23.2 | |
| | | | 31.2 | | | 32.1 | | | 32.2 | | | 101.INS | | XBRL Instance Document | 101.SCH | | XBRL Taxonomy Extension Schema Document | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
(a) Management Contract or Compensatory Plan or Arrangement. * Schedules and/or Exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish a supplemental copy of any omitted schedule or exhibit to the SEC upon request. Item 16. Form 10-K Summary None.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors and Stockholders of Surgery Partners, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Surgery Partners, Inc. and subsidiaries (the Company)"Company") as of December 31, 2017 (Successor)2019 and 2016 (Predecessor), and2018, the related consolidated statements of operations, comprehensive income (loss), shareholders'cash flow, stockholders' equity, and cash flows for the periods September 1, 2017 to December 31, 2017 (Successor) and January 1, 2017 to August 31, 2017 (Predecessor) and the years ended December 31, 20162019 and 2015 (Predecessor),2018, and the related notes (collectively referred to as the “financial statements”"financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company atas of December 31, 2017 (Successor)2019 and 2016 (Predecessor),2018, and the results of its operations and its cash flows for the periods September 1, 2017 to December 31, 2017 (Successor) and January 1, 2017 to August 31, 2017 (Predecessor) and the years ended December 31, 20162019 and 2015 (Predecessor),2018, in conformity with U.S.accounting principles generally accepted accounting principles.in the United States of America. We have also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company'sCompany’s internal control over financial reporting as of December 31, 2017 (Successor),2019, based on criteria established in Internal Control-IntegratedControl - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 16, 201813, 2020, expressed an adverseunqualified opinion thereon.on the Company’s internal control over financial reporting. Change in Accounting Principle As discussed in Note 1 to the financial statements, the Company has adopted Accounting Standards Codification Topic 842, “Leases”, using the modified retrospective adoption method on January 1, 2019. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’sCompany's financial statements based on our audits.audit. We are a public accounting firm registered with the PCAOBPublic Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ ErnstDELOITTE & YoungTOUCHE LLP Nashville, Tennessee March 13, 2020
We have served as the Company's auditor since 2018.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Surgery Partners, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for the periods September 1, 2017 to December 31, 2017 (Successor) and January 1, 2017 to August 31, 2017 (Predecessor) of Surgery Partners, Inc. (the Company), and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of the Company's operations and its cash flows for the periods September 1, 2017 to December 31, 2017 (Successor) and January 1, 2017 to August 31, 2017 (Predecessor), in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/ Ernst & Young
We served as the Company’s auditor since 2014.from 2014 to 2018.
Nashville, Tennessee
March 16, 2018, except for the effect of adopting ASU 2016-18, Statement of Cash Flows - Restricted Cash, as to which the date is March 15, 2019
SURGERY PARTNERS, INC. CONSOLIDATED BALANCE SHEETS (In thousands,Dollars in millions, except shares and per share amounts)
| | | | Successor | | | | Predecessor | | December 31, | | | December 31, 2017 | | | | December 31, 2016 | | 2019 | | 2018 | ASSETS | | | | | | | | | | | Current assets: | | | | | | | | | | | Cash and cash equivalents | | $ | 174,914 |
| | | | $ | 69,699 |
| | $ | 92.7 |
| | $ | 184.3 |
| Accounts receivable, less allowance for doubtful accounts of $2,026 and $29,872, respectively | | 288,023 |
| | | | 220,594 |
| | Accounts receivable | | | 326.9 |
| | 307.6 |
| Inventories | | 44,951 |
| | | | 28,777 |
| | 46.3 |
| | 43.4 |
| Prepaid expenses and other current assets | | 55,337 |
| | | | 42,885 |
| | Prepaid expenses | | | 17.8 |
| | 16.2 |
| Other current assets | | | 41.8 |
| | 36.8 |
| Total current assets | | 563,225 |
| | | | 361,955 |
| | 525.5 |
| | 588.3 |
| Property and equipment, net | | 398,536 |
| | | | 204,253 |
| | 523.3 |
| | 426.3 |
| Intangible assets, net | | 58,908 |
| | | | 48,023 |
| | 47.3 |
| | 54.3 |
| Goodwill | | 3,346,838 |
| | | | 1,555,204 |
| | 3,402.4 |
| | 3,382.8 |
| Investments in and advances to affiliates | | 74,282 |
| | | | 34,980 |
| | 93.2 |
| | 78.5 |
| Restricted invested assets | | 315 |
| | | | 315 |
| | Long-term deferred tax assets | | 132,319 |
| | | | 83,793 |
| | 98.7 |
| | 109.2 |
| Other long-term assets | | 48,350 |
| | | | 16,435 |
| | 328.5 |
| | 36.9 |
| Total assets | | $ | 4,622,773 |
| | | | $ | 2,304,958 |
| | $ | 5,018.9 |
| | $ | 4,676.3 |
| | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | | Current liabilities: | | | | | | | | | | | Accounts payable | | $ | 84,710 |
| | | | $ | 49,766 |
| | $ | 96.7 |
| | $ | 83.3 |
| Accrued payroll and benefits | | 49,625 |
| | | | 29,273 |
| | 54.2 |
| | 55.2 |
| Other current liabilities | | 109,944 |
| | | | 79,864 |
| | 191.2 |
| | 155.2 |
| Current maturities of long-term debt | | 58,726 |
| | | | 27,822 |
| | 56.0 |
| | 55.6 |
| Total current liabilities | | 303,005 |
| | | | 186,725 |
| | 398.1 |
| | 349.3 |
| Long-term debt, less current maturities | | 2,130,556 |
| | | | 1,414,421 |
| | 2,524.7 |
| | 2,270.9 |
| Long-term tax receivable agreement liability | | 43,791 |
| | | | 122,351 |
| | Other long-term liabilities | | 178,689 |
| | | | 76,266 |
| | 396.7 |
| | 271.3 |
| | | | | | | | | | | | Non-controlling interests—redeemable | | 299,316 |
| | | | 180,521 |
| | 321.0 |
| | 326.6 |
| Redeemable preferred stock - Series A, 310,000 shares authorized, issued and outstanding, redemption value of $330,806 at December 31, 2017; no shares were authorized, issued or outstanding at December 31, 2016. | | 330,806 |
| | | | — |
| | Redeemable preferred stock - Series A; shares authorized, issued and outstanding - 310,000; redemption value - $395.0 and $359.3, respectively | | | 395.0 |
| | 359.3 |
| | | | | | | | | | | | Stockholders' equity: | | | | | | | | | | | Preferred stock, $0.01 par value, 20,000,000 shares authorized, no shares issued or outstanding | | — |
| | | | — |
| | Common stock, $0.01 par value, 300,000,000 shares authorized, 48,687,136 shares issued and outstanding at December 31, 2017; 48,488,616 shares issued and outstanding at December 31, 2016. | | 487 |
| | | | 485 |
| | Preferred stock, $0.01 par value; shares authorized - 20,000,000; shares issued or outstanding - none | | | — |
| | — |
| Common stock, $0.01 par value; shares authorized - 300,000,000; shares issued and outstanding - 49,298,940 and 48,869,204, respectively | | | 0.5 |
| | 0.5 |
| Additional paid-in capital | | 695,560 |
| | | | 320,543 |
| | 662.7 |
| | 673.5 |
| Accumulated other comprehensive loss | | | (50.7 | ) | | (22.4 | ) | Retained deficit | | (41,316 | ) | | | | (311,351 | ) | | (315.7 | ) | | (247.0 | ) | Total Surgery Partners, Inc. stockholders' equity | | 654,731 |
| | | | 9,677 |
| | 296.8 |
| | 404.6 |
| Non-controlling interests—non-redeemable | | 681,879 |
| | | | 314,997 |
| | 686.6 |
| | 694.3 |
| Total stockholders' equity | | 1,336,610 |
| | | | 324,674 |
| | 983.4 |
| | 1,098.9 |
| Total liabilities and stockholders' equity | | $ | 4,622,773 |
| | | | $ | 2,304,958 |
| | $ | 5,018.9 |
| | $ | 4,676.3 |
|
See notes to consolidated financial statements.
SURGERY PARTNERS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands,Dollars in millions, except shares and per share amounts)amounts; shares in thousands)
| | | | Successor | | | | Predecessor | | Successor | | | | Predecessor | | | September 1 to December 31, | | | | January 1 to August 31, | | Year Ended December 31, | | Year Ended December 31, | | September 1 to December 31, | | | | January 1 to August 31, | | | 2017 | | | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 | | | | 2017 | | | | | | | | | | | | | | | | | | | | | | Revenues | | $ | 592,604 |
| | | | $ | 748,615 |
| | $ | 1,145,438 |
| | $ | 959,891 |
| | $ | 1,831.4 |
| | $ | 1,771.5 |
| | $ | 592.6 |
| | | | $ | 748.6 |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | Salaries and benefits | | 175,403 |
| | | | 241,149 |
| | 357,175 |
| | 261,685 |
| | 550.0 |
| | 534.7 |
| | 175.4 |
| | | | 241.1 |
| Supplies | | 161,015 |
| | | | 193,322 |
| | 269,239 |
| | 242,083 |
| | 507.9 |
| | 490.3 |
| | 161.0 |
| | | | 193.3 |
| Professional and medical fees | | 45,061 |
| | | | 57,931 |
| | 81,185 |
| | 66,583 |
| | 154.8 |
| | 145.5 |
| | 45.1 |
| | | | 57.9 |
| Lease expense | | 27,868 |
| | | | 36,503 |
| | 52,147 |
| | 44,848 |
| | 85.6 |
| | 86.7 |
| | 27.9 |
| | | | 36.5 |
| Other operating expenses | | 32,281 |
| | | | 43,267 |
| | 61,450 |
| | 54,127 |
| | 109.3 |
| | 104.2 |
| | 32.2 |
| | | | 43.4 |
| Cost of revenues | | 441,628 |
| | | | 572,172 |
| | 821,196 |
| | 669,326 |
| | 1,407.6 |
| | 1,361.4 |
| | 441.6 |
| | | | 572.2 |
| General and administrative expenses (1) | | 29,153 |
| | | | 46,797 |
| | 60,246 |
| | 55,992 |
| | 88.6 |
| | 93.6 |
| | 29.2 |
| | | | 46.8 |
| Depreciation and amortization | | 21,804 |
| | | | 30,124 |
| | 39,551 |
| | 34,545 |
| | 76.5 |
| | 67.4 |
| | 21.8 |
| | | | 30.1 |
| Provision for doubtful accounts | | 12,455 |
| | | | 16,297 |
| | 24,212 |
| | 23,578 |
| | Provision for doubtful accounts (see Note 1) | | | — |
| | — |
| | 12.5 |
| | | | 16.3 |
| Income from equity investments | | (3,319 | ) | | | | (3,148 | ) | | (4,764 | ) | | (3,777 | ) | | (10.2 | ) | | (8.9 | ) | | (3.3 | ) | | | | (3.1 | ) | Loss (gain) on disposal or impairment of long-lived assets, net | | 5 |
| | | | 1,715 |
| | 2,355 |
| | (2,097 | ) | | Merger transaction and integration costs | | 7,470 |
| | | | 5,584 |
| | 8,738 |
| | 17,920 |
| | Loss on debt refinancing | | — |
| | | | 18,211 |
| | 11,876 |
| | 16,102 |
| | Gain on litigation settlements | | (8,740 | ) | | | | (3,794 | ) | | (14,101 | ) | | — |
| | (Gain) loss on disposals and deconsolidations, net | | | (4.4 | ) | | 31.8 |
| | — |
| | | | 1.7 |
| Transaction and integration costs | | | 19.0 |
| | 31.7 |
| | 7.5 |
| | | | 5.6 |
| Impairment charges | | | 7.9 |
| | 74.4 |
| | — |
| | | | — |
| Loss on debt extinguishment | | | 11.7 |
| | — |
| | — |
| | | | 18.2 |
| Loss (gain) on litigation settlements | | | 0.2 |
| | 46.0 |
| | (8.7 | ) | | | | (3.8 | ) | Gain on acquisition escrow release | | (167 | ) | | | | (1,000 | ) | | — |
| | — |
| | — |
| | — |
| | (0.2 | ) | | | | (1.0 | ) | Termination of management agreement and IPO costs | | — |
| | | | — |
| | — |
| | 5,834 |
| | Electronic health records incentive expense (income) | | 45 |
| | | | (305 | ) |
| (408 | ) |
| (1,761 | ) | | Other (income) expense | | — |
| | | | (2 | ) | | 55 |
| | (525 | ) | | Other income | | | (1.4 | ) | | (3.7 | ) | | (0.1 | ) | | | | (0.4 | ) | Total operating expenses | | 500,334 |
| | | | 682,651 |
| | 948,956 |
| | 815,137 |
| | 1,595.5 |
| | 1,693.7 |
| | 500.3 |
| | | | 682.6 |
| Operating income | | 92,270 |
| | | | 65,964 |
| | 196,482 |
| | 144,754 |
| | 235.9 |
| | 77.8 |
| | 92.3 |
| | | | 66.0 |
| Gain on amendment to tax receivable agreement | | 1,098 |
| | | | 15,294 |
| | — |
| | — |
| | — |
| | — |
| | 1.1 |
| | | | 15.3 |
| Tax receivable agreement benefit (expense) | | 25,329 |
| | | | — |
| | (3,733 | ) | | (119,911 | ) | | Tax receivable agreement (expense) benefit | | | (2.4 | ) | | — |
| | 25.3 |
| | | | — |
| Interest expense, net | | (48,740 | ) | | | | (68,929 | ) | | (100,571 | ) | | (100,980 | ) | | (178.9 | ) | | (147.0 | ) | | (48.7 | ) | | | | (69.0 | ) | Income (loss) before income taxes | | 69,957 |
| | | | 12,329 |
| | 92,178 |
| | (76,137 | ) | | 54.6 |
| | (69.2 | ) | | 70.0 |
| | | | 12.3 |
| Income tax expense (benefit) | | 71,639 |
| | | | (18,089 | ) | | 7,095 |
| | (148,982 | ) | | 9.5 |
| | 26.4 |
| | 71.7 |
| | | | (18.1 | ) | Net (loss) income | | (1,682 | ) | | | | 30,418 |
| | 85,083 |
| | 72,845 |
| | Net income (loss) | | | 45.1 |
| | (95.6 | ) | | (1.7 | ) | | | | 30.4 |
| Less: Net income attributable to non-controlling interests | | (39,634 | ) | | | | (42,087 | ) | | (75,630 | ) | | (71,416 | ) | | (119.9 | ) | | (110.1 | ) | | (39.6 | ) | | | | (42.1 | ) | Net (loss) income attributable to Surgery Partners, Inc. | | (41,316 | ) | | | | (11,669 | ) | | 9,453 |
| | 1,429 |
| | Less: Amounts attributable to participating securities (2) | | (26,047 | ) | | | | — |
| | — |
| | — |
| | Net (loss) income attributable to common stockholders | | $ | (67,363 | ) | | | | $ | (11,669 | ) | | $ | 9,453 |
| | $ | 1,429 |
| | Net loss attributable to Surgery Partners, Inc. | | | (74.8 | ) | | (205.7 | ) | | (41.3 | ) | | | | (11.7 | ) | Less: Amounts attributable to participating securities | | | (35.7 | ) | | (32.4 | ) | | (26.1 | ) | | | | — |
| Net loss attributable to common stockholders | | | $ | (110.5 | ) | | $ | (238.1 | ) | | $ | (67.4 | ) | | | | $ | (11.7 | ) | | | | | | | | | | | | | | | | | | | | | | Net (loss) income per share attributable to common stockholders | | | | | | | | | | | | Basic | | $ | (1.39 | ) | | | | $ | (0.24 | ) | | $ | 0.20 |
| | $ | 0.04 |
| | Diluted (3) | | $ | (1.39 | ) | | | | $ | (0.24 | ) | | $ | 0.20 |
| | $ | 0.04 |
| | Weighted average common shares outstanding | | | | | | | | | | | | Basic | | 48,319,193 |
| | | | 48,121,404 |
|
| 48,018,944 |
| | 36,066,233 |
| | Diluted (3) | | 48,319,193 |
| | | | 48,121,404 |
|
| 48,190,738 |
|
| 37,464,387 |
| | Net loss per share attributable to common stockholders - basic and diluted (1) | | | $ | (2.29 | ) | | $ | (4.96 | ) | | $ | (1.39 | ) | | | | $ | (0.24 | ) | Weighted average common shares outstanding - basic and diluted (1) | | | 48,280 |
| | 48,028 |
| | 48,319 |
| | | | 48,121 |
|
(1)Includes contingent acquisition compensation expense of $1.9 million for the four months ended December 31, 2017 (Successor), and $5.1 million for both the eight months ended August 31, 2017 (Predecessor), and the year ended December 31, 2016 (Predecessor).
(2) Includes accrued dividends and undistributed earningsallocated to participating securities and the mark to redemption adjustment for the Series A Preferred Stock. There were no participating securities during the Predecessor periods. See Note 10. "Earnings Per Share" for further discussion.
(3)The impact of potentially dilutive securities for four months ended December 31, 2017 and the eight months ended August 31, 2017 were not considered because the effect would be anti-dilutive in those periods.
| | (1) | The impact of potentially dilutive securities for all periods were not considered because the effect would be anti-dilutive in those periods. |
See notes to consolidated financial statements.
SURGERY PARTNERS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands)Dollars in millions)
| | | | | | | | | | | | | | | | | | | | | | Successor | | | | Predecessor | | | September 1 to December 31, | | | | January 1 to August 31, | | Year Ended December 31, | | | 2017 | | | | 2017 | | 2016 | | 2015 | | | | | | | | | | | | Net (loss) income | | $ | (1,682 | ) | | | | $ | 30,418 |
| | $ | 85,083 |
| | $ | 72,845 |
| Other comprehensive income | | — |
| | | | — |
| | — |
| | — |
| Comprehensive (loss) income | | $ | (1,682 | ) | | | | $ | 30,418 |
| | $ | 85,083 |
| | $ | 72,845 |
| Less: Comprehensive income attributable to non-controlling interests | | (39,634 | ) | | | | (42,087 | ) | | (75,630 | ) | | (71,416 | ) | Comprehensive (loss) income attributable to Surgery Partners, Inc. | | $ | (41,316 | ) | | | | $ | (11,669 | ) | | $ | 9,453 |
| | $ | 1,429 |
|
| | | | | | | | | | | | | | | | | | | | | | Successor | | | | Predecessor | | | Year Ended December 31, | | September 1 to December 31, | | | | January 1 to August 31, | | | 2019 | | 2018 | | 2017 | | | | 2017 | | | | | | | | | | | | Net income (loss) | | $ | 45.1 |
| | $ | (95.6 | ) | | $ | (1.7 | ) | | | | $ | 30.4 |
| Other comprehensive (loss) income, net of tax: | | | | | | | | | | | Derivative activity | | (28.3 | ) | | (22.4 | ) | | — |
| | | | — |
| Comprehensive income (loss) | | $ | 16.8 |
| | $ | (118.0 | ) | | $ | (1.7 | ) | | | | $ | 30.4 |
| Less: Comprehensive income attributable to non-controlling interests | | (119.9 | ) | | (110.1 | ) | | (39.6 | ) | | | | (42.1 | ) | Comprehensive loss attributable to Surgery Partners, Inc. | | $ | (103.1 | ) | | $ | (228.1 | ) | | $ | (41.3 | ) | | | | $ | (11.7 | ) |
See notes to consolidated financial statements.
SURGERY PARTNERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except shares)
| | | | | | | | | | | | | | | | | | | | | | | | | Common Stock (1) | | Additional Paid-in Capital | | Retained Deficit | | Non-Controlling Interests— Non-Redeemable | | Total | | Shares | | Amount | | Predecessor | | | | | | | | | | | | Balance as of December 31, 2014 | 1,000 |
| | $ | — |
| | $ | 58,151 |
| | $ | (322,233 | ) | | $ | 293,618 |
| | $ | 29,536 |
| Net income | — |
| | — |
| | — |
| | 1,429 |
| | 53,800 |
| | 55,229 |
| Equity-based compensation | — |
| | — |
| | 7,502 |
| | — |
| | — |
| | 7,502 |
| Acquisition and disposal of shares of non-controlling interests, net | — |
| | — |
| | (835 | ) | | — |
| | 4,321 |
| | 3,486 |
| Distributions to non-controlling interests—non-redeemable holders | — |
| | — |
| | — |
| | — |
| | (49,784 | ) | | (49,784 | ) | Initial public offering | 14,285,000 |
| | 143 |
| | 250,836 |
| | — |
| | — |
| | 250,979 |
| Effect of Reorganization (2) | 33,870,990 |
| | 339 |
| | — |
| | — |
| | — |
| | 339 |
| Other | — |
| | — |
| | 640 |
| | — |
| | — |
| | 640 |
| Balance as of December 31, 2015 | 48,156,990 |
| | $ | 482 |
| | $ | 316,294 |
| | $ | (320,804 | ) | | $ | 301,955 |
| | $ | 297,927 |
| | | | | | | | | | | | | Net income | — |
| | — |
| | — |
| | 9,453 |
| | 57,607 |
| | 67,060 |
| Issuance of restricted stock, net of forfeitures | 331,626 |
| | 3 |
| | (3 | ) | | — |
| | — |
| | — |
| Equity-based compensation | — |
| | — |
| | 2,021 |
| | — |
| | — |
| | 2,021 |
| Acquisition and disposal of shares of non-controlling interests, net | — |
| | — |
| | 2,231 |
| | — |
| | 4,053 |
| | 6,284 |
| Distributions to non-controlling interests—non-redeemable holders | — |
| | — |
| | — |
| | — |
| | (48,618 | ) | | (48,618 | ) | Balance as of December 31, 2016 | 48,488,616 |
| | $ | 485 |
| | $ | 320,543 |
| | $ | (311,351 | ) | | $ | 314,997 |
| | $ | 324,674 |
| | | | | | | | | | | | | Net (loss) income | — |
| | — |
| | — |
| | (11,669 | ) | | 32,472 |
| | 20,803 |
| Issuance of restricted and unrestricted shares | 355,607 |
| | 3 |
| | (3 | ) | | — |
| | — |
| | — |
| Equity-based compensation | — |
| | — |
| | 3,697 |
| | — |
| | — |
| | 3,697 |
| Cancellation of restricted shares | (33,908 | ) | | — |
| | (790 | ) | | — |
| | — |
| | (790 | ) | Acquisition of NSH | — |
| | — |
| | — |
| | — |
| | 172,645 |
| | 172,645 |
| Acquisition and disposal of shares of non-controlling interests, net | — |
| | — |
| | 3,483 |
| | — |
| | (5,629 | ) | | (2,146 | ) | Distributions to non-controlling interests—non-redeemable holders | — |
| | — |
| | — |
| | — |
| | (38,875 | ) | | (38,875 | ) | Balance as of August 31, 2017 | 48,810,315 |
| | $ | 488 |
| | $ | 326,930 |
| | $ | (323,020 | ) | | $ | 475,610 |
| | $ | 480,008 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common Stock (1) | | Additional Paid-in Capital | | Retained Deficit | | Non-Controlling Interests— Non-Redeemable | | Total | | Shares | | Amount | | Successor | | | | | | | | | | | | Balance as of September 1, 2017 | 48,810,315 |
| | $ | 488 |
| | $ | 720,118 |
| | $ | — |
| | $ | 684,480 |
| | $ | 1,405,086 |
| Net (loss) income | — |
| | — |
| | — |
| | (41,316 | ) | | 26,703 |
| | (14,613 | ) | Issuance of restricted and unrestricted shares | 112,107 |
| | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| Equity-based compensation | — |
| | — |
| | 1,887 |
| | — |
| | — |
| | 1,887 |
| Cancellation of restricted shares | (54,622 | ) | | — |
| | (585 | ) | | — |
| | — |
| | (585 | ) | Preferred dividends | — |
| | — |
| | (10,481 | ) | | — |
| | — |
| | (10,481 | ) | Mark to redemption adjustment | — |
| | — |
| | (15,566 | ) | | — |
| | — |
| | (15,566 | ) | Reallocation in application of pushdown accounting | — |
| | — |
| | — |
| | — |
| | (21,248 | ) | | (21,248 | ) | Acquisition and disposal of shares of non-controlling interests, net | — |
| | — |
| | 2,195 |
| | — |
| | 17,206 |
| | 19,401 |
| Distributions to non-controlling interests—non-redeemable holders | — |
| | — |
| | — |
| | — |
| | (25,262 | ) | | (25,262 | ) | Repurchase of shares | (180,664 | ) | | (2 | ) | | (2,007 | ) | | — |
| | — |
| | (2,009 | ) | Balance as of December 31, 2017 | 48,687,136 |
| | $ | 487 |
| | $ | 695,560 |
| | $ | (41,316 | ) | | $ | 681,879 |
| | $ | 1,336,610 |
|
(1) As described in Note 1 herein, the common stock of the Company is that of Surgery Partners, Inc. as of December 31, 2017, 2016 and 2015 and that of Surgery Center Holdings, Inc. as of December 31, 2014.
(2) As a result of the Reorganization that occurred on September 30, 2015 (as further described in Note 1), Surgery Center Holdings, Inc, became an indirect wholly owned subsidiary of Surgery Partners, Inc. and the common stock of Surgery Center Holdings, Inc. is eliminated in consolidation.
See notes to consolidated financial statements.
SURGERY PARTNERS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS' EQUITY (InDollars in millions; shares in thousands)
| | | | | | | | | | | | | | | | | | | | | | Successor | | | | Predecessor | | | September 1 to December 31, | | | | January 1 to August 31, | | Year Ended December 31, | | | 2017 | | | | 2017 | | 2016 | | 2015 | | | | | | | | | | | | Cash flows from operating activities: | | | | | | | | | | | Net (loss) income | | $ | (1,682 | ) | | | | $ | 30,418 |
| | $ | 85,083 |
| | $ | 72,845 |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | | | | | | | Depreciation and amortization | | 21,804 |
| | | | 30,124 |
| | 39,551 |
| | 34,545 |
| Amortization of debt issuance costs, discounts and premium | | (559 | ) | | | | 5,091 |
| | 7,199 |
| | 6,263 |
| Amortization of unfavorable lease liability | | (221 | ) | | | | (217 | ) | | (431 | ) | | (431 | ) | Equity-based compensation | | 1,887 |
| | | | 3,697 |
| | 2,021 |
| | 7,502 |
| Loss (gain) on disposal or impairment of long-lived assets, net | | 5 |
| | | | 1,715 |
| | 2,355 |
| | (2,097 | ) | Gain on legal settlements | | (8,740 | ) | | | | — |
| | (14,101 | ) | | — |
| Loss on debt refinancing | | — |
| | | | 18,211 |
| | 11,876 |
| | 16,102 |
| Gain on amendment to tax receivable agreement | | (1,098 | ) | | | | (15,294 | ) | | — |
| | — |
| Tax receivable agreement (benefit) expense | | (25,329 | ) | | | | — |
| | 3,733 |
| | 119,911 |
| Deferred income taxes | | 71,031 |
| | | | (18,703 | ) | | 6,882 |
| | (149,891 | ) | Interest on contingent consideration obligation | | — |
| | | | — |
| | 1,124 |
| | 1,041 |
| Provision for doubtful accounts | | 12,455 |
| | | | 16,297 |
| | 24,212 |
| | 23,578 |
| Income from equity investments, net of distributions received | | 678 |
| | | | 489 |
| | (846 | ) | | (543 | ) | Changes in operating assets and liabilities, net of acquisitions and divestitures: | | | | | | | | | | | Accounts receivable | | (31,500 | ) | | | | 8,837 |
| | (60,622 | ) | | (48,783 | ) | Other operating assets and liabilities | | 14,494 |
| | | | (12,947 | ) | | 17,203 |
| | 4,439 |
| Net cash provided by operating activities | | 53,225 |
| | | | 67,718 |
| | 125,239 |
| | 84,481 |
| | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | Purchases of property and equipment, net | | (10,827 | ) | | | | (18,773 | ) | | (39,109 | ) | | (33,439 | ) | Payments for acquisitions, net of cash acquired | | (29,249 | ) | | | | (725,853 | ) | | (146,405 | ) | | (112,596 | ) | Proceeds from divestitures | | 1,183 |
| | | | 70 |
| | 765 |
| | 11,193 |
| Net cash used in investing activities | | (38,893 | ) | | | | (744,556 | ) | | (184,749 | ) | | (134,842 | ) | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | Proceeds from initial public offering, net of offering costs | | — |
| | | | — |
| | — |
| | 250,979 |
| Principal payments on long-term debt | | (18,629 | ) | | | | (1,164,237 | ) | | (473,437 | ) | | (328,329 | ) | Borrowings of long-term debt | | 409 |
| | | | 1,805,966 |
| | 650,707 |
| | 196,366 |
| Payments of debt issuance costs | | (4 | ) | | | | (58,591 | ) | | (14,296 | ) | | — |
| Penalty on prepayment of debt | | — |
| | | | — |
| | (4,900 | ) | | — |
| Payment of premium of debt extinguishment | | — |
| | | | — |
| | — |
| | (7,305 | ) | Proceeds from preferred stock issuance | | — |
| | | | 310,000 |
| | — |
| | — |
| Payments of stock issuance costs | | — |
| | | | (18,347 | ) | | — |
| | — |
| Payments of preferred dividends | | (1,316 | ) | | | | — |
| | — |
| | — |
| Distributions to non-controlling interest holders | | (33,490 | ) | | | | (50,343 | ) | | (65,778 | ) | | (69,720 | ) | Proceeds from (payments related to) ownership transactions with non-controlling interest holders | | 998 |
| | | | (1,518 | ) | | (20,096 | ) | | (12,175 | ) | Repurchase of shares | | (2,009 | ) | | | | — |
| | — |
| | — |
| Financing lease obligations | | 1,007 |
| | | | (796 | ) | | (924 | ) | | 3,558 |
| Other financing activities | | (590 | ) | | | | (789 | ) | | — |
| | | Net cash (used in) provided by financing activities | | (53,624 | ) | | | | 821,345 |
| | 71,276 |
| | 33,374 |
| Net (decrease) increase in cash and cash equivalents | | (39,292 | ) | | | | 144,507 |
| | 11,766 |
| | (16,987 | ) | Cash and cash equivalents at beginning of period | | 214,206 |
| | | | 69,699 |
| | 57,933 |
| | 74,920 |
| Cash and cash equivalents at end of period | | $ | 174,914 |
| | | | $ | 214,206 |
| | $ | 69,699 |
| | $ | 57,933 |
| | | | | | | | | | | | Supplemental cash flow information: | | | | | | | | | | | Interest paid, net of interest income received | | 40,872 |
| | | | 68,646 |
| | 79,262 |
| | 96,799 |
| Cash paid for income taxes | | 485 |
| | | | 598 |
| | 661 |
| | 1,093 |
| Non-cash purchases of property and equipment under capital leases and financing activities | | 14,872 |
| | | | 8,469 |
| | 9,226 |
| | 5,443 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Retained Deficit | | Non-Controlling Interests— Non-Redeemable | | Total | | Shares | | Amount | | Predecessor | | | | | | | | | | | | | | Balance as of December 31, 2016 | 48,489 |
| | $ | 0.5 |
| | $ | 320.5 |
| | $ | — |
| | $ | (311.3 | ) | | $ | 315.0 |
| | $ | 324.7 |
| Net (loss) income | — |
| | — |
| | — |
| | — |
| | (11.7 | ) | | 32.5 |
| | 20.8 |
| Equity-based compensation | 321 |
| | — |
| | 2.9 |
| | — |
| | — |
| | — |
| | 2.9 |
| Acquisition of NSH | — |
| | — |
| | — |
| | — |
| | — |
| | 172.6 |
| | 172.6 |
| Acquisition and disposal of shares of non-controlling interests, net (1) | . | | — |
| | 3.5 |
| | — |
| | — |
| | (5.6 | ) | | (2.1 | ) | Distributions to non-controlling interests—non-redeemable holders | — |
| | — |
| | — |
| | — |
| | — |
| | (38.9 | ) | | (38.9 | ) | Balance as of August 31, 2017 | 48,810 |
| | $ | 0.5 |
| | $ | 326.9 |
| | $ | — |
| | $ | (323.0 | ) | | $ | 475.6 |
| | $ | 480.0 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Successor | | | | | | | | | | | | | | Balance as of September 1, 2017 | 48,810 |
| | $ | 0.5 |
| | $ | 720.1 |
| | $ | — |
| | $ | — |
| | $ | 684.5 |
| | $ | 1,405.1 |
| Net (loss) income | — |
| | — |
| | — |
| | — |
| | (41.3 | ) | | 26.7 |
| | (14.6 | ) | Equity-based compensation | 58 |
| | — |
| | 1.3 |
| | — |
| | — |
| | — |
| | 1.3 |
| Preferred dividends | — |
| | — |
| | (10.5 | ) | | — |
| | — |
| | — |
| | (10.5 | ) | Mark to redemption adjustment | — |
| | — |
| | (15.6 | ) | | — |
| | — |
| | — |
| | (15.6 | ) | Repurchase of shares | (181 | ) | | — |
| | (2.0 | ) | | — |
| | — |
| | — |
| | (2.0 | ) | Acquisition and disposal of shares of non-controlling interests, net (1) | — |
| | — |
| | 2.2 |
| | — |
| | — |
| | (4.0 | ) | | (1.8 | ) | Distributions to non-controlling interests—non-redeemable holders | — |
| | — |
| | — |
| | — |
| | — |
| | (25.3 | ) | | (25.3 | ) | Balance as of December 31, 2017 | 48,687 |
| | 0.5 |
| | 695.5 |
| | — |
| | (41.3 | ) | | 681.9 |
| | 1,336.6 |
| Net (loss) income | — |
| | — |
| | — |
| | — |
| | (205.7 | ) | | 75.5 |
| | (130.2 | ) | Equity-based compensation | 339 |
| | — |
| | 8.1 |
| | — |
| | — |
| | — |
| | 8.1 |
| Preferred dividends | — |
| | — |
| | (32.4 | ) | | — |
| | — |
| | — |
| | (32.4 | ) | Other comprehensive loss | — |
| | — |
| | — |
| | (22.4 | ) | | — |
| | — |
| | (22.4 | ) | Repurchase of shares | (157 | ) | | — |
| | (2.0 | ) | | — |
| | — |
| | — |
| | (2.0 | ) | Acquisition and disposal of shares of non-controlling interests, net (1) | — |
| | — |
| | 4.3 |
| | — |
| | — |
| | 15.8 |
| | 20.1 |
| Distributions to non-controlling interests—non-redeemable holders | — |
| | — |
| | — |
| | — |
| | — |
| | (78.3 | ) | | (78.3 | ) | Other | — |
| | — |
| | — |
| | — |
| | — |
| | (0.6 | ) | | (0.6 | ) | Balance as of December 31, 2018 | 48,869 |
| | 0.5 |
| | 673.5 |
| | (22.4 | ) | | (247.0 | ) | | 694.3 |
| | 1,098.9 |
| Net (loss) income | — |
| | — |
| | — |
| | — |
| | (74.8 | ) | | 80.8 |
| | 6.0 |
| Equity-based compensation | 430 |
| | — |
| | 9.2 |
| | — |
| | — |
| | — |
| | 9.2 |
| Preferred dividends | — |
| | — |
| | (35.7 | ) | | — |
| | — |
| | — |
| | (35.7 | ) | Other comprehensive loss | — |
| | — |
| | — |
| | (28.3 | ) | | — |
| | — |
| | (28.3 | ) | Acquisition and disposal of shares of non-controlling interests, net (1) | — |
| | — |
| | 15.7 |
| | — |
| | — |
| | (7.4 | ) | | 8.3 |
| Distributions to non-controlling interests—non-redeemable holders | — |
| | — |
| | — |
| | — |
| | — |
| | (81.2 | ) | | (81.2 | ) | Impact of adoption of ASC 842 | — |
| | — |
| | — |
| | — |
| | 6.1 |
| | — |
| | 6.1 |
| Other | — |
| | — |
| | — |
| | — |
| | — |
| | 0.1 |
| | 0.1 |
| Balance as of December 31, 2019 | 49,299 |
| | $ | 0.5 |
| | $ | 662.7 |
| | $ | (50.7 | ) | | $ | (315.7 | ) | | $ | 686.6 |
| | $ | 983.4 |
|
| | (1) | Includes post acquisition date adjustments in all periods, including reallocation in application of pushdown accounting in the 2017 successor period. |
See notes to consolidated financial statements.
SURGERY PARTNERS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in millions)
| | | | | | | | | | | | | | | | | | | | | | Successor | | | | Predecessor | | | Year Ended December 31, | | September 1 to December 31, | | | | January 1 to August 31, | | | 2019 | | 2018 | | 2017 | | | | 2017 | | | | | | | | | | | | Cash flows from operating activities: | | | | | | | | | | | Net income (loss) | | $ | 45.1 |
| | $ | (95.6 | ) | | $ | (1.7 | ) | | | | $ | 30.4 |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | Depreciation and amortization | | 76.5 |
| | 67.4 |
| | 21.8 |
| | | | 30.1 |
| Non-cash interest expense (income), net | | 2.5 |
| | (1.4 | ) | | (0.8 | ) | | | | 4.9 |
| Equity-based compensation expense | | 10.2 |
| | 9.3 |
| | 1.9 |
| | | | 3.7 |
| (Gain) loss on disposals and deconsolidations, net | | (4.4 | ) | | 31.8 |
| | — |
| | | | 1.7 |
| Deferred income taxes | | 8.5 |
| | 25.3 |
| | 71.0 |
| | | | (18.7 | ) | Income from equity investments, net of distributions received | | 0.3 |
| | 0.2 |
| | 0.7 |
| | | | 0.5 |
| Loss on debt extinguishment | | 11.7 |
| | — |
| | — |
| | | | 18.2 |
| Non-cash lease expense | | 40.0 |
| | — |
| | — |
| | | | — |
| Impairment charges | | 7.9 |
| | 74.4 |
| | — |
| | | | — |
| Gain on legal settlements | | — |
| | — |
| | (8.7 | ) | | | | — |
| Gain on amendment to tax receivable agreement | | — |
| | — |
| | (1.1 | ) | | | | (15.3 | ) | Tax receivable agreement benefit | | — |
| | — |
| | (25.3 | ) | | | | — |
| Provision for doubtful accounts | | — |
| | — |
| | 12.5 |
| | | | 16.3 |
| Changes in operating assets and liabilities, net of acquisitions and divestitures: | | | | | | | | | | | Accounts receivable | | (23.5 | ) | | (22.8 | ) | | (31.5 | ) | | | | 8.8 |
| Other operating assets and liabilities | | (45.3 | ) | | 56.0 |
| | 14.4 |
| | | | (12.9 | ) | Net cash provided by operating activities | | 129.5 |
| | 144.6 |
| | 53.2 |
| | | | 67.7 |
| | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | Purchases of property and equipment, net | | (73.6 | ) | | (39.8 | ) | | (10.8 | ) | | | | (18.8 | ) | Payments for acquisitions, net of cash acquired | | (13.8 | ) | | (106.8 | ) | | (29.2 | ) | | | | (725.9 | ) | Purchase of equity investments | | (15.2 | ) | | — |
| | — |
| | | | — |
| Proceeds from divestitures | | 17.6 |
| | 19.2 |
| | 1.2 |
| | | | 0.1 |
| Other investing activities | | (0.2 | ) | | (1.5 | ) | | — |
| | | | — |
| Net cash used in investing activities | | (85.2 | ) | | (128.9 | ) | | (38.8 | ) | | | | (744.6 | ) | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | Principal payments on long-term debt | | (490.8 | ) | | (157.6 | ) | | (18.6 | ) | | | | (1,164.2 | ) | Borrowings of long-term debt | | 506.9 |
| | 282.7 |
| | 0.4 |
| | | | 1,806.0 |
| Payments of debt issuance costs | | (8.9 | ) | | (3.0 | ) | | — |
| | | | (58.6 | ) | Penalty on prepayment of debt | | (17.8 | ) | | — |
| | — |
| | | | — |
| Distributions to non-controlling interest holders | | (121.2 | ) | | (109.0 | ) | | (33.5 | ) | | | | (50.3 | ) | (Payments) proceeds related to ownership transactions with non-controlling interest holders, net | | (3.2 | ) | | (2.2 | ) | | 1.0 |
| | | | (1.5 | ) | Proceeds from preferred stock issuance | | — |
| | — |
| | — |
| | | | 310.0 |
| Payments of stock issuance costs | | — |
| | — |
| | — |
| | | | (18.3 | ) | Payments of preferred dividends | | — |
| | (7.8 | ) | | (1.3 | ) | | | | — |
| Repurchase of shares | | — |
| | (2.0 | ) | | (2.0 | ) | | | | — |
| Other financing activities | | (0.9 | ) | | (7.4 | ) | | 0.3 |
| | | | (1.7 | ) | Net cash (used in) provided by financing activities | | (135.9 | ) | | (6.3 | ) | | (53.7 | ) | | | | 821.4 |
| Net (decrease) increase in cash, cash equivalents and restricted cash | | (91.6 | ) | | 9.4 |
| | (39.3 | ) | | | | 144.5 |
| Cash, cash equivalents and restricted cash at beginning of period | | 184.6 |
| | 175.2 |
| | 214.5 |
| | | | 70.0 |
| Cash, cash equivalents and restricted cash at end of period | | $ | 93.0 |
| | $ | 184.6 |
| | $ | 175.2 |
| | | | $ | 214.5 |
| | | | | | | | | | | | Supplemental cash flow information: | | | | | | | | | | | Interest paid, net of interest income received | | 180.3 |
| | 145.4 |
| | 40.9 |
| | | | 68.6 |
| Cash paid for income taxes | | 1.6 |
| | 2.2 |
| | 0.5 |
| | | | 0.6 |
| Non-cash purchases of property and equipment | | 30.7 |
| | 61.0 |
| | 14.9 |
| | | | 8.5 |
|
See notes to consolidated financial statements.
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Accounting Policies Organization Surgery Partners, Inc., a Delaware corporation (together with its subsidiaries, the “Company”"Company"), was formed April 2, 2015, as a holding company for the purpose of facilitating an initial public offering (the “IPO”) of shares of common stock. Prior to September 30, 2015, the Company conducted business through Surgery Center Holdings, Inc. and its subsidiaries. Surgery Center Holdings, LLC was and is the sole indirect owner of the equity interests of Surgery Center Holdings, Inc. and had no other material assets. On September 30, 2015, Surgery Partners, Inc. became the direct parent and sole member of Surgery Center Holdings, LLC (the "Reorganization"). In the Reorganization, all of the equity interests held by the pre-IPO Owners of Surgery Center Holdings, LLC were contributed to Surgery Partners, Inc. in exchange for 33,871,990 shares of common stock of Surgery Partners, Inc. and certain rights to additional payments under a tax receivable agreement. After giving effect to the Reorganization, Surgery Partners, Inc. is a holding company, and its sole material asset is an equity interest in Surgery Center Holdings, LLC. The Company's consolidated financial statements for periods prior to the Reorganization represent the historical operating results and financial position of Surgery Center Holdings, Inc. and certain of its subsidiaries.
On October 1, 2015, the Company completed its IPO of 14,285,000 shares of common stock at an offering price of $19.00 per share. On October 6, 2015, the Company received net proceeds from the sale of common stock in this offering of $255.8 million, after deducting underwriting discounts and other fees of $15.6 million. These net proceeds were used to repay a portion of the borrowings outstanding under the 2014 Second Lien and to pay fees associated with this offering. The Company also incurred an additional $4.8 million in costs directly related to the IPO.
2015. On August 31, 2017, the Company completed its acquisition of NSH Holdco, Inc. (“NSH”). Pursuant to the terms of the Agreement and Plan of Merger, dated as of May 9, 2017, by and among the Company, SP Merger Sub, Inc., a wholly owned subsidiary of the Company, NSH, and IPC / NSH, L.P. (solely in its capacity as sellers’ representative), as amended by that certain Letter Amendment, dated as of July 7, 2017 (as amended, the “NSH Merger Agreement”), SP Merger Sub, Inc. merged with and into NSH with NSH continuing as the surviving corporation and a wholly owned subsidiary of Surgery Center Holdings, Inc. (the “NSH Merger”). Also on August 31, 2017, (i) the Company completed the sale and issuance of 310,000 shares of the Company's preferred stock, par value $0.01 per share, designated as 10.00% Series A Convertible Perpetual Participating Preferred Stock (the “Series A Preferred Stock”) to BCPE Seminole Holdings LP (“Bain”), a fund advised by an affiliate of Bain Capital Private Equity at a purchase price of $1,000 per share in cash (the “Preferred Private Placement”) pursuant to the Securities Purchase Agreement, dated as of May 9, 2017, by and between the Company and ("Bain (the “Preferred Stock Purchase Agreement”Capital"), and (ii) Bain completed its purchase of 26,455,651 shares (the “Purchased Shares”) of the Company's common stock, par value $0.01 per share (the “Common Stock”) from H.I.G. Surgery Centers, LLC (“H.I.G.”) at a purchase price of $19.00 per share in cash (the “Private Sale”) pursuant to the Stock Purchase Agreement, dated as of May 9, 2017, by and among the Company, Bain, H.I.G. and H.I.G. Bayside Debt & LBO Fund II L.P. (for the purposes stated therein) (the “Common Stock Purchase Agreement” and together with the NSH Merger Agreement, the Preferred Stock Purchase Agreement and the other agreements and documents executed in connection therewith, including the TRA (as defined in Note 2. “Significant Accounting Policies - Income Taxes and Tax Receivable Agreement”), the “Transaction Agreements”). As of August 31, 2017, the Purchased Shares representedpurchased approximately 54.2% of the Company’s outstanding Common Stock.common stock. As a result, of the Preferred Private Placement and the Private Sale, Bain Capital became the controlling stockholder of the Company, holding Series A Preferred Stock (as defined in Note 7. "Redeemable Preferred Stock") and Common Stockcommon stock that collectively represent approximately 65.7%67.0% of the voting power of all classes of capital stock of the Company as of August 31, 2017, and H.I.G. and its affiliated investment funds no longer own any capital stock of the Company. In connection with the change of control effected by the Preferred Private Placement and the Private Sale, the Company elected to apply “pushdown” accounting by applying the guidance in Accounting Standards Codification Topic ("ASC") 805, Business Combinations, including the recognition of the Company’s assets and liabilities at fair value as of August 31, 2017, and similarly recognizing goodwill calculated based on the terms of the transaction and the fair value of the new basis of net assets of the Company. Accordingly, the consolidated financial statements of the Company for periods before and after August 31, 2017 reflect different bases of accounting, and the financial positions and results of operations of those periods are not comparable. Throughout the Company's consolidated financial statements and the accompanying notes herein, periods prior to the change of control are identified as "Predecessor" and periods after the change of control are identified as "Successor."
As of December 31, 2017 (Successor),2019, the Company owned and operated a national network of surgical facilities and ancillary services in 3230 states. 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, ("GI"), general surgery, ophthalmology, orthopedics and pain management. The Company's surgical hospitals also provide services such as diagnostic imaging, laboratory, obstetrics, oncology, pharmacy, physical therapy and wound care. Ancillary services are comprised of a diagnostic laboratory, multi-specialty physician practices, urgent care facilities, anesthesia services and optical services. As of December 31, 2017 (Successor),2019, the Company owned or operated a portfolio of 124128 surgical facilities, comprised of 106112 ASCs and 1816 surgical hospitals. The Company owns these facilities in partnership with physicians and, in some cases, healthcarehealth care systems in the markets and communities it serves. The Company owned a majority interest in 8485 of the surgical facilities and consolidated 108107 of thesethe facilities for financial reporting purposes. Basis of Presentation
SURGERY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Significant Accounting Policies
Principlesfinancial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and footnotes. Examples include, but are not limited to, estimates of Consolidationaccounts receivable allowances, professional and general liabilities and the estimate of deferred tax assets or liabilities. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, as well as interests in partnerships and limited liability companies controlled by the Company through its ownership of a majority voting interest or other rights granted to the Company by contract to manage and control the affiliate's business. All significant intercompany balances and transactions are eliminated in consolidation. In connection with the change of control effective August 31, 2017, the Company elected to apply "pushdown" accounting by applying the guidance in Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 805, Business Combinations. Accordingly, the consolidated financial statements of the Company for periods before and after August 31, 2017 reflect different bases of accounting, and the results of operations, changes in stockholders' equity and cash flows of those periods are not comparable. Throughout the Company's consolidated financial statements and the accompanying notes herein, periods prior to August 31, 2017 (the date of the change of control) are identified as "Predecessor" and periods after the date of the change of control are identified as "Successor." Variable Interest Entities The consolidated financial statements include the accounts of variable interest entities ("VIE") in which the Company is the primary beneficiary under the provisions of Accounting Standards Codification 810, Consolidation. The Company has the power to direct the activities that most significantly impact a variable interest entity's economic performance. Additionally, the Company would absorb the majority of the expected losses from any of these entities should such expected losses occur. At December 31, 2019, the variable interest entities include four surgical facilities, three anesthesia practices and three physician practices. The total assets (excluding goodwill and intangible assets, net) of the consolidated VIEs included in the accompanying consolidated balance sheets as of December 31, 2019 and 2018, were $36.2 million and $11.2 million, respectively, and the total liabilities of the consolidated VIEs were $25.2 million and $3.6 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.
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, restricted invested assets and accounts payable approximate their fair values under Level 3 calculations. A summary of the carrying amounts and fair values of the Company's long-term debt follows (in millions): | | | | | | | | | | | | | | | | | | | | Carrying Amount | | Fair Value | | | December 31, | | December 31, | | | 2019 | | 2018 | | 2019 | | 2018 | | | | | | | | | | Senior secured term loan | | $ | 1,434.1 |
| | $ | 1,447.9 |
| | $ | 1,434.1 |
| | $ | 1,382.7 |
| 8.875% senior unsecured notes due 2021 | | $ | — |
| | $ | 406.7 |
| | $ | — |
| | $ | 407.2 |
| 6.750% senior unsecured notes due 2025 | | $ | 370.0 |
| | $ | 370.0 |
| | $ | 368.2 |
| | $ | 320.5 |
| 10.000% senior unsecured notes due 2027 | | $ | 430.0 |
| | $ | — |
| | $ | 471.4 |
| | $ | — |
|
The fair values in the table above were based on a Level 2 inputs using quoted prices for identical liabilities in inactive markets. The carrying amounts related to the Company's other long-term debt obligations, including finance lease obligations, approximate their fair values under Level 3 calculations. The Company has entered into certain interest rate swap agreements (see Note 8. Derivatives and Hedging Activity). At December 31, 2019 and 2018, the fair value of these derivative instruments was $50.7 million and $22.4 million, respectively, and was included in other long-term liabilities in the consolidated balance sheets. The fair value of these derivative financial instruments was based on a quoted market price, or a Level 2 input. Revenues In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers. The Company adopted the new standard effective January 1, 2018, using the modified retrospective method. The presentation of the amount of earnings from operations and net earnings were unchanged upon adoption of the new standard; however, during the year of adoption, the Company determined that amounts historically considered to be bad debt should be considered an implicit price concession, as defined in FASB Accounting Standards Codification 606, "Revenue From Contracts With Customers". This resulted in changes to the presentation of revenues and the provision for bad debts in the consolidated statements of operations. Previously, the estimate for unrealizable amounts was recorded to the provision for bad debts and presented as a component of operating expenses. Upon reassessment during the year of adoption, the estimate for unrealizable amounts is now reflected as an implicit price concession as a reduction to arrive at net revenue. 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 our 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: | | | | | | | | | | | | | | | | | | Successor | | | | Predecessor | | | Year Ended December 31, | | September 1 to December 31, | | | | January 1 to August 31, | | | 2019 | | 2018 | | 2017 | | | | 2017 | Patient service revenues: | | | | | | | | | | | Surgical facilities revenues | | 94.1 | % | | 93.6 | % | | 94.3 | % | | | | 91.4 | % | Ancillary services revenues | | 4.3 | % | | 4.5 | % | | 4.2 | % | | | | 7.0 | % | | | 98.4 | % | | 98.1 | % | | 98.5 | % | | | | 98.4 | % | Other service revenues: | | | | | | | | | | | Optical services revenues | | 0.2 | % | | 0.5 | % | | 0.6 | % | | | | 1.0 | % | Other | | 1.4 | % | | 1.4 | % | | 0.9 | % | | | | 0.6 | % | | | 1.6 | % | | 1.9 | % | | 1.5 | % | | | | 1.6 | % | Total revenues | | 100.0 | % | | 100.0 | % | | 100.0 | % | | | | 100.0 | % |
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 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.Optical service revenues consist of handling charges billed to the members of the Company's optical products purchasing organization. The Company's optical products purchasing organization negotiates volume buying discounts with optical products manufacturers. The buying discounts and any handling charges billed to the members of the buying group represent the revenue recognized for financial reporting purposes. The Company satisfies the performance obligation and recognizes revenue when the orders are shipped to members. The Company bases its estimates for sales returns and discounts on historical experience and has not experienced significant fluctuations between estimated and actual return activity and discounts given. Other revenues include management and administrative service fees derived from the non-consolidated facilities that the Company accounts for under the equity method, management of surgical facilities in which it does not own an interest, and management services provided to physician practices for which the Company is not required to provide capital or additional assets. These agreements typically require the Company to provide recurring management services over a multi-year period which are billed and collected on a monthly basis. The fees derived from these management arrangements are based on a predetermined percentage of the revenues of each facility or practice and are recognized in the period in which management services are rendered and billed. The following table sets forth patient service revenues by type of payor and as a percentage of total patient service revenues for the Company's consolidated surgical facilities (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Successor | | | | Predecessor | | | Year Ended December 31, | | Year Ended December 31, | | September 1 to December 31, | | | | January 1 to August 31, | | | 2019 | | 2018 | | 2017 | | | | 2017 | | | Amount | | % | | Amount | | % | | Amount | | % | | | | Amount | | % | Patient service revenues: | | | | | | | | | | | | | | | | | | | Private insurance | | $ | 970.5 |
| | 53.8 | % | | $ | 948.9 |
| | 54.6 | % | | $ | 347.8 |
| | 59.6 | % | | | | $ | 360.1 |
| | 48.9 | % | Government | | 701.9 |
| | 38.9 | % | | 653.3 |
| | 37.6 | % | | 196.9 |
| | 33.7 | % | | | | 309.0 |
| | 42.0 | % | Self-pay | | 46.1 |
| | 2.6 | % | | 50.0 |
| | 2.9 | % | | 15.2 |
| | 2.6 | % | | | | 15.9 |
| | 2.2 | % | Other (1) | | 84.6 |
| | 4.7 | % | | 84.8 |
| | 4.9 | % | | 23.9 |
| | 4.1 | % | | | | 51.4 |
| | 6.9 | % | Total patient service revenues | | 1,803.1 |
| | 100.0 | % | | 1,737.0 |
| | 100.0 | % | | 583.8 |
| | 100.0 | % | | | | 736.4 |
| | 100.0 | % | Other service revenues: | | | | | | | | | | | | | | | | | | | Optical service revenues | | 3.8 |
| | | | 9.5 |
| | | | 3.5 |
| | | | | | 7.6 |
| |
|
| Other revenues | | 24.5 |
| | | | 25.0 |
| | | | 5.3 |
| | | | | | 4.6 |
| |
|
| Total revenues | | $ | 1,831.4 |
| | | | $ | 1,771.5 |
| | | | $ | 592.6 |
| | | | | | $ | 748.6 |
| | |
| | (1) | Other is comprised of anesthesia service agreements, auto liability, letters of protection and other payor types. |
The increase in other revenues from 2017 to 2018 is primarily due to an increase in management and administrative service fees due to the acquisitions completed in 2017. Total net revenues in 2018 additionally reflect the impact of the Company's adoption of ASU 2014-09 as discussed above. Subsequent to the transactions on August 31, 2017 (Predecessor), the Company, as part of a review of operations undertaken to create a solid foundation to support the Company's long-term growth objectives, incurred a non-recurring adjustment to revenue of $15.6 million, which was attributable to an increase in reserves for certain accounts receivable during the eight months ended August 31, 2017 (Predecessor). The increase in reserves resulted from certain known events and actions during the eight months ended August 31, 2017 (Predecessor) related to select payors primarily in the Company’s ancillary services segment. Upon consideration of such additional information, related receivables
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
were determined to have a low likelihood of collection. The majority of this adjustment related to receivables with balances from the first quarter of 2016 and prior. Cash, Cash Equivalents and Restricted Cash The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company maintains its cash and cash equivalent balances at high credit quality financial institutions. Cash, cash equivalents and restricted cash reported within the consolidated statement of cash flows includes $0.3 million of restricted investments, which are reflected in other long-term assets in the consolidated balance sheet at both December 31, 2019 and 2018. These restricted investments represent restricted cash held in accordance with the provisions of a long-term operating lease agreement held as security for performance under the Company's covenants and obligations within the agreement through January 2024. Accounts Receivable Accounts receivable from third-party payors are recorded net of estimated implicit price concessions, which are estimated based on the historical trend of the Company's surgical facilities’ cash collections and contractual write-offs, established fee schedules, relationships with payors and procedure statistics. While changes in estimated reimbursement from third-party payors remain a possibility, the Company expects that any such changes would be minimal and, therefore, would not have a material effect on its financial condition or results of operations. Accounts receivable consists of receivables from federal and state agencies (under the Medicare and Medicaid programs), 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. As of December 31, 2019 and December 31, 2018, the Company had a net third-party Medicaid settlements liability of $5.6 million and $4.8 million, respectively. The Company recognizes that final reimbursement of accounts receivable is subject to final approval by each third-party payor. However, because the Company has contracts with its third-party payors and also verifies insurance coverage of the patient before medical services are rendered, the amounts that are pending approval from third-party payors are not considered significant. Amounts are classified outside of self-pay if the Company has an agreement with the third-party payor or has verified a patient’s coverage prior to services rendered. The Company's policy is to collect co-payments and deductibles prior to providing medical services. Patient services of the Company are primarily non-emergency, which allows the surgical facilities to control the procedures for which third-party reimbursement is sought and obtained. The Company does not require collateral from self-pay patients. The Company's collection policies and procedures are based on the type of payor, size of claim and estimated collection percentage for each patient account. The operating systems used to manage patient accounts provide for an aging schedule in 30-day increments, by payor, physician and patient. The Company analyzes accounts receivable at each of its surgical facilities to ensure the proper collection and aged category. The operating systems generate reports that assist in the collection efforts by prioritizing patient accounts. Collection efforts include direct contact with third-party payors or patients, written correspondence and the use of legal or collection agency assistance, as required. A summary of the changes in the allowance for doubtful accounts receivable follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | Balance at Beginning of Period | | Provision for Doubtful Accounts | | Accounts Written off, Net of Recoveries | | Impact of adoption of ASC 606 | | Balance at End of Period | Predecessor | | | | | | | | | | | Eight months ended August 31, 2017 | | $ | 29.9 |
| | $ | 16.3 |
| | $ | (14.1 | ) | | $ | — |
| | $ | 32.1 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Successor | | | | | | | | | | | Four months ended December 31, 2017 | | — |
| | 12.5 |
| | (10.5 | ) | | — |
| | 2.0 |
| Year ended December 31, 2018 | | 2.0 |
| | — |
| | — |
| | (2.0 | ) | | — |
|
The receivables related to the Company's optical products purchasing organization are recognized separately from patient accounts receivable and are included in other current assets in the consolidated balance sheets. Such receivables were $8.6 million and $8.5 million at December 31, 2019 and 2018, respectively. Impairment of Long-Lived Assets, Goodwill and Intangible Assets The Company evaluates the carrying value of long-lived assets when impairment indicators are present or when circumstances indicate that impairment may exist. The Company performs an impairment test by preparing an expected undiscounted cash flow projection. If the projection indicates that the recorded amount of the long-lived asset is not expected to be recovered, the carrying value is reduced to estimated fair value. The cash flow projection and fair value represents management’s best estimate, using appropriate and customary assumptions, projections and methodologies, at the date of evaluation. For discussion on impairment for goodwill and indefinite-lived intangible assets, refer to Note 4. "Goodwill and Intangible Assets."
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Professional and General and Workers' Compensation Insurance The Company maintains general liability and professional liability insurance in excess of self-insured retentions through third party commercial insurance carriers in amounts that management believes is sufficient for the Company's operations, although, potentially, some claims may exceed the scope of coverage in effect. The professional and general insurance coverage is on a claims-made basis. The Company also maintains workers' compensation insurance, subject to a deductible. The Company expenses the costs under the self-insured retention exposure for general and professional liability and workers' compensation claims which relate to (i) claims made during the policy period, which are offset by insurance recoveries and (ii) an estimate of claims incurred but not yet reported that are expected to be reported after the policy period expires. Reserves and provisions are based upon actuarially determined estimates using individual case-basis valuations and actuarial analysis. Reserves for professional, general and workers' compensation claim liabilities are determined with no regard for expected insurance recoveries and are presented gross on the consolidated balance sheets. Derivative Instruments and Hedging Activities In accordance with Accounting Standards Codification 815, Derivatives and Hedging, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. In accordance with the FASB’s fair value measurement guidance in ASU 2011-04, 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. Investments in Unconsolidated Affiliates Investments in unconsolidated affiliates in which the Company exerts significant influence but does not control or otherwise consolidate are accounted for using the equity method. Equity method investments are initially recorded at cost, unless the investments are a result of the Company losing control of a previously controlled entity, but still retaining a non-controlling interest. Transactions that result in the deconsolidation of a previously consolidated entity, are measured at fair value. The fair value measurement utilizes Level 3 inputs, which include unobservable data, to measure the fair value of the retained non-controlling interest. The fair value determination is generally based on a combination of multiple valuation methods, which can include discounted cash flow, income approach, or market value approach which incorporates estimates of future earnings and market valuation multiples for certain guideline companies. These investments are included as investments in and advances to affiliates in the accompanying consolidated balance sheets. The Company’s share of the profits and losses from these investments is reported in income from equity investments in the accompanying consolidated statements of operations. The Company monitors its investments for other-than-temporary impairment by considering factors such as current economic and market conditions and the operating performance of the investees and records reductions in carrying values when necessary. Summarized financial information for these equity method investees is included in the following tables (in millions): | | | | | | | | | | | | December 31, | | | 2019 | | 2018 | | | | | | Current assets | | $ | 51.8 |
| | $ | 41.2 |
| Noncurrent assets | | $ | 47.4 |
| | $ | 27.8 |
| Current liabilities | | $ | 25.5 |
| | $ | 21.8 |
| Noncurrent liabilities | | $ | 5.8 |
| | $ | 3.8 |
|
| | | | | | | | | | | | Year Ended December 31, | | | 2019 | | 2018 | | | | | | Net revenues | | $ | 188.5 |
| | $ | 169.8 |
| Cost of revenues | | $ | 132.0 |
| | $ | 118.5 |
| Net income | | $ | 51.1 |
| | $ | 48.2 |
|
The results of operations for the Company's equity method investees was not considered material for the four months ended December 31, 2017 (Successor) and the eight months ended August 31, 2017 (Predecessor).
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During the year ended December 31, 2019, the Company acquired non-controlling interests, primarily in four surgical facilities, for a cash investment of $15.2 million. The non-controlling interests were accounted for as equity method investments. During the year ended December 31, 2018, the Company sold a portion of its interest in one surgery center for net cash proceeds of $0.5 million. As a result of this transaction, the Company lost control of the previously controlled entity but retains a non-controlling interest, resulting in the deconsolidation of the previously consolidated entity. The remaining non-controlling interest was accounted for as an equity method investment, and initially measured and recorded at fair value as of the date of the transaction. The transaction resulted in a pretax gain on deconsolidation of $1.1 million, which is included in loss on disposals and deconsolidations, net, in the accompanying consolidated statement of operations for the year ended December 31, 2018. The gain was determined based on the difference between the fair value of the Company's retained interest in the entity and the carrying value of both the tangible and intangible assets of the entity immediately prior to the transaction less cash proceeds received. The fair value of the investment of $2.0 million was recorded as a component of investments in and advances to affiliates in the accompanying consolidated balance sheets. Non-Controlling Interests The physician limited partners and physician minority members of the entities that the Company controls are responsible for the supervision and delivery of medical services. The governance rights of limited partners and minority members are restricted to those that protect their financial interests. Under certain partnership and operating agreements governing these partnerships and limited liability companies, the Company could be removed as the sole general partner or managing member for certain events such as material breach of the partnership or operating agreement, gross negligence or bankruptcy. These protective rights do not preclude consolidation of the respective partnerships and limited liability companies. Ownership interests in consolidated subsidiaries held by parties other than the Company are identified and generally presented in the consolidated financial statements within the equity section but separate from the Company's equity. However, in instances in which certain redemption features that are not solely within the control of the Company are present, classification of non-controlling interests outside of permanent equity is required. Consolidated net income attributable to the Company and to the non-controlling interests are identified and presented on the consolidated statements of operations; changes in ownership interests in which the Company retains a controlling interest are accounted for as equity transactions assuming the Company continues to consolidate related entities. Certain transactions with non-controlling interests are classified within financing activities in the consolidated statements of cash flows. The consolidated financial statements of the Company include all assets, liabilities, revenues and expenses of surgical facilities in which the Company has sufficient ownership and rights to allow the Company to consolidate the surgical facilities. Similar to its investments in non-consolidated affiliates, the Company regularly engages in the purchase and sale of ownership interests with respect to its consolidated subsidiaries that do not result in a change of control. Non-Controlling Interests — Redeemable. Each partnership and limited liability company through which the Company owns and operates its surgical facilities is governed by a partnership or operating agreement, respectively.agreement. In certain circumstances, the applicable partnership or operating agreements for the Company's surgical facilities provide that the facilities will purchase all of the physician limited partners’ or physician minority members', as applicable, ownership if certain adverse regulatory events occur, such as it becoming illegal for the physician(s) to own an interest in a surgical facility, refer patients to a surgical facility or receive cash distributions from a surgical facility. The non-controlling interests — redeemable are reported outside of stockholders' equity in the consolidated balance sheets. A summary of activity related to the non-controlling interests—redeemable follows (in thousands)millions): | | | | | | Predecessor | | | Balance at December 31, 2015 | | $ | 183,439 |
| Net income attributable to non-controlling interests—redeemable | | 18,023 |
| Acquisition and disposal of shares of non-controlling interests, net—redeemable | | (3,781 | ) | Distributions to non-controlling interest —redeemable holders | | (17,160 | ) | Balance at December 31, 2016 | | 180,521 |
| Net income attributable to non-controlling interests—redeemable | | 9,615 |
| Acquisition and disposal of shares of non-controlling interests, net—redeemable | | (3,323 | ) | Distributions to non-controlling interest —redeemable holders | | (11,468 | ) | Acquisition of NSH | | 153,320 |
| Balance at August 31, 2017 | | $ | 328,665 |
| | | | | | | | | | Successor | | | Balance at September 1, 2017 | | $ | 271,001 |
| Net income attributable to non-controlling interests—redeemable | | 12,931 |
| Acquisition and disposal of shares of non-controlling interests, net—redeemable | | 819 |
| Distributions to non-controlling interest —redeemable holders | | (8,228 | ) | Reallocation in application of pushdown accounting | | 21,248 |
| Purchase price adjustments | | 1,545 |
| Balance at December 31, 2017 | | $ | 299,316 |
|
| | | | | | | | | | | | December 31, | | | 2019 | | 2018 | | | | | | Balance at beginning of period | | $ | 326.6 |
| | $ | 299.3 |
| Net income attributable to non-controlling interests—redeemable | | 39.1 |
| | 34.6 |
| (Disposal) and acquisition of shares of non-controlling interests, net—redeemable (1) | | (4.7 | ) | | 23.7 |
| Distributions to non-controlling interest —redeemable holders | | (40.0 | ) | | (30.7 | ) | Other | | — |
| | (0.3 | ) | Balance at end of period | | $ | 321.0 |
| | $ | 326.6 |
|
SURGERY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Variable Interest Entities
The consolidated financial statements include the accounts of variable interest entities ("VIE") in which the Company is the primary beneficiary under the provisions of ASC 810, Consolidation. At December 31, 2017 (Successor), the variable interest entities include five surgical facilities, three anesthesia practices and three physician practices. At December 31, 2016 (Predecessor), the variable interest entities included five surgical facilities, three anesthesia practices and two physician practice. The change is due to a physician practice acquired during the eight months ended August 31, 2017 (Predecessor). The Company has the power to direct the activities that most significantly impact a variable interest entity's economic performance. Additionally, the Company would absorb the majority of the expected losses from any of these entities should such expected losses occur.
The total assets (excluding goodwill and intangible assets, net) of the consolidated VIEs included in the accompanying consolidated balance sheets as of December 31, 2017 (Successor) and 2016 (Predecessor), were $13.1 million and $24.8 million, respectively, and the total liabilities of the consolidated VIEs were $5.8 million and $10.7 million, respectively. There are no assets that are restricted to use as of December 31, 2017 (Successor).
Equity Method Investments
The Company has non-consolidating investments in surgical facilities and management companies that own or manage surgical facilities. These investments are accounted for using the equity method of accounting. The total amount of these investments included in investments in and advances to affiliates in the consolidated balance sheets was $74.3 million and $35.0 million as of December 31, 2017 (Successor) and December 31, 2016 (Predecessor), respectively.
Use of Estimates
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and footnotes. Examples include, but are not limited to, estimates of accounts receivable allowances, professional and general liabilities and the estimate of deferred tax assets or liabilities. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All adjustments are of a normal, recurring nature. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the comparative periods' financial statements to conform to the current year presentation.
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 quoted prices in active markets for identical assets or liabilities (Level 1), inputs other than quoted prices in active markets that are either directly or indirectly observable (Level 2), or unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions (Level 3), depending on the nature of the item being valued.
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, restricted invested assets and accounts payable approximate their fair values.
A summary of the carrying amounts and fair values of the Company's long-term debt follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | Successor | | | | Predecessor | | | December 31, 2017 | | | | December 31, 2016 | | | Carrying Amount | | Fair Value | | | | Carrying Amount | | Fair Value | | | | | | | | | | | | 2014 Revolver Loan | | $ | — |
| | $ | — |
| | | | $ | 85,000 |
| | $ | 85,000 |
| 2014 First Lien Credit Agreement, net of debt issuance costs and discount | | $ | — |
| | $ | — |
| | | | $ | 911,784 |
| | $ | 917,528 |
| 2017 Senior Secured Credit Facilities: | | | | | | | | | | | Revolver | | $ | — |
| | $ | — |
| | | | $ | — |
| | $ | — |
| Term Loan | | $ | 1,280,532 |
| | $ | 1,267,189 |
| | | | $ | — |
| | $ | — |
| Senior Unsecured Notes due 2021 (1) | | $ | 409,235 |
| | $ | 422,535 |
| | | | $ | 387,942 |
| | $ | 412,189 |
| Senior Unsecured Notes due 2025 | | $ | 370,000 |
| | $ | 346,413 |
| | | | $ | — |
| | $ | — |
|
(1) The carrying amount in the Predecessor period is net of unamortized debt issuance costs and discount, which were eliminated with the application of pushdown accounting.
SURGERY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The fair values of the 2014 First Lien Credit Agreement, Term Loan, 2021 Unsecured Notes and the 2025 Unsecured Notes (in each case, as defined in Note 7. "Long-Term Debt") were based on Level 2 inputs using quoted prices for identical liabilities in inactive markets at December 31, 2017 (Successor) and 2016 (Predecessor), as applicable. The carrying amounts related to the Company's other long-term debt obligations, including the 2014 Revolver Loan and the Revolver (in each case, as defined in Note 7. "Long-Term Debt"), approximate their fair values.
The Company maintains a supplemental executive retirement savings plan (the "SERP") for certain executive officers. The SERP is a non-qualified deferred compensation plan for eligible executive officers and other key employees of the Company that allows participants to defer portions of their compensation. The fair value of the SERP asset and liability was based on a quoted market price, or a Level 1 computation. As of December 31, 2017 (Successor) and 2016 (Predecessor), the fair value of the assets in the SERP were $1.9 million and $1.7 million, respectively, and were included in other long-term assets in the consolidated balance sheets. The Company had a liability related to the SERP of $1.9 million and $1.7 million as of December 31, 2017 (Successor) and 2016 (Predecessor), respectively, which was included in other long-term liabilities in the consolidated balance sheets.
Revenues
The Company recognizes revenues in the period in which the services are performed. Patient service revenues and receivables from third-party payors are recorded net of estimated contractual adjustments and allowances, which the Company estimates based on the historical trend of its cash collections and contractual write-offs, accounts receivable agings, established fee schedules, contracts with payors and procedure statistics.
A summary of revenues by service type as a percentage of total revenues follows:
| | | | | | | | | | | | | | | | | | Successor | | | | Predecessor | | | September 1 to December 31, | | | | January 1 to August 31, | | Year Ended December 31, | | | 2017 | | | | 2017 | | 2016 | | 2015 | Patient service revenues: | | | | | | | | | | | Surgical facilities revenues | | 94.3 | % | | | | 91.4 | % | | 90.3 | % | | 91.6 | % | Ancillary services revenues | | 4.2 | % | | | | 7.0 | % | | 7.9 | % | | 6.4 | % | | | 98.5 | % | | | | 98.4 | % | | 98.2 | % | | 98.0 | % | Other service revenues: | | | | | | | | | | | Optical services revenues | | 0.6 | % | | | | 1.0 | % | | 1.1 | % | | 1.5 | % | Other | | 0.9 | % | | | | 0.6 | % | | 0.7 | % | | 0.5 | % | | | 1.5 | % | | | | 1.6 | % | | 1.8 | % | | 2.0 | % | Total revenues | | 100.0 | % | | | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Patient service revenues. The fee charged for healthcare 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 on the date of service, net of estimated contractual adjustments and discounts from third-party payors, including Medicare and Medicaid. Changes in estimated contractual adjustments and discounts are recorded in the period of change. There were no adjustments as a result of changes in estimates to third-party settlements related to prior years for the four months ended December 31, 2017 (Successor). During the eight months ended August 31, 2017 (Predecessor), the Company recognized an increase to patient service revenues as a result of changes in estimates to third-party settlements related to prior years of approximately $1.1 million. During the years ended December 31, 2016 and 2015, the Company recognized an increase to patient service revenues of $6.8 million and $2.3 million, respectively, as a result of changes in estimates to third-party settlements related to prior years.
SURGERY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Successor | | | | Predecessor | | | September 1 to December 31, | | | | January 1 to August 31, | | Year Ended December 31, | | | 2017 | | | | 2017 | | 2016 | | 2015 | | | Amount | | % | | | | Amount | | % | | Amount | | % | | Amount | | % | Patient service revenues: | | | | | | | | | | | | | | | | | | | Private insurance | | $ | 347,801 |
| | 59.6 | % | | | | $ | 360,092 |
| | 48.9 | % | | $ | 579,662 |
| | 51.5 | % | | $ | 516,739 |
| | 55.0 | % | Government | | 196,926 |
| | 33.7 | % | | | | 308,993 |
| | 42.0 | % | | 448,953 |
| | 39.9 | % | | 359,471 |
| | 38.2 | % | Self-pay | | 15,233 |
| | 2.6 | % | | | | 15,949 |
| | 2.2 | % | | 19,817 |
| | 1.8 | % | | 16,190 |
| | 1.7 | % | Other (1) | | 23,843 |
| | 4.1 | % | | | | 51,374 |
| | 6.9 | % | | 76,172 |
| | 6.8 | % | | 48,311 |
| | 5.1 | % | Total patient service revenues | | $ | 583,803 |
| | 100.0 | % | | | | $ | 736,408 |
| | 100.0 | % | | $ | 1,124,604 |
| | 100.0 | % | | $ | 940,711 |
| | 100.0 | % | Other service revenues: | | | | | | | | | | | | | | | | | | | Optical service revenues | | $ | 3,486 |
| | | | | | $ | 7,629 |
| |
|
| | $ | 12,505 |
| |
|
| | $ | 14,572 |
| | | Other revenues | | 5,315 |
| | | | | | 4,578 |
| |
|
| | 8,329 |
| |
|
| | 4,608 |
| | | Total net revenues | | $ | 592,604 |
| | | | | | $ | 748,615 |
| | | | $ | 1,145,438 |
| | | | $ | 959,891 |
| | |
(1) Other is comprised of anesthesia service agreements, auto liability, letters of protection and other payor types.
Other service revenues.Optical service revenues consist of product sales from the Company's optical laboratories as well as handling charges billed to the members of the Company's optical products purchasing organization. The Company's optical products purchasing organization negotiates volume buying discounts with optical products manufacturers. The buying discounts and any handling charges billed to the members of the buying group represent the revenue recognized for financial reporting purposes. Revenue is recognized as orders are shipped to members. The Company bases its estimates for sales returns and discounts on historical experience and has not experienced significant fluctuations between estimated and actual return activity and discounts given. The Company's optical laboratories manufacture and distribute corrective lenses and eyeglasses to ophthalmologists and optometrists. Revenue is recognized when product is shipped, net of allowance for discounts.
Other revenues include management and administrative service fees derived from the non-consolidated facilities that the Company accounts for under the equity method, management of surgical facilities in which it does not own an interest, and management services provided to physician practices for which the Company is not required to provide capital or additional assets. 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 services are rendered.
Subsequent to the Preferred Private Placement, the Company, as part of a review of operations undertaken to create a solid foundation to support the Company's long-term growth objectives, incurred a non-recurring adjustment to revenue of $15.6 million, which was attributable to an increase in reserves for certain accounts receivable during the eight months ended August 31, 2017 (Predecessor). The increase in reserves resulted from certain known events and actions during the eight months ended August 31, 2017 (Predecessor) related to select payors primarily in the Company’s ancillary services segment. Upon consideration of such additional information, related receivables were determined to have a low likelihood of collection. The majority of this adjustment related to receivables with balances from the first quarter of 2016 and prior. The Company believes it has accounted for all necessary reserve adjustments at this time.
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 and Allowances for Contractual Adjustments and Doubtful Accounts
Accounts receivable are recorded net of contractual adjustments and allowances for doubtful accounts to reflect accounts receivable at net realizable value. Accounts receivable consists of receivables from federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies, employers and patients. Management recognizes that revenues and receivables from government agencies are significant to the Company's operations, but it does not believe that there is significant credit risk associated with these government agencies. Concentration of credit risk with respect to other payors is limited because of the large number of such payors. As of December 31, 2017, the Company had a net third-party Medicaid settlements liability of $1.0 million compared to a third-party Medicaid settlements receivable of $0.5 million at December 31, 2016.
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. The Company's policy is to collect co-payments and deductibles prior to providing medical services. It is also the Company's policy to verify a patient’s insurance 72 hours prior
SURGERY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
to the patient’s procedure. 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 analyzes accounts receivable at each of its facilities to ensure the proper aged category and collection assessment. At a consolidated level, the Company's policy is to review accounts receivable aging, by facility, to determine the appropriate allowance for doubtful accounts. Patient account balances are reviewed for delinquency based on contractual terms. This review is supported by an analysis of the actual revenues, contractual adjustments and cash collections received. An account balance is written off only after the Company has pursued collection with legal or collection agency assistance or otherwise has deemed an account to be uncollectible.
A summary of the changes in the allowance for doubtful accounts receivable follows (in thousands):
| | | | | | | | | | | | | | | | | | | | Balance at Beginning of Period | | Provision for Doubtful Accounts | | Accounts Written off, Net of Recoveries | | Balance at End of Period | Predecessor | | | | | | | | | Year ended December 31, 2015 | | $ | 5,329 |
| | $ | 23,578 |
| | $ | (10,585 | ) | | $ | 18,322 |
| Year ended December 31, 2016 | | 18,322 |
| | 24,212 |
| | (12,662 | ) | | 29,872 |
| Eight months ended August 31, 2017 | | 29,872 |
| | 16,297 |
| | (14,096 | ) | | 32,073 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Successor | | | | | | | | | Four months ended December 31, 2017 | | — |
| | 12,455 |
| | (10,429 | ) | | 2,026 |
|
The Company records an estimate for doubtful accounts based on the aging category and historical collection experience of each product sales or other business included in other service revenues, as discussed in the note above.
The receivables related to the Company's optical products purchasing organization are recognized separately from patient accounts receivable, as discussed above, and are included in other current assets in the consolidated balance sheets. Such receivables were $7.6 million and $7.0 million at December 31, 2017 (Successor) and 2016 (Predecessor), respectively.
| | (1) | Includes post acquisition date adjustments in all periods. |
Inventories Inventories, which consist primarily of medical and drug supplies, are stated at the lower of cost or market value. Cost is determined using the first-in, first-out method. Prepaid Expenses and Other Current AssetsRecent Accounting Pronouncements
A summary of prepaid expenses and other current assets follows (in thousands):
| | | | | | | | | | | | | | Successor | | | | Predecessor | | | December 31, 2017 | | | | December 31, 2016 | | | | | | | | Prepaid expenses | | $ | 16,835 |
| | | | $ | 11,158 |
| Receivables - optical product purchasing organization | | 7,563 |
| | | | 7,042 |
| Acquisition escrow deposit | | 3,809 |
| | | | 10,871 |
| Insurance recoveries | | 2,828 |
| | | | 2,476 |
| Other | | 24,302 |
| | | | 11,338 |
| Total | | $ | 55,337 |
| | | | $ | 42,885 |
|
Property and Equipment
Property and equipment are stated at cost or, if obtained through acquisition, at fair value determined onIn February 2016, the date of acquisition. Depreciation is recognized using the straight-line method over the estimated useful lives of the assets, generally 20 to 40 years for buildings and building improvements, three to five years for computers and software and five to seven years for furniture and equipment. Leasehold improvements are depreciated on a straight-line basis over the shorter of the lease term or the estimated useful life of the assets. Routine maintenance and repairs are expensed as incurred, while expenditures that increase capacities or extend useful lives are capitalized.
FASB issued ASU 2016-02, "Leases" (the "Lease Accounting Standard"). The Company also leases certain facilities and equipment under capital leases. Assets held under capital leases are stated atadopted the present value of minimum lease payments at the inception of the related lease. Such assets are amortized on a straight-line basis over the lesser of the lease term or the remaining useful life of the leased asset.The Company's property and equipment, as well as assets held under capital leases are further described in Note 5.
SURGERY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Goodwill and Intangible Assets
Goodwill represents the fair value of the consideration provided in an acquisition over the fair value of net assets acquired and is not amortized. The Company has indefinite-lived intangible assets related to the certificates of need held in jurisdictions where certain of its surgical facilities are located and Medicare licenses. The Company also has finite-lived intangible assets related to physician guarantee agreements, non-compete agreements, management agreements and customer relationships. Physician income guarantees are amortized into salaries and benefits costs in the consolidated statements of operations over the commitment period of the contract, generally three to four years. Non-compete agreements and management rights agreements are amortized into depreciation and amortization expense in the consolidated statements of operations over the service lives of the agreements, typically ranging from two to five years for non-compete agreements and 15 years for the management rights agreements. Customer relationships are amortized into depreciation and amortization expense in the consolidated statements of operations over the estimated lives of the relationships, ranging from three to ten years. The Company's goodwill and intangible assets are further described in Note 6.
Impairment of Long-Lived Assets, Goodwill and Intangible Assets
The Company evaluates the carrying value of long-lived assets when impairment indicators are present or when circumstances indicate that impairment may exist. The Company performs an impairment test by preparing an expected undiscounted cash flow projection. If the projection indicates that the recorded amount of the long-lived asset is not expected to be recovered, the carrying value is reduced to estimated fair value. The cash flow projection and fair value represents management’s best estimate, using appropriate and customary assumptions, projections and methodologies, at the date of evaluation. No impairment losses on long-lived assets were recognized during the four months ended December 31, 2017 (Successor), the eight months ended August 31, 2017 (Predecessor), and the years ended December 31, 2016 and 2015 (Predecessor).
The Company tests its goodwill and indefinite-lived intangible assets for impairment at least annually, as of OctoberLease Accounting Standard effective January 1, or more frequently if certain indicators arise. The Company tests for goodwill impairment at the reporting unit level, which is defined as one level below an operating segment. The Company has determined that it has five reporting units, which include the following: 1) Surgical Facilities 2) Ancillary Services, 3) Midwest Labs, 4) The Alliance, including Optical Synergies and 5) Family Vision Care. The Company compares the carrying value of the net assets of the reporting unit to the estimated fair value of the reporting unit. If the carrying value exceeds the estimated fair value, an impairment indicator exists and an estimate of the possible impairment loss is calculated. The fair value of the reporting units are estimated2019, using a discounted cash flows approach and are corroborated using a market-basedmodified retrospective transition approach. The fair value calculation includes multiple assumptions and estimates, includingmost prominent among the projected cash flows and discount rates applied.
In connection with the implementation of pushdown accounting, the Company performed its goodwill impairment test as of August 31, 2017 (Predecessor), then re-evaluated for impairment at October 1, 2017 (Successor). Both evaluations resulted in no impairment. There were also no impairment charges recorded during the years ended December 31, 2016 and 2015 (Predecessor).
Restricted Invested Assets
Restricted invested assets of $0.3 million as of both December 31, 2017 (Successor) and 2016 (Predecessor) were related to a requirement under the operating lease agreement at the Company's Chesterfield, Missouri facility. In accordance with the provisions of the lease agreement, the Company has a deposit with the landlord that shall be held as security for performance under the Company's covenants and obligations within the agreement through January 2024.
Other Long-Term Assets
A summary of other long-term assets follows (in thousands):
| | | | | | | | | | | | | | Successor | | | | Predecessor | | | December 31, 2017 | | | | December 31, 2016 | | | | | | | | Acquisition escrow deposit | | $ | 19,600 |
| | | | $ | — |
| Insurance recoveries | | 10,018 |
| | | | 6,835 |
| Notes receivable | | 2,263 |
| | | | 716 |
| Deposits | | 3,151 |
| | | | 4,196 |
| Other | | 13,318 |
| | | | 4,688 |
| Total | | $ | 48,350 |
| | | | $ | 16,435 |
|
changes
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Other Current Liabilities
A summaryfrom this ASU is the recognition of other currentright-of-use assets and lease liabilities follows (in thousands):
| | | | | | | | | | | | | | Successor | | | | Predecessor | | | December 31, 2017 | | | | December 31, 2016 | | | | | | | | Interest payable | | $ | 20,537 |
| | | | $ | 19,206 |
| Amounts due to patients and payors | | 18,096 |
| | | | 12,221 |
| Insurance liabilities | | 9,873 |
| | | | 6,625 |
| Current taxes payable | | 4,912 |
| | | | 2,622 |
| Acquisition escrow liability | | 3,809 |
| | | | 10,871 |
| Accrued expenses and other | | 52,717 |
| | | | 28,319 |
| Total | | $ | 109,944 |
| | | | $ | 79,864 |
|
Other Long-Term Liabilities
A summary of other long-term liabilities follows (in thousands):
| | | | | | | | | | | | | | Successor | | | | Predecessor | | | December 31, 2017 | | | | December 31, 2016 | | | | | | | | Facility lease obligations | | $ | 121,627 |
| | | | $ | 52,653 |
| Acquisition escrow liability | | 19,600 |
| | | | — |
| Medical malpractice liability | | 16,450 |
| | | | 10,453 |
| Unfavorable lease liability | | 11,889 |
| | | | 1,671 |
| Other | | 9,123 |
| | | | 11,489 |
| Total | | $ | 178,689 |
| | | | $ | 76,266 |
|
At fourby lessees for those leases classified as operating leases. The Company’s accounting for finance leases remained substantially unchanged from its prior accounting for capital leases. Upon adoption of the Company's surgical facilities,Lease Accounting Standard, the Company has facilityrecorded $294.0 million of operating lease obligations payable to the lessor of each facility. Payments are allocated to principal adjustmentsliabilities and right-of-use assets on January 1, 2019. The cumulative effect of the lease obligations and interest expense. The current portions of the lease obligations were $6.3accounting change recognized upon adoption was $6.1 million and $1.3 million at December 31, 2017 (Successor) and 2016 (Predecessor), respectively, and were includedreflected as an adjustment to retained deficit in other current liabilities in theour consolidated balance sheets. The long-term portions of the lease obligations, included in the table above, were $121.6 million and $52.7 million at December 31, 2017 (Successor) and 2016 (Predecessor), respectively. The increase is primarily due to two facility lease obligations assumed with the NSH Merger and the revaluation of the obligations with the application of pushdown accounting.See Note 6. "Leases" for further discussion.
Equity-Based Compensation
Transactions in which the Company receives employee and non-employee services in exchange for the Company’s equity instruments or liabilities that are based on the fair value of the Company’s equity securities or may be settled by the issuance of these securities are accounted for using a fair value method. Prior to the Reorganization, on the grant date, the Company employed a market approach to estimate the fair value of equity-based awards based on various considerations and assumptions, including implied earnings multiples and other metrics of relevant market participants, the Company’s operating results and forecasted cash flows and the Company’s capital structure. Such estimates require the input of highly subjective, complex assumptions. However, such assumptions are no longer required to determine fair value of shares of the Company’s common stock as its underlying shares began trading publicly during the fourth quarter of 2015. The Company applies the Black-Scholes-Merton method of valuation in determining share-based compensation expense for option awards.
The Company’s policy is to recognize compensation expense using the straight line method over the relevant vesting period for units that vest based on time. Prior to the Reorganization, employees held membership units in Surgery Center Holdings, LLC, and the associated expense was referred to as unit-based compensation; following the Reorganization, such expense is referred to as equity-based compensation. The Company's equity-based compensation is described further in Note 12.
Professional, General and Workers' Compensation Insurance
The Company maintains general liability and professional liability insurance in excess of self-insured retentions through third party commercial insurance carriers in amounts that management believes is sufficient for the Company's operations, although, potentially, some claims may exceed the scope of coverage in effect. The professional and general insurance coverage is on a claims-made basis. Workers' compensation insurance is on an occurrence basis.
SURGERY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company expenses the costs under the self-insured retention exposure for general and professional liability and workers compensation claims which relate to (i) claims made during the policy period, which are offset by insurance recoveries and (ii) an estimate of claims incurred but not yet reported that are expected to be reported after the policy period expires. Reserves and provisions are based upon actuarially determined estimates using individual case-basis valuations and actuarial analysis. Reserves for professional, general and workers' compensation claim liabilities are determined with no regard for expected insurance recoveries and are presented gross on the consolidated balance sheets. Total professional, general and workers' compensation claim liabilities as of December 31, 2017 and 2016 are $21.0 million and $13.8 million, respectively. The balance includes expected insurance recoveries of $12.8 million and $9.3 million as of December 31, 2017 and 2016, respectively. The increase is primarily due to the acquisition of NSH.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers," along with subsequent amendments, updates and an extension of the effective date (collectively the “New Revenue Standard”), which outlines a single comprehensive model for recognizing revenue and supersedes most existing revenue recognition guidance, including guidance specific to the healthcare industry. This five-step process will require significant management judgment in addition to changing the way many companies recognize revenue in their financial statements. Additionally, and among other provisions, the New Revenue Standard requires expanded quantitative and qualitative disclosures, including disclosure about the nature, amount, timing and uncertainty of revenue. The provisions of the New Revenue Standard are effective for annual periods beginning after December 15, 2017, including interim periods within those years by applying either the full retrospective method or the modified retrospective approach upon adoption. The Company will adopt this ASU on January 1, 2018. The Company plans to adopt using the modified retrospective method, including providing all requisite disclosures under such method. The Company expects that the majority of its provision for doubtful accounts will continue to be recognized as an operating expense rather than as a direct reduction to revenues, given the Company’s practice of assessing a patient’s ability to pay prior to or on the date of providing healthcare services. The Company does not believe the adoption will have a significant impact on our recognition of net revenues for any period. The Company is still evaluating the impact that the adoption will have on its related disclosures. In FebruaryJune 2016, the FASB issued ASU 2016-02, “Leases,”2016-13, which will require, amongintroduced a new model for recognizing credit losses on financial instruments based on an estimate of the current expected credit losses. The new current expected credit losses ("CECL") model generally calls for the immediate recognition of all expected credit losses and applies to financial instruments and other items, lessees to recognize most leases as assets, including accounts receivable and liabilities on the balance sheet. Qualitativeother financial assets measured at amortized cost, debt securities and quantitative disclosures will be enhanced to better understand the amount, timing and uncertainty of cash flows arising from leases.other financial assets. This guidance replaces the current incurred loss model for measuring expected credit losses, requires expected losses on available-for-sale debt securities to be recognized through an allowance for credit losses rather than as reductions in the amortized cost of the securities, and provides for additional disclosure requirements. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2018,2019, and interim periods within those fiscal years, with early adoption permitted. The Company believesadopted this ASU on January 1, 2020, and does not expect the primary effect of adopting the new standard will be to record right-of-use assets and obligations for current operating leases.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations – Clarifying the Definition of a Business,” which narrows the definition of a business when evaluating whether transactions should be accounted for as asset acquisition or business combination. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those years. The adoption of this ASU will not have a material impact on the Company's condensedits consolidated financial position and results of operations and cash flows.operations.
3.2. Acquisitions and DevelopmentsDisposals
The Company accounts for its business combinations in accordance with the fundamental requirements of the acquisition method of accounting and under the premise that an acquirer can be identified for each business combination. The acquirer is the entity that obtains control of one or more businesses in the business combination and the acquisition date is the date the acquirer achieves control. The assets acquired, liabilities assumed and any non-controlling interests in the acquired business at the acquisition date are recognized at their fair values as of that date, and the direct costs incurred in connection with the business combination are recorded and expensed separately from the business combination. Any goodwill recognized is determined as the excess of the fair value of the consideration conveyed plus the fair value of any non-controlling interests in the acquisition over the fair value of the net assets acquired. Acquisitions in which the Company is able to exert significant influence but does not have control are accounted for using the equity method. Acquired assets and assumed liabilities typically include, but are not limited to, fixed assets, intangible assets and professional liabilities. The valuations are based on appraisal reports, discounted cash flow analyses, actuarial analyses or other appropriate valuation techniques to determine the fair value of the assets acquired or liabilities assumed. Fair value attributable to non-controlling interests is based on a Level 3 computation using significant inputs that are not observable in the market. Key inputs used to determine the fair value include financial multiples used in the purchase of non-controlling interests, primarily from acquisitions of surgical facilities. Such multiples, based on earnings, are used as a benchmark for the discount to be applied for the lack of control or marketability. Fair value attributable to the property and equipment acquired is based on Level 3 computations using key inputs such as cost trend data and comparable asset sales. Fair value attributable to the intangible assets acquired is based on Level 3 computations using key inputs such as the Company's internally-prepared financial projections. Fair values assigned to acquired working capital are based on carrying amounts reported by the acquiree at the date of acquisition, which approximate their fair values. 2017 TransactionsAcquisitions
Acquisition of NSH
On AugustDuring the year ended December 31, 2017,2019, the Company completed its acquisitionacquired a controlling interest in one surgical facility, a clinic that was merged into an existing facility and a physician practice for total aggregate consideration of NSH through the NSH Merger, pursuant to the NSH Merger Agreement (as defined in Note 1. "Organization") for total$26.7 million, including cash consideration of $711.7$20.1 million, net of cash acquired. The remainder of the consideration related to the forgiveness of certain amounts due to the Company from the acquired including $19.6clinic. The cash consideration was funded through cash from operations. The total consideration was allocated to the assets acquired and liabilities assumed based upon the respective acquisition date fair values.
During the year ended December 31, 2018, the Company acquired a controlling interest in five surgical facilities in new markets, two surgical facilities in existing markets, one of which was merged into an existing facility and multiple physician practices for a combined cash purchase price of $105.6 million, net of cash acquired. The 2018 acquisitions were funded through cash from operations. The total consideration related to these acquisitions was allocated to the assets acquired and liabilities assumed based upon their respective acquisition date fair values.
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
an escrow account. The NSH Merger added to the Company's portfolio 22 ownedPreliminary or operated surgical facilities, including 7 ASCs and 15 surgical hospitals, as well as complementary ancillary services. The proceeds from the Preferred Private Placement (as defined in Note 1. "Organization"), the 2025 Unsecured Notes and the 2017 Senior Secured Credit Facilities (in each case, as defined in Note 7. "Long-Term Debt") were used to fund the acquisition.
Fees associated with the acquisition of NSH, which includes fees incurred related to the Company's preferred equity issuances and debt financings, was approximately $82.6 million during the eight months ended August 31, 2017 (Predecessor). Approximately $45.5 million was capitalized as deferred financing costs and discount, $18.3 million was capitalized as deferred equity issuance costs, $2.4 million was expensed as merger transaction and integration costs, and $16.4 million was recorded as loss on debt refinancing costs. All capitalized costs were subsequently written off as a result of the application of pushdown accounting, further discussed below.
The total consideration related to the acquisition of NSH was allocated to the assets acquired and liabilities assumed based upon their respective acquisition date fair values. The aggregatefinal amounts preliminarily recognized for each major class of assets acquired and liabilities assumed for acquisitions completed during the years ended December 31, 2019 and 2018, including post acquisition date adjustments, are as follows (in thousands)millions):
| | | | | Cash consideration | $ | 762,850 |
| Fair value of non-controlling interests | 325,965 |
| Aggregate fair value of acquisition | 1,088,815 |
| Net assets acquired: | | Cash and cash equivalents | 51,159 |
| Accounts receivable | 71,901 |
| Inventories | 14,986 |
| Prepaid expenses and other current assets | 18,397 |
| Property and equipment | 174,499 |
| Intangible assets | 27,746 |
| Goodwill | 870,241 |
| Investments in and advances to affiliates | 29,737 |
| Long-term deferred tax assets | 17,279 |
| Other long-term assets | 27,229 |
| Accounts payable | (29,652 | ) | Accrued payroll and benefits | (28,755 | ) | Other current liabilities | (21,287 | ) | Current maturities of long-term debt | (16,416 | ) | Long-term debt, less current maturities | (42,770 | ) | Other long-term liabilities | (75,479 | ) | Total fair value of net assets acquired | $ | 1,088,815 |
|
| | | | | | | | | | | | 2019 | | 2018 | | | | | | Cash consideration (1) | | $ | 26.7 |
| | $ | 106.4 |
| Fair value of non-controlling interests | | 8.3 |
| | 63.8 |
| Aggregate acquisition date fair value | | $ | 35.0 |
| | $ | 170.2 |
| Net assets acquired: | | | | | Current Assets | | $ | 5.4 |
| | $ | 12.6 |
| Property and equipment | | 1.8 |
| | 5.3 |
| Intangible assets | | — |
| | 0.4 |
| Goodwill | | 22.6 |
| | 155.9 |
| Other long-term assets (2) | | 37.7 |
| | 6.6 |
| Current liabilities | | (4.1 | ) | | (6.5 | ) | Long-term debt | | (0.2 | ) | | — |
| Long-term liabilities | | (28.2 | ) | | (4.1 | ) | Aggregate acquisition date fair value | | $ | 35.0 |
| | $ | 170.2 |
|
| | (1) | In connection with the clinic acquisition in 2019, the Company acquired the remaining non-controlling interests in one of its existing consolidated surgical facilities. As such, $6.3 million of the cash consideration for the clinic acquisition was classified as a financing activity and presented in payments related to ownership transactions with non-controlling interest holders in the Consolidated Statements of Cash Flows. |
| | (2) | The assets acquired in 2019 includes the fair value of a non-controlling investment held by the acquired clinic in one of the Company's consolidated surgical facilities of $8.8 million. This investment asset was subsequently eliminated in consolidation. |
During the four months ended December 31, 2017, factors became known to the Company as part of its evaluation of the assets and liabilities existing at the date of acquisition. this resulted in a net increase to goodwill of $25.1 million and corresponding changes to certain classes of assets and liabilities from the preliminary allocation recorded at August 31, 2017, that are reflected in the table above. The Company is still in the process of evaluating all major classes of assets acquired and liabilities assumed. As such, the fair values assigned are subject to change as new facts and circumstances emerge that were present at the date of acquisition.
A majority of the deferred income taxes recognized as a component of the Company's purchase price allocation is a result of the difference between the book and tax basis of the intangible assets recognized.
The preliminary estimated fair value assigned to goodwill is primarily attributable to synergies expected to arise as a result of the NSH Merger by enhancing the growth profile and diversity of the Company across the healthcare continuum. The entire amount of goodwill acquired in connection with the NSH Merger was allocated to the Company's surgical facility services operating segment. The total amount of the goodwill related to the NSH Merger that will be deductible for tax purposes is $153.5 million.
The amounts of revenues and earnings of NSH for the four months ended December 31, 2017 (Successor) was $205.2 million and $20.4 million, respectively, and are included in revenues and net loss attributable to Surgery Partners, Inc., respectively, in the consolidated statement of operations.
SURGERY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following unaudited pro forma combined summary of operations of the Company gives effect to using historical information of the operations of NSH as if the acquisition transaction had occurred as of January 1, 2016 (in thousands):
| | | | | | | | | | | | | | | | | | Successor | | | | Predecessor | | | September 1 to December 31, | | | | January 1 to August 31, | | Year Ended December 31, | | | 2017 | | | | 2017 | | 2016 | | | | | | | | | | Net revenues | | $ | 592,604 |
| | | | $ | 1,122,326 |
| | $ | 1,679,254 |
| | | | | | | | | | Net income | | 4,477 |
| | | | 63,269 |
| | 132,699 |
| Less: Net income attributable to non-controlling interests | | (39,634 | ) | | | | (65,122 | ) | | (112,123 | ) | Net (loss) income attributable to Surgery Partners, Inc. | | $ | (35,157 | ) | | | | $ | (1,853 | ) | | $ | 20,576 |
|
These pro forma amounts exclude transaction related costs of $7.3 million and the gain on amendment to the TRA of $1.1 million for the four months ended December 31, 2017 (Successor), transaction related costs of $11.3 million, loss on debt refinancing of $18.2 million and the gain on amendment to the TRA of $15.3 million for the eight months ended August 31, 2017 (Predecessor). The prior year pro forma amounts exclude the loss on debt refinancing of $11.9 million for the year ended December 31, 2016 (Predecessor). Certain other adjustments, including those related to conforming accounting policies, have not been reflected in the supplemental pro forma operating results as estimating such impacts would be impracticable.
Change of Control - Pushdown Accounting
On August 31, 2017, H.I.G. sold the Purchased Shares (as defined in Note 1. "Organization") beneficially owned by H.I.G. to Bain at a purchase price per share of $19.00 for an aggregate purchase price of $502.7 million in cash pursuant to the Common Stock Purchase Agreement (as defined in Note 1. "Organization"). As of August 31, 2017 (Predecessor), prior to giving effect to the Preferred Private Placement (as defined in Note 1. "Organization"), the Purchased Shares represented approximately 54.2% of the Company's outstanding Common Stock. As a result of the Private Sale and the Preferred Private Placement, Bain holds Series A Preferred Stock and Common Stock that collectively represented approximately 65.7% of the voting power of all classes of capital stock of the Company as of August 31, 2017 (Predecessor), and H.I.G. and its affiliated investment funds no longer own any capital stock of the Company.
Fees associated with the change of control include fees incurred related to the Preferred Private Placement. Refer to Note 9. "Redeemable Preferred Stock", for the amount and accounting treatment of these costs.
In connection with the change of control, the Company elected to apply “pushdown” accounting by applying the guidance in ASC 805, Business Combinations. In accordance with ASC 805, all identifiable assets and liabilities of the Company were measured at and adjusted to fair value as of August 31, 2017, and similarly goodwill was recognized based on the terms of the transaction and the fair value of the new basis of the net assets of the Company.
SURGERY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The aggregate amounts preliminarily recognized in connection with the application of pushdown accounting for each major class of assets and liabilities as of August 31, 2017, including subsequent adjustments, are as follows (in thousands):
| | | | | Equity attributable to Surgery Partners, Inc. | $ | 720,606 |
| Redeemable preferred stock | 310,000 |
| Fair value of non-controlling interests | 957,027 |
| Aggregate fair value | 1,987,633 |
| Net assets: | | Cash and cash equivalents | 214,206 |
| Accounts receivable | 253,173 |
| Inventories | 44,310 |
| Prepaid expenses and other current assets | 61,475 |
| Property and equipment | 380,085 |
| Intangible assets | 60,104 |
| Goodwill | 3,299,911 |
| Investments in and advances to affiliates | 74,722 |
| Restricted invested assets | 315 |
| Long-term deferred tax asset | 204,408 |
| Other long-term assets | 49,681 |
| Accounts payable | (64,921 | ) | Accrued payroll and benefits | (54,437 | ) | Other current liabilities | (94,740 | ) | Current maturities of long-term debt | (49,942 | ) | Long-term debt, less current maturities | (2,142,375 | ) | Long-term tax receivable agreement liability | (78,498 | ) | Other long-term liabilities | (169,844 | ) | Total fair value of net assets | $ | 1,987,633 |
|
During the four months ended December 31, 2017, factors became known to the Company as part of its evaluation of the assets and liabilities existing at August 31, 2017, resulting in a net increase to goodwill of $30.7 million and corresponding changes to certain classes of assets and liabilities from the preliminary allocation recorded, that are reflected in the table above. The majority of the increase to goodwill for pushdown accounting relates to the acquisition of NSH discussed above. The Company is still in the process of evaluating all major classes of assets and liabilities. As such, the fair values assigned are subject to change as new facts and circumstances emerge that were present at August 31, 2017.
A majority of the deferred income taxes recognized as a component of the Company's purchase price allocation is a result of the difference between the book and tax basis of the intangible assets recognized.
Goodwill recognized in connection with the application of pushdown accounting was allocated to each reportable segment as follows: $3.116 billion to surgical facilities services, $151.9 million to ancillary services and $32.5 million to optical services. The total amount of the goodwill related to the application of pushdown accounting that will be deductible for tax purposes is $360.5 million.
Other 2017 Acquisitions
During the eight months ended August 31, 2017 (Predecessor), the Company completed acquisitions in existing markets of three physician practices for a combined cash purchase price of $14.2 million. The acquisitions were funded through cash from operations and proceeds from the 2014 Revolver Loan (as defined in Note 7. "Long-Term Debt").
During the four months ended December 31, 2017 (Successor), the Company acquired a controlling interest in one surgical facility and one physician practice in existing markets for a combined cash purchase price of $29.4 million. The acquisitions were funded through cash from operations.
SURGERY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The total consideration related to the other 2017 acquisitions was allocated to the assets acquired and liabilities assumed based upon their respective acquisition date fair values. The aggregate amounts preliminarily recognized for each major class of assets and liabilities assumed in the other acquisitions completed during 2017, including post acquisition date adjustments, are as follows (in thousands):
| | | | | | | | | | | | Successor | | | | Predecessor | | September 1 to December 31, | | | | January 1 to August 31, | | 2017 | | | | 2017 | | | | | | | Cash consideration | $ | 29,448 |
| | | | $ | 14,163 |
| Fair value of non-controlling interests | 21,893 |
| | | | 105 |
| Aggregate fair value of acquisitions | 51,341 |
| | | | 14,268 |
| Net assets acquired: | | | | | | Current Assets | 2,285 |
| | | | 866 |
| Property and equipment | 248 |
| | | | 696 |
| Intangible assets | 41 |
| | | | 634 |
| Goodwill | 49,317 |
| | | | 12,545 |
| Current liabilities | (550 | ) | | | | (287 | ) | Long-term debt | — |
| | | | (186 | ) | Total fair value of net assets acquired | $ | 51,341 |
| | | | $ | 14,268 |
|
The results of operations of the acquisitions are included in the Company’s results of operations beginning on the date of acquisition. The fair values assigned to certain assets acquired and liabilities assumed by the Company in 2019 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 year ended December 31, 2019, no significant changes were made to the purchase price allocation of assets and liabilities, existing at the date of acquisition, related to individual acquisitions completed in 2018. The goodwill acquired in connection with the 2019 acquisitions was allocated to the Company's reportable segments as follows: $14.1 million to surgical facility services and $8.5 million to ancillary services. The results of operations of the 2019 acquisitions are included in the Company’s results of operations beginning on the dates of acquisitions, and were not considered significant for the year ended December 31, 2019.
2016 TransactionsDisposals
During the year ended December 31, 2016,2019, the Company acquireddisposed of previously owned real property associated with one of its existing non-consolidated surgical facilities. In connection with the sale, the Company recognized a controlling interest$10.9 million pretax gain included in two surgical facilitiesloss (gain) on disposals and two anesthesia practicesdeconsolidations, net in new markets and athe accompanying consolidated statements of operations. The sale did not impact the Company's investment in the surgical facility, inwhich continues to be accounted for as an existing market which was merged into an existing facility and an anesthesia practice in an existing market for an aggregate purchase price of $36.5 million. The Company additionally completed acquisitions in existing markets of an urgent care facility, nine physician practices and two integrated physician practices which includes three ASCs, a lab and a pharmacy for a combined purchase price of $114.7 million, including $16.6 million of contingent acquisition consideration. In addition, the Company purchased an additional 7.04% interest in its hospital in Idaho Falls, Idaho for $20.3 million. The transactions were funded through cash from operations and proceeds from the 2014 First Lien Credit Agreement and 2014 Revolver Loan (in each case, as defined in Note 7. "Long-Term Debt").equity method investment. The aggregate acquisition date fair value recognized for each major class of assets and liabilities assumed in the acquisitions completed duringDuring the year ended December 31, 2016, including post2018, the Company disposed of four surgery centers, two surgical hospitals and its optical laboratory for net cash proceeds of $18.7 million, and recognized a net pretax loss of $21.2 million included in loss on disposals and deconsolidations, net in the consolidated statement of operations for the year ended December 31, 2018. This non-cash loss was primarily a result of the write-off of the net assets of the facility (net of proceeds received) and was primarily driven by the write-off of the associated goodwill.
3. Property and Equipment Property and equipment are stated at cost or, if obtained through acquisition, at fair value determined on the date adjustments,of acquisition. Depreciation is recognized using the straight-line method over the estimated useful lives of the assets, generally 20 to 40 years for buildings and building improvements, three to five years for computers and software and five to seven years for furniture and equipment. Leasehold improvements are depreciated on a straight-line basis over the shorter of the lease term or the estimated useful life of the assets. Routine maintenance and repairs are expensed as follows (in thousands):incurred, while expenditures that increase capacities or extend useful lives are capitalized. | | | | | Cash consideration | $ | 135,061 |
| Fair value of non-controlling interests | 27,164 |
| Aggregate fair value of acquisitions | 162,225 |
| Net assets acquired: | | Current assets | 11,383 |
| Property and equipment | 3,921 |
| Intangible assets | 4,475 |
| Goodwill | 148,181 |
| Other long-term assets | 56 |
| Current liabilities | (5,422 | ) | Long-term liabilities | (369 | ) | Total fair value of net assets acquired | $ | 162,225 |
|
The Company also leases certain facilities and equipment under finance leases. Assets held under finance leases are stated at the present value of lease payments at the inception of the related lease. Such assets are amortized on a straight-line basis over the lesser of the lease term or the remaining useful life of the leased asset.
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During 2017, no significant changes were made to the acquisition date purchase price allocation of assets and liabilities related to individual acquisitions completed in 2016. Approximately $120.0 million of goodwill related to the 2016 acquisitions was deductible for tax purposes.
2015 Transactions
Surgical Facility Acquisitions
During the year ended December 31, 2015, the Company acquired a controlling interest in two surgical facilities located in new markets and three surgical facilities, four anesthesia practices and an urgent care facility in existing markets for an aggregate purchase price of $84.2 million. The Company consolidates these facilities for financial reporting purposes. These transactions were funded with a combination of cash from operations, facility ownership, and proceeds from the refinancing of the Company's credit facilities in connection with the Symbion acquisition.
Ancillary Services
During the year ended December 31, 2015, through its recruiting efforts and capital-efficient acquisitions, the Company completed 13 in-market physician practice transactions through an aggregate investment of $40.4 million. These transactions added a total of 17 physicians to the Company’s physician network and were funded with a combination of cash from operations and revolver proceeds.
4. Divestitures
2017 Transactions
During the four months ended December 31, 2017 (Successor), the Company sold its interest in one surgical facility for $1.3 million, resulting in a pre-tax gain of approximately $0.8 million. During the eight months ended August 31, 2017 (Predecessor), the Company sold its interest in one surgical facility. The proceeds and pre-tax gain for the sale were not significant.
2016 Transactions
During the year ended December 31, 2016, the Company sold its interest in one surgical facility for $0.8 million, resulting in a pre-tax gain of approximately $0.8 million.
2015 Transactions
During the year ended December 31, 2015, the Company sold its interest in three surgical facilities and received aggregate proceeds of $10.9 million, resulting in a pre-tax gain of approximately $2.9 million.
5. Property and Equipment
A summary of property and equipment follows (in thousands)millions): | | | | Successor | | | | Predecessor | | December 31, | | | December 31, 2017 | | | | December 31, 2016 | | 2019 | | 2018 | | | | | | | | | | | | Land | | $ | 19,561 |
| | | | $ | 8,082 |
| | $ | 11.0 |
| | $ | 19.5 |
| Buildings and improvements | | 188,571 |
| | | | 118,172 |
| | 106.6 |
| | 200.4 |
| Furniture and equipment | | 20,813 |
| | | | 14,670 |
| | 23.1 |
| | 24.1 |
| Computer and software | | 28,578 |
| | | | 29,902 |
| | 59.8 |
| | 33.9 |
| Medical equipment | | 138,112 |
| | | | 117,418 |
| | 148.3 |
| | 139.6 |
| Right-of-use finance lease asset | | | 259.3 |
| | — |
| Construction in progress | | 22,581 |
| | | | 2,396 |
| | 25.9 |
| | 64.9 |
| Property and equipment, at cost | | 418,216 |
| | | | 290,640 |
| | 634.0 |
| | 482.4 |
| Less: Accumulated depreciation | | (19,680 | ) | | | | (86,387 | ) | | (110.7 | ) | | (56.1 | ) | Property and equipment, net | | $ | 398,536 |
| | | | $ | 204,253 |
| | $ | 523.3 |
| | $ | 426.3 |
|
At December 31, 2018, the Company had certain land, buildings and improvements that arose solely as a result of the Company being the deemed accounting owner under the build-to-suit guidance in in effect prior to the adoption of the Lease Accounting Standard. Upon adoption of the Lease Accounting Standard on January 1, 2019, the Company derecognized the build-to-suit assets and related liabilities and concluded the leases should be recognized on the balance sheet as finance leases under the new guidance. Further the Company had an ongoing development agreement to construct a new hospital, which costs were recognized as incurred as construction in progress at December 31, 2018. Upon reevaluation, the Company concluded that it did not control the assets under construction and therefore the obligation and related asset were derecognized from the balance sheets upon adoption of the Lease Accounting Standard. The lease related to this new hospital commenced in November 2019, and is recognized as a finance lease at December 31, 2019 (see Note. 6 "Leases"). Depreciation expense was $71.9 million and $62.5 millionfor the years ended December 31, 2019 and 2018 (Successor), respectively, $20.0 million for the four months ended December 31, 2017 (Successor) and $24.1 million for the eight months ended August 31, 2017 (Predecessor). For the years ended December 31, 2016 (Predecessor) and 2015 (Predecessor), depreciation expense was $30.0 million and $25.5 million, respectively. Amortization expense related to assets under capital leases is included in depreciation expense.The carrying values of assets under capital lease were $16.2 million and $15.4 million as of December 31, 2017 (Successor) and 2016 (Predecessor), respectively, net of accumulated depreciation of $5.8 million and $11.6 million, respectively.
SURGERY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6.4. Goodwill and Intangible Assets
A summaryGoodwill represents the fair value of the changesconsideration provided in an acquisition over the fair value of net assets acquired and is not amortized. The Company has indefinite-lived intangible assets related to the certificates of need held in jurisdictions where certain of its surgical facilities are located, Medicare licenses and certain management rights agreements. The Company also has finite-lived intangible assets related to physician guarantee agreements, non-compete agreements, management rights agreements and customer relationships. Physician income guarantees are amortized into salaries and benefits costs in the carrying amountconsolidated statements of goodwilloperations over the commitment period of the contract, generally three to four years. Non-compete agreements and management rights agreements are amortized into depreciation and amortization expense in the consolidated statements of operations over the service lives of the agreements, typically ranging from two to five years for non-compete agreements and 15 years for the years ended December 31, 2017management rights agreements. Customer relationships are amortized into depreciation and 2016 follows (in thousands):
| | | | | | Predecessor | | | Balance at December 31, 2015 | | $ | 1,407,927 |
| Acquisitions | | 147,895 |
| Divestitures | | (552 | ) | Purchase price adjustments | | (66 | ) | Balance at December 31, 2016 | | $ | 1,555,204 |
| Acquisitions | | 858,323 |
| Divestitures | | (175 | ) | Purchase price adjustments | | 1,220 |
| Balance at August 31, 2017 | | $ | 2,414,572 |
| | | | | | | | | | Successor | | | Balance at September 1, 2017 | | $ | 3,269,225 |
| Acquisitions | | 49,317 |
| Divestitures | | (1,957 | ) | Purchase price adjustments | | 30,253 |
| Balance at December 31, 2017 | | $ | 3,346,838 |
|
Additions to goodwill include new acquisitions and incremental ownership acquiredamortization expense in the consolidated statements of operations over the estimated lives of the relationships, ranging from three to ten years.
The Company tests its goodwill and indefinite-lived intangible assets for impairment at least annually, as of October 1, or more frequently if certain indicators arise. The Company tests for goodwill impairment at the reporting unit level, which is defined as one level below an operating segment. As of October 1, 2019, the Company has identified three reporting units, which include the following: 1) Surgical Facilities, 2) Ancillary Services, and 3) Alliance, which is a component of the Optical Services operating segment. In 2018, the Company disposed of two previously identified reporting units, Midwest Labs and Family Vision Care. The Company compares the carrying value of the net assets of the reporting unit to the estimated fair value of the reporting unit. To determine the fair value of the reporting units, the Company obtained valuations at the reporting unit level prepared by third-party valuation specialists which utilized a combination of the income and market approaches. The discounted cash flow model is projected based on a year-by-year assessment that considers historical results, estimated market conditions, internal projections, and relevant publicly available statistics. Determining fair value requires the exercise of significant judgment, including assumptions about appropriate discount rates, perpetual growth rates and the amount and timing of expected future cash flows. The significant judgments are typically based upon Level 3 inputs, generally defined as unobservable inputs representing the Company's subsidiaries. A summaryown assumptions. The cash flows employed in the discounted cash flow analysis are based on the Company's most recent budgets and business plans aligned with provided guidance and, when applicable, various growth rates are assumed for years beyond the current business plan period. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting units. The variables within the discount rate, many of which are outside of the Company's acquisitions forcontrol, provide the years ended December 31, 2017 and 2016 is includedbest estimate of all assumptions applied within the DCF model. There can be no assurance that operations will achieve the future cash flows reflected in Note 3, Acquisitions and Developments. A summary of the components of intangible assets follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Successor | | | | Predecessor | | | December 31, 2017 | | | | December 31, 2016 | | | Gross Carrying Amount | | Accumulated Amortization | | Net | | | | Gross Carrying Amount | | Accumulated Amortization | | Net | | | | | | | | | | | | | | | | Finite-lived intangible assets: | | | | | | | | | | | | | |
|
| Management rights agreements | | $ | 42,600 |
| | $ | (1,058 | ) | | $ | 41,542 |
| | | | $ | 24,751 |
| | $ | (3,461 | ) | | $ | 21,290 |
| Non-compete agreements | | 4,874 |
| | (715 | ) | | 4,159 |
| | | | 24,673 |
| | (8,216 | ) | | 16,457 |
| Physician income guarantees | | 878 |
| | (227 | ) | | 651 |
| | | | 1,901 |
| | (1,088 | ) | | 813 |
| Other | | — |
| | — |
| | — |
| | | | 8,815 |
| | (3,374 | ) | | 5,441 |
| Total finite-lived intangible assets | | 48,352 |
| | (2,000 | ) | | 46,352 |
| | | | 60,140 |
| | (16,139 | ) | | 44,001 |
| Indefinite-lived intangible assets: | | | | | | | | | | | | | | | Management rights agreements | | 5,900 |
| | — |
| | 5,900 |
| | | | — |
| | — |
| | — |
| Certificates of need | | 5,548 |
| | — |
| | 5,548 |
| | | | 3,780 |
| | — |
| | 3,780 |
| Medicare licenses | | 1,108 |
| | — |
| | 1,108 |
| | | | 242 |
| | — |
| | 242 |
| Total intangible assets | | $ | 60,908 |
| | $ | (2,000 | ) | | $ | 58,908 |
| | | | $ | 64,162 |
| | $ | (16,139 | ) | | $ | 48,023 |
|
projections. In determining the fair value under the market approaches, the analysis includes a control
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
premium, which was based on observable market data and a review of selected transactions of companies that operate in the Company's sector. While the Company believes that all assumptions utilized in the testing were appropriate, they may not reflect actual outcomes that could occur. Specific factors that could negatively impact the assumptions used include changes to the discount and growth rates and a change in the equity and enterprise premiums being realized in the market. As of October 1, 2019, prior to impairment testing, the Company had three reporting units with allocated goodwill as follows: 1) Surgical Facilities - $3.4 billion, 2) Ancillary Services - $28.6 million, and 3) Alliance - $11.6 million. As of the October 1, 2019 valuation, the fair value for both the Surgical Facilities and Ancillary Services reporting units was substantially in excess of its carrying value. For the Alliance reporting unit, the carrying value exceeded the fair value, resulting in non-cash impairment charges of $2.5 million in accordance with ASU No. 2017-04. As a result of the impairment charges, the fair value equaled carrying value as of October 1, 2019 for the Alliance reporting unit, any future adverse events or changes in the assumptions could require additional impairment. Subsequent to the date of our annual impairment test, the Company considered its operating results for the fourth quarter of 2019, macroeconomic, industry and market conditions, and other market indicators including its market capitalization. Based on its evaluation of all such factors, the Company concluded that an event had not occurred or circumstances had not changed that would more likely than not reduce the fair value of its reporting units below their carrying values. During the year ended December 31, 2018, as a result of its impairment testing, the Company recorded non-cash impairment charges of $60.7 million and $13.7 million related to the Ancillary Services and Alliance reporting units, respectively. A summary of the aggregate activity related to intangible assetschanges in the carrying amount of goodwill follows (in millions): | | | | | | | | | |
| | December 31, | | | 2019 | | 2018 | | | | | | Balance at beginning of period | | $ | 3,382.8 |
| | $ | 3,346.8 |
| Acquisitions, including post acquisition adjustments | | 22.3 |
| | 143.5 |
| Disposals and deconsolidations | | (0.2 | ) | | (33.1 | ) | Impairment | | (2.5 | ) | | (74.4 | ) | Balance at end of period | | $ | 3,402.4 |
| | $ | 3,382.8 |
|
A summary of the Company's acquisitions and disposals for the years ended December 31, 20172019 and 20162018 is included in Note 2. "Acquisitions and Disposals." A summary of the components of intangible assets follows (in thousands)millions): | | | | | | Predecessor | | | Balance at December 31, 2015 | | $ | 53,568 |
| Additions | | 4,754 |
| Disposals | | (135 | ) | Recruitment expense | | (609 | ) | Amortization | | (9,555 | ) | Balance at December 31, 2016 | | $ | 48,023 |
| Additions | | 28,312 |
| Recruitment expense | | (380 | ) | Amortization | | (6,040 | ) | Balance at August 31, 2017 | | $ | 69,915 |
| | | | | | | | | | Successor | | | Balance at September 1, 2017 | | $ | 56,750 |
| Additions | | 474 |
| Disposals | | (140 | ) | Purchase price adjustments | | 3,873 |
| Recruitment expense | | (227 | ) | Amortization | | (1,822 | ) | Balance at December 31, 2017 | | $ | 58,908 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2019 | | December 31, 2018 | | | Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net | | | | | | | | | | | | | | Finite-lived intangible assets: | | | | | | | | | | | |
|
| Management rights agreements | | $ | 31.1 |
| | $ | (7.3 | ) | | $ | 23.8 |
| | $ | 41.6 |
| | $ | (4.2 | ) | | $ | 37.4 |
| Other | | 8.8 |
| | (4.5 | ) | | 4.3 |
| | 6.4 |
| | (2.8 | ) | | 3.6 |
| Total finite-lived intangible assets | | 39.9 |
| | (11.8 | ) | | 28.1 |
| | 48.0 |
| | (7.0 | ) | | 41.0 |
| Indefinite-lived intangible assets | | 19.2 |
| | — |
| | 19.2 |
| | 13.3 |
| | — |
| | 13.3 |
| Total intangible assets | | $ | 59.1 |
| | $ | (11.8 | ) | | $ | 47.3 |
| | $ | 61.3 |
| | $ | (7.0 | ) | | $ | 54.3 |
|
Additions duringDuring the eight months ended August 31, 2017 (Predecessor) includes $27.8 million from new acquisitions, primarily the acquisition of NSH. Approximately $26.9 million was assigned to management rights agreements and $0.1 million was assigned to non-compete agreements, with estimated weighted average amortization periods of 23 years and 3 years, respectively. Approximately $0.7 million was assigned to certificates of need and $0.1 million was assigned to Medicare licenses. Refer to Note 3. "Acquisitions and Developments" for a summary of acquisition activity.
Purchase price adjustments during the four monthsyear ended December 31, 2017 (Successor) includes net adjustments to preliminary amounts assigned as part2019, the Company acquired a clinic that was previously managed by the Company. As a result of the acquisition of NSH,transaction, the application of pushdown accounting and other 2017 acquisitions. The adjustments included increases of $6.9 million toCompany determined the management rights agreements and $0.2agreement related to the acquired clinic no longer provided a future benefit. As such, the Company recorded non-cash impairment charges of $5.4 million, to certificateswhich was included as a component of need, offset by a decreaseimpairment charges on the accompanying consolidated statement of $3.2 million to non-compete agreements. Refer to Note 3. "Acquisitions and Developments" for a summary of acquisition activity.operations.
Amortization expense for intangible assets was $4.6 million and $4.9 million for the years ended December 31, 2019 and 2018 (Successor), respectively, $1.8 million for the four months ended December 31, 2017 (Successor) and $6.0 million for the eight months ended August 31, 2017 (Predecessor). For the years ended December 31, 2016 (Predecessor) and 2015 (Predecessor), amortization expense for intangible assets was $9.6 million and $9.1 million, respectively. Total estimated amortization expense for the next five years and thereafter related to intangible assets follows (in thousands):
| | | | | | 2018 | | $ | 4,966 |
| 2019 | | 4,576 |
| 2020 | | 4,172 |
| 2021 | | 3,730 |
| 2022 | | 2,874 |
| Thereafter | | 26,034 |
| Total | | $ | 46,352 |
|
SURGERY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Long-Term Debt
A summary of long-term debt follows (in thousands):
| | | | | | | | | | | | | | Successor | | | | Predecessor | | | December 31, 2017 | | | | December 31, 2016 | | | | | | | | 2014 Revolver Loan | | $ | — |
| | | | $ | 85,000 |
| 2014 First Lien Credit Agreement | | — |
| | | | 932,000 |
| 2017 Senior Secured Credit Facilities: | | | | | | | Revolver | | — |
| | | | — |
| Term Loan (1) | | 1,280,532 |
| | | | — |
| Senior Unsecured Notes due 2021 (2) | | 409,235 |
| | | | 400,000 |
| Senior Unsecured Notes due 2025 | | 370,000 |
| | | | — |
| Subordinated Notes | | — |
| | | | 1,000 |
| Notes payable and secured loans | | 101,921 |
| | | | 42,521 |
| Capital lease obligations | | 27,594 |
| | | | 13,996 |
| Less: unamortized debt issuance costs and original issue discount | | — |
| | | | (32,274 | ) | Total debt | | 2,189,282 |
| | | | 1,442,243 |
| Less: Current maturities | | 58,726 |
| | | | 27,822 |
| Total long-term debt | | $ | 2,130,556 |
| | | | $ | 1,414,421 |
|
(1) Includes unamortized fair value discount of $6.2 million as of December 31, 2017. See further discussion below.
(2) Includes unamortized fair value premium of $9.2 million as of December 31, 2017. See further discussion below.
2014 Revolver Loan & 2014 First Lien Credit Agreement
On August 31, 2017 (Predecessor), the Company prepaid in full the outstanding principal of the 2014 Revolver Loan, a revolving credit facility entered into on November 3, 2014, and the 2014 First Lien Credit Agreement, a senior secured obligation of Surgery Center Holdings, Inc. entered into on November 3, 2014, with the proceeds from the 2017 Senior Secured Credit Facilities (as defined below). The total prepayment amount was $1.030 billion, which included $1.027 billion of outstanding principal and $3.0 million of accrued and unpaid interest, other fees and expenses. In connection with the prepayment, the Company recorded a debt extinguishment loss of $18.2 million, included in the loss on debt refinancing in the consolidated statement of operations for the eight months ending August 31, 2017 (Predecessor). The loss includes the partial write-off of unamortized debt issuance costs and discount related to the 2014 Revolver Loan and 2014 First Lien Credit Agreement and a portion of costs incurred with the 2017 Senior Secured Credit Facilities.
In September 2016, in connection with an amendment to the 2014 First Lien Credit Agreement, the Company recorded a loss on debt refinancing of $3.6 million, included in the accompanying consolidated statement of operations for the year ended December 31, 2016 (Predecessor).
2014 Second Lien Credit Agreement
The 2014 Second Lien Credit Agreement, entered into on November 3, 2014, was a senior secured obligation of Surgery Center Holdings, Inc.
In October 2015, the Company partially prepaid the outstanding principal of the 2014 Second Lien Credit Agreement. In connection with the partial prepayment, the Company recorded a debt extinguishment loss of $16.1 million, included in the loss on debt refinancing in the accompanying consolidated statement of operations for the year ended December 31, 2015 (Predecessor).
In March 2016, the Company prepaid in full the remaining outstanding principal of the 2014 Second Lien Credit Agreement, plus accrued and unpaid interest, with the proceeds of the issuance of the 2021 Unsecured Notes, defined below. In connection with the prepayment, the Company recorded a debt extinguishment loss of $8.3 million, included in the loss on debt refinancing in the accompanying consolidated statement of operations for the year ended December 31, 2016 (Predecessor).
2017 Senior Secured Credit Facilities
On August 31, 2017 (Predecessor), SP Holdco I, Inc. and Surgery Center Holdings, Inc., each a wholly-owned subsidiary of the Company, entered into a credit agreement (the “Credit Agreement”) providing for a $1.290 billion senior secured term loan (the “Term Loan”) and a $75.0 million revolving credit facility (the “Revolver” and, together with the Term Loan, the “2017 Senior Secured Credit Facilities”).
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Total estimated amortization expense for the next five years and thereafter related to intangible assets follows (in millions): | | | | | | 2020 | | $ | 4.5 |
| 2021 | | 4.1 |
| 2022 | | 3.2 |
| 2023 | | 2.1 |
| 2024 | | 1.8 |
| Thereafter | | 12.4 |
| Total | | $ | 28.1 |
|
5. Long-Term Debt A summary of long-term debt follows (in millions): | | | | | | | | | | | | December 31, | | | 2019 | | 2018 | | | | | | Senior secured term loan (1) | | $ | 1,434.1 |
| | $ | 1,447.9 |
| Senior secured revolving credit facility | | — |
| | — |
| 8.875% senior unsecured notes due 2021 (2) | | — |
| | 406.7 |
| 6.750% senior unsecured notes due 2025 | | 370.0 |
| | 370.0 |
| 10.000% senior unsecured notes due 2027 | | 430.0 |
| | — |
| Notes payable and other secured loans | | 104.0 |
| | 79.3 |
| Finance lease obligations (3) | | 253.4 |
| | 25.4 |
| Less: unamortized debt issuance costs | | (10.8 | ) | | (2.8 | ) | Total debt | | 2,580.7 |
| | 2,326.5 |
| Less: Current maturities | | 56.0 |
| | 55.6 |
| Total long-term debt | | $ | 2,524.7 |
| | $ | 2,270.9 |
|
| | (1) | Includes unamortized fair value discount of $4.6 million and $5.5 million as of December 31, 2019 and 2018, respectively. |
| | (2) | Includes unamortized fair value premium of $6.7 million as of December 31, 2018. The premium was written-off upon redemption as discussed below. |
| | (3) | In connection with the adoption of the Lease Accounting Standard, the Company's capital lease obligations that existed as of December 31, 2018 were derecognized and included as a component of the finance lease obligations included in the table shown above. See Note 6. "Leases" for further discussion on the adoption of the Lease Accounting Standard. The increase in finance lease obligations upon adoption of the Lease Accounting Standard is due to the inclusion of certain financing obligations that were previously recognized as a component of other current and long-term liabilities as discussed further in Note 13. "Other Assets and Liabilities." The increase also includes the addition of a new finance lease associated with a new de novo hospital, which began operations in the fourth quarter of 2019. |
Senior Secured Credit Facilities The Company has a credit agreement (the "Credit Agreement") providing for a $1.44 billion senior secured term loan (the "Term Loan") and a $120.0 million senior secured revolving credit facility (the "Revolver" and, together with the Term Loan, was fully drawn on August 31, 2017 (Predecessor) and the proceeds thereof were used to finance the consideration paid in the NSH Merger, to repay amounts outstanding under the Company’s then-existing 2014 First Lien"Senior Secured Credit Agreement and 2014 Revolver Loan and amounts outstanding under the existing senior secured credit facilities of NSH, and to pay fees and expenses in connection with the foregoing and transactions related to the Transaction Agreements.Facilities"). The Revolver may be utilized for working capital, capital expenditures and general corporate purposes. Subject to certain conditions and requirements set forth in the Credit Agreement, the Company may request one or more additional incremental term loan facilities or one or more increases in the commitments under the Revolver. During 2019, in connection with the completion of the issuance of the 2027 Unsecured Notes (defined below), the outstanding commitments under the Company's Revolver were increased by $45.0 million pursuant to an incremental amendment to the credit agreement governing its revolving credit facility. As of both December 31, 2019 and 2018, the Company had no outstanding borrowing on the Revolver. As of December 31, 2017 (Successor),2019, the Company's availability on the Revolver was $71.9$112.9 million (including outstanding letters of credit of $3.1$7.1 million). The Term Loan will mature on August 31, 2024 (or, if at least 50.0% ofand the 2021 Unsecured Notes (as defined below) shall have not either been repaid or refinanced with permitted indebtedness having a maturity date not earlier than six months after the maturity date of the Term Loan by no later than October 15, 2020, then October 15, 2020). The Revolver will mature on August 31, 2022 (or, if at least 50.0% of the 2021 Notes have not either been repaid or refinanced with permitted indebtedness having a maturity date not earlier than six months after the maturity date of the Term Loan by no later than October 15, 2020, then October 15, 2020). 2022. The 2017 Senior Secured Credit Facilities bear interest at a rate per annum equal to (x) LIBOR plus a margin ranging from 3.00% to 3.25% per annum, depending on the Company's first lien net leverage ratio or (y) an alternate base rate (which will be the highest of (i) the prime rate, (ii) 0.5% per annum above the federal funds effective rate and (iii) one-month LIBOR plus 1.00% per annum (solely with respect to the Term Loan, the alternate base rate shall not be less than 2.00% per annum)) plus a margin ranging from 2.00% to 2.25% per annum. In addition, the Company is required to pay a commitment fee of 0.50% per annum in respect of unused commitments under the Revolver. The Term Loan amortizes in equal quarterly installments of 0.25% of the aggregate original principal amount of the Term Loan (such amortization payments commenced in December 2017).Loan. The Term Loan is subject to mandatory prepayments based on excess cash flow for the applicable fiscal year that will depend on the first lien net
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
leverage ratio as of the last day of the applicable fiscal year, as well as upon the occurrence of certain other events, as described in the Credit Agreement. There were no excess cash flow payments required as of December 31, 2017 (Successor).2019. With respect to the Revolver, the Company is required to comply with a maximum consolidated total net leverage ratio of 9.50:1.00, which covenant will be tested quarterly on a trailing four quarter basis only if, as of the last day of the applicable fiscal quarter the Revolver is drawn in an aggregate amount greater than 35% of the total commitments under the Revolver. Such financial maintenance covenant is subject to an equity cure. The Credit Agreement includes customary negative covenants restricting or limiting the ability of the Company and its restricted subsidiaries, to, among other things, sell assets, alter its business, engage in mergers, acquisitions and other business combinations, declare dividends or redeem or repurchase equity interests, incur additional indebtedness or guarantees, make loans and investments, incur liens, enter into transactions with affiliates, prepay certain junior debt, and modify or waive certain material agreements and organizational documents, in each case, subject to customary and other agreed upon exceptions. The Credit Agreement also contains customary affirmative covenants and events of default. As of December 31, 2017 (Successor),2019, the Company was in compliance with the covenants contained in the Credit Agreement. The 2017 Senior Secured Credit Facilities are guaranteed, on a joint and several basis, by SP Holdco I, Inc. and each of Surgery Center Holdings, Inc.'s current and future wholly-owned domestic restricted subsidiaries (subject to certain exceptions) (the “Subsidiary Guarantors”"Subsidiary Guarantors") and are secured by a first priority security interest in substantially all of Surgery Center Holdings, Inc.'s, SP Holdco I, Inc.'s and the Subsidiary Guarantors’ assets (subject to certain exceptions). In connection with the Term Loan and Revolver, in 2017 the Company recordedrepaid its then-existing 2014 First Lien Credit Agreement, resulting in a debt extinguishment loss of $18.2 million, included in the loss on debt refinancing in the consolidated statement of operations for the eight months ending August 31, 2017 (Predecessor). The loss includes the partial write-off of unamortized debt issuance costs and discount related to the 2014 Revolver Loan and 2014 First Lien Credit Agreement and a portion of $18.8 million and $9.4 million, respectively, in the Predecessor period, which were eliminatedcosts incurred with the application of pushdown accounting.Senior Secured Credit Facilities. In connection with the application of pushdown accounting, the Company remeasured and recorded the Term Loan at fair value using a measurement date of August 31, 2017.2017 (Predecessor). The fair value was based on a Level 2 computation using quoted prices for identical liabilities in inactive markets. As a result, the Company recorded a fair value discount of $6.5 million as of the measurement date, which is reported in the consolidated balance sheets as a direct deduction from the face amount the Term Loan. The Company amortizes the fair value discount to interest expense over the life of the Term Loan. In connection with incremental Term Loan borrowings in 2018, the Company recorded debt issuance costs and discount of $3.0 million. 6.750% Senior Unsecured Notes due 20212025 Effective March 31, 2016June 30, 2017 (Predecessor), Surgery Center Holdings, Inc.,the Company issued $400.0$370.0 million in gross proceeds of senior unsecured notes due April 15, 2021July 1, 2025 (the "2021"2025 Unsecured Notes"). The 20212025 Unsecured Notes bear interest at the rate of 8.875%6.750% per year, payable semi-annually on April 15January 1 and October 15July 1 of each year. The 20212025 Unsecured Notes are a senior unsecured obligation of Surgery Center Holdings, Inc. and are guaranteed on a senior unsecured basis by each of Surgery Center Holdings, Inc.'s existing and future domestic wholly ownedwholly-owned restricted subsidiaries that guarantees the 2017 Senior Secured Credit Facilities (subject to certain exceptions). The Company may redeem up to 35% of the aggregate principal amount of the 2021 Unsecured Notes, at any time before April 15, 2018, with the net cash proceeds of certain equity offerings at a redemption price equal to 108.875% of the principal amount to be redeemed, plus accrued and unpaid interest to, but excluding, the date of redemption, provided that at least 50% of the aggregate principal amount of the 2021 Unsecured Notes remain outstanding immediately after the occurrence of such redemption and such redemption occurs within 180 days of the date of the closing of any such qualified equity offering.
SURGERY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company may redeem the 2021 Unsecured Notes, in whole or in part, at any time prior to April 15, 2018 at a price equal to 100.000% of the principal amount to be redeemed plus an applicable make-whole premium, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company may redeem the 2021 Unsecured Notes, in whole or in part, at any time on or after April 15, 2018, at the redemption prices set forth below (expressed as a percentage of the principal amount to be redeemed), plus accrued and unpaid interest, if any, to the date of redemption:
| | | | April 15, 2018 to April 14, 2019 | 106.656 | % | April 15, 2019 to April 14, 2020 | 104.438 | % | April 15, 2020 and thereafter | 100.000 | % |
If Surgery Center Holdings, Inc., experiences a change in control under certain circumstances, it must offer to purchase the notes at a purchase price equal to 101.000% of the principal amount, plus accrued and unpaid interest to, but excluding, the date of repurchase. The change of control as discussed in Note 1. "Organization", did not trigger repurchase.
The 2021 Unsecured Notes contain customary affirmative and negative covenants, which among other things, limit the Company’s ability to incur additional debt, pay dividends, create or assume liens, effect transactions with its affiliates, guarantee payment of certain debt securities, sell assets, merge, consolidate, enter into acquisitions and effect sale and leaseback transactions.
In connection with the offering of the 2021 Unsecured Notes, the Company recorded debt issuance costs of $8.4 million in the Predecessor period, which were eliminated with the application of pushdown accounting.
In connection with the application of pushdown accounting, the Company remeasured and recorded the 2021 Unsecured Notes at fair value using a measurement date of August 31, 2017. The fair value was based on a Level 2 computation using quoted prices for identical liabilities in inactive markets. As a result, the Company recorded a fair value premium of $10.0 million as of the measurement date, which is reported in the consolidated balance sheets as a direct addition to the face amount the notes. The Company amortizes the fair value premium to interest expense over the life of the 2021 Unsecured Notes.
Senior Unsecured Notes due 2025
Effective June 30, 2017 (Predecessor), SP Finco, LLC, a wholly owned subsidiary of Surgery Center Holdings, Inc., issued $370.0 million in gross proceeds of senior unsecured notes due July 1, 2025 (the "2025 Unsecured Notes"), which gross proceeds were deposited in an escrow account (the “Escrow Account”) established at Wilmington Trust, National Association (in such capacity, the “Escrow Agent”) in the name of the trustee under the indenture governing the 2025 Unsecured Notes (the “2025 Unsecured Notes Indenture”) on behalf of the holders of the 2025 Unsecured Notes. The 2025 Unsecured Notes bear interest at the rate of 6.750% per year, payable semi-annually on January 1 and July 1 of each year, commencing on January 1, 2018.
In connection with the closing of the NSH Merger and the release of the proceeds from the Escrow Account, both of which occurred on August 31, 2017 (Predecessor), SP Finco, LLC merged with and into Surgery Center Holdings, Inc., with Surgery Center Holdings, Inc. surviving such merger and assuming, by operation of law, the rights and obligations of SP Finco, LLC under the 2025 Unsecured Notes and the indenture governing such notes. As of such time, the 2025 Unsecured Notes became guaranteed on a senior unsecured basis by each of Surgery Center Holdings, Inc.’s domestic wholly owned restricted subsidiaries that guarantees Surgery Center Holdings, Inc.’s senior secured credit facilities (subject to certain exceptions).
The Company may redeem up to 40% of the aggregate principal amount of the 2025 Unsecured Notes at any time prior to July 1, 2020, with the net cash proceeds of certain equity issuances at a redemption price equal to 106.750%106.75% of the principal amount to be redeemed, plus accrued and unpaid interest to, but excluding, the date of redemption, provided that at least 50% of the aggregate principal amount of the 2025 Unsecured Notes remain outstanding immediately after the occurrence of such redemption and such redemption occurs within 180 days of the date of the closing of the applicable equity offering. The Company may redeem the 2025 Unsecured Notes, in whole or in part, at any time prior to July 1, 2020, at a price equal to 100.000%100% of the principal amount to be redeemed plus the applicable premium, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company may redeem the 2025 Unsecured Notes, in whole or in part, at any time on or after July 1, 2020, at the redemption prices set forth below (expressed as a percentage of the principal amount to be redeemed), plus accrued and unpaid interest, if any, up to, but excluding, the date of redemption: | | | | July 1, 2020 to June 30, 2021 | 103.375 | % | July 1, 2021 to June 30, 2022 | 101.688 | % | July 1, 2022 and thereafter | 100.000 | % |
If Surgery Center Holdings, Inc. experiences a change in control under certain circumstances, it must offer to purchase the 2025 Unsecured Notes at a purchase price equal to 101.000% of the principal amount, plus accrued and unpaid interest, if any, up to, but excluding, the date of repurchase. The 2025 Unsecured Notes contain customary affirmative and negative covenants, which, among other things, limit the Company’s ability to incur additional debt, pay dividends, create or assume liens, effect transactions with its affiliates, guarantee payment of certain debt securities, sell assets, merge, consolidate, enter into acquisitions and effect sale and leaseback transactions.
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
TheIn connection with the offering of the 2025 Unsecured Notes, containthe Company recorded debt issuance costs of $17.3 million in the Predecessor period, which were eliminated with the application of pushdown accounting.
10.000% Senior Unsecured Notes due 2027 Effective April 11, 2019, the Company issued the 2027 Unsecured Notes in an aggregate principal amount of $430.0 million due April 15, 2027. The 2027 Unsecured Notes bear interest at the rate of 10.000% per annum, payable semi-annually on April 15 and October 15 of each year, beginning on October 15, 2019. The 2027 Unsecured Notes are a senior unsecured obligation of Surgery Center Holdings, Inc. and are guaranteed on a senior unsecured basis by each of Surgery Center Holdings, Inc.'s existing and future domestic wholly-owned restricted subsidiaries that guarantees the Senior Secured Credit Facilities (subject to certain exceptions). The Company may redeem up to 40% of the aggregate principal amount of the 2027 Unsecured Notes at any time prior to April 15, 2022, with the net cash proceeds of certain equity issuances at a redemption price equal to 110.000% of the principal amount of notes to be redeemed, plus accrued and unpaid interest to, but excluding, the date of redemption. The Company may redeem the 2027 Unsecured Notes, in whole or in part, at any time prior to April 15, 2022, at a redemption price equal to 100% of the principal amount of notes to be redeemed plus the applicable premium, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company may redeem the 2027 Unsecured Notes, in whole or in part, at any time on or after April 15, 2022, at the redemption prices set forth below (expressed as a percentage of the principal amount of notes to be redeemed), plus accrued and unpaid interest, if any, up to, but excluding, the date of redemption: | | | | April 15, 2022 to April 14, 2023 | 105.000 | % | April 15, 2023 to April 14, 2024 | 102.500 | % | April 15, 2024 and thereafter | 100.000 | % |
If Surgery Center Holdings, Inc. experiences a change of control under certain circumstances, it must offer to purchase the 2027 Unsecured Notes at a purchase price equal to 101.000% of the aggregate principal amount of notes, plus accrued and unpaid interest, if any, up to, but excluding, the date of repurchase. The indenture governing the 2027 Unsecured Notes contains customary affirmative and negative covenants, which, among other things, limit the Company’s ability to incur additional debt, pay dividends, create or assume liens, effect transactions with its affiliates, guarantee payment of certain debt securities, sell assets, merge, consolidate, enter into acquisitions and effect sale and leaseback transactions. In connection with the offering of the 20252027 Unsecured Notes, the Company recorded debt issuance costs of $17.3 million in$8.8 million. 8.875% Senior Unsecured Notes due 2021 In connection with issuance of the Predecessor period, which were eliminated with the application of pushdown accounting. Subordinated2027 Unsecured Notes
On August 3, 2017 as discussed above, the Company redeemed in whole a subordinated debt facility of $1.0 million with a maturity date of August 4, 2017 and an interest rate of 17.00% per annum, at a price equal 100%all of the $1.0 millionthen existing senior unsecured notes due 2021 ("2021 Unsecured Notes"). The redemption price was equal to 104.438% of the outstanding principal amount redeemed, plus accrued and unpaid interest. In connection with the redemption, the Company recorded a debt extinguishment loss of $11.7 million, included in loss on debt extinguishment in the consolidated statements of operations for the year ended December 31, 2019. The loss includes the redemption premium paid partially offset by the write-off of the unamortized fair value premium as of the redemption date.
Notes Payable and Secured LoansOther Debt
Certain of the Company’s subsidiaries have outstanding bank indebtedness under notes payable and other secured loans, which is collateralized by the real estate and equipment owned by the surgical facilities to which the loans were made.made, and right-of-use finance lease obligations for which we are liable to various vendors for several property and equipment leases classified as finance leases. The various bank indebtedness agreements contain covenants to maintain certain financial ratios and also restrict encumbrance of assets, creation of indebtedness, investing activities and payment of distributions. At December 31, 2017 (Successor),2019, the Company was in compliance with its covenants contained in the credit agreements. The Company and its subsidiaries had notes payable to financial institutions of $101.9 million and $42.5 million as of December 31, 2017 (Successor) and 2016 (Predecessor), respectively. The increase is primarily due to the acquisition of NSH. Capital Lease Obligations
The Company is liable to various vendors for several property and equipment leases classified as capital leases. The carrying value of the leased assets was $16.2 million and $15.4 million as of December 31, 2017 (Successor) and 2016 (Predecessor), respectively.
Maturities A summary of maturities for the Company's long-term debt, excluding unamortized debt issuance costs and the unamortized fair value discount and premium discussed above, for the next five years and thereafter as of December 31, 20172019 follows (in thousands)millions): | | 2018 | | $ | 58,726 |
| | 2019 | | 36,857 |
| | 2020 | | 1,277,253 |
| | $ | 56.0 |
| 2021 | | 411,748 |
| | 55.2 |
| 2022 | | 8,110 |
| | 42.0 |
| 2023 | | | 36.7 |
| 2024 | | | 1,396.7 |
| Thereafter | | 393,597 |
| | 1,009.5 |
| Total debt | | $ | 2,186,291 |
| | Total | | | $ | 2,596.1 |
|
8.SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Leases On January 1, 2019, the Company adopted the Lease Accounting Standard using the modified retrospective transition approach by applying the new standard to all leases existing at that date. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under the new guidance, while prior period amounts have not been adjusted. The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward its historical lease identification, lease classification and initial direct costs for any leases office space and equipment for its surgical facilities, including surgical facilities under development.that existed prior to January 1, 2019. The Company also elected the accounting policy practical expedient to exclude leases with an initial term of twelve months or less from the balance sheet. Certain of the Company’s lease agreements generallyhave lease and non-lease components, which for the majority of leases the Company accounts for separately when the actual lease and non-lease components are determinable. The Company determines if an arrangement is a lease at inception. Right-of-use assets represent the right to use the underlying assets for the lease term and the lease liabilities represent the obligation to make lease payments arising from the leases. Right-of-use assets and liabilities are recognized at commencement date based on the present value of future lease payments over the lease term, which includes only payments that are fixed and determinable at the time of commencement. When readily determinable, the Company uses the interest rate implicit in a lease to determine the present value of future lease payments. For leases where the implicit rate is not readily determinable, the Company's incremental borrowing rate is used. The Company calculates its incremental borrowing rate on a periodic basis using a third-party financial model that estimates the rate of interest the Company would have to pay to borrow an amount equal to the total lease payments on a collateralized basis over a term similar to the lease. The Company applies its incremental borrowing rate using a portfolio approach. The right-of-use asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. The Company's operating leases are primarily for real estate, including medical office buildings, and corporate and other administrative offices. The Company's finance leases are primarily for medical equipment and information technology and telecommunications assets. The Company's finance leases also include certain land, buildings and improvements as discussed in Note 3. "Property and Equipment." Real estate lease agreements typically have initial terms of ten years and may include one or more options to renew. Certain leases also include options to purchase the leased property. The useful life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. The majority of the Company's medical equipment leases have a bargain purchase option that is reasonably certain of exercise, so these assets are depreciated over their useful life. The Company's lease agreements do not contain any material residual value guarantees, restrictions or covenants. Certain of the Company's lease agreements require the lessee, or the Company to pay allcommon area maintenance, repairs, property taxes utilities and insurance costs. The Company accounts for operatingcosts, which are variable amounts based on actual costs incurred during each applicable period. Certain lease obligationsagreements also include escalating rent payments that are not fixed at commencement but are based on an index that is determined in future periods over the lease term based on changes in the Consumer Price Index or other measure of cost inflation. These variable components of lease payments are expensed as incurred and sublease income on a straight-line basis. Lease obligations paid in advance are recorded as prepaid rent andnot included in prepaid expensesthe determination of the right-of-use asset or lease liability. The following table presents the components of the Company's right-of-use assets and other current assets onliabilities related to leases and their classification in the consolidated balance sheets. The difference between actual lease payments and straight-line lease expense over the initial lease term, excluding optional renewal periods, is recorded as deferred rent and included in other current liabilities and other long-term liabilities on the consolidated balance sheets.sheets at December 31, 2019 (in millions): | | | | | | | | | | Classification in Consolidated Balance Sheets | | December 31, 2019 | | | | | | Assets: | | | | | Operating lease assets | | Other long-term assets | | $ | 297.7 |
| Finance lease assets | | Property and equipment, net of accumulated depreciation | | 237.1 |
| Total leased assets | | | | $ | 534.8 |
| | | | | | Liabilities: | | | | | Operating lease liabilities: | | | | | Current | | Other current liabilities | | $ | 37.3 |
| Long-term | | Other long-term liabilities | | 283.1 |
| Total operating lease liabilities | | | | 320.4 |
| Finance lease liabilities: | | | | | Current | | Current maturities of long-term debt | | 15.8 |
| Long-term | | Long-term debt, less current maturities | | 237.6 |
| Total finance lease liabilities | | | | 253.4 |
| Total lease liabilities | | | | $ | 573.8 |
|
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents the weighted-average lease terms and discount rates at December 31, 2019 (in millions): | | | | | | | | | | Operating Leases | | Finance Leases | | | | | | Weighted-average remaining lease term | | 8.9 years |
| | 16.6 years |
| Weight average discount rate | | 10.4 | % | | 8.7 | % |
The following table presents the components of the Company's lease expense and their classification in the consolidated statement of operations for the year ended December 31, 2019 (in millions): | | | | | | | | December 31, 2019 | | | | Operating lease costs | | $ | 70.4 |
| Finance lease costs: | | | Amortization of leased assets | | 22.2 |
| Interest on lease liabilities | | 13.0 |
| Total finance lease costs | | 35.2 |
| Variable and short-term lease costs | | 13.2 |
| Total lease costs | | $ | 118.8 |
|
During the year ended December 31, 2019, the Company incurred lease costs of $20.6 million under operating lease agreements with physician investors who are related parties. During the year ended December 31, 2019, the Company paid rent of $6.7 million under a finance lease agreement with a lessor who is a related party. One of the Company's surgical facilities has a non-controlling ownership interest in the lessor. Payments are allocated to principal adjustments of the finance lease liability and interest expense. The following table presents supplemental cash flow information for the year ended December 31, 2019 (dollars in millions): | | | | | | | | December 31, 2019 | | | | Cash paid for amounts included in the measurement of lease liabilities: | | | Operating cash outflows from operating leases | | $ | 67.3 |
| Operating cash outflows from finance leases | | $ | 13.0 |
| Financing cash outflows from finance leases | | $ | 13.4 |
| | | | Right-of-use assets obtained in exchange for lease obligations: | | | Operating leases | | $ | 56.2 |
| Finance leases | | $ | 133.3 |
|
Future maturities of lease liabilities at December 31, 2019 are presented in the following table (in millions): | | | | | | | | | | | | Operating Leases | | Finance Leases | | | | | | 2020 | | $ | 67.9 |
| | $ | 35.5 |
| 2021 | | 62.3 |
| | 35.5 |
| 2022 | | 57.0 |
| | 32.8 |
| 2023 | | 53.8 |
| | 30.5 |
| 2024 | | 50.5 |
| | 25.6 |
| Thereafter | | 208.1 |
| | 348.7 |
| Total lease payments | | 499.6 |
| | 508.6 |
| Less: imputed interest | | (179.2 | ) | | (255.2 | ) | Total lease obligations | | $ | 320.4 |
| | $ | 253.4 |
|
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Future minimummaturities of lease payments for non-cancellable operating and capital leases for the next five years and thereafterliabilities at December 31, 2017 follows2018, prior to the adoption of the Lease Accounting Standard, are presented in the following table (in thousands)millions): | | | | Operating Leases | | Capital Leases | | Operating Leases (1) | | Capital Leases | | | | | | | | | | 2018 | | $ | 67,513 |
| | $ | 9,100 |
| | 2019 | | 67,136 |
| | 7,404 |
| | $ | 81.5 |
| | $ | 8.8 |
| 2020 | | 62,735 |
| | 5,020 |
| | 75.6 |
| | 6.7 |
| 2021 | | 56,558 |
| | 3,505 |
| | 66.7 |
| | 4.7 |
| 2022 | | 52,582 |
| | 1,986 |
| | 61.3 |
| | 2.9 |
| 2023 | | | 57.2 |
| | 1.5 |
| Thereafter | | 258,192 |
| | 6,299 |
| | 470.2 |
| | 4.3 |
| Total minimum payments | | $ | 564,716 |
| | 33,314 |
| | Total lease payments | | | $ | 812.5 |
| | 28.9 |
| Less: imputed interest | | | | (5,720 | ) | | | | (3.5 | ) | Capital lease obligations | | | | $ | 27,594 |
| | Total lease obligations | | |
|
| | $ | 25.4 |
|
| | (1) | Includes financing obligations payable to the lessors of certain land, buildings and improvements that arose due to the Company's continued involvement with the leased assets under the sale-leaseback guidance in effect prior to the adoption of the Lease Accounting Standard. As of December 31, 2018, the current portion of the financing obligations was $7.0 million and was included in other current liabilities in the consolidated balance sheets. The long-term portion of the finance obligations was $149.8 million and was included as other long-term liabilities in the consolidated balance sheets. |
TheAs of December 31, 2018, the Company hashad various non-cancellable sub-lease arrangements. The total future minimum rentals to be received under these arrangements as of December 31, 20172018 is $4.2estimated to be $3.4 million.
Rental expense for operating leases was $83.5 million for the year ended December 31, 2018 (Successor), $27.8 million for the four months ended December 31, 2017 (Successor) and $39.2 million for the eight months ended August 31, 2017 (Predecessor). For the years ended December 31, 2016 (Predecessor) and 2015 (Predecessor), rental expense for operating leases was $47.3 million and $40.1 million, respectively. Included in these amounts, the Company incurred lease expense under operating lease agreements with physician investors who are related parties of $20.2 million for the year ended December 31, 2018 (Successor), $7.5 million for the four months ended December 31, 2017 (Successor), and $9.8 million for the eight months ended August 31, 2017 (Predecessor), $14.4 million and $12.9 million for years ended December 31, 2016 and 2015, respectively.. 9.7. Redeemable Preferred Stock
On August 31, 2017 (Predecessor), the Company issuedcompleted the sale issuance of 310,000 shares of the Company's preferred stock, par value $0.01 per share, designated as 10.00% Series A Convertible Perpetual Participating Preferred Stock (the "Series A Preferred Stock") to Bain Capital at a purchase price of $1,000 per share for an aggregate purchase price of $310.0 million. The net proceeds from the Preferredmillion (the "Preferred Private Placement (as defined in Note 1. "Organization"Placement") were used to finance a portion of the NSH Merger.. The accrued value of the Series A Preferred Stock is convertible into shares of Common Stockcommon stock at a price per share of Common Stockcommon stock equal to $19.00, subject to certain adjustments as provided in the Certificate of Designations, Preferences, Rights and Limitations of the 10.00% Series A Convertible Perpetual Participating Preferred Stock of Surgery Partners, Inc. (the “Series"Series A Certificate of Designation”Designation"), at any time at the option of the holder. In addition, the Company may require the conversion of all, but not less than all, of the Series A Preferred Stock pursuant to the terms and conditions of the Series A Certificate of Designation, after the second anniversary of the date of issuance, if the volume weighted average closing price of the Common Stock for any 20 out of 30 consecutive trading days prior to such date, equals or exceeds $42.00 per share. The Company cannot redeem the Series A Preferred Stock prior to the fifth anniversary of its issuance and thereafter, may redeem all, but not less than all, of the Series A Preferred Stock for cash pursuant to and subject to the terms and conditions of the Series A Certificate of Designation. The holders of Series A Preferred Stock may cause the Company to redeem the Series A Preferred Stock upon the occurrence of certain change of control transactions of the Company or the Common Stockcommon stock ceasing to be listed or quoted on a trading market. The Company adjusts the carrying amount of the Series A Preferred Stock to equal the redemption value at the end of each reporting period as if it were also the redemption date. Changes in the redemption value are recognized immediately as they occur. The Series A Preferred Stock ranks senior to the Common Stockcommon stock and any other capital stock of the Company with respect to dividends, redemption and any other rights upon the liquidation, dissolution or winding up of the Company, and the holders thereof are entitled to vote with the holders of Common Stock,common stock, together as a single class, on all matters submitted to a vote of the Company’s stockholders. In addition to participating in any dividends that may be declared with respect to the Common Stockcommon stock on an as-converted basis, each share of Series A Preferred Stock accrues dividends daily at a dividend rate of 10.00%, compounding quarterly, and in any given quarter, subject to certain conditions, the Board of Directors of the Company may declare a cash dividend in an amount up to 50% of the amount of the dividend that has accrued and accumulated during such quarter through the end of such quarter, and the amount of any quarterly dividend paid in cash shall not compound on the applicable date and shall not be included in the accrued value of the Series A Preferred Stock. In the event of the Company’s liquidation, dissolution or winding-up (whether voluntary of involuntary), holders of Series A Preferred Stock will be entitled to receive out of the assets of the Company available for distribution to shareholders, after satisfaction of any liabilities and obligations to creditors of the Company, with respect to each Series A Preferred Share, an amount equal to the greater of (i) $1,000.00 per share, plus dividends compounded to date, plus dividends accrued but not yet compounded and (ii) the amount that a holder of one share of Common Stock would receive, assuming the Series A Preferred Stock had converted into shares of Common Stock.
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
dividends accrued but not yet compounded and (ii) the amount that a holder of one share of common stock would receive, assuming the Series A Preferred Stock had converted into shares of common stock. In connection with the issuance of Series A Preferred Stock, in the Preferred Private Placement, the Company incurred issuance costs of $18.3 million in the Predecessor period,eight months ended August 31, 2017 (Predecessor), which were eliminated with the application of pushdown accounting. AThe following table presents a summary of activity related to the redeemable preferred stock for the period from September 1, 2017 toyears ended December 31, 2017 (Successor) follows2019 and 2018 (in thousands)millions):
| | | | | | Successor | | | Balance at September 1, 2017 | | $ | 310,000 |
| Dividends accrued | | 10,481 |
| Cash dividends declared | | (5,241 | ) | Mark to redemption adjustment | | 15,566 |
| Balance at December 31, 2017 | | $ | 330,806 |
|
| | | | | | | | | | | | December 31, | | | 2019 | | 2018 | | | | | | Balance at beginning of period | | $ | 359.3 |
| | $ | 330.8 |
| Dividends accrued | | 35.7 |
| | 32.4 |
| Cash dividends declared | | — |
| | (3.9 | ) | Balance at end of period | | $ | 395.0 |
| | $ | 359.3 |
|
CashThere were no unpaid cash dividends declared but unpaid at December 31, 2017 were $3.9 million,2019 and were included in other current liabilities in the consolidated balance sheet.2018. The aggregate and per share amounts of unpaid cumulative preferred dividends as of December 31, 20172019 and 2018 were $9.2$69.5 million and $29.56,$224.09, and $33.8 million and $108.97, respectively.
10.8. 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 as part of its interest rate risk management strategy. During 2019 and 2018, 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 and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings, as documented at hedge inception in accordance with the Company’s accounting policy election. Amounts reported in accumulated other comprehensive income 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 $14.6 million will be reclassified as an increase to interest expense. As of December 31, 2019, the Company had four interest rate swaps with a current notional amount of $1.2 billion and a termination date of November 30, 2023. The derivatives are recorded at fair value (see Note 1. "Organization and Summary of Accounting Policies") and classified as a long-term liability included in other long-term liabilities in the consolidated balance sheets as of December 31, 2019 and 2018 . As of December 31, 2018, the Company had three interest rate swaps with a notional amount of $900.0 million. The following table presents the pre-tax effect of the interest rate swaps on the Company's accumulated other comprehensive income ("OCI") and statement of operations (in millions): | | | | | | | | | | | | | | | | | | | | | | Successor | | | | Predecessor | | | Year Ended December 31, | | September 1 to December 31, | | | | January 1 to August 31, | | | 2019 | | 2018 | | 2017 (1) | | | | 2017 (1) | | | | | | | | | | | | Derivatives in cash flow hedging relationships | | | | | | | | | | | Loss recognized in OCI (effective portion) | | $ | 35.8 |
| | $ | 23.1 |
| | $ | — |
| | | | $ | — |
| Loss reclassified from accumulated OCI to interest expense (effective portion) | | 7.5 |
| | 0.6 |
| | — |
| | | | — |
|
| | (1) | There were no derivatives outstanding for the comparative periods in 2017. |
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Earnings Per Share Basic and diluted earnings per share are calculated in accordance with ASC 260, Earnings Per Share, 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. Beginning in the Successor period, in connection with the issuance of the Series A Preferred Stock, theThe Company began computingcomputes 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. Refer to Note 9. "Redeemable Preferred Stock", for further disclosure of the terms and conditions, including the participation rights, of the Series A Preferred Stock. A reconciliation of the numerator and denominator of basic and diluted earnings per share follows (in thousands(dollars in millions, except share and per share amounts)amounts; shares in thousands): | | | | | | | | | | | | | | | | | | | | | | Successor | | | | Predecessor | | | September 1 to December 31, | | | | January 1 to August 31, | | Year Ended December 31, | | | 2017 | | | | 2017 | | 2016 | | 2015 | | | | | | | | | | | | Numerator: | | | | | | | | | | | Net (loss) income attributable to Surgery Partners, Inc. | | $ | (41,316 | ) | | | | $ | (11,669 | ) | | $ | 9,453 |
| | $ | 1,429 |
| Less: amounts allocated to participating securities (1) | | 10,481 |
| | | | — |
| | — |
| | — |
| Less: mark to redemption adjustment | | 15,566 |
| | | | — |
| | — |
| | — |
| Net (loss) income attributable to common stockholders | | $ | (67,363 | ) | | | | $ | (11,669 | ) | | $ | 9,453 |
| | $ | 1,429 |
| | | | | | | | | | | | Denominator: | | | | | | | | | | | Weighted average shares outstanding- basic | | 48,319,193 |
| | | | 48,121,404 |
| | 48,018,944 |
| | 36,066,233 |
| Effect of dilutive securities (2) | | — |
| | | | — |
| | 171,794 |
| | 1,398,154 |
| Weighted average shares outstanding- diluted | | 48,319,193 |
| | | | 48,121,404 |
| | 48,190,738 |
| | 37,464,387 |
| | | | | | | | | | | | Earnings (loss) per share: | | | | | | | | | | | Basic | | $ | (1.39 | ) | | | | $ | (0.24 | ) | | $ | 0.20 |
| | $ | 0.04 |
| Diluted (2) | | $ | (1.39 | ) | | | | $ | (0.24 | ) | | $ | 0.20 |
| | $ | 0.04 |
| | | | | | | | | | | | Securities outstanding not included in the computation of diluted (loss) earnings per share as their effect is antidilutive: | | | | | | | | | | | Stock options | | — |
| | | | — |
| | — |
| | — |
| Restricted shares | | 62,850 |
| | | | 105,944 |
| | — |
| | — |
| Convertible preferred stock | | — |
| | | | N/A |
| | N/A |
| | N/A |
|
| | | | | | | | | | | | | | | | | | | | | | Successor | | | | Predecessor | | | Year Ended December 31, | | September 1 to December 31, | | | | January 1 to August 31, | | | 2019 | | 2018 | | 2017 | | | | 2017 | | | | | | | | | | | | Numerator: | | | | | | | | | | | Net loss attributable to Surgery Partners, Inc. | | $ | (74.8 | ) | | $ | (205.7 | ) | | $ | (41.3 | ) | | | | $ | (11.7 | ) | Less: Amounts allocated to participating securities (1) | | (35.7 | ) | | (32.4 | ) | | (10.5 | ) | | | | — |
| Less: Mark to redemption adjustment | | — |
| | — |
| | (15.6 | ) | | | | — |
| Net loss attributable to common stockholders | | $ | (110.5 | ) | | $ | (238.1 | ) | | $ | (67.4 | ) | | | | $ | (11.7 | ) | | | | | | | | | | | | Denominator: | | | | | | | | | | | Weighted average shares outstanding- basic and diluted (2) | | 48,280 |
| | 48,028 |
| | 48,319 |
| | | | 48,121 |
| | | | | | | | | | | | Basic and diluted loss per share (2) | | $ | (2.29 | ) | | $ | (4.96 | ) | | $ | (1.39 | ) | | | | $ | (0.24 | ) | | | | | | | | | | | | Dilutive securities outstanding not included in the computation of diluted loss per share as their effect is antidilutive: | | | | | | | | | | | Stock options | | — |
| | 83 |
| | — |
| | | | — |
| Restricted shares | | 67 |
| | 198 |
| | 63 |
| | | | 106 |
|
(1) Amounts allocated to participating securities includes dividends accrued during the Successor period for the Series A Preferred Stock. The Series A Preferred Stock does not participate in undistributed losses. There were no participating securities during the Predecessor periods.
SURGERY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(2) The impact of potentially dilutive securities for the four months ended December 31, 2017 (Successor) and the eight months ended August 31, 2017 (Predecessor), were not considered because the effect would be anti-dilutive in each of those periods.
| | (1) | Includes dividends accrued during the Successor periods for the Series A Preferred Stock. The Series A Preferred Stock does not participate in undistributed losses. There were no participating securities during the Predecessor periods. |
| | (2) | The impact of potentially dilutive securities for all periods were not considered because the effect would be anti-dilutive in each of those periods. |
Share Repurchase Transactions On December 15, 2017, the Company's Board of Directors authorized a share repurchase program of up to $50.0 million of the Company's issued and outstanding common stock from time to time. The timing and size of repurchases will be determined based on market conditions and other factors. The authorization does not obligate the repurchase of any shares and the Company may repurchase shares of common stock at any time without prior notice. The share repurchases will be made in accordance with applicable securities laws in open market or privately negotiated transactions. The authorization does not have a specified expiration date, and the share repurchase program may be suspended, recommenced or discontinued at any time or from time to time without prior notice. DuringIn December 2017, the Company repurchased 180,664 shares of its common stock stock at an average price of $11.12 per share through market purchases. At December 31, 2017, the Company had $48.0 million of repurchase authorization available under the December 2017 authorization.
During the first quarter ofIn 2018, through the date of this report, the Company repurchased 156,818 shares of its common stock stock at an average price of $12.64 per share through market purchases. At March 15, 2018,December 31, 2019, the Company had $46.0 million of repurchase authorization available under the December 2017 authorization.
11.10. Income Taxes and Tax Receivable Agreement
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 aAny change in tax rates isthat could impact deferred tax assets or liabilities are recognized in income in the same period that includes the enactment date.change occurs. If a net operating loss ("NOL") carryforward exists, the Company makes a determination as to whether that NOL carryforward will be utilized in the future. A valuation allowance is established for certain net operating loss 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
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
assumptions. If these estimates and related assumptions change in the future, the Company may be required to adjust its deferred tax valuation allowances. The Company, or one or more of its subsidiaries, files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal income tax examinations for years prior to 20142016 or state income tax examinations for years prior to 2013.2015. The Company and certain of its subsidiaries file a consolidated federal income tax return. The partnerships, limited liability companies, and certain non-consolidated physician practice corporations also file separate income tax returns. The Company's allocable portion of each partnership's and limited liability company's income or loss is included in taxable income of the Company. The remaining income or loss of each partnership and limited liability company is allocated to the other owners. The Company made income tax payments of $0.5$1.6 million and $0.6$2.2 million for the years ended December 31, 2019 and 2018 (Successor), $0.5 million for the four months ended December 31, 2017 (Successor) and $0.6 million for the eight months ended August 31, 2017 (Predecessor), respectively. Income tax payments were $0.7 million and $1.1 million for the years ended December 31, 2016 and 2015, respectively.. Income tax expense (benefit) is comprised of the following (in thousands)millions): | | | | | | | | | | | | | | | | | | | | | | Successor | | | | Predecessor | | | September 1 to December 31, | | | | January 1 to August 31, | | Year Ended December 31, | | | 2017 | | | | 2017 | | 2016 | | 2015 | | | | | | | | | | | | Current: | | | | | | | | | | | Federal | | $ | (111 | ) | | | | $ | — |
| | $ | (31 | ) | | $ | — |
| State | | 990 |
| | | | 614 |
| | 244 |
| | 909 |
| Deferred: | | | | | | | | | | | Federal | | 77,472 |
| | | | (17,288 | ) | | 7,326 |
| | (132,311 | ) | State | | (6,712 | ) | | | | (1,415 | ) | | (444 | ) | | (17,580 | ) | Total income tax expense (benefit) | | $ | 71,639 |
| | | | $ | (18,089 | ) | | $ | 7,095 |
| | $ | (148,982 | ) |
SURGERY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | | | | | | | | Successor | | | | Predecessor | | | Year Ended December 31, | | September 1 to December 31, | | | | January 1 to August 31, | | | 2019 | | 2018 | | 2017 | | | | 2017 | | | | | | | | | | | | Current: | | | | | | | | | | | Federal | | $ | (0.2 | ) | | $ | (0.3 | ) | | $ | (0.1 | ) | | | | $ | — |
| State | | 1.7 |
| | 1.5 |
| | 1.0 |
| | | | 0.6 |
| Deferred: | | | | | | | | | | | Federal | | 3.2 |
| | 16.5 |
| | 77.5 |
| | | | (17.3 | ) | State | | 4.8 |
| | 8.7 |
| | (6.7 | ) | | | | (1.4 | ) | Total income tax expense (benefit) | | $ | 9.5 |
| | $ | 26.4 |
| | $ | 71.7 |
| | | | $ | (18.1 | ) |
A reconciliation of the provision for income taxes as reported in the consolidated statements of operations and the amount of income tax expense (benefit) computed by multiplying consolidated income (loss) in each year by the U.S. federal statutory rate of 21% (2019 and 2018) and 35% (2017) follows (in thousands)millions): | | | | Successor | | | | Predecessor | | Successor | | | | Predecessor | | | September 1 to December 31, | | | | January 1 to August 31, | | Year Ended December 31, | | Year Ended December 31, | | September 1 to December 31, | | | | January 1 to August 31, | | | 2017 | | | | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 | | | | 2017 | | | | | | | | | | | | | | | | | | | | | | Tax expense (benefit) at U.S.federal statutory rate | | $ | 24,485 |
| | | | $ | 4,315 |
| | $ | 32,263 |
| | $ | (26,648 | ) | | $ | 11.5 |
| | $ | (14.5 | ) | | $ | 24.5 |
| | | | $ | 4.3 |
| State income tax, net of U.S. federal tax benefit | | 1,685 |
| | | | (456 | ) | | (86 | ) | | 1,059 |
| | 5.7 |
| | 10.0 |
| | 1.7 |
| | | | (0.5 | ) | Change in valuation allowance | | 529 |
| | | | 1,324 |
| | 354 |
| | (137,721 | ) | | 13.6 |
| | 26.9 |
| | 0.6 |
| | | | 1.3 |
| Net income attributable to non-controlling interests | | (13,872 | ) | | | | (14,731 | ) | | (26,470 | ) | | (24,996 | ) | | (25.2 | ) | | (23.1 | ) | | (13.9 | ) | | | | (14.7 | ) | Changes in measurement of uncertain tax positions | | (191 | ) | | | | 20 |
| | (262 | ) | | (10 | ) | | (0.1 | ) | | (0.1 | ) | | (0.2 | ) | | | | — |
| Stock option compensation | | 306 |
| | | | 37 |
| | (200 | ) | | — |
| | 1.3 |
| | 0.5 |
| | 0.3 |
| | | | — |
| Differences related to divested facilities | | (429 | ) | | | | (1,708 | ) | | — |
| | — |
| | 0.1 |
| | 6.0 |
| | (0.4 | ) | | | | (1.7 | ) | Nondeductible transaction costs | | 2,058 |
| | | | (977 | ) | | — |
| | 3,442 |
| | — |
| | — |
| | 2.1 |
| | | | (1.0 | ) | Tax return reconciling differences | | — |
| | | | (316 | ) | | 1,635 |
| | (1,574 | ) | | 1.1 |
| | 1.7 |
| | — |
| | | | (0.3 | ) | Change in effective tax rate | | 64,343 |
| | | | (825 | ) | | — |
| | (2,143 | ) | | 0.3 |
| | 0.5 |
| | 64.3 |
| | | | (0.8 | ) | TRA liability | | (7,404 | ) | | | | (4,782 | ) | | (327 | ) | | 39,428 |
| | Tax Receivable Agreement liability | | | 1.6 |
| | 0.9 |
| | (7.4 | ) | | | | (4.8 | ) | Goodwill impairment | | | 0.5 |
| | 8.9 |
| | — |
| | | | — |
| Litigation settlement | | | — |
| | 8.6 |
| | — |
| | | | — |
| Other | | 129 |
| | | | 10 |
| | 188 |
| | 181 |
| | (0.9 | ) | | 0.1 |
| | 0.1 |
| | | | 0.1 |
| Total income tax expense (benefit) | | $ | 71,639 |
| | | | $ | (18,089 | ) | | $ | 7,095 |
| | $ | (148,982 | ) | | $ | 9.5 |
| | $ | 26.4 |
| | $ | 71.7 |
| | | | $ | (18.1 | ) |
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The components of temporary differences and the approximate tax effects that give rise to the Company’s net deferred tax asset are as follows (in thousands)millions): | | | | | | | | | | | | | | Successor | | | | Predecessor | | | December 31, 2017 | | | | December 31, 2016 | | | | | | | | Deferred tax assets: | | | | | | | Medical malpractice liability | | $ | 3,236 |
| | | | $ | 4,194 |
| Accrued vacation and incentive compensation | | 2,125 |
| | | | 1,112 |
| Net operating loss carryforwards | | 137,794 |
| | | | 158,796 |
| Allowance for bad debts | | 2,545 |
| | | | 8,343 |
| Capital loss carryforwards | | 3,024 |
| | | | 2,785 |
| Deferred rent | | — |
| | | | 1,371 |
| Depreciation on property and equipment | | — |
| | | | 530 |
| Deferred financing costs | | 17,004 |
| | | | — |
| TRA liability | | 1,042 |
| | | | 4,542 |
| Other deferred assets | | 4,961 |
| | | | 4,879 |
| Total gross deferred tax assets | | 171,731 |
| | | | 186,552 |
| Less: Valuation allowance | | (11,032 | ) | | | | (7,358 | ) | Total deferred tax assets | | 160,699 |
| | | | 179,194 |
| Deferred tax liabilities: | | | | | | | Deferred financing costs | | — |
| | | | (8,797 | ) | Depreciation on property and equipment | | (12,098 | ) | | | | — |
| Amortization of intangible assets | | (12,441 | ) | | | | (15,241 | ) | Basis differences of partnerships and joint ventures | | (2,399 | ) | | | | (68,160 | ) | Deferred rent | | (717 | ) | | | | — |
| Other deferred liabilities | | (725 | ) | | | | (3,203 | ) | Total deferred tax liabilities | | (28,380 | ) | | | | (95,401 | ) | Net deferred tax assets | | $ | 132,319 |
| | | | $ | 83,793 |
|
SURGERY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | December 31, | | | 2019 | | 2018 | | | | | | Deferred tax assets: | | | | | Medical malpractice liability | | $ | 3.5 |
| | $ | 3.5 |
| Accrued vacation and incentive compensation | | 2.3 |
| | 2.9 |
| Net operating loss carryforwards | | 143.0 |
| | 139.4 |
| Allowance for bad debts | | 2.2 |
| | 2.5 |
| Capital loss carryforwards | | 2.0 |
| | 3.7 |
| Deferred rent | | 1.7 |
| | 1.9 |
| Amortization of intangible assets | | 0.3 |
| | 2.4 |
| Deferred financing costs | | 9.5 |
| | 14.6 |
| Section 163(j) interest | | 54.7 |
| | 27.3 |
| Interest rate swap liability | | 12.9 |
| | 5.4 |
| TRA liability | | 1.2 |
| | 1.2 |
| Right of use | | 52.1 |
| | — |
| Affiliate indebtedness receivable | | 6.8 |
| | — |
| Other deferred assets | | 7.3 |
| | 7.1 |
| Total gross deferred tax assets | | 299.5 |
| | 211.9 |
| Less: Valuation allowance | | (77.9 | ) | | (50.4 | ) | Total deferred tax assets | | 221.6 |
| | 161.5 |
| Deferred tax liabilities: | | | | | Depreciation on property and equipment | | (2.8 | ) | | (3.9 | ) | Basis differences of partnerships and joint ventures | | (67.5 | ) | | (47.8 | ) | Right of use | | (51.5 | ) | | — |
| Other deferred liabilities | | (1.1 | ) | | (0.6 | ) | Total deferred tax liabilities | | (122.9 | ) | | (52.3 | ) | Net deferred tax assets | | $ | 98.7 |
| | $ | 109.2 |
|
The Company had federal net operating lossNOL carryforwards of $507.4$530.6 million as of December 31, 2017,2019, of which $516.2 million expire between 2025 and 2037 and2037. The remaining federal NOL carryforwards, which were generated subsequent to 2017, do not expire. The Company had state net operating lossNOL carryforwards of $619.6$596.7 million as of December 31, 2017,2019, which expire between 20182020 and 2037.2039. The Company had capital loss carryforwards of $12.6$7.6 million as of December 31, 2017,2019, which expire between 20182020 and 2022.2023. The Company had federal and state credit carryforwards of $1.1 million as of December 31, 2017.2019. The federal credits do not expire, and the state credits expire between 20182020 and 2029.2030. The Company had IRC Section 163(j) interest limitation carryforwards of $222.7 million as of December 31, 2019, which do not expire. The Company has recorded a valuation allowance against deferred tax assets at December 31, 20172019 and 20162018 totaling $11.0$77.9 million and $7.4$50.4 million, respectively, which represents an increase of $3.6$27.5 million. The valuation allowance continues to be provided for certain deferred tax assets for which the Company believes it is more likely than not that the tax benefits will not be realized, which are primarily Section 163(j) interest carryforwards, certain state net operating lossesNOLs and capital loss carryforwards. The Company has evaluated the realizability of its deferred tax assets based on sources of positive and negative evidence, and determined that it is more likely than not that the NOL carryforwards will be realized. The determination was made based upon projections of future book and taxable income. If the Company's expectations for future operating results on a consolidated basis or at the state jurisdiction level vary from actual results due to changes in health care regulations, general economic conditions, or other factors, the Company may need to adjust the valuation allowance, for all or a portion of its deferred tax assets. The Company's income tax expense in future periods will be reduced or increased to the extent of offsetting decreases or increases, respectively, in its valuation allowance in the period when the change in circumstances occurs. These changes could have a significant impact on the Company's future earnings. Included in the increase in the valuation allowance for the year ended December 31, 20172019 was an increase of approximately $0.4$7.0 million that was recorded to additional-paid-in-capital as the result of the tax effect of the disposals of shares of non-controlling interests. Also included in the increase in the valuation allowance was an increase of approximately $0.3 million that was recorded to goodwill related to certain deferred tax assets acquired during the year.interest rate swap liability. Approximately $1.8$14.2 million of the valuation allowance as of December 31, 20172019 is recorded against deferred tax assets that, if subsequently recognized, will be credited directly to contributed capital.
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A reconciliation of the beginning and ending liability for gross unrecognized tax benefits for the years ended December 31, 20172019 and 20162018 is as follows (in thousands)millions): | | | | Successor | | | | Predecessor | | December 31, | | | December 31, 2017 | | | | December 31, 2016 | | 2019 | | 2018 | | | | | | | | | | | | Unrecognized tax benefits at beginning of year | | $ | 1,061 |
| | | | $ | 1,403 |
| | $ | 0.1 |
| | $ | 0.7 |
| Additions for acquired positions | | 36 |
| | | | — |
| | Additions for tax positions of prior years | | — |
| | | | 60 |
| | Reductions for tax positions of prior year | | (407 | ) | | | | (398 | ) | | — |
| | (0.6 | ) | Settlements | | — |
| | | | (4 | ) | | Unrecognized tax benefits at end of year | | $ | 690 |
| | | | $ | 1,061 |
| | $ | 0.1 |
| | $ | 0.1 |
|
The Company recognizes interest and penalties related to uncertain tax positions in its provision for income taxes in the consolidated statements of operations. For both the years ended December 31, 20172019 and 2016,2018, the Company had approximately $0.1 million and $0.2 million, respectively, of accrued interest and penalties related to uncertain tax positions. The total amount of accrued liabilities related to uncertain tax positions that would affect the Company's effective tax rate, if recognized, is $0.2$0.1 million and $0.3$0.1 million as of December 31, 20172019 and 2016,2018, respectively. The reserves are included in long-term taxes payable and long-term deferred tax assets in the consolidated balance sheet as of December 31, 2017.2019. The Tax Cuts and Jobs Act (the "Tax Act") was enacted on December 22, 2017. The Tax Act reduces the USU.S. federal corporate tax rate from 35% to 21%, allows for 100% expensing of certain capital expenditures, and will limitlimits interest expense deductions beginning in 2018. As of December 31, 2017, the Company has not completed itsThe Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment ofdate for companies to complete the Act; however, in certain cases, as described below, the Company has made a reasonable estimate of the effects on existing deferred tax balances. In other cases, the Company has not been able to make a reasonable estimate and continues to account for those items based on existing accounting under ASC 740, andAccounting Standards Codification 740. In accordance with SAB 118, a company must reflect the provisionsincome tax effects of the tax laws that were in effect immediately prior to enactment. In all cases, the Company will continue to make and refine its calculations as additional analysis is completed. In addition, estimates may also be affected as the Company gains a more thorough understanding of the tax law. The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, the Company is still analyzing certainthose aspects of the Tax Act and refining its calculations,for which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.accounting under Accounting Standards Codification 740 is complete. The most significant componentCompany's accounting for elements of the uncertainty relates to the state tax impactTax Act is complete as of December 31, 2018, including a reduction of the U.S. federal changes and how the states will or will not adopt federal changes. The effect on the Company will primarily be relatedcorporate tax rate from 35% to its state net operating losses and related valuation allowances. The provisional amount recorded related to the remeasurement of the deferred tax balance was $64.0 million, which is included as a component of income tax expense.
The Company has not made sufficient progress on the analysis of the21%, 100% expensing that may be claimed at certain partnership entities in their 2017 income tax returns for applicableof capital expenditures, and the effects that would have on the Company's deferred tax assets and liabilities. The temporary differences related to these amounts would adjust the Company's deferred tax assets and liabilities related to partnership differences and net operating losses, but would likely have an immaterial net effect on the overall deferred tax asset recorded in the financial statements.interest expense limitation under Section 163(j).
Tax Receivable Agreement
On May 9, 2017, the Company and H.I.G., in its capacity as the stockholders representative, 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, H.I.G. (in its
SURGERY PARTNERS, INC.11. Equity-Based Compensation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
capacity as the stockholders representative) and the other parties referred to therein, which amendment became effective on August 31, 2017. The TRA was initially entered intoTransactions in connection with the reorganization undertaken to facilitate the Company’s initial public offering. Pursuant to the amendment to the TRA, the Company agreed to make payments to H.I.G. in its capacity as the stockholders representative pursuant to a fixed payment schedule. The amounts payable under the TRA are calculated as the product of (i) an annual base amount and (ii) the maximum corporate federal income tax rate for the applicable year plus three percent. The amounts payable under the TRA are related to the Company’s projected realized tax savings over the next six years and are not dependent on the Company’s actual tax savings over such period. The calculation of amounts payable pursuant to the TRA is thus dependent on the maximum corporate federal income tax rate. To the extent that the Company is unable to make payments under the TRA and such inability is a result of the terms of credit agreements and other debt documents that are materially more restrictive than those existing as of September 30, 2015, such payments will be deferred and will accrue interest at a rate of LIBOR plus 500 basis points until paid. If the terms of such credit agreements and other debt documents cause the Company to be unable to make payments under the TRA and such terms are not materially more restrictive than those existing as of September 30, 2015, such payments will be deferred and will accrue interest at a rate of LIBOR plus 300 basis points until paid.
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. During the eight months ended August 31, 2017 (Predecessor), the Company recognized a reduction in the carrying value of the liability under the TRA of $43.9 million, with $15.3 million of the reduction recorded to a gain on amendment of TRA and $28.6 million recorded as a reduction to the goodwill recorded in connection with the application of pushdown accounting related to the change of control (discussed in Note 1. "Organization").
As a result of the reduction in the corporate tax rate from the Tax Cuts and Jobs Act discussed above, the Company remeasured the value of the liability under the TRA pursuant to the calculation terms as described above. During the four months ended December 31, 2017 (Predecessor), the Company recognized a reduction in the carrying value of the liability under the TRA of $25.3 million, included as a tax receivable agreement benefit in the consolidated statement of operations. 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 as of December 31, 2017 will be approximately $65.1 million. The carrying value of the liability under the TRA, reflecting the discount as discussed above, was $44.3 million as of December 31, 2017.
Prior to the remeasurement at the lower corporate tax rate, but subsequent to the effectiveness of the amendment discussed above, the Company estimated that the total amounts payable under the TRA would be approximately $120.5 million. Prior to the effectiveness of the amendment to the TRA, the amounts payable under the TRA varied depending upon a number of factors, including the amount, character and timing of the taxable income of Surgery Partners, Inc. The Company estimated the total amounts payable would be approximately $123.4 million, if the tax benefits of related deferred tax assets were ultimately realized. The amounts payable were recognized during 2015 in conjunction with the release of the Company's valuation allowance recorded against the deferred tax assets.
On September 8, 2017 (Successor), in connection with the resignation of the Company's former Chief Executive Officer, Michael Doyle, Mr. Doyle entered into a TRA Waiver and Assignment Agreement (the “CEO TRA Assignment Agreement”) with the Company, pursuant to which the Company accepted the assignment of 50% of Mr. Doyle’s (and his affiliates’) interest in future payments to which such parties were entitled pursuant to the TRA, in exchange for an upfront payment of approximately $5.1 million, in the aggregate, as set forth in the CEO TRA Assignment Agreement. On September 15, 2017 (Successor), certain of the Company’s employees entered into TRA Waiverreceives employee and Assignment Agreements with the Company (collectively, the “Employee TRA Assignment Agreements” and together with the CEO TRA Assignment Agreement, the “TRA Assignment Agreements”), pursuant to which the Company made upfront payments of approximately $4.8 million in the aggregate,non-employee services in exchange for the assignment of 100% of each such employee’s interest in future payments to which such employee was entitled pursuant toCompany’s equity instruments or liabilities that are based on the TRA. During the four months ended December 31, 2017 (Successor), the Company recognized an aggregate gain of $1.1 million as a resultfair value of the TRA Assignment Agreements.
12. Equity-Based Compensation
Prior to the Reorganization, the Surgery Center Holdings, LLC’s ("Holdings LLC") Amended and Restated Limited Liability Company Agreement, dated December 24, 2009, provided, from time to time, as approvedCompany’s equity securities or may be settled by the Holdings LLC's Board, for the issuance of a subordinate class of the Holdings LLC's nonvoting membership units to certain key persons, as defined, of the Company or its subsidiaries.
In April 2013, the Company modified the terms of the 2010 awards to allowthese securities are accounted for additional vesting in 2013 of its share-based awards with time-vesting conditions. In November 2014, the Holdings LLC issued to certain executives of Symbion who became employees of the Company following the Company’s acquisition of Symbion an additional 1,300,000 unvested B-Units, which are subject to vesting conditions to occur through November 2019.
Prior to the Reorganization, in the event of employee termination, the B-Units were subject tousing a 90-day repurchase option. Upon termination, all unvested B-Units were effectively forfeited. If the employee was terminated for cause, as defined, or resigned prior to the expiration of certain tenure periods specified in such employee’s agreement, the repurchase price for each vested B-Unit was zero, and was deemed automatically repurchased by the Company. The repurchase price for vested B-Units, should the Company elect to exercise the repurchase option, was at fair market value, as defined. If the Company did not exercise the repurchase option, the employee owned the vested B-Units pursuant to the Holdings LLC's LLC Agreement, which included restrictions on transfer, among other provisions. The fair value of each Holdings LLC issued B-Unit was estimatedmethod. The Company’s policy is to recognize compensation expense using the straight line method over the relevant vesting period for units that vest based on the date of grant.time.
SURGERY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In September 2015, the Company adopted theThe Surgery Partners, Inc. 2015 Omnibus Incentive Plan, as amended ("2015 Omnibus Incentive Plan") from which all equity-based awards will be granted. Under this plan, the Company can grant stock options, SARs, restricted stock, unrestricted stock, stock units, performance awards, cash awards and other awards convertible into or otherwise based on shares of its common stock. As of December 31, 2017, 4,815,7002019, 8,315,700 shares were authorized to be granted under the 2015 Omnibus Incentive Plan and 3,716,8096,448,187 were available for future equity grants.
Restricted Share-Based Awards During the four monthsyears ended December 31, 2017 (Successor)2019 and the eight months ended August 31, 2017 (Predecessor),2018, the Company granted 112,107556,450 and 251,904519,605 restricted stock awards respectively,("RSAs") to certain officers, employees and non-employee directors in accordance with the 2015 Omnibus Incentive Plan. The Company granted 384,629 and 569,114 restricted stock awards during the years ended December 31, 2016 (Predecessor) and 2015 (Predecessor),Plan, respectively. Vesting and payment of these restricted stock awardsRSAs are generally subject to continuing service of the employee or non-employee director over the ratable vesting periods beginning one year from the date of grant to three or five years after the date of grant. The fair values of these restricted stock unitsRSAs were determined based on the closing price of the Company’s common stock on the trading date immediately prior to the grant date. During the eight months ended August 31, 2017 (Predecessor) and the yearyears ended December 31, 2016 (Predecessor)2019 and 2018, the Company granted 232,242389,972 and 292,147335,074 performance-based restricted stock units respectively,("PSUs") subject to the achievement of a combination of performance conditions. There were no grants during the four months ended December 31, 2017 (Successor) and the year ended December 31, 2015 (Predecessor).conditions, respectively. In addition to the achievement of the performance conditions, these performance-based restricted stock unitsPSUs are generally subject to the continuing service of the employee over the ratable vesting period from the earned date continuing for two years. The performance condition for the targeted performance-based restricted stock units granted during the eight months ended August 31, 2017 (Predecessor) is based on the Company’s achievement of annually established targets for adjusted earnings per share for 2017. For these restricted stock units, the number of shares payable at the end of the performance periods ranges from 0% to 150% of the targeted units based on the Company’s actual performance and/or market conditions results as compared to the targets. The performance condition for the targeted performance-based restricted stock units granted during the year ended December 31, 2016 (Predecessor) is based on the Company’s actual adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”). These stock units are not considered outstanding until earned. During the eight monthsyear ended AugustDecember 31, 2017 (Predecessor), 136,5502019, 245,301 of the restricted stock unitsPSUs granted in 2018 were deemed to have been earned. During the year ended December 31, 2018, none of the PSUs previously granted were deemed to have been earned. No additional units granted were deemed to have been earned during the four months ended December 31, 2017 (Successor). Additionally, during the four monthsyear ended December 31, 2017 (Successor),2018, the Company granted 215,823127,292 leverage performance restricted stock units ("LPUs") subject to the achievement of a combination of market conditions. There were no grantsThe Company did not grant any LPUs during the eight months ended August 31, 2017 (Predecessor) or the yearsyear ended December 31, 2016 (Predecessor)2019. The market condition for the LPUs granted during the year ended December 31, 2018 is based on the compound annual growth rate of the Company’s total stockholder return, considered both alone and 2015 (Predecessor).relative to that of the companies making up the S&P Composite 1500 Health Care Companies, over a three-year performance period. In addition to the achievement of the market conditions, these leverage performance unitsLPUs are generally subject to the continuing service of the employee over the ratable vesting period from the performance period end date continuing for threetwo years. The market condition for the leverage performance restricted stock units granted during the four months ended December 31, 2017 (Successor) is based on the Company’s three-year annualized total shareholder return relative to the companies making up the S&P Composite 1500 Health Care Index as of the grant date. These stock units are not considered outstanding until earned. During the four monthsyears ended December 31, 2017 (Successor),2019 and 2018, none of the leverage performance restricted stock unitsLPUs granted were deemed to have been earned.
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For these restricted stock units,LPUs, the number of shares payable at the end of the vesting periods ranges from 0% to 500% of the targeted units based on the Company’s actual performance and/or market conditions results as compared to the targets. The fair values of these restricted stock units were determined based on a combination, where applicable, of the closing price of the Company’s common stock on the trading date immediately prior to the grant date for units subject to performance conditions, or at its Monte-Carlo simulation value for units subject to market conditions. The Company recognizes compensation expense for the portion of the targeted performance-based restricted stock units subject to market conditions even if the condition is never satisfied. However, if the performance conditions are not met for the portion of the targeted performance-based restricted stock units subject to such performance conditions, no compensation expense will be recognized, and any previously recognized compensation expense will be reversed. Forfeitures are recognized as incurred.
SURGERY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
the LPUs were not appropriate to incentivize and retain the Company’s current executive management team. In March 2019, the Compensation Committee permitted certain named executive officers to exchange their previously granted LPUs for new stock option awards. As a result, 190,538 LPUs were voluntarily exchanged for 1,756,500 new stock option awards.
Restricted Share-Based Activity All units and per unit amounts in these consolidated financial statements and notes to the consolidated financial statements reflect the Reorganization that occurred in September 2015 (see Note 1). A summary of non-vested restricted share-based activity for the years ended December 31, 2017, 2016,2019, 2018, and 20152017 follows:
| | | | Unvested Shares | | Weighted Average Grant Date Fair Value | | Unvested Shares | | Weighted Average Grant Date Fair Value | Predecessor | | | | | | | | | Outstanding at January 1, 2015 | | 1,242,065 |
| | $ | 1.96 |
| | Granted/Earned | | 569,114 |
| | 6.31 |
| | Vested | | (1,643,525 | ) | | 3.79 |
| | Outstanding at December 31, 2015 | | 167,654 |
| | $ | 2.53 |
| | Granted/Earned | | 384,629 |
| | 15.09 |
| | Forfeited/Canceled | | (53,003 | ) | | 11.85 |
| | Vested | | (37,038 | ) | | 6.31 |
| | Outstanding at December 31, 2016 | | 462,242 |
| | $ | 3.72 |
| | 462,242 |
| | $ | 3.72 |
| Granted/Earned | | 388,454 |
| | 18.40 |
| | 388,454 |
| | 18.40 |
| Forfeited/Canceled | | (67,771 | ) | | 18.01 |
| | Forfeited/Cancelled | | | (67,771 | ) | | 18.01 |
| Vested | | (169,881 | ) | | 10.29 |
| | (169,881 | ) | | 10.29 |
| Outstanding at August 31, 2017 | | 613,044 |
| | $ | 16.02 |
| | 613,044 |
| | $ | 16.02 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Successor | | | | | | | | | Outstanding at September 1, 2017 | | 613,044 |
| | $ | 16.02 |
| | 613,044 |
| | $ | 16.02 |
| Granted/Earned | | 112,107 |
| | 11.15 |
| | 112,107 |
| | 11.15 |
| Forfeited/Canceled | | (54,622 | ) | | 10.94 |
| | Forfeited/Cancelled | | | (54,622 | ) | | 10.94 |
| Vested | | (96,073 | ) | | 17.03 |
| | (96,073 | ) | | 17.03 |
| Outstanding at December 31, 2017 | | 574,456 |
| | $ | 15.95 |
| | 574,456 |
| | $ | 15.95 |
| Granted/Earned | | | 519,605 |
| | 16.10 |
| Forfeited/Cancelled | | | (180,719 | ) | | 15.09 |
| Vested | | | (210,318 | ) | | 16.31 |
| Outstanding at December 31, 2018 | | | 703,024 |
| | $ | 16.18 |
| Granted/Earned | | | 801,751 |
| | 12.70 |
| Forfeited/Cancelled | | | (272,706 | ) | | 12.97 |
| Vested | | | (456,183 | ) | | 16.20 |
| Outstanding at December 31, 2019 | | | 775,886 |
| | $ | 13.78 |
|
Stock Options and Stock Appreciation Rights The Company granted 2,256,500 and 700,000 stock options during the years ended December 31, 2019 and 2018, respectively. The Company did not grant any stock options during either the yearfour months ended December 31, 2017. During2017 (Successor) or the yearseight months ended DecemberAugust 31, 2016 and 2015, the Company granted options to purchase shares of the Company’s common stock to certain directors in accordance the 2015 Omnibus Incentive Plan.2017 (Predecessor). Options to purchase shares are granted with an exercise price equal to the fair market value of the Company’s common stock on the day of grant, based on the closing price of the Company’s common stock on the trading date immediately prior to the grant date,date. The stock options granted during the year ended December 31, 2019 are subject to the following performance and become ratably exercisable beginning one year fromvesting criteria: (i) one-third (33.3%) of the dateaward will vest in three equal annual installments on each of grantthe first three anniversaries of December 31, 2019, (ii) one-third (33.3%) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $25.00 over a period of thirty (30) consecutive trading days, and (iii) one-third (33.3%) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $35.00 over a period of thirty (30) consecutive trading days, in each case, generally subject to three years after the date of grant.continued employment on each vesting date. Forfeitures are recognized as incurred. Option
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The stock options granted during the year ended December 31, 2018 are subject to the following performance and vesting criteria: (i) fifty percent (50%) of the stock option awards will vest in five equal annual installments on each of the first five anniversaries of the date of grant, (ii) twenty-five percent (25%) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $25.00 over a period of sixty (60) consecutive trading days, and (iii) twenty-five percent (25%) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $35.00 over a period of sixty (60) consecutive trading days, in each case, generally subject to continued employment on each vesting date. Forfeitures are recognized as incurred. On December 16, 2018, the Company cancelled 200,000 stock options and replaced them with 200,000 stock-settled stock appreciation right awards (the "SAR Awards"). These were the only SAR Awards granted as of December 31, 2019. The SAR Awards had a base price equal to the exercise price of the cancelled stock options. Fifty percent (50%) of the SAR Awards will vest in five equal annual installments on each of the first five anniversaries of the date of grant, generally subject to continued employment on each vesting date. Twenty-five percent (25%) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $25.00 over a period of sixty (60) consecutive trading days, and twenty-five percent (25%) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $35.00 over a period of sixty (60) consecutive trading days, in each case, generally subject to continued employment on each vesting date. Forfeitures are recognized as incurred. Option/SAR Valuation In applying the Black-Scholes-Merton option pricingMonte Carlo simulation model to value both the stock options and SAR Awards, the Company used the following assumptions: | | ▪ | Risk-free interest rate. The risk-free interest rate is used as a component of the fair value of stock options to take into account the time value of money. For the risk-free interest rate, the Company uses the implied yield on United States Treasury zero-coupon issues with a remaining term equal to the expected life, in years, of the options granted. |
| | ▪ | Expected volatility. Volatility, for the purpose of share-based compensation, is a measurement of the amount that a share price has fluctuated. Expected volatility involves reviewing historical volatility and determining what, if any, change the share price will have in the future. The Company used historical stock price information of certain peer group companies for a period of time equal to the expected option life period to determine estimated volatility. |
| | ▪ | Expected life, in years. A clear distinction is made between the expected life of an option and the contractual term of the option. The expected life of an option is considered the amount of time, in years, that an option is expected to be outstanding before it is exercised. Whereas, the contractual term of the stock option is the term an option is valid before it expires. |
| | ▪ | Expected dividend yield. Since issuing dividends will affect the fair value of a stock option, GAAP requires companies to estimate future dividend yields or payments. The Company has not historically issued dividends and does not intend to issue dividends in the future. As a result, the Company does not apply a dividend yield component to its valuation. |
SURGERY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table sets forth the assumptions used by the Company to estimate the fair value of options and SAR Awards granted in 2016during the years ended December 31, 2019 and 2015 under the 2015 Omnibus Incentive Plan:2018: | | | | | Expected volatility | | 29% - 43% |
| Risk-free interest rate | | 0.54% - 1.36% |
| Expected dividends | | — |
| Average expected term (years) | | 2.56 |
| Fair value of stock options granted | | $2.64 - $5.74 |
|
| | | | | | | | | | 2019 | | 2018 | | | | | | Expected volatility | | 60 | % | | 60% - 65% |
| Risk-free interest rate | | 2.30% - 2.40% |
| | 2.50% - 2.90% |
| Expected dividends | | — |
| | — |
| Average expected term (years) | | 4 |
| | 10 |
| Fair value of stock options granted | | $4.83 - $6.41 |
| | $8.48 - $9.44 |
|
The estimated fair value of options is amortized to expense on a straight-line basis over the options’ vesting period.
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock Option and Stock Appreciation Rights Activity A summary of stock option and SAR Award activity for the years ended December 31, 2017, 2016,2019, 2018, and 20152017 follows: | | | | Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (years) | | Options/SARs | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (years) | Predecessor | | | | | | | | | | | Outstanding at January 1, 2015 | | — |
| | | | | Granted | | 8,488 |
| | $ | 20.03 |
| | 3.0 | | Exercised | | — |
| | | | | Forfeited | | — |
| | | | | Outstanding at December 31, 2015 | | 8,488 |
| | $ | 20.03 |
| | 3.0 | | Granted | | 7,779 |
| | 17.99 |
| | 1.6 | | Exercised | | — |
| | | | | Forfeited | | — |
| | | | | Outstanding at December 31, 2016 | | 16,267 |
| | $ | 19.05 |
| | 1.8 | | 16,267 |
| | $ | 19.05 |
| | 1.8 | Granted | | — |
| |
| |
| | — |
| |
| |
| Exercised | | (3,580 | ) | | 15.36 |
| |
| | (3,580 | ) | | 15.36 |
| |
| Forfeited | | — |
| | | | | Forfeited/Cancelled | | | — |
| | | | Outstanding at August 31, 2017 | | 12,687 |
| | $ | 20.10 |
| | 1.5 | | 12,687 |
| | $ | 20.10 |
| | 1.5 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Successor | | | | | | | | | | | Outstanding at September 1, 2017 | | 12,687 |
| | $ | 20.10 |
| | 1.5 | | 12,687 |
| | $ | 20.10 |
| | 1.5 | Granted | | — |
| |
| |
| | — |
| |
| |
| Exercised | | — |
| | | | | — |
| | | | Forfeited | | — |
| | | | | Outstanding at December 31, 2017 (1) | | 12,687 |
| | $ | 20.10 |
| | 1.2 | | Forfeited/Cancelled | | | — |
| | | | Outstanding at December 31, 2017 | | | 12,687 |
| | $ | 20.10 |
| | 1.2 | Granted | | | 700,000 |
| | 12.90 |
| | 10.0 | Exercised | | | — |
| | | | Forfeited/Cancelled | | | (200,000 | ) | | 12.90 |
| | 10.0 | Outstanding at December 31, 2018 | | | 512,687 |
| | $ | 13.03 |
| | 9.8 | Granted | | | 2,256,500 |
| | 13.00 |
| | 9.2 | Exercised | | | — |
| | | | Forfeited/Cancelled | | | — |
| | | | Outstanding at December 31, 2019 (1) | | | 2,769,187 |
| | $ | 13.02 |
| | 9.0 |
(1) Of the outstanding options, 7,058153,409 were exercisable as of December 31, 2017 (Successor).2019. Other information pertaining to equity-based compensation At December 31, 2017 (Successor),2019, unrecognized compensation cost related to unvested shares was approximately $6.6$24.2 million. Unrecognized compensation cost will be expensed annually based on the number of shares that vest during the year. The Company records equity-based compensation expense to recognize the fair value of the restricted shares that vest and stock options granted. DuringThe Company recorded equity-based compensation expense of $10.2 million and $9.3 million for the years ended December 31, 2019 and 2018 (Successor), respectively, $1.9 million for the four months ended December 31, 2017 (Successor) and $3.7 million for the eight months ended August 31, 2017 (Predecessor), the Company recorded equity-based compensation expense of $1.9 million and $3.7 million, respectively. The Company recorded equity-based compensation expense of $2.0 million and $7.5 million during the years ended December 31, 2016 (Predecessor) and 2015 (Predecessor), respectively. In connection with the IPO, 1,632,626 restricted shares immediately vested which resulted in accelerated vesting of $6.2 million which is included within the $7.5 million of equity-based compensation expense for the year ended December 31, 2015 (Predecessor).
SURGERY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13.12. Employee Benefit Plans
Surgery Partners 401(k) Plan The Surgery Partners 401(k) Plan is a defined contribution plan whereby certain employees who have completed at least one month of service, including at least one hour of service during that period of time, are eligible to participate. Employees may enroll in the plan immediately upon completion of the minimum service requirement. The Surgery Partners 401(k) Plan allows eligible employees to make contributions of varying percentages or flat dollar amounts of their annual compensation, up to the maximum allowable amounts by the Internal Revenue Service ("IRS"). Eligible employees may or may not receive a match by the Company of their contributions. Employer contributions vest incrementally over a period of five years. The Company's contributions were $7.6 million for each of the years ended December 31, 2019 and 2018 (Successor), $2.3 million for the four months ended December 31, 2017 (Successor), and $2.8 million for the eight months ended August 31, 2017 (Predecessor). For the years ended
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Other Assets and Liabilities Other Long-Term Assets A summary of other long-term assets is as follows (in millions): | | | | | | | | | | | | December 31, | | | 2019 | | 2018 | | | | | | Right-of-use operating lease assets | | $ | 297.7 |
| | $ | — |
| Other | | 30.8 |
| | 36.9 |
| Total | | $ | 328.5 |
| | $ | 36.9 |
|
Other Current Liabilities A summary of other current liabilities is as follows (in millions): | | | | | | | | | | | | December 31, | | | 2019 | | 2018 | | | | | | Interest payable | | $ | 21.8 |
| | $ | 20.8 |
| Amounts due to patients and payors | | 16.5 |
| | 20.0 |
| Accrued legal settlement | | 35.1 |
| | 42.3 |
| Right-of-use operating lease liabilities | | 37.3 |
| | — |
| Accrued expenses and other | | 80.5 |
| | 72.1 |
| Total | | $ | 191.2 |
| | $ | 155.2 |
|
Other Long-Term Liabilities A summary of other long-term liabilities is as follows (in millions): | | | | | | | | | | | | December 31, | | | 2019 | | 2018 | | | | | | Right-of-use operating lease liabilities | | $ | 283.1 |
| | $ | — |
| Facility lease obligations | | — |
| | 149.8 |
| Other | | 113.6 |
| | 121.5 |
| Total | | $ | 396.7 |
| | $ | 271.3 |
|
At December 31, 2016 and 2015, contributions were $5.1 million and $2.2 million, respectively. Supplemental Executive Retirement Savings Plan
In connection with the Symbion acquisition,2018, the Company acquired and continues to maintain a supplemental executive retirement savings plan (the "SERP") for certain former Symbion executives. The SERP provides supplemental retirement savings alternatives to eligible officers and key employees of the Company by allowing participants to defer portions of their compensation. Under the SERP, eligible employees may enroll in the plan before December 31 to be entered in the plan the following year. Eligible employees may defer into the SERP up to 25% of their normal period payroll and up to 50% of their annual bonus. If the enrolled employee contributes a minimum of 2% of his or her base salary into the SERP, the Company will contribute 2% of the enrolled employee’s base salaryhad financing obligations payable to the planlessors of certain land, buildings and has the option of contributing additional amounts. Periodically, the enrolled employee’s deferred amounts are transferred to a plan administrator. The plan administrator maintains separate non-qualified accounts for each enrolled employee to track deferred amounts. On May 1 of each year, the Company is required to make its contribution to each enrolled employee’s account. See Note 2. "Significant Accounting Policies" for information about the fair value of the assets and liabilities in the SERP.
14. Related Party Transactions
On December 24, 2009, the Company and Bayside Capital, Inc. (or "Bayside"), an affiliate of H.I.G. Capital, LLC (or "H.I.G."), entered into a Management and Investment Advisory Services Agreement ("Management Agreement") pursuant to which the Company received certain management, consulting and financial advisory services. The Management Agreement was terminated upon completion of the IPO in 2015. Prior to termination, fees related to the Management Agreement of $3.0 million were includedimprovements that arose solely as general and administrative expense in the accompanying consolidated statements of operations for the year ended December 31, 2015. As a result of the IPO,Company being the deemed accounting owner under the build-to-suit guidance in effect prior to the adoption of the Lease Accounting Standard. These obligations were included as facility lease obligations in other long-term liabilities at December 31, 2018 in the table above. Upon adoption of the Lease Accounting Standard on January 1, 2019, the Company further paid Baysidederecognized the build-to-suit liabilities and related assets and concluded the leases should be recognized on the balance sheet as finance leases under the new guidance. Further, the Company had an ongoing development agreement to construct a transaction fee pursuant to the Management Agreement of $5.4 million during the year endednew hospital, which costs were recognized as incurred as a deferred financing obligation included in facility lease obligations at December 31, 2015.2018. Upon reevaluation, the Company concluded that it did not control the assets under construction and therefore the obligation and related asset were derecognized from the balance sheets upon adoption of the Lease Accounting Standard. The lease related to this new hospital commenced in November 2019, and is recognized as a component of finance lease assets and liabilities at December 31, 2019 (see Note. 6 "Leases").
15.14. 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. To cover these claims, theThe Company maintains professional, general liability and professionalworkers' compensation liability insurance in excess of self-insured retentions, through third party commercial insurance carriers in amounts thatcarriers. Although management believes the coverage is sufficient for the Company's operations, although, potentially, some claims may potentially exceed the scope of coverage in effect. The professional and general insurance coverage is on a claims-made basis. Workers' compensation insurance is on an occurrence basis. Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance. The Company is not aware of any such proceedings that wouldare reasonably possible to have a material adverse effect on the Company's business, financial position, results of operations or liquidity. Total professional,
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
general and workers' compensation claim liabilities as of December 31, 2019 and 2018 were $19.4 million and $18.2 million, respectively. The balance includes expected insurance recoveries of $12.1 million and $12.0 million as of December 31, 2019 and 2018, respectively. 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 action including fines, penalties, and exclusion from the Medicare, Medicaid and other federal healthcarehealth care programs. From time to time, governmental regulatory agencies will conduct inquiries of the Company's practices, including, but not limited to, the Company's compliance with federal and state fraud and abuse laws, billing practices and relationships with physicians. It is the Company's current practice and future intent to cooperate fully with such inquiries. The Company is not aware of any such inquiry that would have a material adverse effect on the Company's business, financial position, results of operations or liquidity. In addition, on On October 23, 2017, the Company received aseveral civil investigative demand (“CID”demands ("CIDs") from the federal government under the False Claims Act (“FCA”)FCA for documents and information dating back to January 1, 2010 relating to the medical necessity of certain drug tests conducted by the Company’s physicians and submitted to laboratories owned and operated by the Company. In addition, the Company was informed by CMS that payments to its diagnostic laboratory, Logan Laboratories, were suspended for a period of time, pending further investigations by CMS. CMS lifted the suspension as of December 18, 2019. On January 23, 2020, the United States District Court for the Middle District of Florida unsealed the Complaint in the case of Cho et al. ex rel. United States v. Surgery Partners et al., which we understand to be related to the investigation that gave rise to the CIDs. The Company intends to respondhas been providing information to the CIDgovernment in response to the CIDs and cooperatecurrently has a non-binding agreement in principle with the U.S. Attorney’s Office in connectionUnited States Department of Justice on the financial terms of a settlement with the FCA investigation.
SURGERY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
resolving these matters. The Company previously recorded a litigation-related charge of $46.0 million relating to these matters on the consolidated statements of operations for the year ended December 31, 2018. The Company continues to believe that this reserve is sufficient to cover a potential resolution with the government relating to these matters, including legal expenses relating to the settlement that have not previously been recorded in operating expenses. The ultimate timing, amount and/or final terms of any such resolution may differ materially from those anticipated or the Company may not be able to reach a resolution at all. It is reasonably possible that the Company will incur additional losses above the amount reserved, but the Company is not able to estimate such amounts at this time. See Item 1A "Risk Factors" included elsewhere in this Annual Report under the heading "Risk Factors - Risks Related to Government Regulation - Companies within the health care industry, including us, continue to be the subject of federal and state audits and investigations, including actions for false and other improper claims."
Acquired Facilities The Company, through its wholly-owned subsidiaries or controlled partnerships and limited liability companies, has acquired and will continue to acquire surgical facilities with prior operating histories. Such facilities may have unknown or contingent liabilities, including liabilities for failure to comply with healthcarehealth care laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although the Company attempts to assure that no such liabilities exist, obtain indemnification from prospective sellers covering such matters and institute policies designed to conform centers to its standards following completion of acquisitions, there can be no assurance that the Company will not become liable for past activities that may later be asserted to be improper by private plaintiffs or government agencies. There can be no assurance that any such matter will be covered by indemnification or, if covered, that the liability sustained will not exceed contractual limits or the financial capacity of the indemnifying party. The Company cannot predict whether federal or state statutory or regulatory provisions will be enacted that would prohibit or otherwise regulate relationships which the Company has established or may establish with other healthcarehealth care providers or have materially adverse effects on its business or revenues arising from such future actions. Management believes, however, that it will be able to adjust the Company's operations so as to be in compliance with any statutory or regulatory provision as may be applicable. Potential Physician Investor Liability A majority of the physician investors in the partnerships and limited liability companies which operate the Company's surgical facilities carry general and professional liability insurance on a claims-made basis. Each partnership or limited liability company may, however, be liable for damages to persons or property arising from occurrences at the surgical facilities. Although the various physician investors and other surgeons generally are required to obtain general and professional liability insurance with tail coverage that extends beyond the period of any claims-made policies, such individuals may not be able to obtain coverage in amounts sufficient to cover all potential liability. Since most insurance policies contain exclusions, the physician investors will not be insured against all possible occurrences. In the event of an uninsured or underinsured loss, the value of an investment in the partnership interests or limited liability company membership units and the amount of distributions could be adversely affected. Contingent ConsiderationTax 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 purchase agreement dated December 24, 2009 (“fixed payment schedule. The amounts payable under the Purchase Agreement”)TRA are
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
calculated as the product of (i) an annual base amount and (ii) the maximum corporate federal income tax rate for the applicable year plus three percent. The amounts payable under the TRA are related to the Company’s projected realized tax savings over the next five years and are not dependent on the Company’s actual tax savings over such period. The calculation of amounts payable pursuant to the TRA is thus dependent on the maximum corporate federal income tax rate. To the extent that the Company is unable to make payments under the TRA, such payments will be deferred and will accrue interest at a rate of LIBOR plus 500 basis points until paid. If the terms of credit agreements and other debt documents cause the Company to be unable to make payments under the TRA and such terms are not materially more restrictive than those existing as of September 30, 2015, such payments will be deferred and will accrue interest at a rate of LIBOR plus 300 basis points until paid. 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. During the eight months ended August 31, 2017 (Predecessor), the Company acquired controlling interestsrecognized a reduction in 36 business entities in various Florida locations which operate freestanding ASCsthe carrying value of the liability under the TRA of $43.9 million, with $15.3 million of the reduction recorded to a gain on amendment of TRA and provided anesthesia and pain management services (“the 2009 Acquisition”). The Purchase Agreement provided for maximum potential contingent consideration of up to $10.0$28.6 million based on operating results subsequentrecorded as a reduction to the acquisition forgoodwill recorded in connection with the period from January 1, 2010 to December 31, 2010. Pursuantapplication of pushdown accounting related to the Purchase Agreement,change of control. As a result of the contingent consideration was payable as principal under a Subordinated Promissory Note,reduction in the form of which was delivered concurrent withcorporate tax rate from the Purchase Agreement. In December 2010,Tax Cuts and Jobs Act, the Company filed an indemnification claim againstremeasured the Seller alleging breaches of and inaccuracies in representations and warranties included in the Purchase Agreement. On June 10, 2013, the court issued a judgment in favorvalue of the Company regarding its indemnification claim and its claim regardingliability under the overstatement of accounts receivable byTRA pursuant to the seller. Followingcalculation terms as described above. During the judgment, an appeal was filed by the seller and a cross-appeal was filed by the Company. In December 2016, the appeals court found in favor of the Company as well as dismissing the arguments raised by the seller in its appeal as without merit. The parties subsequently agreed to mediate the dispute, which was scheduled to begin in 2017. Based on a court order in December 2016, the Company removed the contingent consideration liability on its consolidated balance sheets. For the yearfour months ended December 31, 2016 (Predecessor)2017 (Successor), the Company recordedrecognized a gain on litigation settlement of $14.1 million related to this matter. On April 20, 2017, a settlement was reached between the two parties resultingreduction in the Company receiving $3.9carrying value of the liability under the TRA of $25.3 million, included as a tax receivable agreement benefit in the consolidated statement of which $2.7 million was paid fromoperations.
Assuming the escrow funds set up byCompany's tax rate is 24%, calculated as the seller atmaximum corporate federal tax rate plus three percent, throughout the timeremaining term of purchase and $1.2 million was paid by the seller. During the second quarter of 2017 (Predecessor)TRA, the Company recordedestimates the total remaining amounts payable under the TRA was approximately $60.1 million and $64.6 million as of December 31, 2019 and 2018, respectively. The carrying value of the liability under the TRA, reflecting the discount as discussed above, was $48.7 million and $48.5 million as of December 31, 2019 and 2018, respectively. The current portion of the liability was $16.9 million and $7.6 million as of December 31, 2019 and 2018, respectively, and is included as a gain on litigation settlementcomponent of $3.8 million forother current liabilities in the settlement amount, netconsolidated balance sheet. The long-term portion is included as a component of legal costs.other long-term liabilities in the consolidate balance sheet. Contingent Consideration In connection with an acquisition during the three months ended June 30, 2016,certain prior period acquisitions, pursuant to the applicable purchase agreement provided for potential contingentagreements, the Company was required to pay consideration of up to $16.6 million to be paid to the prior owners of the applicable facilityfacilities should the requirements for continuing employment agreed to in the purchase agreementagreements be met. In accordance with ASCAccounting Standards Codification 805, Business Combinations, contingent consideration with a continuing employment provision is recognized ratably over the defined performance period as compensation expense. In the fourth quarter of 2017, the Company reached a settlement for a dispute with the prior owners, providing relief to the Company of any unpaid current and future liability related to the contingent consideration. Based on the settlement, the Company removed its accrued contingent consideration liability, which was included in other current liabilities in the consolidated balance sheets and recorded a gain on litigation settlement of $8.7 million during the four months ended December 31, 2017 (Successor). As disclosed in the footnotes to the consolidated statement of operations, theThe Company recognized contingent acquisition compensation expense of $1.5 million for the year ended December 31, 2018 (Successor), $1.9 million for the four months ended December 31, 2017 (Successor) and $5.1 million for both the eight months ended August 31, 2017 (Predecessor) and. There was no contingent acquisition compensation expense during the year ended December 31, 2016 (Predecessor)2019 (Successor).
Subsequent to December 31, 2017, The Company recorded the expense as a component of general and administrative expenses in the consolidated statement of operations. The Company estimateshas no further contingent acquisition compensation expense obligations.
Other In connection with the Company's integration of $1.5the corporate office functions related to the acquisition of NSH, the Company closed its Chicago, Illinois office on September 30, 2018. As a result, the Company recognized a cease-use liability of $1.4 million, representing the estimated costs that will continue to be incurred under the office lease for its remaining term. The estimated costs were included as transaction and integration costs in the consolidated statement of operations for the year ended December 31, 2018 related toand as a component of other acquisitions completedcurrent liabilities and other long-term liabilities in 2016.the consolidated balance sheet as of December 31, 2018. In 2018, the Company recognized a liability of $4.5 million for estimated severance costs in connection with the corporate office integration. The estimated costs were included as transaction and integration costs in the consolidated statement of operations for the year ended December 31, 2018. There were no unpaid severance costs remaining as of December 31, 2019.
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
16.15. Segment Reporting
A public company is required to report annual and interim financial and descriptive information about its reportable operating segments. Operating segments, as defined, are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or "CODM," in deciding how to allocate resources and in assessing performance.
The Company operates in three major lines of business that are also the Company's reportable operating segments - the operation of surgical facilities, the operation of opticalancillary services and the operation of optical services. The surgical facility services segment consists of the operation of ASCs and surgical hospitals, and includes anesthesia services. The ancillary services.services segment consists of a diagnostic laboratory and multi-specialty physician practices. The optical services segment consists of an optical products group purchasing organization, and until October 2018, an optical laboratory that manufactured eyewear. "All other" primarily consists of the Company's corporate general and administrative functions. Prior to 2017, the all other component was disaggregated and presented below the reportable operating segments in the Adjusted EBITDA reconciliation table. The Company has conformed the prior periods to align to the current year presentation. These changes had no effect on the Company’s reportable operating segments, which are presented consistent with prior periods. Adjusted EBITDA is the primary profit/loss metric reviewed by the CODM in making key business decisions and on allocation of resources. The segment disclosures below provide a reconciliation from Adjusted EBITDA to income before income taxes, its most directly comparable GAAP financial measure, in the reported consolidated financial information.
The following tables present financial information for each reportable segment (in thousands)millions): | | | | Successor | | | | Predecessor | | Successor | | | | Predecessor |
|
| September 1 to December 31, | | | | January 1 to August 31, | | Year Ended December 31, |
| Year Ended December 31, | | September 1 to December 31, | | | | January 1 to August 31, |
|
| 2017 | | | | 2017 | | 2016 | | 2015 |
| 2019 | | 2018 | | 2017 | | | | 2017 | Revenues: |
| | | | |
|
|
|
| |
| | | | | | | | |
| Surgical facility services |
| $ | 564,458 |
| | | | $ | 688,725 |
| | $ | 1,042,097 |
|
| $ | 884,144 |
|
| $ | 1,748.2 |
| | $ | 1,682.4 |
| | $ | 564.4 |
| | | | $ | 688.7 |
| Ancillary services |
| 24,660 |
| | | | 52,261 |
| | 90,836 |
|
| 61,175 |
|
| 79.4 |
| | 79.6 |
| | 24.7 |
| | | | 52.3 |
| Optical services |
| 3,486 |
| | | | 7,629 |
| | 12,505 |
|
| 14,572 |
|
| 3.8 |
| | 9.5 |
| | 3.5 |
| | | | 7.6 |
| Total revenues |
| $ | 592,604 |
| | | | $ | 748,615 |
|
| $ | 1,145,438 |
|
| $ | 959,891 |
| | Total | |
| $ | 1,831.4 |
| | $ | 1,771.5 |
| | $ | 592.6 |
| | | | $ | 748.6 |
| | | | | | | | | | | | | Adjusted EBITDA: | | | | | | | | | | | | Surgical facility services | | | $ | 328.9 |
| | $ | 309.5 |
| | $ | 103.8 |
| | | | $ | 125.9 |
| Ancillary services | | | 2.6 |
| | 3.0 |
| | (2.3 | ) | | | | (6.5 | ) | Optical services | | | 1.4 |
| | 2.5 |
| | 0.7 |
| | | | 2.2 |
| All other | | | (74.3 | ) | | (80.2 | ) | | (23.5 | ) | | | | (36.0 | ) | Total | | | $ | 258.6 |
| | $ | 234.8 |
| | $ | 78.7 |
| | | | $ | 85.6 |
| | | | | | | | | | | | | Adjusted EBITDA: | | | $ | 258.6 |
| | $ | 234.8 |
| | $ | 78.7 |
| | | | $ | 85.6 |
| Net income attributable to non-controlling interests | | | 119.9 |
| | 110.1 |
| | 39.6 |
| | | | 42.1 |
| Depreciations and amortization | | | (76.5 | ) | | (67.4 | ) | | (21.8 | ) | | | | (30.1 | ) | Interest expense, net | | | (178.9 | ) | | (147.0 | ) | | (48.7 | ) | | | | (69.0 | ) | Equity-based compensation expense | | | (10.2 | ) | | (9.3 | ) | | (1.9 | ) | | | | (3.7 | ) | Transaction, integration and acquisition costs (1) | | | (36.1 | ) | | (34.0 | ) | | (9.2 | ) | | | | (7.7 | ) | Gain (loss) on disposals and deconsolidation, net | | | 4.4 |
| | (31.8 | ) | | — |
| | | | (1.7 | ) | (Loss) gain on litigation settlements and other litigation costs (2) | | | (4.6 | ) | | (46.0 | ) | | 8.7 |
| | | | 3.8 |
| Loss on debt extinguishment | | | (11.7 | ) | | — |
| | — |
| | | | (18.2 | ) | Tax receivable agreement (expense) benefit | | | (2.4 | ) | | — |
| | 25.3 |
| | | | — |
| Impairment charges | | | (7.9 | ) | | (74.4 | ) | | — |
| | | | — |
| Reserve adjustments (3) | | | — |
| | (2.7 | ) | | — |
| | | | — |
| Contingent acquisition compensation expense | | | — |
| | (1.5 | ) | | (2.0 | ) | | | | (5.1 | ) | Gain on acquisition escrow release | | | — |
| | — |
| | 0.2 |
| | | | 1.0 |
| Gain on amendment to tax receivable agreement | | | — |
| | — |
| | 1.1 |
| | | | 15.3 |
| (Loss) income before income taxes | | | $ | 54.6 |
| | $ | (69.2 | ) | | $ | 70.0 |
| | | | $ | 12.3 |
|
| | | | | | | | | | | | | | | | | | | | | | Successor | | | | Predecessor | | | September 1 to December 31, | | | | January 1 to August 31, | | Year Ended December 31, | | | 2017 | | | | 2017 | | 2016 | | 2015 | Adjusted EBITDA: | | | | | | | | | | | Surgical facility services | | $ | 103,760 |
| | | | $ | 125,912 |
| | $ | 214,218 |
| | $ | 180,113 |
| Ancillary services | | (2,255 | ) | | | | (6,526 | ) | | 12,685 |
| | 18,715 |
| Optical services | | 736 |
| | | | 2,214 |
| | 3,308 |
| | 3,905 |
| All other | | (23,504 | ) | | | | (36,036 | ) | | (50,948 | ) | | (44,680 | ) | Total Adjusted EBITDA (1) | | 78,737 |
| | | | 85,564 |
| | 179,263 |
| | 158,053 |
| | | | | | | | | | | | Net income attributable to non-controlling interests | | 39,634 |
| | | | 42,087 |
| | 75,630 |
| | 71,416 |
| Depreciation and amortization | | (21,804 | ) | | | | (30,124 | ) | | (39,551 | ) | | (34,545 | ) | Interest expense, net | | (48,740 | ) | | | | (68,929 | ) | | (100,571 | ) | | (100,980 | ) | Non-cash stock compensation expense | | (1,887 | ) | | | | (3,697 | ) | | (2,021 | ) | | (7,502 | ) | Contingent acquisition compensation expense | | (1,982 | ) | | | | (5,057 | ) | | (5,092 | ) | | — |
| Termination of management agreement and IPO costs | | — |
| | | | — |
| | — |
| | (5,834 | ) | Management fee (2) | | — |
| | | | — |
| | — |
| | (2,250 | ) | Merger transaction, integration and practice acquisition costs (3) | | (9,330 | ) | | | | (7,677 | ) | | (11,617 | ) | | (20,579 | ) | Gain on litigation settlement | | 8,740 |
| | | | 3,794 |
| | 14,101 |
| | — |
| Gain on acquisition escrow release | | 167 |
| | | | 1,000 |
| | — |
| | — |
| Gain (loss) on disposal or impairment of long-lived assets, net | | (5 | ) | | | | (1,715 | ) | | (2,355 | ) | | 2,097 |
| Gain on amendment to tax receivable agreement | | 1,098 |
| | | | 15,294 |
| | — |
| | — |
| Tax receivable agreement benefit (expense) | | 25,329 |
| | | | — |
| | (3,733 | ) | | (119,911 | ) | Loss on debt refinancing | | — |
| | | | (18,211 | ) | | (11,876 | ) | | (16,102 | ) | Income (loss) before income taxes | | $ | 69,957 |
| | | | $ | 12,329 |
| | $ | 92,178 |
| | $ | (76,137 | ) |
(1) The above table reconciles Adjusted EBITDA to income before income taxes as reflected in the consolidated statements of operations.
| | (1) | For the years ended December 31, 2019 and 2018 (Successor), this amount includes transaction and integration costs of $19.0 million and $31.7 million, respectively, and acquisition costs of $2.8 million and $2.2 million, respectively. This amount further includes start-up costs related to a de novo surgical hospital of $14.3 million for the year ended December 31, 2019 (Successor), with no comparable costs in the 2018 period (Successor). For the four months ended December 31, 2017 (Successor) and the eight months ended August 31, 2017 (Predecessor), this amount includes transaction and integration costs of $7.5 million and $5.6 million, respectively, and acquisition costs of $1.8 million and $2.1 million, respectively. There were no start-up costs related to the de novo surgical hospital in the 2017 periods. |
| | (2) | For the years ended December 31, 2019 and 2018 (Successor), this amount includes a loss on litigation settlements of $0.2 million and $46.0 million, respectively. This amount further includes other litigation costs of $4.4 million for the year ended December 31, 2019 (Successor), with no comparable costs in the 2018 period (Successor). For the four months ended December 31, 2017 (Successor) and the eight months ended August 31, 2017 (Predecessor), this amount includes a gain on litigation settlements of $8.7 million and $3.8 million, respectively. |
SURGERY PARTNERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | (3) | This amount represents adjustments to revenue in connection with applying consistent policies across the combined company as a result of the integration of Surgery Partners and a previously acquired entity. |
When the Company uses the term “Adjusted EBITDA,” it is referring to income before income taxes minus (a) net income attributable to non-controlling interests plus (b) depreciation and amortization, (c) interest expense, net, (d) non-cash stock compensation expense, (e) contingent acquisition compensation expense, (f) termination of management agreement and IPO costs, (g) management fee, (h) merger transaction, integration and practice acquisition costs, minus (i) gain on litigation settlement, (j) gain on acquisition escrow release, (plus)/minus (k) (loss)/gain on disposal or impairment of long-lived assets, net, minus (l) gain on amendment to tax receivable agreement, (plus)/minus (m) tax receivable agreement (expense)/gain and plus (n) loss on debt refinancing. The Company uses Adjusted EBITDA as a measure of financial performance. Adjusted EBITDA is a key measure used by the Company’s management to assess operating performance, make business decisions and allocate resources. Non-controlling interests represent the interests of third parties, such as physicians, and in some cases, healthcare systems that own an interest in surgical facilities that the Company consolidates for financial reporting purposes. The Company believes that it is helpful to investors to present Adjusted EBITDA as defined above because it excludes the portion of net income attributable to these third-party interests and clarifies for investors the Company's portion of Adjusted EBITDA generated by its surgical facilities and other operations.Adjusted EBITDA is not a measurement of financial performance under GAAP, and should not be considered in isolation or as a substitute for net income, operating income or any other measure calculated in accordance with generally accepted accounting principles. The items excluded from Adjusted EBITDA are significant components in understanding and evaluating the Company's financial performance. The Company believes such adjustments are appropriate, as the magnitude and frequency of such items can vary significantly and are not related to the assessment of normal operating performance. The Company's calculation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.
(2) Fee payable pursuant the Management and Investment Advisory Services Agreement between the Company and Bayside, which was terminated in connection with the Company's IPO.
(3) This amount includes merger transaction and integration costs of $7.5 million for the four months ended December 31, 2017 (Successor), $5.6 million for the eight months ended August 31, 2017 (Predecessor), and $8.7 million and $17.9 million for the years ended December 31, 2016 (Predecessor) and 2015 (Predecessor), respectively.
This amount includes practice acquisition costs of $1.8 million for the four months ended December 31, 2017 (Successor), $2.1 million for the eight months ended August 31, 2017 (Predecessor), and $2.9 million and $2.7 million for the years ended December 31, 2016 (Predecessor) and 2015 (Predecessor, respectively. | | | | | | | | | | | | December 31, | | | 2019 | | 2018 | Assets: | | | | | Surgical facility services | | $ | 4,580.4 |
| | $ | 4,204.4 |
| Ancillary services | | 69.6 |
| | 52.7 |
| Optical services | | 17.7 |
| | 20.1 |
| All other | | 351.2 |
| | 399.1 |
| Total assets | | $ | 5,018.9 |
| | $ | 4,676.3 |
|
| | | | Successor | | | | Predecessor | | Successor | | | | Predecessor | | | December 31, 2017 | | | | December 31, 2016 | | Year Ended December 31, | | September 1 to December 31, | | | | January 1 to August 31, | Assets: | | | | | | | | | | | 2019 | | 2018 | | 2017 | | | | 2017 | Cash purchases of property and equipment, net: | | | | | | | | | | | | Surgical facility services | | $ | 4,072,521 |
| | | | $ | 1,914,842 |
| | $ | 65.9 |
| | $ | 34.2 |
| | $ | 9.3 |
| | | | $ | 14.6 |
| Ancillary services | | 104,274 |
| | | | 184,002 |
| | 1.1 |
| | 0.4 |
| | 0.2 |
| | | | 1.9 |
| Optical services | | 48,309 |
| | | | 22,478 |
| | — |
| | — |
| | 0.1 |
| | | | 0.1 |
| All other | | 397,669 |
| | | | 183,636 |
| | 6.6 |
| | 5.2 |
| | 1.2 |
| | | | 2.2 |
| Total assets | | $ | 4,622,773 |
| | | | $ | 2,304,958 |
| | Total | | | $ | 73.6 |
| | $ | 39.8 |
| | $ | 10.8 |
| | | | $ | 18.8 |
|
In connection with the application of pushdown accounting the Company reevaluated the relative fair value of its operating segments using a measurement date of October 1, 2017. As a result of its evaluation, the Company reallocated goodwill as of the measurement date to each reportable segment as follows: $3.158 billion to surgical facilities services, $74.3 million to ancillary services and $38.4 million to optical services.
| | | | | | | | | | | | | | | | | | | | | | Successor | | | | Predecessor | | | September 1 to December 31, | | | | January 1 to August 31, | | Year Ended December 31, | | | 2017 | | | | 2017 | | 2016 | | 2015 | Cash purchases of property and equipment, net: | | | | | | | | | | | Surgical facility services | | $ | 9,334 |
| | | | $ | 14,582 |
| | $ | 29,157 |
| | $ | 26,723 |
| Ancillary services | | 191 |
| | | | 1,875 |
| | 5,388 |
| | 1,051 |
| Optical services | | 83 |
| | | | 73 |
| | 351 |
| | 128 |
| All other | | 1,219 |
| | | | 2,243 |
| | 4,213 |
| | 5,537 |
| Total cash purchases of property and equipment, net | | $ | 10,827 |
| | | | $ | 18,773 |
| | $ | 39,109 |
| | $ | 33,439 |
|
SURGERY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17.16. Quarterly Financial Information (Unaudited)
The following tables include a summary of certain information related to the Company's quarterly consolidated results of operations for each of the four quarters in the years ended December 31, 20172019 and 2016.2018. The timing of acquisitions and divestitures completed during the years presented affects the comparability of the quarterly financial information. The following should be read in conjunction with the audited consolidated financial statements included herein. The amounts are as follows (in thousandsmillions except per share amounts): | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | Predecessor | | | | Successor | | | Q1 | | Q2 | | Q3(1) | | | | Q3(1) | | Q4 | | | | | | | | | | | | | | Revenues | | $ | 286,183 |
| | $ | 288,353 |
| | $ | 174,079 |
| | | | $ | 132,258 |
| | $ | 460,346 |
| Cost of revenues | | $ | 211,948 |
| | $ | 216,452 |
| | $ | 143,772 |
| | | | $ | 102,924 |
| | $ | 338,704 |
| Net income (loss) | | $ | 14,422 |
| | $ | 11,627 |
| | $ | 4,369 |
| | | | $ | (2,648 | ) | | $ | 966 |
| Net income attributable to non-controlling interests | | $ | (17,176 | ) | | $ | (16,098 | ) | | $ | (8,813 | ) | | | | $ | (6,492 | ) | | $ | (33,142 | ) | Net loss attributable to Surgery Partners, Inc. | | $ | (2,754 | ) | | $ | (4,471 | ) | | $ | (4,444 | ) | | | | $ | (9,140 | ) | | $ | (32,176 | ) | Basic net loss per share attributable to common stockholders (2) | | $ | (0.06 | ) | | $ | (0.09 | ) | | $ | (0.09 | ) | | | | $ | (0.57 | ) | | $ | (0.83 | ) | Diluted net loss per share attributable to common stockholders (2) | | $ | (0.06 | ) | | $ | (0.09 | ) | | $ | (0.09 | ) | | | | $ | (0.57 | ) | | $ | (0.83 | ) |
(1) The Predecessor period for Q3 includes the two months ended August 31, 2017. The Successor period for Q3 includes the one month ended September 30, 2017.
(2)Beginning in the Successor period, per share amounts include the impact of amounts allocated to participating securities. Refer to Note 10. "Earnings Per Share" for further discussion. | | | | | | | | | | | | | | | | | | | | 2019 | | | Q1 | | Q2 | | Q3 | | Q4 | | | | | | | | | | Revenues | | $ | 416.8 |
| | $ | 445.4 |
| | $ | 452.0 |
| | $ | 517.2 |
| Cost of revenues | | $ | 326.1 |
| | $ | 340.4 |
| | $ | 353.1 |
| | $ | 388.0 |
| Net income (loss) | | $ | 3.5 |
| | $ | 8.1 |
| | $ | 10.9 |
| | $ | 22.6 |
| Net income attributable to non-controlling interests | | $ | (23.6 | ) | | $ | (27.9 | ) | | $ | (26.6 | ) | | $ | (41.8 | ) | Net loss attributable to Surgery Partners, Inc. | | $ | (20.1 | ) | | $ | (19.8 | ) | | $ | (15.7 | ) | | $ | (19.2 | ) | Basic net loss per share attributable to common stockholders | | $ | (0.60 | ) | | $ | (0.59 | ) | | $ | (0.51 | ) | | $ | (0.59 | ) | Diluted net loss per share attributable to common stockholders | | $ | (0.60 | ) | | $ | (0.59 | ) | | $ | (0.51 | ) | | $ | (0.59 | ) |
| | | | | | | | | | | | | | | | | | | | 2016 | | | Predecessor | | | Q1 | | Q2 | | Q3 | | Q4 | | | | | | | | | | Revenues | | $ | 267,074 |
| | $ | 289,681 |
| | $ | 282,682 |
| | $ | 306,001 |
| Cost of revenues | | $ | 196,703 |
| | $ | 208,852 |
| | $ | 201,394 |
| | $ | 214,247 |
| Net income | | $ | 10,357 |
| | $ | 22,293 |
| | $ | 14,334 |
| | $ | 38,100 |
| Net income attributable to non-controlling interests | | $ | (17,547 | ) | | $ | (20,173 | ) | | $ | (16,672 | ) | | $ | (21,238 | ) | Net (loss) income attributable to Surgery Partners, Inc. | | $ | (7,190 | ) | | $ | 2,120 |
| | $ | (2,338 | ) | | $ | 16,862 |
| Basic net (loss) income per share attributable to common stockholders | | $ | (0.15 | ) | | $ | 0.04 |
| | $ | (0.05 | ) | | $ | 0.35 |
| Diluted net (loss) income per share attributable to common stockholders | | $ | (0.15 | ) | | $ | 0.04 |
| | $ | (0.05 | ) | | $ | 0.35 |
|
| | | | | | | | | | | | | | | | | | | | 2018 | | | Q1 | | Q2 | | Q3 | | Q4 | | | | | | | | | | Revenues | | $ | 411.3 |
| | $ | 436.6 |
| | $ | 432.4 |
| | $ | 491.2 |
| Cost of revenues | | $ | 327.3 |
| | $ | 340.1 |
| | $ | 334.3 |
| | $ | 359.7 |
| Net income (loss) | | $ | 5.1 |
| | $ | 4.3 |
| | $ | 2.0 |
| | $ | (107.0 | ) | Net income attributable to non-controlling interests | | $ | (22.6 | ) | | $ | (23.8 | ) | | $ | (23.0 | ) | | $ | (40.7 | ) | Net loss attributable to Surgery Partners, Inc. | | $ | (17.5 | ) | | $ | (19.5 | ) | | $ | (21.0 | ) | | $ | (147.7 | ) | Basic net loss per share attributable to common stockholders | | $ | (0.53 | ) | | $ | (0.57 | ) | | $ | (0.61 | ) | | $ | (3.25 | ) | Diluted net loss per share attributable to common stockholders | | $ | (0.53 | ) | | $ | (0.57 | ) | | $ | (0.61 | ) | | $ | (3.25 | ) |
SURGERY PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Subsequent Events
On March 1, 2018, the Company acquired a controlling interest of a surgical facility in Omaha, Nebraska, for $21.9 million. The acquisition was funded through cash from operations. As of the date of this filing, the Company has not completed its preliminary estimation of the fair values assigned to the assets acquired and liabilities assumed.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | SURGERY PARTNERS, INC. | | | By: | /s/ Wayne S. DeVeydtJ. Eric Evans Wayne S. DeVeydtJ. Eric Evans
Chief Executive Officer (Principal Executive Officer) |
Date: March 16, 201813, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this reportAnnual Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | SIGNATURES | TITLE | DATE | | Chief Executive Officer, Director (Principal Executive Officer) | March 16, 201813, 2020 | /s/ J. Eric Evans | J. Eric Evans | | | | Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | March 13, 2020 | /s/ Thomas F. Cowhey | Thomas F. Cowhey | | | | Executive Chairman of the Board | March 13, 2020 | /s/ Wayne S. DeVeydt | Wayne S. DeVeydt
| | | | Interim Chief Financial Officer
(Principal Financial Officer) | March 16, 2018 | /s/ R. David Kretschmer | R. David Kretschmer | | | | Senior Vice President, Corporate Controller
(Principal Accounting Officer)
| March 16, 2018 | /s/ Dennis Dean | Dennis Dean | | | | Chairman, Director | March 16, 201813, 2020 | /s/ T. Devin O'Reilly | T. Devin O'Reilly | | | | Director | March 16, 201813, 2020 | /s/ Teresa DeLuca | Teresa DeLuca | | | | Director | March 16, 201813, 2020 | /s/ Adam FeinsteinJohn A. Deane | Adam FeinsteinJohn A. Deane | | | | Director | March 16, 201813, 2020 | /s/ Brent Turner | Brent Turner | | | | Director | March 16, 201813, 2020 | /s/ Christopher GordonAndrew Kaplan | Christopher GordonAndrew Kaplan | | | | Director | March 16, 201813, 2020 | /s/ Clifford G. Adlerz | Clifford G. Adlerz | | |
|