Option Care Health, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone fourth-quarter filing. Amounts below are in U.S. dollars; financial figures are generally in millions unless stated otherwise.
Business context and reporting period
Option Care Health provides home and alternate-site infusion services through 158 locations in 45 states. The August 6, 2019 merger with BioScrip was accounted for as an acquisition with Option Care as the accounting acquirer. Accordingly, 2019 results include BioScrip only from the merger date and are not directly comparable with 2018.
Key financial metrics
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $2,310.4 | $1,939.8 |
| Gross profit / margin | $513.0 / 22.2% | $422.2 / 21.8% |
| Operating income (loss) | ($0.3) | $38.3 |
| Net income (loss) | ($75.9) | ($6.1) |
| Net cash from operations | $39.5 | $24.4 |
| Cash and cash equivalents at year-end | $67.1 | $36.4 |
Fourth-quarter 2019 unaudited results: revenue $720.8, gross profit $175.6, operating income $14.0, and net loss $15.8. The filing does not provide a standalone Q4 cash-flow figure.
At year-end, working capital was $228.7. Total debt principal was $1,337.3; debt net of discounts and financing costs was $1,286.5. Interest expense, net, was $73.7 for the year, while cash interest paid was $50.8. The $150.0 ABL revolver had no borrowings and $140.4 of net availability after letters of credit. Management said existing cash and expected operating cash flows should cover operating requirements for at least 12 months.
Changes versus prior period
- Reported revenue rose 19.1%, primarily reflecting $308.9 of BioScrip revenue after the merger, plus growth in chronic-condition therapies. Because the merger contributed only part-year revenue, reported annual growth is not like-for-like.
- Gross margin increased to 22.2% from 21.8%, which management attributed to therapy mix, formulary management, and improved procurement economics following the merger.
- SG&A rose 32.9% to $459.6; management cited merger transaction and integration costs. Merger transaction expenses were approximately $25.8.
- Interest expense rose 60.9% to $73.7, principally due to new merger-related debt. Other expense included $5.5 of debt-extinguishment costs.
- Operating cash flow improved by $15.0 to $39.5, with stronger receivable collections partly offset by payment of acquired payables. Investing cash outflow was $727.8, including $700.2 for the merger; financing cash inflow was $719.0.
Outlook, risks, contingencies, and unusual items
- Merger and outlook: Management cited opportunities for administrative savings, network optimization, and procurement benefits, and described ongoing integration work. No quantified earnings or revenue guidance was provided.
- Debt and interest: The company issued a $925.0 first-lien term loan and $400.0 of second-lien notes at the merger. The second-lien notes carry a floating rate and mature in 2027; the company elected to capitalize $12.3 of initial interest through a payment-in-kind election. Interest-rate swaps hedge portions of the variable-rate exposure through 2020–2021. Management also identified LIBOR transition risk.
- Operating and reimbursement risks: Results depend on payer contracts, reimbursement rates and timely collections; the largest payer represented approximately 16% of 2019 revenue. Three vendors supplied approximately 70% of pharmaceutical and medical-supply purchases. Drug shortages, benchmark pricing changes, payer audits, regulatory requirements, and clinician staffing may affect operations and margins.
- Other risks: Merger integration and realization of expected savings are uncertain. The company reported $1,425.5 of goodwill and noted potential impairment risk. HC Group Holdings I controlled approximately 81% of shares at year-end, and the company qualified as a Nasdaq controlled company.
- Legal matters: The company was involved in proceedings and government or payer reviews arising in the ordinary course. Management did not expect pending matters, after reserves and indemnification, to materially affect the balance sheet, but acknowledged outcomes could adversely affect results or cash flows.
- Unusual reporting matters: The company corrected errors it judged immaterial, including a $6.5 adjustment to merger-related transaction fees reported in the prior quarter. Goodwill was reduced by $6.5 for a separate immaterial prior-period balance-sheet error. No goodwill impairment was recorded in 2019.
- Controls: Management and the auditor reported effective internal control over financial reporting, but the assessment excluded Option Care controls, covering approximately 93% of year-end assets and 87% of annual revenue, because the merger occurred during the year and there was insufficient time to complete the assessment. Integration of combined-company controls was ongoing.
Important facts for investors to verify
- Whether merger synergies are realized, and how organic growth and margins perform on a comparable basis.
- Cash conversion and receivables collection trends, including the sustainability of the 2019 working-capital benefit.
- Debt service capacity, floating-rate exposure, covenant terms, and available revolver capacity.
- Progress integrating operations and financial controls, including expanded control testing in subsequent filings.
- Renewal and pricing terms for major payer relationships, and continuity of supply from concentrated vendors.
- Developments in payer audits, reimbursement policy, litigation, and other contingencies.