sgry-20240331

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, 2024

☐ 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.)

340 Seven Springs Way, Suite 600
Brentwood, Tennessee						37027
(Address of Principal Executive Offices)						(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 class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

SGRY

The 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 30, 2024, there were 127,094,449 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	1
	Condensed Consolidated Balance Sheets (Unaudited)	1
	Condensed Consolidated Statements of Operations (Unaudited)	2
	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)	3
	Condensed Consolidated Statements of Stockholders' Equity (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows (Unaudited)	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Mine Safety Disclosures	25
Item 5.	Other Information	25
Item 6.	Exhibits	25

Signatures		26

Table of Contents

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, 2024		December 31, 2023
ASSETS
Current assets:
Cash and cash equivalents	$	185.2	$	195.9
Accounts receivable	494.3		496.4
Inventories	77.0		75.2
Prepaid expenses	31.7		31.0
Other current assets	107.7		96.5
Total current assets	895.9		895.0
Property and equipment, net of accumulated depreciation of $485.4 and $454.4, respectively	982.8		968.7

Goodwill and other intangible assets, net	4,451.1		4,380.8
Investments in and advances to affiliates	188.7		184.1
Right-of-use operating lease assets	257.7		255.3
Long-term deferred tax assets	87.0		89.5
Other long-term assets	112.4		103.3
Total assets	$	6,975.6	$	6,876.7

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	174.1	$	171.8
Accrued payroll and benefits	68.6		73.8
Other current liabilities	203.5		204.1
Current maturities of long-term debt	77.2		73.3
Total current liabilities	523.4		523.0
Long-term debt, less current maturities	2,793.8		2,701.8
Right-of-use operating lease liabilities	250.5		248.9
Other long-term liabilities	46.3		41.1

Non-controlling interests—redeemable	323.7		327.4

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 - 127,101,670 and 126,593,727, respectively	1.3		1.3
Additional paid-in capital	2,495.6		2,497.6
Accumulated other comprehensive income	52.0		57.5
Retained deficit	(581.6)		(569.2)
Total Surgery Partners, Inc. stockholders' equity	1,967.3		1,987.2
Non-controlling interests—non-redeemable	1,070.6		1,047.3
Total stockholders' equity	3,037.9		3,034.5
Total liabilities and stockholders' equity	$	6,975.6	$	6,876.7

See notes to unaudited condensed consolidated financial statements.

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SURGERY PARTNERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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


	Three Months Ended March 31,
	2024		2023

Revenues	$	717.4	$	666.2
Operating expenses:
Salaries and benefits	215.2		202.2
Supplies	188.8		188.4
Professional and medical fees	82.6		74.6
Lease expense	21.4		21.4
Other operating expenses	54.1		45.6
Cost of revenues	562.1		532.2
General and administrative expenses	33.2		32.0
Depreciation and amortization	33.7		33.7
Transaction and integration costs	17.4		12.5
Net loss on disposals, consolidations and deconsolidations	1.5		10.5
Equity in earnings of unconsolidated affiliates	(2.7)		(3.3)
Litigation settlements	(1.8)		3.0

Other income, net	(2.0)		(0.8)
	641.4		619.8
Operating income	76.0		46.4
Interest expense, net	(47.3)		(46.8)
Income (loss) before income taxes	28.7		(0.4)
Income tax (expense) benefit	(4.4)		1.6
Net income	24.3		1.2
Less: Net income attributable to non-controlling interests	(36.7)		(26.1)
Net loss attributable to Surgery Partners, Inc.	$	(12.4)	$	(24.9)

Net loss per share attributable to common stockholders:
Basic	$	(0.10)	$	(0.20)
Diluted (1)	$	(0.10)	$	(0.20)
Weighted average common shares outstanding:
Basic	125,972		125,206
Diluted (1)	125,972		125,206

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

See notes to unaudited condensed consolidated financial statements.

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SURGERY PARTNERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, dollars in millions)


	Three Months Ended March 31,
	2024		2023

Net income	$	24.3	$	1.2
Other comprehensive income (loss), net of tax:
Derivative activity, net of tax of $0	(5.5)		(11.3)
Comprehensive income (loss)	18.8		(10.1)
Less: Comprehensive loss attributable to non-controlling interests	(36.7)		(26.1)
Comprehensive loss attributable to Surgery Partners, Inc.	$	(17.9)	$	(36.2)

See notes to unaudited condensed consolidated financial statements.

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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 Income (Loss)		Retained Deficit		Non-Controlling Interests— Non-Redeemable		Total
	Shares	Amount
Balance as of December 31, 2022	125,961	$	1.3	$	2,478.0	$	76.2	$	(557.3)	$	942.7	$	2,940.9
Net (loss) income	—	—		—		—		(25.0)		18.3		(6.7)
Equity-based compensation	519	—		3.7		—		—		—		3.7
Other comprehensive loss	—	—		—		(11.3)		—		—		(11.3)
Acquisition and disposal of shares of non-controlling interests, net	—	—		(3.6)		—		—		49.7		46.1
Distributions to non-controlling interests—non-redeemable holders	—	—		—		—		—		(30.2)		(30.2)
Balance as of March 31, 2023	126,480	$	1.3	$	2,478.1	$	64.9	$	(582.3)	$	980.5	$	2,942.5


Balance as of December 31, 2023	126,594	$	1.3	$	2,497.6	$	57.5	$	(569.2)	$	1,047.3	$	3,034.5
Net (loss) income	—	—		—		—		(12.4)		29.3		16.9
Equity-based compensation	508	—		4.9		—		—		—		4.9
Other comprehensive loss	—	—		—		(5.5)		—		—		(5.5)
Acquisition and disposal of shares of non-controlling interests, net	—	—		(6.9)		—		—		23.7		16.8
Distributions to non-controlling interests—non-redeemable holders	—	—		—		—		—		(29.7)		(29.7)
Balance as of March 31, 2024	127,102	$	1.3	$	2,495.6	$	52.0	$	(581.6)	$	1,070.6	$	3,037.9

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)


	Three Months Ended March 31,
	2024		2023

Cash flows from operating activities:
Net income	$	24.3	$	1.2
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	33.7		33.7
Non-cash lease expense	9.0		9.0
Non-cash interest expense, net	1.5		6.5
Equity-based compensation expense	4.9		4.2
Net loss on disposals, consolidations and deconsolidations	1.5		10.5

Deferred income taxes	2.5		(1.8)
Equity in earnings of unconsolidated affiliates, net of distributions received	1.0		(0.2)

Changes in operating assets and liabilities, net of acquisitions and divestitures:
Accounts receivable	5.4		8.8

Other operating assets and liabilities	(43.1)		2.6
Net cash provided by operating activities	40.7		74.5

Cash flows from investing activities:
Purchases of property and equipment	(21.0)		(24.3)
Payments for acquisitions, net of cash acquired	(54.6)		(40.7)
Proceeds from disposals of facilities and other assets	1.5		8.0
Purchases of equity investments	(2.0)		(9.6)

Other investing activities	(7.0)		(4.1)
Net cash used in investing activities	(83.1)		(70.7)

Cash flows from financing activities:
Principal payments on long-term debt	(120.2)		(15.9)
Borrowings of long-term debt	192.5		15.9
Payments of debt issuance costs	—		(1.3)



Distributions to non-controlling interest holders	(40.5)		(41.9)
Proceeds related to ownership transactions with non-controlling interest holders	1.4		5.1

Other financing activities	(1.5)		(3.1)
Net cash provided by (used in) financing activities	31.7		(41.2)
Net decrease in cash and cash equivalents	(10.7)		(37.4)
Cash and cash equivalents at beginning of period	195.9		282.9
Cash and cash equivalents at end of period	$	185.2	$	245.5

See notes to unaudited condensed consolidated financial statements.

Table of Contents

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 orthopedics and pain management, gastroenterology, ophthalmology, and general surgery. The Company's surgical hospitals also provide services such as diagnostic imaging, laboratory, 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, 2024, the Company owned or operated a portfolio of 165 surgical facilities, comprised of 147 ASCs and 18 surgical hospitals in 33 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 92 of these surgical facilities and consolidated 124 surgical 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, 2023 (the "2023 Annual Report on Form 10-K"). Certain prior year amounts have been reclassified to conform with the current year presentation.

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.

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.

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SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents a summary of revenues by service type as a percentage of total revenues:


	Three Months Ended March 31,
	2024		2023
Patient service revenues:
Surgical Facility Services	94.9	%	96.0	%
Ancillary Services	3.4	%	2.5	%
Total patient service revenues	98.3	%	98.5	%
Other service revenues	1.7	%	1.5	%
Total revenues	100.0	%	100.0	%

Patient service revenues. This revenue is related to charging facility fees in exchange for providing patient care. The fee charged for health care procedures performed in surgical facilities varies depending on the type of service provided, but usually includes all charges for usage of an operating room, a recovery room, special equipment, medical supplies, nursing staff and medications. The fee does not normally include professional fees charged by the patient’s surgeon, anesthesiologist or other attending physician, which are billed directly by such physicians to the patient or third-party payor. However, in several surgical facilities, the Company charges for anesthesia services. Ancillary service revenues include fees for patient visits to the Company's physician practices, pharmacy services and diagnostic tests ordered by physicians.

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. Because 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.

Several states utilize supplemental Medicaid reimbursement programs for the purpose of providing reimbursement to providers to increase base rates to the levels that Medicare would have paid for the same service or for payments that offset a portion of the cost of providing care to Medicaid and indigent patients. These programs are designed with input from the Centers for Medicare & Medicaid Services (“CMS”) and are funded with a combination of state and federal resources, including, in certain instances, fees or taxes levied on the providers. We account for payments under these supplemental programs as variable consideration and estimate the amount using the most likely amount method. Reimbursement under these programs, including the recognition of variable consideration, is reflected in patient service revenues. Taxes or other program-related costs are reflected in other operating expenses.

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 and other non-patient services. The management agreements typically require the Company to provide recurring management services over a multi-year period, which are billed and collected on a monthly basis. The fees derived from these management arrangements are based on a predetermined percentage of the revenues of each facility or practice and are recognized in the period in which management services are rendered and billed.

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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,
	2024				2023
	Amount		%		Amount		%
Patient service revenues:
Private insurance	$	361.0	51.2	%	$	335.6	51.1	%
Government	303.6		43.0	%	287.8		43.8	%
Self-pay	19.8		2.8	%	15.6		2.4	%
Other (1)	20.9		3.0	%	17.4		2.7	%
Total patient service revenues	705.3		100.0	%	656.4		100.0	%
Other service revenues	12.1				9.8
Total revenues	$	717.4			$	666.2

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

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.

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 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.

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SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company's effective tax rate was 15.3% for the three months ended March 31, 2024 compared to 400.0% for the three months ended March 31, 2023. For the three months ended March 31, 2024, the effective tax rate differed from the U.S. federal statutory rate of 21% primarily due to earnings attributable to non-controlling interests, an increase in the Company’s valuation allowance attributable to interest expense limitations, state tax expense, and a discrete tax expense of $0.7 million related to the vesting of restricted stock awards. For the three months ended March 31, 2023, the effective tax rate differed from the U.S. federal statutory rate of 21% primarily due to earnings attributable to non-controlling interests, an increase in the Company’s valuation allowance attributable to interest expense limitations, and a discrete tax benefit of $1.8 million related to the vesting of restricted stock awards. 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.

Goodwill

Goodwill represents the excess of the fair value of the consideration provided in an acquisition plus the fair value of any non-controlling interests 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 disposals for the three months ended March 31, 2024 is included in Note 2. "Acquisitions and Disposals."

A summary of activity related to goodwill for the three months ended March 31, 2024 is as follows (in millions):


Balance at December 31, 2023	$	4,326.0
Acquisitions, including post acquisition adjustments	77.5
Disposals	(6.0)
Balance at March 31, 2024	$	4,397.5

A detailed evaluation of potential impairment indicators was performed as of March 31, 2024, which specifically considered recent increases in interest rates, inflation risk and market volatility. On the basis of available evidence as of March 31, 2024, 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 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 risks, 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. Management believes the likelihood of an event occurring that would trigger such purchases was remote as of March 31, 2024. The non-controlling interests—redeemable are reported outside of stockholders' equity in the condensed consolidated balance sheets.

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SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	Three Months Ended March 31,
	2024		2023

Balance at beginning of period	$	327.4	$	342.0
Net income attributable to non-controlling interests—redeemable	7.4		7.8
Acquisition and disposal of shares of non-controlling interests, net—redeemable	(0.3)		7.7
Distributions to non-controlling interest —redeemable holders	(10.8)		(11.7)
Balance at end of period	$	323.7	$	345.8

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 and accounts payable approximate their fair values under Level 3 calculations.

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


	Carrying Amount				Fair Value
	March 31, 2024		December 31, 2023		March 31, 2024		December 31, 2023

Senior secured term loan	$	1,398.4	$	1,398.4	$	1,403.6	$	1,401.9
6.750% senior unsecured notes due 2025	$	185.0	$	185.0	$	185.0	$	183.2
10.000% senior unsecured notes due 2027	$	320.0	$	320.0	$	320.8	$	321.2

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.

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, 2024, the Company's consolidated VIEs consisted of seven surgical facilities and fourteen 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, 2024 and December 31, 2023, were $67.0 million and $65.3 million, respectively, and the total liabilities of the consolidated VIEs were $39.1 million and $41.2 million, respectively.

Recent Accounting Pronouncements

In November 2023, the FASB issued Accounting Standards Update ("ASU") 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures, which requires enhanced disclosures of significant segment expenses. The ASU is effective for annual periods beginning after December 15, 2023 and interim periods beginning after December 15, 2024. The amendments in this ASU must be applied retrospectively to all periods presented and early adoption is permitted. The Company is evaluating the impact of this ASU on its condensed consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740), Improvements to Income Tax Disclosures, which establishes new requirements for the categorization and disaggregation of information in the rate reconciliation as well as for

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disaggregation of income taxes paid. The ASU is effective for annual periods beginning after December 15, 2024 and interim periods beginning after December 15, 2025. The amendments in this ASU may be applied prospectively or retrospectively to all periods presented and early adoption is permitted. The Company is evaluating the impact of this ASU on its condensed consolidated financial statements.

2. Acquisitions, Disposals and Deconsolidations

Acquisitions

During the three months ended March 31, 2024:

•The Company acquired a controlling interest in two surgical facilities and several physician practices for aggregate cash consideration of $66.0 million, net of cash acquired, and non-cash consideration of $1.1 million, which consisted of a non-controlling interest in one of the Company's existing surgical facilities. As of March 31, 2024, $11.4 million of the cash consideration was deferred and included as a component of current liabilities in the condensed consolidated balance sheets. In connection with these acquisitions, the Company preliminarily recognized non-controlling interests of $21.2 million and goodwill of $77.2 million.

During the three months ended March 31, 2023:

•The Company acquired a controlling interest in one surgical facility and one physician practice for aggregate cash consideration of $16.2 million, net of cash acquired and non-cash consideration of $1.3 million, which consisted of non-controlling interest in one of the Company's existing surgical facilities. In connection with these acquisitions, the Company preliminarily recognized non-controlling interests of $12.0 million and goodwill of $25.7 million.

•The Company acquired a controlling interest in two surgical facilities, which were previously accounted for as equity method investments, for aggregate cash consideration of $24.5 million, net of cash acquired. These transactions resulted in the consolidation of the previously non-consolidated entities. The previously held non-controlling interests were remeasured and recorded at fair value as of the dates of the transactions. The fair value measurement utilizes Level 3 inputs, which includes unobservable data. The acquisition date fair value of the previously held non-controlling interests was $8.3 million. As a result of increasing its ownership interest, the Company recognized a net loss of $2.9 million included in net loss on disposals, consolidations and deconsolidations in the condensed consolidated statements of operations for the three months ended March 31, 2023. The net loss was determined based on the difference between the fair value of the Company's previously held non-controlling interests in the entities and the carrying values immediately prior to the transactions. In connection with the consolidation of these facilities, the Company preliminarily recognized non-controlling interests of $34.2 million and goodwill of $65.6 million.

•The Company acquired a non-controlling interest in one existing surgical facility and one in-development de novo surgical facility for aggregate cash consideration of $12.4 million. The non-controlling interests were accounted for as equity method investments and recorded as a component of investments in and advances to affiliates in the condensed consolidated balance sheets.

Disposals

During the three months ended March 31, 2024, the Company sold a portion of its interests in a surgical facility for net cash proceeds of $1.5 million. As a result of the transaction, the Company lost control of the previously controlled surgical facility but retains a non-controlling interest, resulting in the deconsolidation of the previously consolidated entity. This transaction resulted in a pretax net gain on deconsolidation of $2.7 million, which is included in net loss on disposals, consolidations and deconsolidations in the accompanying condensed consolidated statements of operations for the three months ended March 31, 2024. The net loss was determined based on the difference between the net cash proceeds plus the fair value of the Company’s retained interests in the entity and the carrying values of both the tangible and intangible assets of the entity immediately prior to the transaction.

During the three months ended March 31, 2023, the Company sold its interests in a surgical facility for a cash sales price of $8.8 million, a portion of which was held in escrow pursuant to the purchase agreement. In connection with the sale, the Company recognized a pre-tax loss of $0.2 million included in net loss on disposals, consolidations and deconsolidations in the condensed consolidated statements of operations for the three months ended March 31, 2023.

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3. Long-Term Debt

A summary of long-term debt follows (in millions):


	March 31, 2024		December 31, 2023

Senior secured term loan (1)	$	1,398.4	$	1,398.4
Senior secured revolving credit facility	87.0		—
6.750% senior unsecured notes due 2025	185.0		185.0
10.000% senior unsecured notes due 2027	320.0		320.0
Notes payable and other secured loans	202.2		205.2
Finance lease obligations	704.6		693.6
Less: unamortized debt issuance costs and discounts	(26.2)		(27.1)
Total debt	2,871.0		2,775.1
Less: current maturities	77.2		73.3
Total long-term debt	$	2,793.8	$	2,701.8

(1)Includes unamortized fair value discount of $1.6 million as of March 31, 2024 and December 31, 2023, respectively.

As of March 31, 2024, the Company's availability on its Revolver was $607.3 million (including letters of credit of $9.5 million). The increase in outstanding borrowings on the Revolver, was primarily due to the timing of acquisitions completed during the first quarter of 2024.

See Note 10. "Subsequent Events" for additional information related to the Company's debt obligations.

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 condensed consolidated balance sheets (in millions):


	Classification in Condensed Consolidated Balance Sheets	March 31, 2024		December 31, 2023

Assets:
Operating lease assets	Right-of-use operating lease assets	$	257.7	$	255.3
Finance lease assets	Property and equipment, net of accumulated depreciation	591.4		587.0
Total leased assets		$	849.1	$	842.3

Liabilities:
Operating lease liabilities:
Current	Other current liabilities	$	37.8	$	37.6
Long-term	Right-of-use operating lease liabilities	250.5		248.9
Total operating lease liabilities		288.3		286.5
Finance lease liabilities:
Current	Current maturities of long-term debt	26.3		25.4
Long-term	Long-term debt, less current maturities	678.3		668.2
Total finance lease liabilities		704.6		693.6
Total lease liabilities		$	992.9	$	980.1

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The following table presents the components of the Company's lease expense and their classification in the condensed consolidated statements of operations (in millions):


	Three Months Ended March 31,
	2024		2023

Operating lease costs	$	15.9	$	16.4
Finance lease costs:
Amortization of leased assets	11.8		9.4
Interest on lease liabilities	13.0		12.3
Total finance lease costs	24.8		21.7
Variable and short-term lease costs	5.8		5.2
Total lease costs	$	46.5	$	43.3

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


	Three Months Ended March 31,
	2024		2023

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases	$	15.6	$	16.1
Operating cash outflows from finance leases	$	12.4	$	11.7
Financing cash outflows from finance leases	$	7.5	$	6.4

Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	19.2	$	8.9
Finance leases	$	12.1

SEC Form 10-Q filed by Surgery Partners Inc.