 2021, the effective tax rate differed from 21% due to tax benefits of $2.2 million related to the vesting of restricted stock awards. 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.
2. Acquisitions and Disposals
During the three months ended March 31, 2022, the Company acquired a controlling interest in two surgical facilities, one of which was merged into an existing surgical facility, for aggregate cash consideration of $31.1 million, net of cash acquired, and non-cash consideration of $2.6 million. The cash consideration was funded through available resources and the non-cash consideration consisted of a non-controlling interest in one of the Company's existing surgical facilities. The total consideration was allocated to the assets acquired and liabilities assumed based upon the respective acquisition date fair values. The aggregate amounts preliminarily recognized for each major class of assets acquired and liabilities assumed for the acquisitions are as follows (in millions):
Total consideration$34.7 
Fair value of non-controlling interests10.6 
Aggregate acquisition date fair value$45.3 
Net assets acquired:
Current assets $5.3 
Property and equipment1.9 
Goodwill42.7 
Right-of-use operating lease assets20.7 
Current liabilities(5.5)
Right-of-use operating lease liabilities(19.8)
Aggregate acquisition date fair value$45.3 
The fair values assigned to certain assets acquired and liabilities assumed by the Company have been estimated on a preliminary basis and are subject to change as new facts and circumstances emerge that were present at the date of acquisition. During the three months ended March 31, 2022, no significant changes were made to the purchase price allocation of assets and liabilities, existing at the date of acquisition, related to individual acquisitions completed in 2021. The goodwill acquired was allocated to the Company's Surgical Facility services reportable segment. The results of operations of the acquisitions were included in the Company’s results of operations beginning on the dates of acquisition and were not considered significant for the three months ended March 31, 2022.
Disposals and Deconsolidations
During the three months ended March 31, 2022, the Company sold its interests in a surgical facility, which was previously accounted for as an equity method investment, for net cash proceeds of $11.5 million, and recognized a pre-tax loss of $0.4 million included in loss on disposals and deconsolidations, net in the condensed consolidated statements of operations for the three months ended March 31, 2022.
During the three months ended March 31, 2022, the Company contributed its interests in two surgical facilities as non-cash consideration for non-controlling interests in two new separate entities. As a result of these transactions, the Company lost control of the previously controlled surgical facilities but retains a non-controlling interest in each, resulting in the deconsolidation of the previously consolidated entities. The remaining non-controlling interests were accounted for as equity method investments, and initially measured and recorded at fair value as of the dates of the transactions. The fair value measurement utilizes Level 3 inputs, which includes unobservable data, to measure the fair value of the retained non-controlling interests. The fair value determination was based on a combination of multiple valuation methods, which included discounted cash flow and market value approach, which incorporates estimates of future earnings and market valuation multiples for certain guideline companies. The preliminary fair value of the investments of $9.8 million was recorded as a component of investments in and advances to affiliates in the accompanying condensed consolidated balance sheets. Further,

11

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
based on the preliminary valuation, the transactions resulted in a pretax net loss on deconsolidations of $5.6 million, which is included in gain on disposals and deconsolidations, net, in the accompanying condensed consolidated statement of operations for the three months ended March 31, 2022. The gains were determined based on the difference between the fair value of the Company's retained interests in the entities and the carrying values of both the tangible and intangible assets of the entities immediately prior to the transactions.
3. Long-Term Debt
A summary of long-term debt follows (in millions):
March 31,
2022
December 31,
2021
Senior secured term loan (1)
$1,527.0 $1,530.7 
6.750% senior unsecured notes due 2025
370.0 370.0 
10.000% senior unsecured notes due 2027
545.0 545.0 
Notes payable and other secured loans159.3 145.0 
Finance lease obligations507.7 364.6 
Less: unamortized debt issuance costs and discounts(15.8)(16.5)
Total debt3,093.2 2,938.8 
Less: Current maturities68.0 60.4 
Total long-term debt$3,025.2 $2,878.4 
(1)Includes unamortized fair value discount of $2.8 million and $3.0 million as of March 31, 2022 and December 31, 2021, respectively.
The increase in finance lease obligations is a result of the modification of certain existing facility real estate leases that were previously classified as operating leases. See Note 4. "Leases" for further discussion.
Revolving Credit Facility
As of March 31, 2022, the Company's availability on its revolving credit facility (the "Revolver") was $203.0 million (including outstanding letters of credit of $7.0 million). There were no outstanding borrowings under the Revolver as of both March 31, 2022 and December 31, 2021.

12

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Leases
The Company's operating leases are primarily for real estate, including medical office buildings, and corporate and other administrative offices. The Company's finance leases are primarily for medical equipment and information technology and telecommunications assets.
The following table presents the components of the Company's right-of-use assets and liabilities related to leases and their classification in the consolidated balance sheets (in millions):
Classification in Consolidated Balance SheetsMarch 31, 2022December 31, 2021
Assets:
Operating lease assetsRight-of-use operating lease assets$277.4 $324.1 
Finance lease assetsProperty and equipment, net of accumulated depreciation467.6 329.6 
Total leased assets$745.0 $653.7 
Liabilities:
Operating lease liabilities:
CurrentOther current liabilities$35.2 $40.1 
Long-termRight-of-use operating lease liabilities272.1 315.6 
Total operating lease liabilities307.3 355.7 
Finance lease liabilities:
CurrentCurrent maturities of long-term debt22.9 19.0 
Long-termLong-term debt, less current maturities484.8 345.6 
Total finance lease liabilities507.7 364.6 
Total lease liabilities$815.0 $720.3 
During the three months ended March 31, 2022, the Company extended certain existing facility real estate leases, resulting in the reclassification of the leases from operating to finance. The modifications resulted in an increase to finance lease liabilities and assets of $146.5 million and $145.0 million, respectively, including the reclassification of existing operating lease liabilities and assets of $60.8 million and $59.3 million, respectively.
The following table presents the components of the Company's lease expense and their classification in the condensed consolidated statement of operations (in millions):
Three Months Ended March 31,
20222021
Operating lease costs$16.1 $18.6 
Finance lease costs:
Amortization of leased assets9.2 7.1 
Interest on lease liabilities9.9 6.3 
Total finance lease costs19.1 13.4 
Variable and short-term lease costs4.4 5.2 
Total lease costs$39.6 $37.2 

13

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents supplemental cash flow information (dollars in millions):
Three Months Ended March 31,
20222021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases $15.6 $18.2 
Operating cash outflows from finance leases$9.8 $5.7 
Financing cash outflows from finance leases$6.0 $5.0 
Right-of-use assets obtained in exchange for lease obligations:
Operating leases$22.0 $6.3 
Finance leases$89.3 $1.4 
5. Derivatives and Hedging Activities
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and interest rate caps as part of its interest rate risk management strategy. During 2022 and 2021, such derivatives have been used to hedge the variable cash flows associated with existing variable-rate debt.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income ("OCI") and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings, as documented at hedge inception in accordance with the Company’s accounting policy election. Amounts reported in accumulated OCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. Over the next 12 months, the Company estimates that an additional $12.0 million will be reclassified as an increase to interest expense.
As of March 31, 2022, the Company had nine interest rate swaps with a total net hedged notional amount of $1.2 billion and two interest rate caps with a total hedged notional amount of $329.8 million. Of the nine interest rate swaps, three are pay-fixed, receive 1-Month LIBOR (subject to a minimum of 0.75%) interest rate swaps designated in cash flow hedging relationships with a total notional amount of $1.2 billion and a termination date of March 31, 2025. The remaining six interest rate swaps are undesignated and consist of three pay-fixed, receive 1-Month LIBOR (subject to a minimum of 1.00%) interest rate swaps and three pay 1-Month LIBOR (subject to a minimum of 1.00%), receive-fixed interest rate swaps with a termination date of November 30, 2023. The pay-floating, receive-fixed swaps are designed to economically offset the undesignated pay-fixed, receive-floating swaps. The interest rate caps each have a termination date of March 31, 2025.
The pay-fixed, receive floating interest rate swaps did not meet the requirements to be considered derivatives in their entirety as a result of the financing component. Accordingly, the swaps are considered hybrid instruments, consisting of a financing element treated as a debt instrument and an embedded at-market derivative that was designated as a cash flow hedge.
Within the Company’s condensed consolidated balance sheets, the financing elements treated as debt instruments described above are carried at amortized cost and the embedded at-market derivatives and the undesignated swaps are recorded at fair value. The cash flows related to the portion treated as debt are classified as financing activities in the condensed consolidated statements of cash flows while the portion treated as an at-market derivative are classified as operating activities. Cash settlements related to the undesignated swaps will offset and are classified as operating activities in the condensed consolidated cash flows. Within the Company’s condensed consolidated balance sheets, the interest rate caps are recorded at fair value. The cash flows related to the interest rate caps are classified as operating activities in the condensed consolidated statements of cash flows.

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SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The key terms of interest rate swaps and interest rate caps outstanding are presented below:
March 31, 2022December 31, 2021
DescriptionEffective DateNotional Amount (in millions)StatusNotional Amount (in millions)StatusMaturity Date
Pay-fixed swapMay 7, 2021$435.0 Active$435.0 ActiveMarch 31, 2025
Pay-fixed swapMay 7, 2021330.0 Active330.0 ActiveMarch 31, 2025
Pay-fixed swapMay 7, 2021435.0 Active435.0 ActiveMarch 31, 2025
Interest rate capSeptember 30, 2021164.9 Active166.8 ActiveMarch 31, 2025
Interest rate capSeptember 30, 2021164.9 Active166.8 ActiveMarch 31, 2025
Pay-fixed swapNovember 30, 2018165.0 Active165.0 ActiveNovember 30, 2023
Pay-fixed swapNovember 30, 2018120.0 Active120.0 ActiveNovember 30, 2023
Pay-fixed swapJune 28, 2019150.0 Active150.0 ActiveNovember 30, 2023
Receive-fixed swapApril 30, 2021(165.0)Active(165.0)ActiveNovember 30, 2023
Receive-fixed swapApril 30, 2021(120.0)Active(120.0)ActiveNovember 30, 2023
Receive-fixed swapApril 30, 2021(150.0)Active(150.0)ActiveNovember 30, 2023
$1,529.8 $1,533.6 
Our interest rate swap agreements, excluding the portion treated as debt, are recognized at fair value in the condensed consolidated balance sheets and are valued using pricing models that rely on market observable inputs such as yield curve data, which are classified as Level 2 inputs within the fair value hierarchy. The fair value of the interest rate caps are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected receipts on the caps are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. The interest rate caps are classified using Level 2 inputs within the fair value hierarchy.
The following table presents the fair values of our derivatives and their location on the condensed consolidated balance sheets (in millions):
March 31, 2022December 31, 2021
LocationAssetsLiabilitiesAssetsLiabilities
Derivatives not designated as hedging instruments
Interest rate swapsOther long-term assets$4.7 $— $12.5 $— 
Interest rate swapsOther long-term liabilities— 4.6 — 12.4 
Derivatives in cash flow hedging relationships
Interest rate capsOther long-term assets11.1 — 2.9 — 
Interest rate swapsOther long-term assets51.4 — 8.2 — 
Interest rate swaps
Other long-term liabilities (1)
— 42.4 — 45.8 
Total$67.2 $47.0 $23.6 $58.2 
(1)The balance as of March 31, 2022 and December 31, 2021 is related to the financing component of the pay-fixed, receive floating interest rate swaps.
The following table presents the pre-tax effect of the interest rate swaps and caps on the Company's accumulated OCI and condensed consolidated statement of operations (in millions):
Three Months Ended March 31,
Location20222021
Derivatives not designated as hedging instruments
Loss recognized in incomeOther income, net$(0.1)$ 
Derivatives in cash flow hedging relationships
Gain recognized in OCI (effective portion)$(50.4)$(0.9)
Loss reclassified from accumulated OCI into income (effective portion) (1)
Interest expense, net$6.4 $5.5 
(1)Includes amortization of accumulated OCI related to de-designated and terminated interest rate swaps of $5.3 million for the three months ended March 31, 2022 with no related amortization for the three months ended March 31, 2021.

15

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Earnings Per Share
Basic and diluted earnings per share are calculated based on the weighted-average number of shares outstanding in each period and dilutive stock options, unvested shares and warrants, to the extent such securities exist and have a dilutive effect on earnings per share. The Company computes basic and diluted earnings per share using the two-class method. The two-class method of computing earnings per share is an earnings allocation method that determines earnings per share for common shares and participating securities according to their participation rights in dividends and undistributed earnings.
A reconciliation of the numerator and denominator of basic and diluted earnings per share follows (dollars in millions, except per share amounts; shares in thousands):
Three Months Ended March 31,
20222021
Numerator:
Net income (loss) attributable to Surgery Partners, Inc.$12.2 $(21.0)
Less: amounts allocated to participating securities (1)
 (10.3)
Net income (loss) attributable to common stockholders$12.2 $(31.3)
Denominator:
Weighted average shares outstanding- basic87,995 54,773 
Weighted average shares outstanding- diluted (2)
90,272 54,773 
Income (loss) per share:
Basic$0.14 $(0.57)
Diluted (2)
$0.14 $(0.57)
Dilutive securities outstanding not included in the computation of income (loss) per share as their effect is antidilutive:
Stock options1,634 1,728 
Restricted shares643 1,410 
(1)Includes dividends accrued for the Series A Preferred Stock for the three months ended March 31, 2021. The Series A Preferred Stock did not participate in undistributed losses and was converted to common stock during the second quarter of 2021. There were no participating securities for the three months ended March 31, 2022.
(2)The impact of potentially dilutive securities for the three months ended March 31, 2021, was not considered because the effect would be anti-dilutive.
7. Other Current Liabilities
A summary of other current liabilities is as follows (in millions):
March 31,
2022
December 31,
2021
Right-of-use operating lease liabilities$35.2 $40.1 
Interest payable36.0 29.2 
Amounts due to patients and payors32.7 26.0 
Cost report liabilities22.5 26.4 
Tax receivable agreement liability20.2 19.7 
Accrued expenses and other74.5 68.6 
Total$221.1 $210.0 
8. Commitments and Contingencies
Professional, General and Workers' Compensation Liability Risks
The Company is subject to claims and legal actions in the ordinary course of business, including claims relating to patient treatment, employment practices and personal injuries. The Company maintains professional, general and workers' compensation liability insurance in excess of self-insured retentions through third party commercial insurance carriers. Although management believes the coverage is sufficient for the Company's operations, some claims may potentially exceed the scope of coverage in effect. Plaintiffs in these matters may

16

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
request punitive or other damages that may not be covered by insurance. The Company is not aware of any such proceedings that are reasonably possible to have a material adverse effect on the Company's business, financial position, results of operations or liquidity. Total professional, general and workers' compensation claim liabilities as of March 31, 2022 and December 31, 2021 were $18.9 million and $19.8 million, respectively. Expected insurance recoveries of $8.7 million as of both March 31, 2022 and December 31, 2021, are included as a component of other current assets and other long-term assets in the condensed consolidated balance sheets.
Laws and Regulations
Laws and regulations governing the Company's business, including those relating to the Medicare and Medicaid programs, are complex and subject to interpretation. These laws and regulations govern every aspect of how the Company's surgical facilities conduct their operations, from licensing requirements to how and whether the Company's facilities may receive payments pursuant to the Medicare and Medicaid programs. Compliance with such laws and regulations can be subject to future government agency review and interpretation as well as legislative changes to such laws. Noncompliance with such laws and regulations may subject the Company to significant regulatory sanctions including fines, penalties, and exclusion from the Medicare, Medicaid and other federal health care programs. From time to time, governmental regulatory agencies will conduct inquiries of the Company's practices, including, but not limited to, the Company's compliance with federal and state fraud and abuse laws, billing practices and relationships with physicians.
Stockholder Litigation
On December 4, 2017, a purported Company stockholder filed an action in the Delaware Court of Chancery (the "Delaware Action"). That action is captioned Witmer v. H.I.G. Capital, L.L.C., et al., C.A. No. 2017-0862. The plaintiff in the Delaware Action asserted claims against (i) certain current and former members of the Company’s Board of Directors (together, the "Directors"); (ii) H.I.G. Capital, LLC and certain of its affiliates (collectively, "H.I.G."); and (iii) Bain Capital Private Equity, L.P. and certain of its affiliates (collectively, "Bain Capital" and, together with the Directors and H.I.G., the "Defendants"). The parties to the Delaware Action negotiated a final stipulation of settlement (the “Settlement Stipulation”), which governs the terms of the settlement of the Delaware Action, and which they filed with the Court of Chancery on November 22, 2021. On February 11, 2022, the Court of Chancery approved the settlement of the Delaware Action as memorialized in the Settlement Stipulation. That decision became final and non-appealable on March 14, 2022. The case is now closed. Pursuant to the settlement, the Company received $32.8 million in March 2022, which was included in litigation settlement in the condensed consolidated statements of operations for the three months ended March 31, 2022.
Acquired Facilities
The Company, through its wholly-owned subsidiaries or controlled partnerships and limited liability companies, has acquired and will continue to acquire surgical facilities with prior operating histories. Such facilities may have unknown or contingent liabilities, including liabilities for failure to comply with health care laws and regulations, such as billing and reimbursement laws and regulations, the Stark Law, the Anti-Kickback Statute, the FCA, and similar fraud and abuse laws. Although the Company attempts to assure that no such liabilities exist, obtain indemnification from prospective sellers covering such matters and institute policies designed to conform centers to its standards following completion of acquisitions, there can be no assurance that the Company will not become liable for past activities that may later be asserted to be improper by private plaintiffs or government agencies. There can be no assurance that any such matter will be covered by indemnification or, if covered, that the liability sustained will not exceed contractual limits or the financial capacity of the indemnifying party.
The Company cannot predict whether federal or state statutory or regulatory provisions will be enacted that would prohibit or otherwise regulate relationships which the Company has established or may establish with other health care providers or have materially adverse effects on its business or revenues arising from such future actions. Management believes, however, that it will be able to adjust the Company's operations so as to be in compliance with any statutory or regulatory provision as may be applicable.
Potential Physician Investor Liability
A majority of the physician investors in the partnerships and limited liability companies which operate the Company's surgical facilities carry general and professional liability insurance on a claims-made basis. Each partnership or limited liability company may, however, be liable for damages to persons or property arising from occurrences at the surgical facilities. Although the various physician investors and other surgeons generally are required to obtain general and professional liability insurance with tail coverage that extends beyond the period of any claims-made policies, such individuals may not be able to obtain coverage in amounts sufficient to cover all potential liability. Since most insurance policies contain exclusions, the physician investors will not be insured against all possible occurrences. In the event of an uninsured or underinsured loss, the value of an investment in the partnership interests or limited liability company membership units and the amount of distributions could be adversely affected.
Tax Receivable Agreement
On May 9, 2017, the Company entered into an agreement to amend that certain Income Tax Receivable Agreement, dated September 30, 2015 (as amended, the "TRA"), by and between the Company, and the other parties referred to therein, which amendment became effective on August 31, 2017. Pursuant to the amendment to the TRA, the Company agreed to make payments to H.I.G., the Company's former controlling shareholder, in its capacity as the stockholders representative pursuant to a fixed payment schedule. The amounts payable under the TRA are calculated as the product of (i) an annual base amount and (ii) the maximum corporate federal income tax rate for the applicable year plus three percent. The amounts payable under the TRA are related to the Company’s projected realized tax savings

17

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
over the next five years and are not dependent on the Company’s actual tax savings over such period. The calculation of amounts payable pursuant to the TRA is thus dependent on the maximum corporate federal income tax rate. To the extent that the Company is unable to make payments under the TRA, such payments will be deferred and will accrue interest at a rate of the LIBOR plus 500 basis points until paid. If the terms of credit agreements and other debt documents cause the Company to be unable to make payments under the TRA and such terms are not materially more restrictive than those existing as of September 30, 2015, such payments will be deferred and will accrue interest at a rate of LIBOR plus 300 basis points until paid.
Assuming the Company's tax rate is 24%, calculated as the maximum corporate federal tax rate plus three percent, throughout the remaining term of the TRA, the Company estimates the total remaining amounts payable under the TRA was approximately $22.0 million as of both March 31, 2022 and December 31, 2021. As a result of the amendment to the TRA, the Company was required to value the liability under the TRA by discounting the fixed payment schedule using the Company’s incremental borrowing rate. The carrying value of the liability under the TRA, reflecting the discount, was $20.2 million and $19.7 million as of March 31, 2022 and December 31, 2021, respectively, and is included as a component of other current liabilities in the condensed consolidated balance sheets.
9. Segment Reporting
The Company currently operates in two major lines of business that are also the Company's reportable operating segments - the operation of surgical facilities and the operation of ancillary services. The Surgical Facility Services segment consists of the operation of ASCs, surgical hospitals and anesthesia services. The Ancillary Services segment consists of multi-specialty physician practices. The "All other" line item 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 March 31,
20222021
Revenues:
Surgical Facility Services$578.8 $495.8 
Ancillary Services17.4 16.6 
Total$596.2 $512.4 
Adjusted EBITDA:
Surgical Facility Services$101.0 $95.0 
Ancillary Services0.1 (0.9)
All other(24.0)(21.2)
Total$77.1 $72.9 
Reconciliation of Adjusted EBITDA:
Income before income taxes$44.1 $11.0 
Net income attributable to non-controlling interests(30.6)(31.8)
Depreciation and amortization27.4 25.7 
Interest expense, net56.3 53.3 
Equity-based compensation expense3.7 5.2 
Transaction, integration and acquisition costs (1)
7.1 9.4 
Gain on disposals and deconsolidations, net(0.1)(0.9)
(Gain) loss on litigation settlement and other litigation costs (2)
(30.8)1.0 
Adjusted EBITDA$