Option Care Health, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Unless the context requires otherwise, references in this report to "Option Care Health," the “Company,” “we,” “us” and “our” refer to Option Care Health, Inc. and its consolidated subsidiaries. The following discussion and analysis of the financial condition and results of operations of Option Care Health, Inc. (“Option Care Health”, or the “Company”) should be read in conjunction with the audited consolidated financial statements and related notes, as presented in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 23, 2022, as well as the Company’s unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this report. Forward-Looking Statements This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains statements not purely historical and which may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act’), including statements regarding our expectations, beliefs, future plans and strategies, anticipated events or trends concerning matters that are not historical facts or that necessarily depend upon future events. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential,” and similar expressions. Such forward-looking statements include, but are not limited to, the effect of the novel coronavirus (“COVID-19”) on our business, financial condition and results of operations. This Quarterly Report contains, among others, forward-looking statements based upon current expectations that involve numerous risks and uncertainties, including those described in Item 1A “Risk Factors”. Investors are cautioned that any such forward-looking statements are not guarantees of future performance, involve risks and uncertainties and that actual results may differ materially from those possible results discussed in the forward-looking statements as a result of various factors. Do not place undue reliance on such forward-looking statements as they speak only as of the date they are made. Except as required by law, the Company assumes no obligation to publicly update or revise any forward-looking statement even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. Business Overview Option Care Health, and its wholly-owned subsidiaries, provides infusion therapy and other ancillary health care services through a national network of 154 locations around the United States. The Company contracts with managed care organizations, third-party payers, hospitals, physicians, and other referral sources to provide pharmaceuticals and complex compounded solutions to patients for intravenous delivery in the patients’ homes or other nonhospital settings. Our services are provided in coordination with, and under the direction of, the patient’s physician. Our multidisciplinary team of clinicians, including pharmacists, nurses, dietitians and respiratory therapists, work with the physician to develop a plan of care suited to each patient’s specific needs. We provide home infusion services consisting of anti-infectives, nutrition support, bleeding disorder therapies, immunoglobulin therapy, and other therapies for chronic and acute conditions. HC Group Holdings II, Inc. (“HC II”) was incorporated under the laws of the State of Delaware on January 7, 2015, with its sole shareholder being HC Group Holdings I, LLC. (“HC I”). On April 7, 2015, HC I and HC II collectively acquired Walgreens Infusion Services, Inc. and its subsidiaries from Walgreen Co., and the business was rebranded as Option Care, Inc. (“Option Care”). On March 14, 2019, HC I and HC II entered into a definitive agreement (the “Merger Agreement”) to merge with and into a wholly-owned subsidiary of BioScrip, Inc. (“BioScrip”) (the “Merger”), a national provider of infusion and home care management solutions, which was completed on August 6, 2019 (the “Merger Date”). The Merger was accounted for as a reverse merger under the acquisition method of accounting for business combinations with Option Care being considered the accounting acquirer and BioScrip being considered the legal acquirer. Following the close of the transaction, BioScrip was rebranded as Option Care Health, Inc. and the combined company’s stock, par value $0.0001, was listed on the Nasdaq Capital Market. Effective February 3, 2020, the Company was listed on the Nasdaq Global Select Market under the ticker symbol “OPCH”. 23 Table of Contents Update on the Impact of the COVID-19 Pandemic The primary operations of the Company focus on providing infusion therapy services and based on the recent impact of the pandemic across the healthcare ecosystem, the Company began experiencing a related impact across a number of facets beginning in March 2020. The Company has been disrupted by both positive and negative referral patterns, experienced challenges in our staffing, increased pricing and ability to procure, and ability to procure personal protection equipment, supplies and key drugs. The Company anticipates that the pandemic could affect its operations for an extended period; however, at this time it cannot confidently forecast the duration nor the ultimate financial impact on its operations. See Item 1A. “Risk Factors” under the caption “The COVID-19 pandemic and other pandemic events could adversely impact our business operations, results of operations, cash flows and financial position” included in our Annual Report on Form 10-K for the year ended December 31, 2021 for further discussion of risks. 24 Table of Contents Composition of Results of Operations The following results of operations include the accounts of Option Care Health and our subsidiaries for the three months March 31, 2022 and 2021. Gross Profit Gross profit represents our net revenue less cost of revenue. Net Revenue. Infusion and related health care services revenue is reported at the estimated net realizable amounts from third-party payers and patients for goods sold and services rendered. When pharmaceuticals are provided to a patient, revenue is recognized upon delivery of the goods. When nursing services are provided, revenue is recognized when the services are rendered. Due to the nature of the health care industry and the reimbursement environment in which the Company operates, certain estimates are required to record revenue and accounts receivable at their net realizable values at the time goods or services are provided. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payers may result in adjustments to amounts originally recorded. Cost of Revenue. Cost of revenue consists of the actual cost of pharmaceuticals and other medical supplies dispensed to patients. In addition to product costs, cost of revenue includes warehousing costs, purchasing costs, depreciation expense relating to revenue-generating assets, such as infusion pumps, shipping and handling costs, and wages and related costs for the pharmacists, nurses, and all other employees and contracted workers directly involved in providing service to the patient. The Company receives volume-based rebates and prompt payment discounts from some of its pharmaceutical and medical supplies vendors. These payments are recorded as a reduction of inventory and are accounted for as a reduction of cost of revenue when the related inventory is sold. Operating Costs and Expenses Selling, General and Administrative Expenses . Selling, general and administrative expenses consist principally of salaries for administrative employees that directly and indirectly support the operations, occupancy costs, marketing expenditures, insurance, and professional fees. Depreciation and Amortization Expense. Depreciation within this caption includes infrastructure items such as computer hardware and software, office equipment and leasehold improvements. Depreciation of revenue-generating assets, such as infusion pumps, is included in cost of revenue. Other Income (Expense) Interest Expense, Net . Interest expense consists principally of interest payments on the Company’s outstanding borrowings under the ABL Facility, the first lien term loan and senior notes, amortization of discount and deferred financing fees. Refer to the “Liquidity and Capital Resources” section below for further discussion of these outstanding borrowings. Equity in Earnings of Joint Ventures . Equity in earnings of joint ventures consists of our proportionate share of equity earnings or losses from equity investments in two infusion joint ventures with health systems. Other, Net . Other income (expense) primarily includes activity in the prior year loss on extinguishment of debt incurred in connection with the January 2021 debt refinancing and miscellaneous non-operating expenses. Income Tax Expense . The Company is subject to taxation in the United States and various states. The Company’s income tax expense is reflective of the current federal and state tax rates. Change in unrealized gains (losses) on cash flow hedges, net of income tax expense (benefit) . Change in unrealized gains (losses) on cash flow hedges, net of income taxes, consists of the gains and losses associated with the changes in the fair value of derivatives designated as hedging instruments related to the interest rate caps and interest rate swaps, net of income taxes. Results of Operations The following table presents Option Care Health’s consolidated results of operations for the three months ended March 31, 25 Table of Contents 2022 and March 31, 2021 (in thousands): For the three months ended March 31, 2022 March 31, 2021 Amount % of Revenue Amount % of Revenue NET REVENUE $ 915,784 100.0 % $ 759,237 100.0 % COST OF REVENUE 714,848 78.1 % 593,764 78.2 % GROSS PROFIT 200,936 21.9 % 165,473 21.8 % OPERATING COSTS AND EXPENSES: Selling, general and administrative expenses 133,969 14.6 % 120,040 15.8 % Depreciation and amortization expense 14,722 1.6 % 16,339 2.2 % Total operating expenses 148,691 16.2 % 136,379 18.0 % OPERATING INCOME 52,245 5.7 % 29,094 3.8 % OTHER INCOME (EXPENSE): Interest expense, net (12,246) (1.3) % (19,481) (2.6) % Equity in earnings of joint ventures 1,267 0.1 % 1,205 0.2 % Other, net 2 — % (12,401) (1.6) % Total other expense (10,977) (1.2) % (30,677) (4.0) % INCOME (LOSS) BEFORE INCOME TAXES 41,268 4.5 % (1,583) (0.2) % INCOME TAX EXPENSE 10,993 1.2 % 1,278 0.2 % NET INCOME (LOSS) $ 30,275 3.3 % $ (2,861) (0.4) % OTHER COMPREHENSIVE INCOME, NET OF TAX: Change in unrealized gains on cash flow hedges, net of income tax expense of $3,763,and $0, respectively 11,070 1.2 % 4,081 0.5 % OTHER COMPREHENSIVE INCOME $ 11,070 1.2 % $ 4,081 0.5 % NET COMPREHENSIVE INCOME $ 41,345 4.5 % $ 1,220 0.2 % 26 Table of Contents Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021 The following tables present selected consolidated comparative results of operations from Option Care Health’s unaudited condensed consolidated financial statements for the three months ended ended March 31, 2022 and March 31, 2021. Gross Profit For the three months ended March 31, 2022 March 31, 2021 (unaudited) (unaudited) Variance (in thousands, except for percentages) Net revenue $ 915,784 $ 759,237 $ 156,547 20.6 % Cost of revenue 714,848 593,764 121,084 20.4 % Gross profit $ 200,936 $ 165,473 $ 35,463 21.4 % Gross profit margin 21.9 % 21.8 % The increase in net revenue was primarily driven by organic growth in the Company’s portfolio of therapies, consisting of acute revenue that had mid single digit growth relative to the prior year while chronic revenue grew in the high-twenties. Additionally, acquisition related growth accounted for approximately 2% of the increase in net revenue and gross profit. The increase in cost of revenue was driven by the growth in revenue. The increase in gross profit was primarily related to contribution margin from the increase in net revenue. Gross profit margin was consistent with the prior year as the growth in the chronic portfolio was concentrated in higher profit therapies. Operating Expenses For the three months ended March 31, 2022 March 31, 2021 (unaudited) (unaudited) Variance (in thousands, except for percentages) Selling, general and administrative expenses 133,969 120,040 $ 13,929 11.6 % Depreciation and amortization expense 14,722 16,339 (1,617) (9.9) % Total operating expenses $ 148,691 $ 136,379 $ 12,312 9.0 % The increase in Selling, general and administrative expenses is primarily due to salaries and benefits as a result of acquired team members, but has decreased as a percentage of revenue to 14.6% for the three months ended March 31, 2022 as compared to 15.8% for the three months ended March 31, 2021, as our revenue has grown at a faster pace than our selling, general and administrative expenses. The decrease in depreciation and amortization expense is primarily attributed to certain intangible assets whose useful life expired, which resulted in approximately $1.5 million decrease to amortization expense. 27 Table of Contents Other Income (Expense) For the three months ended March 31, 2022 March 31, 2021 (unaudited) (unaudited) Variance (in thousands, except for percentages) Interest expense, net (12,246) (19,481) $ 7,235 (37.1) % Equity in earnings of joint ventures 1,267 1,205 62 5.1 % Other, net 2 (12,401) 12,403 (100.0) % Total other expense $ (10,977) $ (30,677) $ 19,700 (64.2) % The decrease in interest expense was primarily attributable to the debt refinancing of the first lien term loan and issuance of senior notes in October 2021 during the three months ended March 31, 2022. See Note 10, Indebtedness , of the consolidated financial statements for further information. The increase in equity in earnings of joint ventures was primarily attributable to organic growth in both the acute and chronic portfolio of therapies. Income Tax Expense For the three months ended March 31, 2022 March 31, 2021 (unaudited) (unaudited) Variance (in thousands, except for percentages) Income tax expense 10,993 1,278 $ 9,715 760.2 % The Company maintains a valuation allowance against certain state net operating losses (“NOL”). The Company’s tax expense for the three months ended March 31, 2022 consists of quarterly tax liabilities attributable to state tax returns as well as recognized deferred federal and state tax expense. These tax expense items resulted in an effective tax rate of 26.6% during the three months ended March 31, 2022. During the three months ended March 31, 2021, the effective tax rate was negative 80.7%. The variance in the Company’s effective tax rate of 26.6% for the three months ended March 31, 2022 compared to the Company’s Federal statutory rate of 21% is primarily attributable to current and deferred state taxes as well as various non-deductible expenses. The variance in the Company’s effective tax rate of negative 80.7% for the three months ended March 31, 2021 compared to the Company’s Federal statutory rate of 21% is primarily attributable to the Company only recognizing certain deferred federal and state tax expense and current state tax expense while any tax benefits that would have otherwise been recognized were offset by the Company’s tax valuation allowance in effect during that period. The variance in the year-over-year effective tax rates is primarily attributable to the company not recognizing any tax benefit for the period ended March 31, 2021 because it maintained a full tax valuation allowance reserve against such benefits. This reserve was subsequently reversed during the three months ended December 31, 2021. Therefore, the reserve was not applicable in computing tax expense for the three months ended March 31, 2022, thus producing the effective tax rate variance year-over-year. 28 Table of Contents Net Income and Other Comprehensive Income For the three months ended March 31, 2022 March 31, 2021 (unaudited) (unaudited) Variance (in thousands, except for percentages) Net income $ 30,275 $ (2,861) $ 33,136 (1,158.2) % Other comprehensive income, net of tax: Changes in unrealized gains on cash flow hedges, net of income taxes 11,070 4,081 6,989 171.3 % Other comprehensive income $ 11,070 4,081 6,989 171.3 % Net comprehensive income $ 41,345 $ 1,220 $ 40,125 3,288.9 % The change in net income (loss) was primarily attributable to organic growth from additional revenue related to the factors described in the above sections. The change in unrealized gains on cash flow hedges, net of income taxes, was primarily related to the increase in fair market value of the $300.0 million interest rate cap hedge executed in October 2021. For the three months ended March 31, 2021, the change in unrealized gains on cash flow hedges, net of income taxes, primarily related to the increase in fair value on the $925.0 million notional swap; the swap expired in August 2021. Net comprehensive income increased to $41.3 million for the three months ended March 31, 2022, compared to net comprehensive income of $1.2 million for the three months ended March 31, 2021, primarily as a result of the changes in net income, discussed above, further increased by the impact of the fair value of the interest rate cap hedge. For the three months ended March 31, 2021, the change in net comprehensive income was primarily related to the increase in fair value on the $925.0 million notional swap; the swap expired August 2021. 29 Table of Contents Liquidity and Capital Resources For the three months ended March 31, 2022 and the twelve months ended December 31, 2021, the Company’s primary sources of liquidity were cash on hand of $145.6 million and $119.4 million, respectively, as well as the $167.9 million of borrowings available under its credit facilities (net of $7.1 million undrawn letters of credit issued and outstanding). During the three months ended March 31, 2022 and the year ended December 31, 2021, the Company’s positive cash flows from operations enabled investments in pharmacy and information technology infrastructure to support growth and create additional capacity in the future, as well as pursue acquisitions. The Company’s primary uses of cash include supporting our ongoing business activities, investment in capital expenditures in both facilities and technology, and the pursuit of acquisitions. Ongoing operating cash outflows are associated with procuring and dispensing drugs, personnel and other costs associated with servicing patients, as well as paying cash interest on the outstanding debt. Ongoing investing cash flows are primarily associated with capital projects related to business acquisitions, the improvement and maintenance of our pharmacy facilities and investment in our information technology systems. Ongoing financing cash flows are primarily associated with the quarterly principal payments on our outstanding debt. Our business strategy includes the deployment of capital to pursue acquisitions that complement our operations. We continue to evaluate acquisition opportunities and view acquisitions as a key part of our growth strategy. The Company historically has funded its acquisitions with cash with the exception of the Merger. The Company may require additional capital in excess of current availability in order to complete future acquisitions. It is impossible to predict the amount of capital that may be required for acquisitions, and there is no assurance that sufficient financing for these activities will be available on acceptable terms. Short-Term and Long-Term Liquidity Requirements The Company’s ability to make principal and interest payments on any borrowings under our credit facilities and our ability to fund planned capital expenditures will depend on our ability to generate cash in the future, which, to a certain extent, is subject to general economic, financial, competitive, regulatory and other conditions. Based on our current level of operations and planned capital expenditures, we believe that our existing cash balances and expected cash flows generated from operations will be sufficient to meet our operating requirements for at least the next 12 months. We may require additional borrowings under our credit facilities and alternative forms of financings or investments to achieve our longer-term strategic plans. Credit Facilities The Company’s asset-based-lending (“ABL”) revolving credit facility provides for borrowings up to $175.0 million, which matures on October 27, 2026. The ABL Facility bears interest at a rate equal to, at the Borrowers’ election, either (i) a base rate determined in accordance with the ABL Credit Agreement plus an applicable margin, which is equal to between 0.25% and 0.75% based on the historical excess availability as a percentage of the Line Cap (as such term is defined in the ABL Credit Agreement) and (ii) LIBOR (or a comparable successor rate, with a floor of 0.00% per annum) plus an applicable margin, which is equal to between 1.25% and 1.75% based on the historical excess availability as a percentage of the Line Cap. The Company had $7.1 million of undrawn letters of credit issued and outstanding, resulting in net borrowing availability under the ABL facility of $167.9 million as of March 31, 2022. The principal balance of the first lien term loan is repayable in quarterly installments of $1.5 million plus interest, with a final payment of all remaining outstanding principal due on October 27, 2028. The quarterly principal payments commenced in March of 2022. Interest on the first lien term loan is payable monthly on either (i) LIBOR (or a comparable successor rate, with a floor of 0.50% per annum) plus an applicable margin of 2.75% for Eurocurrency Rate Loans and (ii) a base rate determined in accordance with the new first lien term loan agreement, plus 1.75% for Base Rate Loans. The senior notes bear interest at a rate of 4.375% per annum, which are payable semi-annually in arrears on October 31 and April 30 of each year, commencing on April 30, 2022. The senior notes mature on October 31, 2029. Interest payments over the course of long-term debt obligations total an estimated $293.8 million based on final maturity dates of the Company’s credit facilities. Interest payments are calculated based on the LIBOR rate as of March 31, 2022. Actual payments are based on changes in LIBOR and exclude the interest rate cap derivative instrument. 30 Table of Contents Cash Flows Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021 The following table presents selected data from Option Care Health’s unaudited condensed consolidated statements of cash flows: Three Months Ended March 31, 2022 2021 (unaudited) (unaudited) Variance (in thousands) Net cash provided by operating activities $ 32,681 $ 18,380 $ 14,301 Net cash used in investing activities (5,359) (3,123) (2,236) Net cash used in financing activities (1,145) (5,160) 4,015 Net increase in cash and cash equivalents 26,177 10,097 16,080 Cash and cash equivalents - beginning of period 119,423 99,265 20,158 Cash and cash equivalents - end of period $ 145,600 $ 109,362 $ 36,238 Cash Flows from Operating Activities The increase in cash flows provided by operating activities is primarily due to higher net income, decrease in interest expense due to the October 2021 debt refinancing, and timing of vendor payments during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. Cash Flows from Investing Activities The increase in cash flows used in investing activities is primarily due to the amount of investments in our pharmacies and infrastructure. Cash Flows from Financing Activities The decrease in cash used in financing activities is related to the current year repayments of the first term lien notes, which resulted in repayments of $1.5 million. The remaining change in financing activities was related to net proceeds from the January 2021 refinancing in the three months ended March 31, 2021 with no comparable activity in the three months ended March 31, 2022. Critical Accounting Policies and Estimates The Company prepares its unaudited condensed consolidated financial statements in accordance with United States generally accepted accounting principles (“GAAP”), which requires the Company to make estimates and assumptions. The Company evaluates its estimates and judgments on an ongoing basis. Estimates and judgments are based on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period presented. The Company’s actual results may differ from these estimates, and different assumptions or conditions may yield different estimates. The company’s critical accounting policies and estimates as presented in our Annual report on 10-K for the year ended December 31, 2021 are hereby incorporated by reference. 31 Table of Contents Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no material changes to our exposure to market risk from those included in our Annual Report on Form 10-K for the year ended December 31, 2021, hereby incorporated by reference.