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. Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is intended to assist the reader in understanding and assessing significant changes and trends related to our results of operations and financial condition. The following discussion and analysis should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and the related notes thereto included in Item 1 of Part I of this Quarterly Report on Form 10-Q (this “Form 10-Q”). Certain statements in this Item 2 of Part I of this Form 10-Q, and in Item 1A, “Risk Factors” of Part I of our Annual Report on Form 10-K for the year ended December 31, 2022 (our “Form 10-K”), may cause our actual results, financial position, and cash and cash equivalents generated from operations to differ materially from these forward-looking statements. Business Overview Option Care Health, and its wholly-owned subsidiaries, provides infusion therapy and other ancillary health care services through a national network of 168 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, and dietitians 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. 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. On March 14, 2019, HC I and HC II entered into the Merger Agreement to merge with and into a wholly-owned subsidiary of BioScip, a national provider of infusion and home care management solutions, which was completed on August 6, 2019. Following the close of the transaction, BioScrip was rebranded as Option Care Health. 24 Table of Contents Update on the Impact of the COVID-19 Pandemic The primary operations of the Company focus on providing infusion therapy services, however, the COVID-19 pandemic has impacted the healthcare ecosystem and the Company such that, beginning in March 2020, we have been disrupted by both positive and negative referral patterns and have experienced challenges in our staffing, increased pricing and periodic inability to procure personal protection equipment, supplies and key drugs. The Company anticipates that new variants could affect its operations for an extended period; however, at this time we cannot confidently forecast the duration or the ultimate financial impact on our operations. See Item 1A. “Risk Factors” under the caption “The COVID-19 pandemic and other potential pandemic events could adversely impact our business, results of operations, cash flows and financial position” included in our Form 10-K for further discussion of risks. 25 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 ended March 31, 2023 and 2022. 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 intangibles amortization, 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, First Lien Term Loan, Senior Notes, amortization of discount and deferred financing fees, payments associated with the interest rate cap, and interest income earned on cash and cash equivalents. 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 related to non-operating income and 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 (Losses) Gains on Cash Flow Hedges, Net of Income Tax Expense . Change in unrealized (losses) gains 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 cap hedge, net of income taxes. 26 Table of Contents Results of Operations The following table presents Option Care Health’s consolidated results of operations for the three months ended March 31, 2023 and 2022 (in thousands, except for percentages): Three Months Ended March 31, 2023 2022 Amount % of Revenue Amount % of Revenue NET REVENUE $ 1,015,848 100.0 % $ 915,784 100.0 % COST OF REVENUE 786,843 77.5 % 714,848 78.1 % GROSS PROFIT 229,005 22.5 % 200,936 21.9 % OPERATING COSTS AND EXPENSES: Selling, general and administrative expenses 147,866 14.6 % 133,969 14.6 % Depreciation and amortization expense 14,514 1.4 % 14,722 1.6 % Total operating expenses 162,380 16.0 % 148,691 16.2 % OPERATING INCOME 66,625 6.6 % 52,245 5.7 % OTHER INCOME (EXPENSE): Interest expense, net (13,834) (1.4) % (12,246) (1.3) % Equity in earnings of joint ventures 1,437 0.1 % 1,267 0.1 % Other, net 1 — % 2 — % Total other expense (12,396) (1.2) % (10,977) (1.2) % INCOME BEFORE INCOME TAXES 54,229 5.3 % 41,268 4.5 % INCOME TAX EXPENSE 15,021 1.5 % 10,993 1.2 % NET INCOME $ 39,208 3.9 % $ 30,275 3.3 % OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX: Change in unrealized (loss) gain on cash flow hedges, net of income tax benefit (expense) of $1,152 and ($3,763), respectively (3,443) (0.3) % 11,070 1.2 % OTHER COMPREHENSIVE (LOSS) INCOME (3,443) (0.3) % 11,070 1.2 % NET COMPREHENSIVE INCOME $ 35,765 3.5 % $ 41,345 4.5 % 27 Table of Contents Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022 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 March 31, 2023 and 2022. Gross Profit Three Months Ended March 31, 2023 2022 Variance (in thousands, except for percentages) Net revenue $ 1,015,848 $ 915,784 $ 100,064 10.9 % Cost of revenue 786,843 714,848 71,995 10.1 % Gross profit $ 229,005 $ 200,936 $ 28,069 14.0 % Gross profit margin 22.5 % 21.9 % 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 low-double-digits. Acute growth was driven primarily due to collaborating with referral sources, which increased the volume of patient services. Acquisition related growth accounted for approximately 1% of the increase in both net revenue and gross profit. The increase in net revenue was partially offset by the divestiture of respiratory therapy assets as well as therapies related to the treatment of ALS and pre-term labor. The increase in cost of revenue and gross profit was primarily driven by the growth in revenue. Revenue growth outpaced the increase in cost of revenue primarily due to our disciplined procurement strategies and efficient utilization of our infusion suite network, partially offset by inflationary impacts. Operating Expenses Three Months Ended March 31, 2023 2022 Variance (in thousands, except for percentages) Selling, general and administrative expenses $ 147,866 $ 133,969 $ 13,897 10.4 % Depreciation and amortization expense 14,514 14,722 (208) (1.4) % Total operating expenses $ 162,380 $ 148,691 $ 13,689 9.2 % The increase in selling, general and administrative expenses is primarily due to an increase in salaries and benefits as a result of acquired team members and inflationary pressures, however, these expenses have remained consistent as a percentage of revenue at 14.6% for the three months ended March 31, 2023 and 2022 due to the Company’s focus on controlling spending leverage. 28 Table of Contents Other Income (Expense) Three Months Ended March 31, 2023 2022 Variance (in thousands, except for percentages) Interest expense, net $ (13,834) $ (12,246) $ (1,588) 13.0 % Equity in earnings of joint ventures 1,437 1,267 170 13.4 % Other, net 1 2 (1) (50.0) % Total other expense $ (12,396) $ (10,977) $ (1,419) 12.9 % The increase in interest expense, net during the three months ended March 31, 2023 was primarily attributable to increases in the First Lien Term Loan’s variable interest rate as compared to three months ended March 31, 2022, partially offset by interest income generated from our cash and cash equivalents. 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 the performance of the joint ventures. Income Tax Expense Three Months Ended March 31, 2023 2022 Variance (in thousands, except for percentages) Income tax expense $ 15,021 $ 10,993 $ 4,028 36.6 % The Company recorded income tax expense of $15.0 million and $11.0 million for the three months ended March 31, 2023 and 2022, respectively, which represents an effective tax rate of 27.7% and 26.6%, respectively. The variance in the Company’s effective tax rate of 27.7% for the three months ended March 31, 2023, compared to the federal statutory rate of 21%, is primarily attributable to the difference between federal and state tax rates, as well as various non-deductible expenses. The variance in the Company’s effective tax rate of 26.6% for the three months ended March 31, 2022, compared to the federal statutory rate of 21%, is primarily attributable to current and deferred state taxes as well as various non-deductible expenses. 29 Table of Contents Net Income and Other Comprehensive (Loss) Income Three Months Ended March 31, 2023 2022 Variance (in thousands, except for percentages) Net income $ 39,208 $ 30,275 $ 8,933 29.5 % Other comprehensive (loss) income, net of tax: Changes in unrealized (loss) gain on cash flow hedges, net of income taxes (3,443) 11,070 (14,513) (131.1) % Other comprehensive (loss) income (3,443) 11,070 (14,513) (131.1) % Net comprehensive income $ 35,765 $ 41,345 $ (5,580) (13.5) % The change in net income was primarily attributable to organic growth from additional revenue related to the factors described in the above sections. For the three months ended March 31, 2023 and 2022, the change in unrealized (loss) gain on cash flow hedges, net of income taxes, was related to the change in fair market value of the $300.0 million interest rate cap hedge executed in October 2021. Net comprehensive income decreased to $35.8 million for the three months ended March 31, 2023, compared to net comprehensive income of $41.3 million for the three months ended March 31, 2022, primarily as a result of the impact of the fair value of the interest rate cap hedge, partially offset by the increase in net income, as discussed above. Liquidity and Capital Resources For the three months ended March 31, 2023 and the twelve months ended December 31, 2022, the Company’s primary sources of liquidity were cash and cash equivalents of $297.8 million and $294.2 million, respectively. As of March 31, 2023, the Company had $219.5 million of borrowings available under its credit facilities (net of $5.5 million undrawn letters of credit issued and outstanding). As of December 31, 2022, the Company had $168.3 million of borrowings available under its credit facilities (net of $6.7 million undrawn letters of credit issued and outstanding). During the three months ended March 31, 2023 and the year ended December 31, 2022, 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 to pursue acquisitions and share repurchases. The Company’s primary uses of cash and cash equivalents include supporting our ongoing business activities, investment in capital expenditures in both facilities and technology, the pursuit of acquisitions, and share repurchases. 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 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, along with potential future share repurchases. Our business strategy includes the deployment of capital to pursue acquisitions that complement our existing 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 and cash equivalents 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. 30 Table of Contents 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 and cash equivalents 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 and cash equivalents balances and expected cash flows generated from operations will be sufficient to meet our operating requirements over the next 12 months and beyond. 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 Effective January 13, 2023, the Company entered into an agreement to amend the ABL Facility, to among other things, increase the amount of borrowing availability by $50.0 million to $225.0 million total borrowing availability and to replace LIBOR with SOFR as the new reference rate. The ABL Facility provides for borrowings up to $225.0 million and matures on October 27, 2026. The ABL Facility bears interest at a rate equal to, at the Company’s 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) SOFR (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 $5.5 million of undrawn letters of credit issued and outstanding, resulting in net borrowing availability under the ABL Facility of $219.5 million as of March 31, 2023. 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 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 First Lien Term Loan agreement addresses reference rate reform and establishes SOFR as the benchmark replacement when LIBOR ceases to exist. The Senior Notes bear interest at a rate of 4.375% per annum and are payable semi-annually in arrears on October 31 and April 30 of each year, which began 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 $386.5 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, 2023. Actual payments are based on changes in LIBOR and exclude the interest rate cap derivative instrument. 31 Table of Contents Cash Flows Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022 The following table presents selected data from Option Care Health’s unaudited condensed consolidated statements of cash flows: Three Months Ended March 31, 2023 2022 Variance (in thousands) Net cash provided by operating activities $ 89,752 $ 32,681 $ 57,071 Net cash used in investing activities (5,760) (5,359) (401) Net cash used in financing activities (80,402) (1,145) (79,257) Net increase in cash and cash equivalents 3,590 26,177 (22,587) Cash and cash equivalents - beginning of period 294,186 119,423 174,763 Cash and cash equivalents - end of period $ 297,776 $ 145,600 $ 152,176 Cash Flows from Operating Activities The increase in cash provided by operating activities is primarily due to higher net income, changes in inventory, changes on accounts receivable, prepaid expenses and other current assets, partially offset by certain accruals and timing of vendor payments during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. Cash Flows from Investing Activities The increase in cash used in investing activities during the three months ended March 31, 2023 is primarily due the amount of investments in our pharmacies and infrastructure as compared to the three months ended March 31, 2022. Cash Flows from Financing Activities The increase in cash used in financing activities is primarily related to the Company’s repurchase of common stock during the three months ended March 31, 2023, with no comparable activity during the three months ended March 31, 2022. Critical Accounting Policies and Estimates The Company prepares its unaudited condensed consolidated financial statements in accordance with GAAP, which requires the Company to make estimates and assumptions. The Company evaluates its estimates and assumptions on an ongoing basis. Estimates and assumptions 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 assumptions 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. There have been no material changes to the Company’s critical accounting policies and estimates as presented in our Form 10-K, which are hereby incorporated by reference. 32 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 Form 10-K, which is hereby incorporated by reference.