OPTION CARE HEALTH, INC. Unless the context requires otherwise, references in this report to "Option Care Health ," the "Company," "we," "us" and "our" refer toOption Care Health, Inc. and its consolidated subsidiaries. The following discussion and analysis of the financial condition and results of operations ofOption 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 theSecurities and Exchange Commission onMarch 11, 2021 , 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 OverviewOption Care Health , and its wholly-owned subsidiaries, provides infusion therapy and other ancillary health care services through a national network of 146 locations aroundthe 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 theState of Delaware onJanuary 7, 2015 , with its sole shareholder beingHC Group Holdings I, LLC . ("HC I"). OnApril 7, 2015 , HC I and HC II collectively acquiredWalgreens Infusion Services, Inc. and its subsidiaries fromWalgreen Co. , and the business was rebranded asOption Care, Inc. ("Option Care"). 25 -------------------------------------------------------------------------------- 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 inMarch 2020 . The Company relies upon patient referrals from multiple sources, including but not limited to patients discharged from acute care settings (e.g., hospitals) and patients requiring treatment for chronic conditions from specialty physicians. As expected, the pandemic has negatively affected new patient referrals for both acute and chronic conditions; however, the Company did experience an increase in patient transfers from hospital and outpatient settings which positively affected revenues. For the three and nine months endedSeptember 30, 2021 , the revenue results reflect acute revenue that had mid-single digit growth, while chronic revenue grew in the mid-teens relative to the prior year.Option Care Health continues to collaborate with payers and health systems to transition patients into the home or one of our alternate treatment sites to receive vital infusion therapy. The Company continued to experience cost inefficiencies during the three and nine months endedSeptember 30, 2021 with respect to clinical labor and other staffing challenges. Integration-related initiatives that were accelerated during the year endedDecember 31, 2020 continue to offset the negative impacts resulting from the COVID-19 pandemic. Further, to date, the Company has experienced no material deceleration in cash collections and collaboration with payers continues to be productive. The Company anticipates that the pandemic could affect its operations for an extended period; however, at this time 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 could adversely impact our business, results of operations, cash flows and financial position" included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 for further discussion of risks. 26 -------------------------------------------------------------------------------- Table of Contents Composition of Results of Operations The following results of operations include the accounts ofOption Care Health and our subsidiaries for the three and nine months endedSeptember 30, 2021 and 2020. 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 second lien notes, amortization of discount and deferred financing fees, changes in derivatives not designated as hedging instruments related to the interest rate swaps, and reclassification from accumulated other comprehensive income to interest expense upon discontinuing hedge accounting. 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 loss on extinguishment of debt incurred in connection with the 2021 debt refinancing and miscellaneous non-operating expenses. Income Tax Expense. The Company is subject to taxation inthe 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. 27 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table presentsOption Care Health's consolidated results of operations for the three and nine months endedSeptember 30, 2021 and 2020 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 (unaudited) 2020 (unaudited) 2021 (unaudited) 2020 (unaudited) Amount % of Revenue Amount % of Revenue Amount % of Revenue Amount % of Revenue NET REVENUE$ 891,937 100.0 %$ 781,609 100.0 %$ 2,511,446 100.0 %$ 2,227,897 100.0 % COST OF REVENUE 688,969 77.2 % 607,456 77.7 % 1,944,037 77.4 % 1,729,395 77.6 % GROSS PROFIT 202,968 22.8 % 174,153 22.3 % 567,409 22.6 % 498,502 22.4 % OPERATING COSTS AND EXPENSES: Selling, general and administrative expenses 134,633 15.1 % 123,000 15.7 % 388,930 15.5 % 377,198 16.9 % Depreciation and amortization expense 15,452 1.7 % 16,597 2.1 % 48,410 1.9 % 54,892 2.5 % Total operating expenses 150,085 16.8 % 139,597 17.9 % 437,340 17.4 % 432,090 19.4 % OPERATING INCOME 52,883 5.9 % 34,556 4.4 % 130,069 5.2 % 66,412 3.0 % OTHER INCOME (EXPENSE): Interest expense, net (16,000) (1.8) % (24,583) (3.1) % (52,717) (2.1) % (84,102) (3.8) % Equity in earnings of joint ventures 1,676 0.2 % 790 0.1 % 4,567 0.2 % 2,364 0.1 % Other, net 4 - % (8,344) (1.1) % (12,392) (0.5) % (8,322) (0.4) % Total other expense (14,320) (1.6) % (32,137) (4.1) % (60,542) (2.4) % (90,060) (4.0) % INCOME (LOSS) BEFORE INCOME TAXES 38,563 4.3 % 2,419 0.3 % 69,527 2.8 % (23,648) (1.1) % INCOME TAX EXPENSE 3,087 0.3 % 756 0.1 % 5,096 0.2 % 2,267 0.1 % NET INCOME (LOSS)$ 35,476 4.0 % $ 1,663 0.2 %$ 64,431 2.6 %$ (25,915) (1.2) % OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: Change in unrealized gains (losses) on cash flow hedges, net of income tax expense (benefit) of$0 ,$0 ,$0 and$0 , respectively 2,892 0.3 % 4,022 0.5 % 11,172 0.4 % (8,034) (0.4) % OTHER COMPREHENSIVE INCOME (LOSS) 2,892 0.3 % 4,022 0.5 % 11,172 0.4 % (8,034) (0.4) % NET COMPREHENSIVE INCOME (LOSS)$ 38,368 4.3 % $ 5,685 0.7 %$ 75,603 3.0 %$ (33,949) (1.5) % 28
-------------------------------------------------------------------------------- Table of Contents Three Months EndedSeptember 30, 2021 Compared to Three Months EndedSeptember 30, 2020 The following tables present selected consolidated comparative results of operations fromOption Care Health's unaudited condensed consolidated financial statements for the three month periods endedSeptember 30, 2021 andSeptember 30, 2020 . Gross Profit Three Months Ended September 30, 2021 2020 (unaudited) (unaudited) Variance (in thousands, except for percentages) Net revenue$ 891,937 $ 781,609 $ 110,328 14.1 % Cost of revenue 688,969 607,456 81,513 13.4 % Gross profit$ 202,968 $ 174,153 $ 28,815 16.5 % Gross profit margin 22.8 % 22.3 % 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 mid-teens. 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. The slight increase in gross profit margin was driven by mix shift toward higher profit therapies. Operating Expenses
Three Months Ended
2021 2020
(unaudited) (unaudited) Variance
(in thousands, except for percentages)
Selling, general and administrative expenses $ 134,633 $ 123,000 $ 11,633 9.5 %
Depreciation and amortization expense 15,452 16,597 (1,145) (6.9) %
Total operating expenses $ 150,085 $ 139,597 $ 10,488 7.5 %
The increase in Selling, general and administrative expenses is primarily due to
salaries and benefits, but has decreased as a percentage of revenue to 15.1% for
the three months ended September 30, 2021 as compared to 15.7% for the three
months ended September 30, 2020 , as our revenue has grown at a faster pace than
our selling, general and administrative expenses.
The decrease in depreciation and amortization was primarily related to a
reduction in capital expenditures corresponding with the stabilization of
capital expenditures through completion of Merger integration activities during
the year ended December 31, 2020 .
29
--------------------------------------------------------------------------------
Table of Contents
Other Income (Expense)
Three Months Ended September 30,
2021 2020
(unaudited) (unaudited) Variance
(in thousands, except for percentages)
Interest expense, net $ (16,000) $ (24,583) $ 8,583 (34.9) %
Equity in earnings of joint ventures 1,676 790 886 112.2 %
Other, net 4 (8,344) 8,348 (100.0) %
Total other expense $ (14,320) $ (32,137) $ 17,817 (55.4) %
The decrease in interest expense was primarily attributable to the debt
refinancing of the first lien term loan and prepayment of the second lien notes
in January 2021 , as well as the reduction in the outstanding debt balance due to
retirement of debt obligations which were completed during 2020. See Note 10,
Indebtedness, of the unaudited condensed consolidated financial statements.
The increase in equity in earnings of joint ventures was primarily attributable
to organic growth in both the acute and chronic portfolio of therapies.
The change in other, net is primarily attributable to the loss on extinguishment
of debt of $8.3 million incurred in the third quarter of 2020 in conjunction
with the $125.0 million repayment of principal on the second lien notes.
Income Tax Expense
Three Months Ended September 30,
2021 2020
(unaudited) (unaudited) Variance
(in thousands, except for percentages)
Income tax expense $ 3,087 $ 756 $ 2,331 308.3 %
The Company maintains a full valuation allowance, established at the time of
Merger, against all of its net U.S. federal and state deferred tax assets with
the exception of approximately $0.3 million of estimated state net operating
losses ("NOL"). Because of the Company's full valuation allowance, the Company's
tax expense for the three months ended September 30, 2021 only consists of
quarterly tax liabilities attributable to separate company state tax returns as
well as recognized deferred tax expense. These tax expense items resulted in an
effective tax rate of 8.0% during the three months ended September 30, 2021 .
During the three months ended September 30, 2020 , the effective tax rate was
31.3%. The variance in the year-over-year effective tax rates is primarily
attributable to changes in the valuation allowance combined with year-over-year
variances in income (loss) before income taxes for the Company. The quarterly
tax rates of both periods differ from the Company's 21% federal statutory rate
primarily due to changes in valuation allowance, certain state and local taxes,
non-deductible costs and resolution of certain tax matters.
30--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
