| Significant Accounting Policies | Significant Accounting Policies Principles of Consolidation The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, as well as interests in partnerships and limited liability companies controlled by the Company through its ownership of a majority voting interest or other rights granted to the Company by contract to manage and control the affiliate's business. All significant intercompany balances and transactions are eliminated in consolidation. The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation of the Company's financial position and results of operations have been included. The Company’s fiscal year ends on December 31 and interim results are not necessarily indicative of results for a full year or any other interim period. The condensed consolidated balance sheet at December 31, 2017 (Successor) has been derived from the audited financial statements as of that date. The information contained in these condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the fiscal year ended December 31, 2017 (Successor). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. 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 condensed 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 condensed 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 condensed consolidated statements of cash flows. The condensed 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. In certain circumstances, the applicable partnership or operating agreements for the Company's surgical facilities provide that the facilities will purchase all of the physician limited partners’ or physician minority members’, as applicable, ownership if certain adverse regulatory events occur, such as it becoming illegal for the physician(s) to own an interest in a surgical facility, refer patients to a surgical facility or receive cash distributions from a surgical facility. The non-controlling interests — redeemable are reported outside of stockholders' equity in the condensed consolidated balance sheets. A summary of activity related to the non-controlling interests—redeemable follows (in thousands): Successor Balance at December 31, 2017 $ 299,316 Net income attributable to non-controlling interests—redeemable 6,738 Acquisition and disposal of shares of non-controlling interests, net—redeemable 16,058 Distributions to non-controlling interest—redeemable holders (8,469 ) Balance at March 31, 2018 $ 313,643 Variable Interest Entities The condensed consolidated financial statements include the accounts of variable interest entities in which the Company is the primary beneficiary under the provisions of ASC 810, Consolidation . As of both March 31, 2018 (Successor) and December 31, 2017 (Successor), the variable interest entities include five surgical facilities, three anesthesia practices and three physician practices. 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 condensed consolidated balance sheets as of March 31, 2018 (Successor) and December 31, 2017 (Successor), were $14.1 million and $13.1 million , respectively, and the total liabilities of the consolidated VIEs were $5.8 million and $5.8 million , respectively. 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 condensed consolidated balance sheets was $75.2 million and $74.3 million as of March 31, 2018 (Successor) and December 31, 2017 (Successor), respectively. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and footnotes. Examples include, but are not limited to, estimates of accounts receivable allowances, professional and general liabilities and the estimate of deferred tax assets or liabilities. 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 condensed 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 Carrying Amount Fair Value March 31, December 31, 2017 March 31, December 31, 2017 2017 Senior Secured Credit Facilities: Revolver $ — $ — $ — $ — Term Loan $ 1,277,482 $ 1,280,532 $ 1,275,566 $ 1,267,189 Senior Unsecured Notes due 2021 $ 408,633 $ 409,235 $ 422,424 $ 422,535 Senior Unsecured Notes due 2025 $ 370,000 $ 370,000 $ 356,125 $ 346,413 The fair values of the Term Loan, 2021 Unsecured Notes and the 2025 Unsecured Notes (in each case, as defined in Note 4. Long-Term Debt) were based on a Level 2 inputs using quoted prices for identical liabilities in inactive markets at March 31, 2018 (Successor) and December 31, 2017 (Successor), as applicable. The carrying amounts related to the Company's other long-term debt obligations, including the Revolver (as defined in Note 4. 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 both March 31, 2018 (Successor) and December 31, 2017 (Successor), the fair value of both the assets and liabilities in the SERP were $1.9 million and were included in other long-term assets and other long-term liabilities in the condensed consolidated balance sheets. Revenues In May 2014, the Financial Accounting Standards Board ("FASB") issued a new standard related to revenue recognition. The Company adopted the new standard effective January 1, 2018, using the modified retrospective method. The adoption of the new standard did not have an impact on our recognition of net revenues for any periods prior to adoption. The majority of the “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. After initial recognition, the Company’s accounts receivables are subject to impairment assessments periodically based on changes in credit risks using historical trends of cash collections, write-offs, accounts receivable agings and other factors. The Company's revenues generally relate to contracts with patients in which the performance obligations are to provide healthcare 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. The Company's performance obligations are generally satisfied over a period of less than one day. The contractual relationships with patients, in most cases, also involve a third-party payer (Medicare, Medicaid, managed care health plans, employers and commercial insurance companies, including plans offered through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated with (managed care health plans, employers and commercial insurance companies) the third-party payers. The payment arrangements with third-party payers for the services provided to the related patients typically specify payments at amounts less than the Company's standard charges. Medicare generally pays for services at prospectively determined rates based on clinical, diagnostic and other factors. Services provided to patients having Medicaid coverage are generally paid at prospectively determined rates per discharge, per identified service or per covered member. Agreements with commercial insurance carriers, managed care and preferred provider organizations generally provide for payments based upon predetermined rates per diagnosis, per diem rates or discounted fee-for-service rates. The Company continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms resulting from contract renegotiations and renewals. A summary of revenues by service type as a percentage of total revenues follows: Three Months Ended March 31, 2018 2017 Successor Predecessor Patient service revenues: Surgical facilities revenues 93.5 % 89.6 % Ancillary services revenues 4.9 % 8.8 % 98.4 % 98.4 % Other service revenues: Optical services revenues 0.7 % 1.0 % Other revenues 0.9 % 0.6 % 1.6 % 1.6 % Total revenues 100.0 % 100.0 % Patient service revenues. This includes revenue related to charging facility fees in exchange for providing patient care. 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 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, including Medicare and Medicaid. 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. There were no adjustments as a result of changes in estimates to third-party settlements related to prior years during the three months ended March 31, 2018 (Successor). During the three months ended March 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 $0.4 million . 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): Three Months Ended March 31, 2018 2017 Successor Predecessor Amount % Amount % Patient service revenues: Private insurance $ 219,636 53.5 % $ 139,003 49.4 % Government 159,347 38.8 % 116,878 41.5 % Self-pay 12,970 3.1 % 6,071 2.2 % Other (1) 18,793 4.6 % 19,694 6.9 % Total patient service revenues 410,746 100.0 % 281,646 100.0 % Other service revenues: Optical services revenues 2,960 2,821 Other revenues 3,663 1,716 Total revenues $ 417,369 $ 286,183 (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. 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. The Company's optical laboratories manufacture and distribute corrective lenses and eyeglasses to ophthalmologists and optometrists. The Company satisfies the performance obligation and recognize revenue when the 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. 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. 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. In accordance with the provisions of the operating lease agreement at the Company's Chesterfield, Missouri facility, 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. The Company presents the restricted amount separate from cash and cash equivalents under the caption "restricted invested assets" in the condensed consolidated balance sheets. The following table reconciles cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the totals shown within the condensed consolidated statement of cash flows (in thousands): Successor March 31, December 31, Cash and cash equivalents $ 112,816 $ 174,914 Restricted invested assets 315 315 Total cash, cash equivalents and restricted cash in the statement of cash flows $ 113,131 $ 175,229 Accounts Receivable and Allowances for Contractual Adjustments and Doubtful Accounts With the Company's adoption of ASC 2014-09 on January 1, 2018, for those accounts in which the Company has an unconditional right to payment, subject only to the passage of time, the right is recorded as a receivable. 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. The Company had a net third-party Medicaid settlements liability of $4.3 million and $1.0 million as of March 31, 2018 (Successor) and December 31, 2017 (Successor), respectively, included in other current liabilities in the condensed consolidated balance sheets. The Company recognizes that final reimbursement of accounts receivable is subject to final approval by each third-party payor. However, because the Company has contracts with its third-party payors and also verifies insurance coverage of the patient before medical services are rendered, the amounts that are pending approval from third-party payors are not considered significant. 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 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. The receivables related to the Company's optical products purchasing organization are recognized separately from patient accounts receivable, as discussed above, and are included in other current assets in the condensed consolidated balance sheets. Such receivables were $10.3 million and $7.6 million at March 31, 2018 (Successor) and December 31, 2017 (Successor), respectively. 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 Assets A summary of prepaid expenses and other current assets follows (in thousands): Successor March 31, December 31, Prepaid expenses $ 15,810 $ 16,835 Receivables - optical product purchasing organization 10,259 7,563 Insurance recoveries 2,828 2,828 Other 25,427 28,111 Total $ 54,324 $ 55,337 Property and Equipment Property and equipment are stated at cost or, if obtained through acquisition, at fair value determined on 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. A summary of property and equipment follows (in thousands): Successor March 31, December 31, Land $ 19,546 $ 19,561 Buildings and improvements 193,942 188,571 Furniture and equipment 23,681 20,813 Computer and software 30,904 28,578 Medical equipment 137,956 138,112 Construction in progress 25,860 22,581 Property and equipment, at cost 431,889 418,216 Less: Accumulated depreciation (31,504 ) (19,680 ) Property and equipment, net $ 400,385 $ 398,536 The Company also leases certain facilities and equipment under capital leases. Assets held under capital leases are stated at the present value of minimum lease payments at the inception of the related lease. Such assets are depreciated on a straight-line basis over the lesser of the lease term or the remaining useful life of the leased asset. The carrying values of assets under capital lease were $19.1 million and $16.2 million as of March 31, 2018 (Successor) and December 31, 2017 (Successor), respectively, net of accumulated depreciation of $7.4 million and $5.8 million , respectively. Intangible Assets The Company has indefinite-lived intangible assets related to the certificates of need held in jurisdictions where certain of its surgical facilities are located. 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 condensed 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 condensed consolidated statements of operations over the service lives of the agreements, typically ranging from two to five years for non-compete agreements and fifteen years for the management rights agreements. Customer relationships are amortized into depreciation and amortization expense in the condensed consolidated statements of operations over the estimated lives of the relationships, ranging from three to ten years . A summary of the components of intangible assets follows (in thousands): Successor March 31, 2018 December 31, 2017 Gross Carrying Amount Accumulated Amortization Net Gross Carrying Amount Accumulated Amortization Net Finite-lived intangible assets: Management rights agreements $ 42,600 $ (1,998 ) $ 40,602 $ 42,600 $ (1,058 ) $ 41,542 Non-compete agreements 4,381 (1,102 ) 3,279 4,874 (715 ) 4,159 Physician income guarantees 878 (323 ) 555 878 (227 ) 651 Total finite-lived intangible assets 47,859 (3,423 ) 44,436 48,352 (2,000 ) 46,352 Indefinite-lived intangible assets: Management rights agreements 11,000 — 11,000 5,900 — 5,900 Certificates of need 5,863 — 5,863 5,548 — 5,548 Medicare licenses 1,113 — 1,113 1,108 — 1,108 Total intangible assets $ 65,835 $ (3,423 ) $ 62,412 $ 60,908 $ (2,000 ) $ 58,908 Goodwill Goodwill represents the fair value of the consideration provided in an acquisition over the fair value of net assets acquired and is not amortized. Additions to goodwill include amounts resulting from new business combinations and incremental ownership purchases in the Company's subsidiaries. A summary of the Company's acquisitions for the three months ended March 31, 2018 is included in Note 3. Acquisitions and Developments. A summary of activity related to goodwill for the three months ended March 31, 2018 (Successor) follows (in thousands): Successor Balance at December 31, 2017 $ 3,346,838 Acquisitions, including post acquisition adjustments 35,963 Balance at March 31, 2018 $ 3,382,801 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 three months ended March 31, 2018 (Successor) and three months ended March 31, 2017 (Predecessor). 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 an operating segment or 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 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 estimated using a discounted cash flows approach and are corroborated using a market-based approach. The fair value calculation includes multiple assumptions and estimates, including the projected cash flows and discount rates applied. The Company performed its most recent annual impairment test as of October 1, 2017 (Successor) and did not incur an impairment loss. Other Long-Term Assets A summary of other long-term assets follows (in thousands): Successor March 31, December 31, Acquisition escrow deposit $ 20,471 $ 19,600 Insurance recoveries 11,518 10,018 Other 20,390 18,732 Total $ 52,379 $ 48,350 Other Current Liabilities A summary of other current liabilities follows (in thousands): Successor March 31, December 31, Interest payable $ 22,895 $ 20,537 Amounts due to patients and payors 20,283 18,096 Insurance liabilities 9,843 9,873 Facility lease obligations 6,426 6,256 Current taxes payable 5,678 4,912 Accrued expenses and other 48,445 50,270 Total $ 113,570 $ 109,944 Other Long-Term Liabilities A summary of other long-term liabilities follows (in thousands): Successor March 31, December 31, Facility lease obligations $ 119,239 $ 121,627 Tax receivable agreement liability 44,930 43,791 Acquisition escrow liability 20,471 19,600 Medical malpractice liability 17,950 16,450 Other 30,934 21,012 Total $ 233,524 $ 222,480 At four of the Company's surgical facilities, the Company has facility lease obligations payable to the lessor of each facility. Payments are allocated to principal adjustments of the lease obligations and interest expense. The current and long-term balances of the lease obligations are included in the other current liabilities and other long-term liabilities tables above. Operating Leases The Company leases office space and equipment for its surgical facilities, including surgical facilities under development. The lease agreements generally require the lessee, or the Company, to pay all maintenance, property taxes, utilities and insurance costs. The Company accounts for operating lease obligations and sublease income on a straight-line basis. Contingent obligations of the Company, as defined by each lease agreement, are recognized when specific contractual measures have been met, typically the result of an increase in the Consumer Price Index. Lease obligations paid in advance are recorded as prepaid rent and included in prepaid expenses and other current assets on the condensed 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 condensed consolidated balance sheets. 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. In September 2015, the Company adopted the Surgery Partners, Inc. 2015 Omnibus Incentive Plan ("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. The Company applies the Black-Scholes-Merton method of valuation in determining share-based compensation expense for option awards. Application of this method includes assumptions such as expected stock price volatility, risk-free |
