(EDGAR Online via COMTEX) -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following Management's Discussion and Analysis of Financial Condition and Results of Operations is designed to assist the reader in understanding our consolidated financial statements, the changes in certain key items in those financial statements from year-to-year and the primary factors that accounted for those changes as well as how certain accounting principles affect our consolidated financial statements. Except for the historical information contained herein, the following discussion contains forward-looking statements that are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. We discuss such risks, uncertainties and other factors throughout this Annual Report and specifically under the caption "Forward-Looking Statements" in this Annual Report. In addition, the following discussion of financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto appearing in Item 8 in this Annual Report. Business Overview Option Care Health, and its wholly-owned subsidiaries, provides infusion therapy and other ancillary health care services through a national network of 145 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". See Note 3, Business Acquisitions, of the consolidated financial statements for further discussion of the Merger.
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Results of Operations The following table presents Option Care Health's consolidated results of operations for the years ended December 31, 2020 and 2019 (in thousands). For discussion of Option Care Health's consolidated results of operations for the year ended December 31, 2019 compared to 2018, refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2019 Annual Report on 10-K filed with the Securities and Exchange Commission on March 5, 2020. Year Ended December 31, 2020 (1) 2019 (1) Amount % of Revenue Amount % of Revenue NET REVENUE $ 3,032,610 100.0% $ 2,310,417 100.0% COST OF REVENUE 2,350,346 77.5% 1,797,418 77.8% GROSS PROFIT 682,264 22.5% 512,999 22.2% OPERATING COSTS AND EXPENSES: Selling, general and administrative expenses 500,199 16.5% 459,628 19.9% Depreciation and amortization expense 71,310 2.4% 53,690 2.3% Total operating expenses 571,509 18.8% 513,318 22.2% OPERATING INCOME (LOSS) 110,755 3.7% (319) -% OTHER INCOME (EXPENSE): Interest expense, net (107,770) (3.6)% (73,724) (3.2)% Equity in earnings of joint ventures 3,313 0.1% 2,840 0.1% Other, net (11,541) (0.4)% (6,991) (0.3)% Total other expense (115,998) (3.8)% (77,875) (3.4)% LOSS BEFORE INCOME TAXES (5,243) (0.2)% (78,194) (3.4)% INCOME TAX EXPENSE (BENEFIT) 2,833 0.1% (2,274) (0.1)% NET LOSS $ (8,076) (0.3)% $ (75,920) (3.3)% OTHER COMPREHENSIVE LOSS, NET OF TAX: Change in unrealized losses on cash flow hedges, net of income taxes of $0 and $259, respectively (3,977) (0.1)% (8,039) (0.3)% OTHER COMPREHENSIVE LOSS (3,977) (0.1)% (8,039) (0.3)% NET COMPREHENSIVE LOSS $ (12,053) (0.4)% $ (83,959) (3.6)%
(1) 2020 includes the results of operations from BioScrip for the full year. 2019 includes the results of operations of BioScrip from the August 6, 2019 Merger Date onward and are, therefore, not comparable. Table of Contents
Gross Profit Year Ended December 31, 2020 2019 Variance (in thousands, except for percentages) Net revenue $ 3,032,610 $ 2,310,417 $ 722,193 31.3 % Cost of revenue 2,350,346 1,797,418 552,928 30.8 % Gross profit $ 682,264 $ 512,999 $ 169,265 33.0 % Gross profit margin 22.5 % 22.2 %
The 31.3% increase in net revenue was primarily driven by additional revenue following the Merger, as the prior year included the results of BioScrip from the August 6, 2019 Merger Date, along with organic growth in the Company's portfolio of therapies. For the year ended December 31, 2020, the revenue results reflect flat revenues for acute therapies relative to the prior year due to the impact of the COVID-19 pandemic, while revenue for chronic therapies grew in the mid-teens. The increase in cost of revenue was driven by the impact of the Merger and revenue growth. The increase in gross profit was primarily related to contribution margin from additional revenue from the Merger. The slight increase in gross profit margin was primarily driven by the positive impact from the merger integration net cost synergies, partially offset by the incremental wage costs and personal protective equipment costs related to the COVID-19 pandemic and mix shift toward lower profit chronic therapies.
Operating Expenses Year Ended December 31, 2020 2019 Variance (in thousands, except for percentages) Selling, general and administrative expenses $ 500,199 $ 459,628 $ 40,571 8.8 % Depreciation and amortization expense 71,310 53,690 17,620 32.8 % Total operating expenses $ 571,509 $ 513,318 $ 58,191 11.3 %
Selling, general and administrative expenses increased for the year ended December 31, 2020 primarily due to the impact of the Merger, but has decreased as a percentage of revenue to 16.5% for the year ended December 31, 2020 as compared to 19.9% for the year ended December 31, 2019 primarily due to synergy realization from Merger integration activities as well as spending reductions to offset the negative impacts of the COVID-19 pandemic.
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Other Income (Expense) Year Ended December 31, 2020 2019 Variance (in thousands, except for percentages) Interest expense, net $ (107,770) $ (73,724) $ (34,046) 46.2 % Equity in earnings of joint ventures 3,313 2,840 473 16.7 % Other, net (11,541) (6,991) (4,550) 65.1 % Total other expense $ (115,998) $ (77,875) $ (38,123) 49.0 %
The increase in interest expense was primarily attributable to the additional expense related to the new debt issued at the close of the Merger, partially offset by the savings from the combined $174.0 million prepayment of principal on the Second Lien Notes in the third and fourth quarters of 2020. The prior year included interest expense on the new debt from the Merger Date. See Note 11, Indebtedness, of the consolidated financial statements.
Income Tax Expense (Benefit) Year Ended December 31, 2020 2019 Variance (in thousands, except for percentages) Income tax expense (benefit) $ 2,833 $ (2,274) $ 5,107 (224.6) %
The Company's tax expense for the year ended December 31, 2020 is comprised of a change in deferred tax assets and liabilities, partially offset by a change in valuation allowance, and state tax liabilities, resulting in a negative effective tax rate of 54.0%. The Company's tax benefit for the year ended December 31, 2019 is comprised of a deferred tax benefit partially offset by a change in valuation allowance and state tax liabilities. This results in an effective tax rate of 2.9% for the year ended December 31, 2019. These effective tax rates differ from the Company's 21% federal statutory rate primarily due to a change in valuation allowance, certain state and local taxes and non-deductible costs.
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Net Loss and Other Comprehensive Loss Year Ended December 31, 2020 2019 Variance (in thousands, except for percentages) Net loss $ (8,076) $ (75,920) $ 67,844 (89.4) % Other comprehensive loss, net of tax: Changes in unrealized losses on cash flow hedges, net of income taxes (3,977) (8,039) 4,062 (50.5) % Other comprehensive loss (3,977) (8,039) 4,062 (50.5) % Net comprehensive loss $ (12,053) $ (83,959) $ 71,906 (85.6) %
Net loss decreased primarily driven by the growth in gross profit, which more than offset the incremental operating expenses and interest expense incurred in conjunction with the Merger. The decrease in net loss is also impacted by the full realization of $60 million of Merger synergies in 2020 following the Merger, which more than offset the negative impacts of the COVID-19 pandemic during 2020.
Mar 11, 2021
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