Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________
Form 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
or
o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number:  001-37576
Surgery Partners, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
47-3620923
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

40 Burton Hills Boulevard, Suite 500
Nashville, Tennessee 37215
(Address of principal executive offices and zip code)
(615) 234-5900
(Registrant’s telephone number, including area code) 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer o
 
Accelerated filer x
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No  x
As of November 9, 2017, there were 48,769,296 shares of the registrant’s common stock outstanding.
 




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

 
 
Page
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
 
 
Item 2.
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
Exhibits





PART 1 - FINANCIAL INFORMATION
Item 1.  Financial Statements
SURGERY PARTNERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, amounts in thousands, except shares and per share amounts)
 
 
Successor
 
 
 
Predecessor
 
 
September 30,
2017
 
 
 
December 31,
2016
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
199,701

 
 
 
$
69,699

Accounts receivable, less allowance for doubtful accounts of $2,045 and $29,872, respectively
 
271,140

 
 
 
220,594

Inventories
 
44,523

 
 
 
28,777

Prepaid expenses and other current assets
 
53,724

 
 
 
32,014

Acquisition escrow deposit
 
4,571

 
 
 
10,871

Total current assets
 
573,659

 
 
 
361,955

Property and equipment, net
 
388,697

 
 
 
204,253

Intangible assets, net
 
56,507

 
 
 
48,023

Goodwill
 
3,270,309

 
 
 
1,555,204

Investments in and advances to affiliates
 
64,427

 
 
 
34,980

Restricted invested assets
 
315

 
 
 
315

Long-term deferred tax assets
 
209,207

 
 
 
83,793

Long-term acquisition escrow deposit
 
19,600

 
 
 

Other long-term assets
 
19,133

 
 
 
16,435

Total assets
 
$
4,601,854

 
 
 
$
2,304,958

 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
Accounts payable
 
$
73,251

 
 
 
$
49,766

Accrued payroll and benefits
 
42,439

 
 
 
29,273

Acquisition escrow liability
 
4,571

 
 
 
10,871

Other current liabilities
 
106,279

 
 
 
68,993

Current maturities of long-term debt
 
48,472

 
 
 
27,822

Total current liabilities
 
275,012

 
 
 
186,725

Long-term debt, less current maturities
 
2,144,862

 
 
 
1,414,421

Long-term tax receivable agreement liability
 
68,148

 
 
 
122,351

Long-term acquisition escrow liability
 
19,600

 
 
 

Other long-term liabilities
 
116,799

 
 
 
76,266

 
 
 
 
 
 
 
Non-controlling interests—redeemable
 
271,416

 
 
 
180,521

Redeemable preferred stock - Series A, 310,000 shares authorized, issued and outstanding, redemption value of $326,882 at September 30, 2017; no shares were authorized issued or outstanding at December 31, 2016.
 
326,882

 
 
 

 
 
 
 
 
 
 
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, 48,769,296 shares issued and outstanding at September 30, 2017; 48,488,616 shares issued and outstanding at December 31, 2016
 
488

 
 
 
485

Additional paid-in capital
 
704,054

 
 
 
320,543

Retained deficit
 
(9,140
)
 
 
 
(311,351
)
Total Surgery Partners, Inc. stockholders' equity
 
695,402

 
 
 
9,677

Non-controlling interests—non-redeemable
 
683,733

 
 
 
314,997

Total stockholders' equity
 
1,379,135

 
 
 
324,674

Total liabilities and stockholders' equity
 
$
4,601,854

 
 
 
$
2,304,958

See notes to unaudited condensed consolidated financial statements.


1



SURGERY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, amounts in thousands, except shares and per share amounts)
 
 
Successor
 
 
 
Predecessor
 
Predecessor
 
 
September 1 to September 30,
 
 
 
July 1 to August 31,
 
Three Months Ended September 30,
 
January 1 to August 31,
 
Nine Months Ended September 30,
 
 
2017
 
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
132,258

 
 
 
$
174,079

 
$
282,682

 
$
748,615

 
$
839,437

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and benefits
 
41,784

 
 
 
61,240

 
85,724

 
241,149

 
266,401

Supplies
 
35,028

 
 
 
48,078

 
65,907

 
193,322

 
196,484

Professional and medical fees
 
11,254

 
 
 
14,229

 
20,856

 
57,931

 
60,813

Lease expense
 
6,858

 
 
 
9,203

 
13,204

 
36,503

 
38,712

Other operating expenses
 
8,000

 
 
 
11,022

 
15,703

 
43,267

 
44,539

Cost of revenues
 
102,924

 
 
 
143,772

 
201,394

 
572,172

 
606,949

General and administrative expenses (1)
 
7,777

 
 
 
12,601

 
14,985

 
46,797

 
42,205

Depreciation and amortization
 
3,330

 
 
 
7,599

 
9,713

 
30,124

 
28,984

Provision for doubtful accounts
 
3,690

 
 
 
4,834

 
8,514

 
16,297

 
15,931

Income from equity investments
 
(712
)
 
 
 
(896
)
 
(1,167
)
 
(3,148
)
 
(3,007
)
Loss on disposal or impairment of long-lived assets, net
 
333

 
 
 
114

 
572

 
1,715

 
1,697

Merger transaction and integration costs
 
2,983

 
 
 
2,343

 
1,864

 
5,584

 
6,361

Loss on debt refinancing
 

 
 
 
18,211

 
3,595

 
18,211

 
11,876

Gain on litigation settlement
 

 
 
 

 

 
(3,794
)
 

Gain on acquisition escrow release
 

 
 
 
(1,000
)
 

 
(1,000
)
 

Electronic health records incentive expense (income)
 
7

 
 
 
(3
)
 
364

 
(305
)

269

Other (income) expense
 

 
 
 

 

 
(2
)
 
97

Total operating expenses
 
120,332

 
 
 
187,575

 
239,834

 
682,651

 
711,362

Operating income (loss)
 
11,926

 
 
 
(13,496
)
 
42,848

 
65,964

 
128,075

Gain on amendment to tax receivable agreement
 
1,098

 
 
 
15,294

 

 
15,294

 

Tax receivable agreement expense
 

 
 
 

 
(3,733
)
 

 
(3,733
)
Interest expense, net
 
(15,883
)
 
 
 
(18,147
)
 
(26,475
)
 
(68,929
)
 
(74,863
)
(Loss) income before income taxes
 
(2,859
)
 
 
 
(16,349
)
 
12,640

 
12,329

 
49,479

Income tax (benefit) expense
 
(211
)
 
 
 
(20,718
)
 
(1,694
)
 
(18,089
)
 
2,496

Net (loss) income
 
(2,648
)
 
 
 
4,369

 
14,334

 
30,418

 
46,983

Less: Net income attributable to non-controlling interests
 
(6,492
)
 
 
 
(8,813
)
 
(16,672
)
 
(42,087
)
 
(54,392
)
Net loss attributable to Surgery Partners, Inc.
 
$
(9,140
)
 
 
 
$
(4,444
)
 
$
(2,338
)
 
$
(11,669
)
 
$
(7,409
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss per share attributable to common stockholders (2)
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
(0.57
)
 
 
 
$
(0.09
)
 
$
(0.05
)
 
$
(0.24
)
 
$
(0.15
)
Diluted (3)
 
$
(0.57
)
 
 
 
$
(0.09
)
 
$
(0.05
)
 
$
(0.24
)
 
$
(0.15
)
Weighted average common shares outstanding
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
48,314,746

 
 
 
48,146,611

 
48,019,652

 
48,121,404

 
48,018,706

Diluted (3)
 
48,314,746

 
 
 
48,146,611

 
48,019,652

 
48,121,404

 
48,018,706


(1) Includes contingent acquisition compensation expense of $605,000 for the one month ended September 30, 2017 (Successor), $1.2 million and $5.1 million for the two and eight months ended August 31, 2017 (Predecessor), respectively, and $1.5 million and $3.1 million for the three and nine months ended September 30, 2016, respectively.
(2) Includes the impact of amounts allocated to participating securities. See Note 6. "Earnings Per Share" for the calculation of net loss per share attributable to common stockholders.
(3) The impact of potentially dilutive securities for all periods presented was not considered because the effect would be anti-dilutive in those periods.

See notes to unaudited condensed consolidated financial statements.



2



SURGERY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, amounts in thousands)
 
 
Successor
 
 
 
Predecessor
 
Predecessor
 
 
September 1 to September 30,
 
 
 
July 1 to August 31,
 
Three Months Ended September 30,
 
January 1 to August 31,
 
Nine Months Ended September 30,
 
 
2017
 
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income
 
(2,648
)
 
 
 
4,369

 
14,334

 
30,418

 
46,983

Other comprehensive income
 

 
 
 

 

 

 

Comprehensive (loss) income
 
$
(2,648
)
 
 
 
$
4,369

 
$
14,334

 
$
30,418

 
$
46,983

Less: Comprehensive income attributable to non-controlling interests
 
(6,492
)
 
 
 
(8,813
)
 
(16,672
)
 
(42,087
)
 
(54,392
)
Comprehensive loss attributable to Surgery Partners, Inc.
 
$
(9,140
)
 
 
 
$
(4,444
)
 
$
(2,338
)
 
$
(11,669
)
 
$
(7,409
)
See notes to unaudited condensed consolidated financial statements.




3



SURGERY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited, amounts in thousands, except shares)
 
Common Stock
 
Additional
Paid-in Capital
 
Retained Deficit
 
Non-Controlling Interests—
Non-Redeemable
 
Total
 
Shares
 
Amount
 
Predecessor
 
 
 
 
 
 
 
 
 
 
 
Balance at 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 at August 31, 2017
48,810,315

 
$
488

 
$
326,930

 
$
(323,020
)
 
$
475,610

 
$
480,008

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-in Capital
 
Retained Deficit
 
Non-Controlling Interests—
Non-Redeemable
 
Total
 
Shares
 
Amount
 
Successor
 
 
 
 
 
 
 
 
 
 
 
Balance at September 1, 2017
48,810,315

 
$
488

 
$
720,118

 
$

 
$
684,480

 
$
1,405,086

Net (loss) income

 

 

 
(9,140
)
 
5,438

 
(3,702
)
Issuance of restricted and unrestricted shares

 

 

 

 

 

Equity-based compensation

 

 
1,683

 

 

 
1,683

Cancellation of restricted shares
(41,019
)
 

 

 

 

 

Preferred dividends

 

 
(2,633
)
 

 

 
(2,633
)
Mark to redemption adjustment

 

 
(15,566
)
 

 

 
(15,566
)
Acquisition and disposal of shares of non-controlling interests, net

 

 
452

 

 
(471
)
 
(19
)
Distributions to non-controlling interests—non-redeemable holders

 

 

 

 
(5,714
)
 
(5,714
)
Balance at September 30, 2017
48,769,296

 
$
488

 
$
704,054

 
$
(9,140
)
 
$
683,733

 
$
1,379,135


See notes to unaudited condensed consolidated financial statements.



4



SURGERY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
 
 
Successor
 
 
 
Predecessor
 
 
September 1 to September 30,
 
 
 
January 1 to August 31,
 
Nine Months Ended September 30,
 
 
2017
 
 
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
 
 
Net (loss) income
 
$
(2,648
)
 
 
 
$
30,418

 
$
46,983

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
3,330

 
 
 
30,124

 
28,984

Amortization of debt issuance costs, discounts and premium
 
(103
)
 
 
 
5,091

 
5,295

Amortization of unfavorable lease liability
 
(27
)
 
 
 
(217
)
 
(323
)
Equity-based compensation
 
1,683

 
 
 
3,697

 
1,326

Loss on disposal or impairment of long-lived assets, net
 
333

 
 
 
1,715

 
1,697

Loss on debt refinancing
 

 
 
 
18,211

 
11,876

Gain on amendment to tax receivable agreement
 
(1,098
)
 
 
 
(15,294
)
 

Tax receivable agreement expense
 

 
 
 

 
3,733

Deferred income taxes
 
(465
)
 
 
 
(18,703
)
 
1,903

Provision for doubtful accounts
 
3,690

 
 
 
16,297

 
15,931

(Income) loss from equity investments, net of distributions received
 
(203
)
 
 
 
489

 
(138
)
Changes in operating assets and liabilities, net of acquisitions and divestitures:
 
 
 
 
 
 
 
 
Accounts receivable
 
(2,795
)
 
 
 
8,837

 
(38,480
)
Other operating assets and liabilities
 
(2,919
)
 
 
 
(12,947
)
 
14,076

Net cash (used in) provided by operating activities
 
(1,222
)
 
 
 
67,718

 
92,863

 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
 
Purchases of property and equipment, net
 
(1,840
)
 
 
 
(18,773
)
 
(28,377
)
Payments for acquisitions, net of cash acquired
 
(1,163
)
 
 
 
(725,853
)
 
(126,018
)
Proceeds from divestitures
 

 
 
 
70

 

Net cash used in investing activities
 
(3,003
)
 
 
 
(744,556
)
 
(154,395
)
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
 
Principal payments on long-term debt
 
(3,609
)
 
 
 
(1,164,237
)
 
(453,957
)
Borrowings of long-term debt
 

 
 
 
1,805,966

 
580,945

Payments of debt issuance costs
 
(4
)
 
 
 
(58,591
)
 
(14,296
)
Penalty on prepayment of debt
 

 
 
 

 
(4,900
)
Proceeds from preferred stock issuance
 

 
 
 
310,000

 

Payments of stock issuance costs
 

 
 
 
(18,347
)
 

Distributions to non-controlling interest holders
 
(6,444
)
 
 
 
(50,343
)
 
(49,443
)
Receipts (payments) related to ownership transactions with non-controlling interest holders
 
30

 
 
 
(1,518
)
 
1,105

Financing lease obligation
 
(253
)
 
 
 
(796
)
 
(646
)
Other financing activities
 

 
 
 
(789
)
 


Net cash (used in) provided by financing activities
 
(10,280
)
 
 
 
821,345

 
58,808

Net (decrease) increase in cash and cash equivalents
 
(14,505
)
 
 
 
144,507

 
(2,724
)
Cash and cash equivalents at beginning of period
 
214,206

 
 
 
69,699

 
57,933

Cash and cash equivalents at end of period
 
$
199,701

 
 
 
$
214,206

 
$
55,209

See notes to unaudited condensed consolidated financial statements.


5

Table of Contents
SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(Unaudited)


1. Organization
Surgery Partners, Inc., a Delaware corporation (together with its subsidiaries, the “Company”), was formed on 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 has 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. 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 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”), 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”), 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 represented approximately 54.2% of the Company’s outstanding Common Stock. As a result of the Preferred Private Placement and the Private Sale, Bain became the controlling stockholder of the Company, holding Series A Preferred Stock and Common Stock that collectively represent approximately 65.7% 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 condensed 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 condensed 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 September 30, 2017 (Successor), the Company owned and operated a national network of surgical facilities and ancillary services in 32 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 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, optical services and specialty pharmacy services.
As of September 30, 2017 (Successor), the Company owned or operated a portfolio of 124 surgical facilities, comprised of 104 ASCs and 20 surgical hospitals. The Company owns these facilities in partnership with physicians and, in some cases, healthcare systems in the markets and communities it serves. The Company owned a majority interest in 85 of the surgical facilities and consolidated 109 of these facilities for financial reporting purposes. In addition, the Company owned or operated a network of 60 physician practices.
2. 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.


6

Table of Contents
SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(Unaudited)

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, 2016 (Predecessor) 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, 2016 (Predecessor). 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):
Predecessor
 
 
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
 
1,054

Acquisition and disposal of shares of non-controlling interests, net—redeemable
 
91

Distributions to non-controlling interest—redeemable holders
 
(730
)
Balance at September 30, 2017
 
$
271,416

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 September 30, 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 practices. The change is due to a physician practice acquired


7

Table of Contents
SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(Unaudited)

during the three months ended June 30, 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. As of September 30, 2017 (Successor) and December 31, 2016 (Predecessor), the condensed consolidated balance sheets of the Company included total assets of $90.1 million and $99.5 million, respectively, and total liabilities of $8.0 million and $10.7 million, respectively, related to the Company's variable interest entities.
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 $64.4 million and $35.0 million as of September 30, 2017 (Successor) and December 31, 2016 (Predecessor), 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.
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
 
 
 
Predecessor
 
 
September 30, 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
 
$
1,283,626

 
$
1,267,581

 
 
 
$

 
$

Senior Unsecured Notes due 2021 (1)
 
$
409,821

 
$
429,288

 
 
 
$
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.
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 4. "Long-Term Debt") were based on a Level 2 computation using quoted prices for identical liabilities in inactive markets at September 30, 2017 (Successor) and December 31, 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 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 September 30, 2017 (Successor) and December 31, 2016 (Predecessor), the fair value of the assets in the SERP were $1.8 million and $1.7 million, respectively, and were included in other long-term assets in the condensed consolidated balance sheets. The Company had a liability related to the SERP of $1.8 million and $1.7 million as of September 30, 2017 (Successor) and December 31, 2016 (Predecessor), respectively, which was included in other long-term liabilities in the condensed consolidated balance sheets.


8

Table of Contents
SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(Unaudited)

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
 
Predecessor
 
 
September 1 to September 30,
 
 
 
July 1 to August 31,
 
Three Months Ended September 30,
 
January 1 to August 31,
 
Nine Months Ended September 30,
 
 
2017
 
 
 
2017
 
2016
 
2017
 
2016
Patient service revenues:
 
 
 
 
 
 
 
 
 
 
 
 
   Surgical facilities revenues
 
94.0
%
 
 
 
95.5
%
 
90.4
%
 
91.4
%
 
90.6
%
   Ancillary services revenues
 
4.2
%
 
 
 
2.7
%
 
8.0
%
 
7.0
%
 
7.5
%
 
 
98.2
%
 
 
 
98.2
%
 
98.4
%
 
98.4
%
 
98.1
%
Other service revenues:
 
 
 
 
 
 
 
 
 
 
 
 
   Optical services revenues
 
0.7
%
 
 
 
1.1
%
 
1.1
%
 
1.0
%
 
1.2
%
   Other
 
1.1
%
 
 
 
0.7
%
 
0.5
%
 
0.6
%
 
0.7
%
 
 
1.8
%
 
 
 
1.8
%
 
1.6
%
 
1.6
%
 
1.9
%
Total revenues
 
100.0
%
 
 
 
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. During the two and 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 $630,000, $1.1 million, respectively. There were no adjustments as a result of changes in estimates to third-party settlements related to prior years for the one month ended September 30, 2017 (Successor).
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 September 30,
 
 
 
July 1 to August 31,
 
Three Months Ended September 30,
 
 
2017
 
 
 
2017
 
2016
 
 
Amount
 
%
 
 
 
Amount
 
%
 
Amount
 
%
Patient service revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Private insurance
 
$
72,930

 
56.2
%
 
 
 
$
80,166

 
46.9
%
 
$
140,637

 
50.6
%
Government
 
46,162

 
35.5
%
 
 
 
73,734

 
43.1
%
 
111,929

 
40.2
%
Self-pay
 
3,861

 
3.0
%
 
 
 
4,119

 
2.4
%
 
5,389

 
1.9
%
Other (1)
 
6,883

 
5.3
%
 
 
 
12,909

 
7.6
%
 
20,240

 
7.3
%
Total patient service revenues
 
$
129,836

 
100.0
%
 
 
 
$
170,928

 
100.0
%
 
$
278,195

 
100.0
%
Other service revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Optical service revenues
 
$
888

 
 
 
 
 
$
1,905

 
 
 
$
3,203

 
 
Other revenues
 
1,534

 
 
 
 
 
1,246

 
 
 
1,284

 
 
Total net revenues
 
$
132,258

 
 
 
 
 
$
174,079

 
 
 
$
282,682

 
 


9

Table of Contents
SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(Unaudited)

 
 
Successor
 
 
 
Predecessor
 
 
September 1 to September 30,
 
 
 
January 1 to August 31,
 
Nine Months Ended September 30,
 
 
2017
 
 
 
2017
 
2016
 
 
Amount
 
%
 
 
 
Amount
 
%
 
Amount
 
%
Patient service revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Private insurance
 
$
72,930

 
56.2
%
 
 
 
$
360,092

 
48.9
%
 
$
418,798

 
50.9
%
Government
 
46,162

 
35.5
%
 
 
 
308,993

 
42.0
%
 
331,041

 
40.2
%
Self-pay
 
3,861

 
3.0
%
 
 
 
15,949

 
2.2
%
 
13,814

 
1.7
%
Other (1)
 
6,883

 
5.3
%
 
 
 
51,374

 
6.9
%
 
59,313

 
7.2
%
Total patient service revenues
 
$
129,836

 
100.0
%
 
 
 
$
736,408

 
100.0
%
 
$
822,966

 
100.0
%
Other service revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Optical service revenues
 
$
888

 
 
 
 
 
$
7,629

 


 
$
10,222

 


Other revenues
 
1,534

 
 
 
 
 
4,578

 


 
6,249

 


Total net revenues
 
$
132,258

 
 
 
 
 
$
748,615

 
 
 
$
839,437

 
 
(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 two months ended August 31, 2017 (Predecessor). The increase in reserves resulted from certain known events and actions during the two 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 September 30, 2017 (Successor), the Company had a net third-party Medicaid settlements liability of $1.4 million compared to a net third-party Medicaid settlements receivable of $454,000 at December 31, 2016 (Predecessor).
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.


10

Table of Contents
SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(Unaudited)

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 $8.4 million and $7.0 million at September 30, 2017 (Successor) and December 31, 2016 (Predecessor), 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
 
 
 
Predecessor
 
 
September 30,
2017
 
 
 
December 31,
2016
 
 
 
 
 
 
 
Prepaid expenses
 
$
18,418

 
 
 
$
11,158

Receivables - optical product purchasing organization
 
8,369

 
 
 
7,042

Insurance recoveries
 
2,837

 
 
 
2,476

Tax refund receivable
 
8,618

 
 
 

Other current assets
 
15,482

 
 
 
11,338

Total
 
$
53,724

 
 
 
$
32,014

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 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
 
 
 
Predecessor
 
 
September 30,
2017
 
 
 
December 31,
2016
 
 
 
 
 
 
 
Land
 
$
20,880

 
 
 
$
8,082

Buildings and improvements
 
181,237

 
 
 
118,172

Furniture and equipment
 
14,242

 
 
 
14,670

Computer and software
 
21,708

 
 
 
29,902

Medical equipment
 
140,198

 
 
 
117,418

Construction in progress
 
13,161

 
 
 
2,396

Property and equipment, at cost
 
391,426

 
 
 
290,640

Less: Accumulated depreciation
 
(2,729
)
 
 
 
(86,387
)
Property and equipment, net
 
$
388,697

 
 
 
$
204,253

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 $19.2 million and $15.4 million as of September 30, 2017 (Successor) and December 31, 2016 (Predecessor), respectively, net of accumulated depreciation of $0.7 million and $11.6 million, respectively.


11

Table of Contents
SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(Unaudited)

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 15 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 activity related to intangible assets for the period from January 1, 2017 to August 31, 2017 (Predecessor) and the period from September 1, 2017 to September 30, 2017 (Successor) follows (in thousands):
 
 
Physician Income Guarantees
 
Management Rights
 
Non-Compete Agreements
 
Certificates of Need
 
Customer Relationships
 
Other
 
Total Intangible Assets
Predecessor
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
 
$
813

 
$
21,290

 
$
16,457

 
$
3,780

 
$
3,704

 
$
1,979

 
$
48,023

Additions
 
445

 
26,900

 
92

 
745

 

 
130

 
28,312

Recruitment expense
 
(380
)
 

 

 

 

 

 
(380
)
Amortization
 

 
(1,154
)
 
(3,715
)
 

 
(733
)
 
(438
)
 
(6,040
)
Balance at August 31, 2017
 
$
878

 
$
47,036

 
$
12,834

 
$
4,525

 
$
2,971

 
$
1,671

 
$
69,915

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Physician Income Guarantees
 
Management Rights
 
Non-Compete Agreements
 
Certificates of Need
 
Customer Relationships
 
Other
 
Total Intangible Assets
Successor
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 1, 2017
 
$
878

 
$
41,600

 
$
8,024

 
$
5,078

 
$

 
$
1,170

 
$
56,750

Additions
 

 

 
41

 
25

 

 

 
66

Recruitment expense
 
(38
)
 

 

 

 

 

 
(38
)
Amortization
 

 
(138
)
 
(84
)
 

 

 
(49
)
 
(271
)
Balance at September 30, 2017
 
$
840

 
$
41,462

 
$
7,981

 
$
5,103

 
$

 
$
1,121

 
$
56,507



12

Table of Contents
SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(Unaudited)

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 activity related to goodwill for the period from January 1, 2017 to August 31, 2017 (Predecessor) and the period from September 1, 2017 to September 30, 2017 (Successor) follows (in thousands):
Predecessor
 
 
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
 
1,214

Divestitures
 

Purchase price adjustments
 
(130
)
Balance at September 30, 2017
 
$
3,270,309

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 in accordance with Accounting Standards Codification (ASC) 350, Intangibles- Goodwill and Other. 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. The Company tests its goodwill and intangible assets for impairment at least annually, or more frequently if certain indicators arise. 
Restricted Invested Assets
Restricted invested assets of $315,000 as of both September 30, 2017 (Successor) and December 31, 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
 
 
September 30,
2017
 
 
 
December 31,
2016
 
 
 
 
 
 
 
Notes receivable
 
$
2,853

 
 
 
$
716

Deposits
 
2,794

 
 
 
4,196

Assets of SERP
 
1,804

 
 
 
1,725

Debt issuance costs
 

 
 
 
1,488

Insurance recoverable
 
6,835

 
 
 
6,835

Other
 
4,847

 
 
 
1,475

Total
 
$
19,133

 
 
 
$
16,435



13

Table of Contents
SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(Unaudited)

Other Current Liabilities
A summary of other current liabilities follows (in thousands):
 
 
Successor
 
 
 
Predecessor
 
 
September 30,
2017
 
 
 
December 31,
2016
 
 
 
 
 
 
 
Interest payable
 
$
23,777

 
 
 
$
19,206

Current taxes payable
 
6,731

 
 
 
2,622

Insurance liabilities
 
10,287

 
 
 
6,625

Amounts due to patients and payors
 
15,087

 
 
 
12,221

Tax receivable agreement liability
 
837

 
 
 
999

Contingent acquisition compensation liability
 
7,866

 
 
 
4,589

Contingent proceeds payable
 
8,618

 
 
 

Other accrued expenses
 
33,076

 
 
 
22,731

Total
 
$
106,279

 
 
 
$
68,993

Other Long-Term Liabilities
A summary of other long-term liabilities follows (in thousands):