Option Care Health, Inc. — FY 2021 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2021; it is an annual report, not a standalone fourth-quarter report. Option Care Health provides home and alternate-site infusion services through 154 locations in 45 states, with one reportable segment. Comparisons below are with FY 2020 unless noted.
Financial performance and liquidity
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Revenue | $3,438.6 million | $3,032.6 million |
| Gross profit / margin | $779.6 million / 22.7% | $682.3 million / 22.5% |
| Operating income / margin | $190.8 million / 5.5% | $110.8 million / 3.7% |
| Net income (loss) | $139.9 million | $(8.1) million |
| Diluted earnings (loss) per share | $0.77 | $(0.04) |
| Cash from operating activities | $208.6 million | $127.4 million |
| Cash and cash equivalents at year-end | $119.4 million | $99.3 million |
- Revenue rose 13.4%, primarily from organic growth. Acute therapy revenue grew at a mid-single-digit rate and chronic therapy revenue at a mid-teens rate. Gross margin improved modestly, which management attributed to a mix shift toward higher-profit therapies.
- SG&A increased 5.1% in dollars but declined to 15.3% of revenue from 16.5%; management cited expense discipline, leverage of existing infrastructure and merger synergies. Depreciation and amortization expense declined 11.6%.
- Interest expense fell to $67.0 million from $107.8 million, reflecting 2021 refinancing transactions and repayment of the second-lien notes. Net income also benefited materially from a $23.4 million income tax benefit, including release of most of the deferred-tax-asset valuation allowance.
- Investing cash outflow was $111.5 million, including $85.9 million for acquisitions and $25.6 million for property and equipment. Financing cash outflow was $76.9 million; year-end cash increased by $20.2 million.
- At year-end, debt principal was $1.10 billion: $600 million of variable-rate first-lien term debt and $500 million of 4.375% senior notes due 2029. Cash less stated principal debt was approximately $980.6 million. The ABL revolver had no borrowings and $167.9 million of net availability. Current assets were $710.3 million and current liabilities $459.7 million.
Material changes and unusual items
- In January 2021, the company refinanced the remaining $245.8 million second-lien notes with incremental first-lien borrowing. In October, it refinanced to $600 million of first-lien term debt, extended its maturity to 2028, and issued $500 million of senior notes due 2029. Refinancing activity produced a reported $13.4 million loss on extinguishment of debt for the year.
- Acquisitions included BioCure assets, Infinity Infusion Nursing and Wasatch Infusion. Acquisition-related cash outlays totaled $85.9 million; some purchase-price allocations were preliminary at year-end.
- The company corrected payer-category classifications in 2020 and the first half of 2021, moving amounts from government to commercial revenue. It deemed the errors immaterial; there was no impact on consolidated balance sheets, statements of income or cash flows.
- Walgreens controlled approximately 20.7% of the common stock at year-end after obtaining control of HC Group in December 2021. HC Group completed secondary offerings of 76.4 million shares during 2021.
Outlook, risks and contingencies
- Management stated that existing cash and expected operating cash flows should be sufficient for operating requirements and planned capital expenditures for at least the next 12 months. It noted that additional borrowing or other financing may be needed for longer-term strategic plans. The filing provides no specific revenue or earnings guidance.
- Management said COVID-19 effects remained difficult to forecast, citing changing referral patterns, staffing constraints and potential supply-chain impacts. It reported adequate pharmaceutical and supply levels at year-end, with no significant pandemic-related supply availability impact to that date.
- Key risks include payer reimbursement and pricing pressure, payer and referral-source concentration, dependence on pharmaceutical suppliers, labor availability and costs, regulatory compliance, reimbursement delays and audits, cybersecurity, and substantial indebtedness. Four vendors supplied approximately 74% of pharmaceutical and medical-supply purchases; the largest payer generated approximately 16% of revenue and its contract was renewed effective February 2022. Direct government programs accounted for approximately 12% of revenue.
- A hypothetical 100-basis-point change in rates on unhedged variable-rate debt would change annual interest expense by approximately $1.8 million. The company had a $300 million notional interest-rate cap hedge.
- The company disclosed legal proceedings and routine governmental and payer reviews, but stated it did not expect pending matters, after reserves and indemnification, to materially affect its balance sheet. It cautioned that unexpected verdicts, fines or rulings could affect results or cash flows. Goodwill impairment testing found no impairment in 2021.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Critical audit matters included revenue transaction-price adjustments and deferred-tax-asset realizability.
Important facts for investors to verify
- How much of the $139.9 million net income reflects recurring operating performance versus the $23.4 million tax benefit from valuation-allowance release.
- Whether organic growth, therapy mix and merger synergies continue to support revenue growth and margins, and how staffing and labor costs affect execution.
- The final purchase accounting and operating contribution from 2021 acquisitions, as well as the expected completion and financial effect of the announced 2022 acquisition.
- Debt repayment, variable-rate exposure, covenant terms and availability under the ABL facility; also monitor cash conversion and acquisition spending.
- Continuity of the largest payer contract and concentrated pharmaceutical supply, and any changes in reimbursement terms, drug pricing benchmarks or government policy.
- Potential consequences of the payer-classification correction and the assumptions underlying revenue estimates, deferred tax assets and related critical audit matters.