Option Care Health, Inc. (OPCH)

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” and in Item 1A. “Risk Factors” 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 provide infusion therapy and other ancillary healthcare services through a national network of 185 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 non-hospital 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, therapies for neurological disorders and chronic inflammatory disorders, immunoglobulin therapy, and other therapies for chronic and acute conditions. The Company operates in one segment, infusion services.

Update on the Impact of the Change Healthcare Cybersecurity Incident

As previously disclosed, on February 21, 2024, Change Healthcare, a subsidiary of UnitedHealth Group, experienced an incident in which a cybersecurity threat actor gained access to some of its information technology systems (“Change Healthcare Cybersecurity Incident”). Since the time of the system disruption, Option Care Health has worked continuously to find alternative processes to help maintain patient care and overall operations.

As of December 31, 2024, the Company has not identified any compromise or unauthorized access of its systems or networks due to this third party incident. As of the end of the second quarter of 2024, the Company reconnected to key applications maintained by Change Healthcare and as of the end of the fourth quarter of 2024, the Company has fully recovered.

During the fourth quarter of 2024, the Company did not experience a material financial impact from the Change Healthcare Cybersecurity Incident on the financial results as reported. The Company continues to maintain strong liquidity and, having resumed submission of all claims to payers, has determined that the Change Healthcare Cybersecurity Incident did not materially impact the Company, including its business operations, financial condition or results of operations.

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Composition of Results of Operations

The following results of operations include the accounts of Option Care Health and our subsidiaries for the years ended December 31, 2024 and 2023.

Gross Profit

Gross profit represents our net revenue less cost of revenue.

Net Revenue. Infusion and related healthcare 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 healthcare 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 relates to property and equipment and amortization relates to intangibles. Depreciation of revenue-generating assets, such as infusion pumps, is included in cost of revenue.

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Other Income (Expense)

Interest Expense, Net. Interest expense consists principally of interest and fee payments on the Company’s outstanding borrowings under the ABL Facility, First Lien Term Loan, Revolver Facility, 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. During the year ended December 31, 2024, other income (expense) primarily includes activity related to non-operating income and expenses. During the year ended December 31, 2023, other income (expense) primarily includes the termination fee, net of merger-related expenses, received on behalf of Amedisys, Inc. (“Amedisys”). On May 3, 2023, the Company entered into a definitive merger agreement (the “Amedisys Merger Agreement”) with Amedisys, a leading provider of healthcare in home health and hospice settings. On June 26, 2023, the Company entered into an agreement to terminate the Amedisys Merger Agreement (the “Mutual Termination Agreement”). Under the terms of the Mutual Termination Agreement, the Company received a payment of $106.0 million in cash on behalf of Amedisys (the “Termination Fee”).

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 (Loss) Gain on Cash Flow Hedge, Net of Income Tax Benefit (Expense). Change in unrealized (loss) gain on cash flow hedge, net of income tax benefit (expense), consists of the (loss) gain associated with the changes in the fair value of hedging instruments related to the interest rate cap, net of income taxes.

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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, 2024 and 2023 (in thousands, except for percentages). For a discussion of Option Care Health’s consolidated results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022, refer to Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2023 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 22, 2024.

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Year Ended December 31, 2024 Compared to Year Ended December 31, 2023

The following table presents selected consolidated comparative results of operations for the years ended December 31, 2024 and 2023:

Gross Profit

The increase in net revenue during the year ended December 31, 2024 was primarily driven by organic growth in the Company’s portfolio of therapies, consisting of acute revenue that had high single digits growth relative to the prior year while chronic revenue grew in the high teens. The increase in cost of revenue was primarily driven by the growth in revenue, therapy mix, and acute drug supply chain disruption, as well as the comparable impact of certain temporary favorable therapy procurement dynamics in the prior year. The decrease in gross profit margin was primarily due to the launch of certain new higher cost therapies included within chronic growth (including rare and orphan therapies) and to the same comparable impact of certain temporary favorable procurement dynamics in the prior year that did not continue into 2024. Additionally, the Company received notice of a manufacturer’s intention to significantly reduce the spread at which the Company procures a certain therapy relative to drug reference prices beginning in early 2025, which is expected to negatively impact gross profit by approximately $60 million to $70 million in 2025.

Operating Expenses

The increase in selling, general and administrative expenses during the year ended December 31, 2024 was primarily due to an increase in salaries, benefits, and general costs to support the business; however, these expenses have declined as a percentage of revenue to 12.6% for the year ended December 31, 2024 compared to 14.1% for the year ended December 31, 2023, due to the Company’s focus on leveraging existing infrastructure to control spending.

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Other Income (Expense)

The decrease in interest expense, net during the year ended December 31, 2024 was primarily attributable to additional interest income generated from our cash and cash equivalents, partially offset by an increase in the Company’s First Lien Term Loan principal balance, compared to the year ended December 31, 2023. See Note 11, Indebtedness, of the consolidated financial statements for further information.

The decrease in other, net during the year ended December 31, 2024 was due to the $106.0 million payment received on behalf of Amedisys, under the terms of the Mutual Termination Agreement, net of merger-related expenses during the year ended December 31, 2023. There was no comparable activity during the year ended December 31, 2024.

Income Tax Expense

The Company recorded income tax expense of $71.8 million and $91.7 million, which represents an effective tax rate of 25.3% and 25.5% for the years ended December 31, 2024 and 2023, respectively. The variance in the Company’s effective tax rate of 25.3% and 25.5% for the years ended December 31, 2024 and 2023, respectively, was primarily attributable to the difference in state taxes, various non-deductible expenses, and a change in state valuation allowance. The variance in the Company’s effective tax rate of 25.3% for the year ended December 31, 2024, compared to the federal statutory rate of 21%, was also primarily attributable to state taxes, various non-deductible expenses, and a change in state valuation allowance. The income tax expense for the year ended December 31, 2023 includes $21.8 million of tax expense related to the Termination Fee received, under the terms of the Mutual Termination Agreement, net of merger-related expenses, and the release of $5.8 million of state valuation allowance in September 2023.

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Net Income and Other Comprehensive (Loss) Income

The change in net income for the year ended December 31, 2024 was attributable to the $106.0 million payment received on behalf of Amedisys, under the terms of the Mutual Termination Agreement, net of merger-related expenses during the year ended December 31, 2023. There was no comparable activity during the year ended December 31, 2024.

For the years ended December 31, 2024 and 2023, the change in unrealized (loss) gain on cash flow hedge, net of income tax benefit (expense) 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 $207.9 million for the year ended December 31, 2024, compared to net comprehensive income of $260.9 million for the year ended December 31, 2023, primarily as a result of the changes in net income discussed above.

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Liquidity and Capital Resources

For the years ended December 31, 2024 and 2023, the Company’s primary sources of liquidity were cash and cash equivalents of $412.6 million and $343.8 million, respectively. As of December 31, 2024, the Company had $395.9 million of borrowings available under its credit facilities (net of $4.1 million undrawn letters of credit issued and outstanding), described further below. During the year ended December 31, 2023, the Company’s positive cash flows from operations have enabled investments in pharmacy, infusion suites, 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, and 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 and cash taxes. Ongoing investing cash flows are primarily associated with capital projects and 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 its 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.

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 for at least 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.

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Credit Facilities

On May 8, 2024, the Company entered into the third amendment to the amended and restated First Lien Credit Agreement dated as of October 27, 2021 (the “Third Amendment”). The Third Amendment, among other things, (i) provides for an additional $50.0 million of incremental First Lien Term Loan indebtedness and (ii) reduces the interest rate on the First Lien Term Loan from Term Secured Overnight Financing Rate (“SOFR”) (including a credit spread adjustment) plus 2.75% to Term SOFR plus 2.25% and removes the credit spread adjustment with respect to such First Lien Term Loan.

The principal balance of the First Lien Term Loan is repayable in quarterly installments of $1.6 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. Under the Third Amendment, interest on the First Lien Term Loan is payable monthly on either (i) SOFR (with a floor of 0.50% per annum) plus an applicable margin of 2.25% for Term SOFR Loans (as such term is defined in the Third Amendment); or (ii) a base rate determined in accordance with the Third Amendment, plus 1.25% for Base Rate Loans (as such term is defined in the Third Amendment).

On December 7, 2023, the Company entered into the second amendment to the amended and restated First Lien Credit Agreement dated as of October 27, 2021 (the “Second Amendment”). The Second Amendment, among other things, provides for revolving credit commitments by the applicable Revolving Credit Lenders in an aggregate amount of $400.0 million (the “Revolver Facility”) pursuant to which such lenders have agreed to make Revolving Credit Loans to the Company. The Revolver Facility matures on the date that is the earlier of (i) December 7, 2028 and (ii) the date that is 91 days prior to the stated maturity date applicable to any Term B Loans. Borrowings under the Revolver Facility will bear interest at a rate equal to, at the option of the Company, either (i) the Term SOFR applicable thereto plus the Applicable Rate or (ii) the then-applicable Base Rate plus the Applicable Rate, which Applicable Rate shall be, subject to certain caveats thereto, as follows (i) until delivery of financial statements and related Compliance Certificate for the first full fiscal quarter ending after the effective date of the Second Amendment, (A) for Term SOFR Loans, 1.75%, or (B) for Base Rate Loans, 0.75% and (ii) thereafter, the Applicable Rate for Term SOFR Loans and Base Rate Loans, based upon the Total Net Leverage Ratio as set forth in the most recent Compliance Certificate received by the Administrative Agent pursuant to the terms of the Credit Agreement. As of December 31, 2024, the Company had $4.1 million of undrawn letters of credit issued and outstanding, resulting in net borrowing availability under the Revolver Facility of $395.9 million.

The Senior Notes bear interest at a rate of 4.375% per annum, which are payable semi-annually in arrears on October 31 and April 30 of each year, and 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 $271.1 million based on final maturity dates of the Company’s credit facilities. Interest payments are calculated based on current rates as of December 31, 2024. Actual payments are based on changes in SOFR and exclude the interest rate cap derivative instrument.

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Cash Flows

Year Ended December 31, 2024 Compared to Year Ended December 31, 2023

The following table presents selected data from Option Care Health’s consolidated statements of cash flows for the years ended December 31, 2024 and 2023:

Cash Flows from Operating Activities

The decrease in cash provided by operating activities during the year ended December 31, 2024 was primarily due to the $106.0 million payment received on behalf of Amedisys, under the terms of the Mutual Termination Agreement, net of merger-related expenses during the year ended December 31, 2023, changes in accounts receivable and accrued compensation and employee benefits. Additionally, changes in accounts payable and inventory were driven by organic growth in the Company as well as strategic supply chain purchases.

Cash Flows from Investing Activities

The decrease in cash used in investing activities during the year ended December 31, 2024 was primarily due to prior year acquisition activity with no comparable activity during the year ended December 31, 2024. See Note 3, Business Acquisitions and Divestitures, of the consolidated financial statements for more information.

Cash Flows from Financing Activities

The decrease in cash used in financing activities was primarily related to the Company’s debt refinancing in May 2024, in which $50.0 million in proceeds from issuance of debt was received, which partially offset $250.0 million in repurchase of common stock during the year ended December 31, 2024, whereas the cash used in financing activities during the year ended December 31, 2023 was primarily related to the Company’s $250.0 million repurchase of common stock.

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Critical Accounting Estimates

The Company prepares its consolidated financial statements in accordance with United States generally accepted accounting principles (“GAAP”), which require the Company to make estimates and assumptions. The Company evaluates its estimates and judgments on an ongoing basis. Estimates and judgments 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 judgments 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.

The following discussion is not intended to be a comprehensive list of all the accounting policies, estimates or judgments made in the preparation of our financial statements. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 2, Summary of Significant Accounting Policies, within the notes to the consolidated financial statements included in Item 8 of this Annual Report.

Revenue Recognition and Accounts Receivable

Net revenue is reported at the net realizable value amount that reflects the consideration the Company expects to receive in exchange for providing services. Revenues are from commercial payers, government payers, and patients for goods and services provided and are based on a gross price based on payer contracts, fee schedules, or other arrangements less any implicit price concessions.

Due to the nature of the healthcare 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.

The Company assesses the expected consideration to be received at the time of patient acceptance based on the verification of the patient’s insurance coverage, historical information with the patient, similar patients, or the payer. Performance obligations are determined based on the nature of the services provided by the Company. The majority of the Company’s performance obligations are to provide infusion services to deliver medicine, nutrients, or fluids directly into the body.

The Company provides a variety of infusion-related therapies to patients, which frequently include multiple deliverables of pharmaceutical drugs and related nursing services. After applying the criteria from Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), the Company concluded that multiple performance obligations exist in its contracts with its customers. Revenue is allocated to each performance obligation based on relative standalone price, determined based on reimbursement rates established in the third-party payer contracts. Pharmaceutical drug revenue is recognized at the time the pharmaceutical drug is delivered to the patient, and nursing revenue is recognized on the date of service.

The Company’s accounts receivable are reported at the net realizable value amount that reflects the consideration the Company expects to receive in exchange for providing services, which is inclusive of adjustments for price concessions. The majority of accounts receivable are due from private insurance carriers and governmental healthcare programs, such as Medicare and Medicaid.

Price concessions may result from patient hardships, patient uncollectible accounts sent to collection agencies, lack of recovery due to not receiving prior authorization, differing interpretations of covered therapies in payer contracts, different pricing methodologies, or various other reasons.

Included in accounts receivable are earned but unbilled gross receivables. Delays ranging from one day up to several weeks between the date of service and billing can occur due to delays in obtaining certain required payer-specific documentation from internal and external sources.

After applying the criteria from ASC 606, an allowance for doubtful accounts is established only as a result of an adverse change in the payers’ ability to pay outstanding billings. As of December 31, 2024 and 2023, the Company had no allowance for doubtful accounts. The Company recorded an allowance for implicit price concessions based on its historical experience of additional revenue being recorded or revenue being written off when amounts received are greater than or less than the originally estimated net realizable value. The detailed assessments included, among other factors, current over/under payments which had not yet been applied to an account, historical contractual adjustments, and historical payments. Contractual allowance estimates are adjusted to actual amounts as cash is received and claims are settled.

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Business Acquisitions

The Company accounts for business acquisitions in accordance with ASC Topic 805, Business Combinations (“ASC 805”), with assets and liabilities being recorded at their acquisition date fair values and goodwill being calculated as the purchase price in excess of the net identifiable assets. The application of ASC 805 requires management to make estimates and assumptions when determining the acquisition date fair values of acquired assets and assumed liabilities. Management’s estimates and assumptions include, but are not limited to, the future cash flows an asset is expected to generate and the weighted-average cost of capital. See Note 3, Business Acquisitions and Divestitures, for further discussion of business acquisitions.

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” and in Item 1A. “Risk Factors” 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 provide infusion therapy and other ancillary healthcare services through a national network of 177 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 non-hospital 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, therapies for chronic inflammatory disorders and neurological disorders, immunoglobulin therapy, and other therapies for chronic and acute conditions.

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Composition of Results of Operations

The following results of operations include the accounts of Option Care Health and our subsidiaries for the years ended December 31, 2023 and 2022.

Gross Profit

Gross profit represents our net revenue less cost of revenue.

Net Revenue. Infusion and related healthcare 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 healthcare 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.

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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, Revolver Facility, Senior Notes, amortization of discount and deferred financing fees, and 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. On May 3, 2023, the Company entered into a definitive merger agreement (the “Amedisys Merger Agreement”) with Amedisys, Inc. (“Amedisys”), a leading provider of healthcare in home health and hospice settings. On June 26, 2023, the Company entered into an agreement to terminate the Amedisys Merger Agreement (the “Mutual Termination Agreement”). Under the terms of the Mutual Termination Agreement, the Company received a payment of $106.0 million in cash on behalf of Amedisys (the “Termination Fee”). Other income (expense) primarily includes the termination fee, net of merger-related expenses, received on behalf of Amedisys during the year ended December 31, 2023. During the year ended December 31, 2022, other income (expense) primarily includes the gain on the sale of respiratory therapy assets, which closed in December 2022.

Income Tax Benefit 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 Gain (Loss) on Cash Flow Hedge, Net of Income Tax Benefit (Expense). Change in unrealized gain (loss) on cash flow hedge, net of income tax benefit (expense), consists of the gain (loss) associated with the changes in the fair value of hedging instruments related to the interest rate cap, net of income taxes.

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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, 2023 and 2022 (in thousands, except for percentages). For a discussion of Option Care Health’s consolidated results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021, refer to Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 23, 2023.

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Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

The following table presents selected consolidated comparative results of operations for the years ended December 31, 2023 and 2022:

Gross Profit

The increase in net revenue during the year ended December 31, 2023 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. The increase in net revenue was partially offset by the divestiture of respiratory therapy assets in December 2022 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, which outpaced the increase in cost of revenue primarily due to our disciplined procurement strategies, certain temporary favorable therapy pricing dynamics that emerged due to the timing in variances in reference prices that affects our costs relative to reimbursement, and efficient utilization of our clinical workforce and infusion suite network.

Operating Expenses

The increase in selling, general and administrative expenses during the year ended December 31, 2023 is primarily due to an increase in salaries, benefits, and equity compensation as a result of expansion of team members to adjust to current volumes, however, these expenses have remained relatively consistent as a percentage of revenue at 14.1% and 14.4% for the years ended December 31, 2023 and 2022, respectively, due to the Company’s focus on controlling spending leverage.

Other Income (Expense)

The decrease in interest expense, net during the year ended December 31, 2023 was primarily attributable to an increase in interest income generated from our cash and cash equivalents, partially offset by increases in the First Lien Term Loan’s variable interest rate compared to the year ended December 31, 2022.

The increase in other, net during the year ended December 31, 2023 is primarily attributable to the receipt of the Termination Fee, net of merger-related expenses. During the year ended December 31, 2022, the change in other, net is primarily due to a $10.3 million pre-tax gain from the sale of respiratory therapy assets (“Respiratory Therapy Asset Sale”), which closed in December 2022.

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Income Tax Expense

The Company recorded income tax expense of $91.7 million and $55.2 million, which represents an effective tax rate of 25.5% and 26.8% for the years ended December 31, 2023 and 2022, respectively. The income tax expense for the year ended December 31, 2023 includes $21.8 million of tax expense related to the Termination Fee received, under the terms of the Mutual Termination Agreement, net of merger-related expenses, and the release of $5.8 million of state valuation allowance in September 2023. The variance in the Company’s effective tax rate of 25.5% and 26.8% for the years ended December 31, 2023 and 2022, respectively, is primarily attributable to the difference in state taxes, various non-deductible expenses, and a change in state valuation allowance. The variance in the Company’s effective tax rate of 25.5% for the year ended December 31, 2023, compared to the federal statutory rate of 21%, is also primarily attributable to state taxes, various non-deductible expenses, and a change in state valuation allowance.

Net Income and Other Comprehensive (Loss) Income

The change in net income for the year ended December 31, 2023 was attributable to organic growth from additional revenue related to the factors described in the above sections and the Termination Fee received under the terms of the Mutual Termination Agreement, net of merger-related expenses. There was no comparable activity during the year ended December 31, 2022.

For the year ended December 31, 2023, the change in unrealized (loss) gain on cash flow hedge, net of income tax benefit (expense) 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 increased to $260.9 million for the year ended December 31, 2023, compared to net comprehensive income of $172.2 million for the year ended December 31, 2022, primarily as a result of the changes in net income discussed above, partially offset by the impact of the change in fair market value of the interest rate cap hedge discussed above.

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Liquidity and Capital Resources

For the years ended December 31, 2023 and 2022, the Company’s primary sources of liquidity were cash on hand of $343.8 million and $294.2 million, respectively. As of December 31, 2023, the Company had $394.7 million of borrowings available under its credit facilities (net of $5.3 million undrawn letters of credit issued and outstanding), described further below. During the years ended December 31, 2023 and 2022, the Company’s positive cash flows from operations have enabled investments in pharmacy, infusion suites, 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 include supporting our ongoing business activities, investment in capital expenditures in both facilities and technology, and 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 and cash taxes. Ongoing investing cash flows are primarily associated with capital projects and 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.

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 for at least 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.

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Credit Facilities

On December 7, 2023, the Company amended its First Lien Credit Agreement to, among other things, create a Revolver Facility which provides for borrowings up to $400.0 million. The Revolver Facility matures on the date that is the earlier of (i) December 7, 2028 and (ii) the date that is 91 days prior to the stated maturity date applicable to any Term B Loans. Borrowings under the Revolver Facility will bear interest at a rate equal to, at the option of the Company, either (i) the Term Secured Overnight Financing Rate (“SOFR”) applicable thereto plus the Applicable Rate or (ii) the then-applicable Base Rate plus the Applicable Rate, which Applicable Rate shall be, subject to certain caveats thereto, as follows (i) until delivery of financial statements and related Compliance Certificate for the first full fiscal quarter ending after the effective date of the Amendment, (A) for Term SOFR Loans, 1.75%, (B) for Base Rate Loans, 0.75% and (ii) thereafter, the following percentages per annum, based upon the Total Net Leverage Ratio as set forth in the most recent compliance certificate received by the Administrative Agent pursuant to the terms of the Credit Agreement. As of December 31, 2023, the Company had $5.3 million of undrawn letters of credit issued and outstanding, resulting in net borrowing availability under the Revolver Facility of $394.7 million. The table below illustrates the aforementioned interest rate terms:

Concurrently with the creation of the Revolver Facility, the Company terminated the asset-based-lending revolving credit facility, which provided for borrowings up to $225.0 million with a maturity date of October 27, 2026 (the “ABL Facility”). The ABL Facility bore 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 (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. As of December 31, 2023, the Company’s ABL Facility was terminated. Effective January 13, 2023, the Company entered into an agreement to amend the ABL Facility and increase the amount of borrowing availability by $50.0 million to $225.0 million total borrowing availability. As a result of the amended agreement, SOFR was established as the new reference rate, replacing LIBOR.

Effective June 30, 2023, the Company entered into an agreement, dated as of June 8, 2023, to amend the First Lien Term Loan to replace LIBOR and related definitions and provisions with SOFR as the new reference rate. 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) SOFR (with a floor of 0.50% per annum) plus an applicable margin of 2.75% for Term SOFR Loans (as such term is defined in the First Lien Credit Agreement Amendment); or (ii) a base rate determined in accordance with the new First Lien Credit Agreement Amendment, plus 1.75% for Base Rate Loans (as such term is defined in the First Lien Credit Agreement Amendment).

The Senior Notes bear interest at a rate of 4.375% per annum, which are payable semi-annually in arrears on October 31 and April 30 of each year, and 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 $359.8 million based on final maturity dates of the Company’s credit facilities. Interest payments are calculated based on current rates as of December 31, 2023. Actual payments are based on changes in SOFR and exclude the interest rate cap derivative instrument.

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Cash Flows

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

The following table presents selected data from Option Care Health’s consolidated statements of cash flows for the years ended December 31, 2023 and 2022:

Cash Flows from Operating Activities

The increase in cash provided by operating activities is primarily due to higher net income, the Termination Fee received under the terms of the Mutual Termination Agreement, net of merger-related expenses and taxes, stock-based incentive compensation expense, changes in accrued compensation and employee benefits, timing of collections on accounts receivable, partially offset by cash paid for taxes, changes in inventory, and certain accruals and timing of vendor payments during the year ended December 31, 2023 as compared to the year ended December 31, 2022.

Cash Flows from Investing Activities

The decrease in cash used in investing activities during the year ended December 31, 2023 is primarily due to a decrease in acquisition activity as compared to the year ended December 31, 2022. See Note 3, Business Acquisitions and Divestitures, of the consolidated financial statements for more information.

Cash Flows from Financing Activities

The cash used in financing activities is primarily related to the Company’s repurchase of common stock during the year ended December 31, 2023, whereas the cash provided by financing activities in the year ended December 31, 2022 was primarily related to the proceeds of warrant exercises.

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Critical Accounting Estimates

The Company prepares its consolidated financial statements in accordance with United States generally accepted accounting principles (“GAAP”), which requires the Company to make estimates and assumptions. The Company evaluates its estimates and judgments on an ongoing basis. Estimates and judgments 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 judgments 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.

The following discussion is not intended to be a comprehensive list of all the accounting policies, estimates or judgments made in the preparation of our financial statements. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 2, Summary of Significant Accounting Policies, within the notes to the consolidated financial statements included in Item 8 of this Annual Report.

Revenue Recognition and Accounts Receivable

Net revenue is reported at the net realizable value amount that reflects the consideration the Company expects to receive in exchange for providing services. Revenues are from commercial payers, government payers, and patients for goods and services provided and are based on a gross price based on payer contracts, fee schedules, or other arrangements less any implicit price concessions.

Due to the nature of the healthcare 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.

The Company assesses the expected consideration to be received at the time of patient acceptance based on the verification of the patient’s insurance coverage, historical information with the patient, similar patients, or the payer. Performance obligations are determined based on the nature of the services provided by the Company. The majority of the Company’s performance obligations are to provide infusion services to deliver medicine, nutrients, or fluids directly into the body.

The Company provides a variety of infusion-related therapies to patients, which frequently include multiple deliverables of pharmaceutical drugs and related nursing services. After applying the criteria from Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), the Company concluded that multiple performance obligations exist in its contracts with its customers. Revenue is allocated to each performance obligation based on relative standalone price, determined based on reimbursement rates established in the third-party payer contracts. Pharmaceutical drug revenue is recognized at the time the pharmaceutical drug is delivered to the patient, and nursing revenue is recognized on the date of service.

The Company’s accounts receivable are reported at the net realizable value amount that reflects the consideration the Company expects to receive in exchange for providing services, which is inclusive of adjustments for price concessions. The majority of accounts receivable are due from private insurance carriers and governmental healthcare programs, such as Medicare and Medicaid.

Price concessions may result from patient hardships, patient uncollectible accounts sent to collection agencies, lack of recovery due to not receiving prior authorization, differing interpretations of covered therapies in payer contracts, different pricing methodologies, or various other reasons.

Included in accounts receivable are earned but unbilled gross receivables. Delays ranging from one day up to several weeks between the date of service and billing can occur due to delays in obtaining certain required payer-specific documentation from internal and external sources.

After applying the criteria from ASC 606, an allowance for doubtful accounts is established only as a result of an adverse change in the payers’ ability to pay outstanding billings. As of December 31, 2023 and 2022, the Company had no allowance for doubtful accounts. The Company recorded an allowance for implicit price concessions based on its historical experience of additional revenue being recorded or revenue being written off when amounts received are greater than or less than the originally estimated net realizable value. The detailed assessments included, among other factors, current over/under payments which had not yet been applied to an account, historical contractual adjustments, and historical payments. Contractual allowance estimates are adjusted to actual amounts as cash is received and claims are settled.

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Business Acquisitions

The Company accounts for business acquisitions in accordance with ASC Topic 805, Business Combinations (“ASC 805”), with assets and liabilities being recorded at their acquisition date fair values and goodwill being calculated as the purchase price in excess of the net identifiable assets. The application of ASC 805 requires management to make estimates and assumptions when determining the acquisition date fair values of acquired assets and assumed liabilities. Management’s estimates and assumptions include, but are not limited to, the future cash flows an asset is expected to generate and the weighted-average cost of capital. See Note 3, Business Acquisitions and Divestitures, for further discussion of business acquisitions.

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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” and in Item 1A. “Risk Factors” 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 provide infusion therapy and other ancillary health care services through a national network of 163 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, therapies for chronic inflammatory disorders and neurological disorders, 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 BioScrip, a national provider of infusion and home care management solutions, which was completed on August 6, 2019. Following the close of the Merger, BioScrip was rebranded as Option Care Health.

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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 in March 2020. The Company has been disrupted by both positive and negative referral patterns and experienced challenges in our staffing and our ability to procure personal protection equipment and key drugs. The Company anticipates that the pandemic could affect its operations for an extended period; however, at this time it 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 and other potential pandemic events could adversely impact our business, results of operations, cash flows and financial position” for further discussion of risks.

Composition of Results of Operations

The following results of operations include the accounts of Option Care Health and our subsidiaries for the years ended December 31, 2022 and 2021.

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, and payments associated with the interest rate cap. 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.

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Other, Net. Other income (expense) primarily includes prior year loss on extinguishment of debt incurred in connection with 2021 debt refinancings and miscellaneous non-operating expenses. Current year other income (expense) primarily includes the gain on sale of respiratory therapy assets, which closed in December 2022.

Income Tax Expense (Benefit). 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 Gains (Losses) on Cash Flow Hedges, Net of Income Tax Expense. Change in unrealized gains (losses) on cash flow hedges, net of income taxes, consists of the gains (losses) associated with the changes in the fair value of hedging instruments related to the interest rate caps and interest rate swaps, net of income taxes.

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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, 2022 and 2021 (in thousands, except for percentages). For discussion of Option Care Health’s consolidated results of operations for the year ended December 31, 2021 compared to 2020, refer to Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 23, 2022.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

The following tables present selected consolidated comparative results of operations for the years ended December 31, 2022 and 2021:

Gross Profit

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The 14.7% increase in net revenue was primarily driven by organic growth in the Company’s portfolio of therapies, consisting of mid-single-digit acute revenue growth relative to the prior year while chronic revenue grew in the mid-teens. Acute growth was driven primarily due to collaborating with referral sources, which increased the volume of patient service. Acquisition related growth accounted for approximately 2% and 3% of the increase in net revenue and gross profit, respectively. The increase in cost of revenue and gross profit was primarily driven by the growth in revenue. The decrease in gross margin percent was primarily driven by therapy mix and also impacted by inflationary pressures including labor, transportation, and medical supplies costs.

Selling, general and administrative expenses increased for the year ended December 31, 2022 primarily due to salaries, benefits and inflationary pressures, but has decreased as a percentage of revenue to 14.4% for the year ended December 31, 2022 as compared to 15.3% for the year ended December 31, 2021, as our revenue has grown at a faster pace than our selling, general and administrative expenses as the Company’s scaled enterprise partially mitigated the inflationary impacts.

The decrease in depreciation and amortization expense is primarily attributed to certain intangible assets whose useful life expired partially offset by additional intangible assets due to acquisitions.

Other Income (Expense)

The decrease in interest expense for the year ended December 31, 2022 was primarily attributable to the debt refinancing of the First Lien Term Loan and issuance of the Senior Notes in October 2021. See Note 11, Indebtedness, of the consolidated financial statements for more information.

During the year ended December 31, 2022, the change in other, net is primarily due to a $10.3 million pre-tax gain from the sale of respiratory therapy assets that were previously held for sale (“Respiratory Therapy Asset Sale”), which closed in December 2022. In addition, a loss on extinguishment of debt incurred in conjunction with the January and October 2021 debt refinancing was included in the results for the year ended December 31, 2021. There was no comparable activity during the year ended December 31, 2022.

Income Tax Expense (Benefit)

The Company recorded income tax expense of $55.2 million and an income tax benefit of $23.4 million, which represents an effective tax rate of 26.8% and negative 20.1% for the years ended December 31, 2022 and 2021, respectively. The variance in the Company’s effective tax rate of 26.8% and negative 20.1% is primarily attributable to the release of the Company’s federal valuation allowance for the year ended December 31, 2021. The variance in the Company’s effective tax rate of 26.8% for the year ended December 31, 2022 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.

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Net Income and Other Comprehensive Income

The change in net income was primarily attributable to organic growth from additional revenue related to the factors described in the above sections, in addition to the $10.3 million pre-tax gain from the Respiratory Therapy Asset Sale for the year ended December 31, 2022. In addition, the 2021 release of the Company’s valuation allowance as referenced in the Income Tax (Benefit) Expense section above was included in the results for the year ended December 31, 2021. There was no comparable activity during the year ended December 31, 2022.

For the year ended December 31, 2022, the change in unrealized gains on cash flow hedges, net of income taxes, was related to the increase in fair market value of the $300.0 million interest rate cap hedge. For the year ended December 31, 2021, the change in unrealized gains on cash flow hedges, net of income taxes, primarily related to the increase in fair value on the $925.0 million notional swap; the swap expired in August 2021.

The change in net comprehensive income was the result of the changes in net income, described above, further increased by the impact of the fair value of the interest rate cap hedge.

Liquidity and Capital Resources

For the years ended December 31, 2022 and 2021, the Company’s primary sources of liquidity were cash on hand of $294.2 million and $119.4 million, respectively. As of December 31, 2022, $168.3 million of borrowings available under its credit facilities (net of $6.7 million undrawn letters of credit issued and outstanding), described further below. During the years ended December 31, 2022 and 2021, the Company’s positive cash flows from operations have enabled investments in pharmacy and information technology infrastructure to support growth and create additional capacity in the future, as well as the pursuit of acquisitions.

The Company’s primary uses of cash include supporting our ongoing business activities, investment in capital expenditures in both facilities and technology, and the pursuit of acquisitions. Ongoing operating cash outflows are associated with procuring and dispensing drugs, personnel and other costs associated with servicing patients, as well as paying cash for interest on the outstanding debt and for income taxes. 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.

Our business strategy includes the deployment of capital to pursue acquisitions that complement our 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 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.

Short-Term and Long-Term Liquidity Requirements

Our 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 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 balances and expected cash flows generated from operations will be sufficient to meet our operating requirements for at least the next 12 months. We may require additional borrowings under our credit facilities and alternative forms of financings or investments to achieve our longer-term strategic plans.

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Credit Facilities

As of December 31, 2022, the Company’s asset-based-lending revolving credit facility provided for borrowings up to $175.0 million, which matures on October 27, 2026 (the “ABL Facility”). 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) London Interbank offered Rate (“LIBOR”) (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 $6.7 million of undrawn letters of credit issued and outstanding, resulting in net borrowing availability under the ABL Facility of $168.3 million as of December 31, 2022. Effective January 13, 2023, the Company entered into an agreement to amend the ABL Facility and increase the amount of borrowing availability by $50.0 million to $225.0 million total borrowing availability. As a result of the amended agreement, Secured Overnight Financing Rate (“SOFR”) was established as the new reference rate, replacing LIBOR.

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 of 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 (as defined in the First Lien Term Loan agreement) and (ii) a base rate determined in accordance with the new First Lien Term Loan agreement, plus 1.75% for Base Rate Loans (as defined in the First Lien Term Loan agreement). The First Lien Term Loan agreement addresses reference rate reform and established SOFR as the benchmark replacement when LIBOR ceases to exist.

The Senior Notes bear interest at a rate of 4.375% per annum, which are payable semi-annually in arrears on October 31 and April 30 of each year, and 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 $383.8 million based on final maturity dates of the Company’s credit facilities. Interest payments are calculated based on the LIBOR rate as of December 31, 2022. Actual payments are based on changes in LIBOR and exclude the interest rate cap derivative instrument.

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Cash Flows

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

The following table presents selected data from Option Care Health’s consolidated statements of cash flows for the years ended December 31, 2022 and 2021:

Cash Flows from Operating Activities

The increase in cash flows provided by operating activities is primarily due to higher net income, decrease in interest expense due to the January and October 2021 debt refinancings, timing of vendor payments and deferred income taxes, which were partially offset by changes in inventory and accounts receivable during the year ended December 31, 2022, as compared to the year ended December 31, 2021.

Cash Flows from Investing Activities

The decrease in cash flows used in investing activities is primarily due to the inflow from the Respiratory Therapy Asset Sale and partially offset by various acquisitions made within the year ended December 31, 2022, which are described in Note 3, Business Acquisitions and Divestitures, of the consolidated financial statements, as compared to various acquisitions during the year ended December 31, 2021.

Cash Flows from Financing Activities

The increase in cash flows provided by financing activities is primarily related to the proceeds from warrant exercises during the year ended December 31, 2022, with no comparable activity during the year ended December 31, 2021. Additionally, the cash used in financing activities for the year ended December 31, 2021, is related to the January and October 2021 debt refinancing activities, with no comparable activity during the year ended December 31, 2022.

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Critical Accounting Estimates

The Company prepares its consolidated financial statements in accordance with United States generally accepted accounting principles (“GAAP”), which requires the Company to make estimates and assumptions. The Company evaluates its estimates and judgments on an ongoing basis. Estimates and judgments 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 judgments 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.

The following discussion is not intended to be a comprehensive list of all the accounting policies, estimates or judgments made in the preparation of our financial statements. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 2, Summary of Significant Accounting Policies, within the notes to the consolidated financial statements included in Item 8 of this Annual Report.

Revenue Recognition and Accounts Receivable

Net revenue is reported at the net realizable value amount that reflects the consideration the Company expects to receive in exchange for providing services. Revenues are from commercial payers, government payers, and patients for goods and services provided and are based on a gross price based on payer contracts, fee schedules, or other arrangements less any implicit price concessions.

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.

The Company assesses the expected consideration to be received at the time of patient acceptance based on the verification of the patient’s insurance coverage, historical information with the patient, similar patients, or the payer. Performance obligations are determined based on the nature of the services provided by the Company. The majority of the Company’s performance obligations are to provide infusion services to deliver medicine, nutrients, or fluids directly into the body.

The Company provides a variety of infusion-related therapies to patients, which frequently include multiple deliverables of pharmaceutical drugs and related nursing services. After applying the criteria from Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), the Company concluded that multiple performance obligations exist in its contracts with its customers. Revenue is allocated to each performance obligation based on relative standalone price, determined based on reimbursement rates established in the third-party payer contracts. Pharmaceutical drug revenue is recognized at the time the pharmaceutical drug is delivered to the patient, and nursing revenue is recognized on the date of service.

The Company’s accounts receivable are reported at the net realizable value amount that reflects the consideration the Company expects to receive in exchange for providing services, which is inclusive of adjustments for price concessions. The majority of accounts receivable are due from private insurance carriers and governmental health care programs, such as Medicare and Medicaid.

Price concessions may result from patient hardships, patient uncollectible accounts sent to collection agencies, lack of recovery due to not receiving prior authorization, differing interpretations of covered therapies in payer contracts, different pricing methodologies, or various other reasons.

Included in accounts receivable are earned but unbilled gross receivables. Delays ranging from one day up to several weeks between the date of service and billing can occur due to delays in obtaining certain required payer-specific documentation from internal and external sources.

After applying the criteria from ASC 606, an allowance for doubtful accounts is established only as a result of an adverse change in the payers’ ability to pay outstanding billings. As of December 31, 2022 and 2021, the Company had no allowance for doubtful accounts. The Company recorded an allowance for implicit price concessions based on its historical experience of additional revenue being recorded or revenue being written off when amounts received are greater than or less than the originally estimated net realizable value. The detailed assessments included, among other factors, current over/under payments which had not yet been applied to an account, historical contractual adjustments, and historical payments. Contractual allowance estimates are adjusted to actual amounts as cash is received and claims are settled.

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Business Acquisitions

The Company accounts for business acquisitions in accordance with ASC Topic 805, Business Combinations (“ASC 805”), with assets and liabilities being recorded at their acquisition date fair values and goodwill being calculated as the purchase price in excess of the net identifiable assets. The application of ASC 805 requires management to make estimates and assumptions when determining the acquisition date fair values of acquired assets and assumed liabilities. Management’s estimates and assumptions include, but are not limited to, the future cash flows an asset is expected to generate and the weighted-average cost of capital. See Note 3, Business Acquisitions and Divestitures, for further discussion of business acquisitions.

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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 154 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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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 in March 2020. The Company has been disrupted by both positive and negative referral patterns, experienced challenges in our staffing, and ability to procure personal protection equipment and key drugs. The Company anticipates that the pandemic could affect its operations for an extended period; however, at this time it 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” for further discussion of risks.

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Composition of Results of Operations

The following results of operations include the accounts of Option Care Health and our subsidiaries for the years ended December 31, 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, First Lien Term Loan, Senior Notes, as well as interest payments on the Company’s previous $400.0 million senior secured lien PIK toggle floating rate notes due 2027 that were fully prepaid in January 2021 (“the Second Lien Notes”) amortization of discount and deferred financing fees and changes in derivatives not designated as hedging instruments related to the interest rate swaps. 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 current year loss on extinguishment of debt incurred in connection with 2021 debt refinancings and miscellaneous non-operating expenses.

Income Tax (Benefit) 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 hedging instruments related to the interest rate caps and interest rate swaps, net of income taxes.

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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, 2021 and 2020 (in thousands). For discussion of Option Care Health’s consolidated results of operations for the year ended December 31, 2020 compared to 2019, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Annual Report on 10-K filed with the Securities and Exchange Commission on March 11, 2021.

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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

The following tables present selected consolidated comparative results of operations for the years ended December 31, 2021 and 2020:

Gross Profit

The 13.4% increase in net revenue was primarily driven by organic growth in the Company’s portfolio of therapies. For the year ended December 31, 2021, the revenue results reflect mid single-digits revenue growth for acute therapies, while revenue for chronic therapies grew in the mid-teens relative to the prior year. The increase in cost of revenue was primarily driven by the revenue growth. 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

Selling, general and administrative expenses increased for the year ended December 31, 2021 primarily due to salaries and benefits, but has decreased as a percentage of revenue to 15.3% for the year ended December 31, 2021 as compared to 16.5% for the year ended December 31, 2020 primarily due to disciplined expense management, the leverage of established infrastructure, and Merger synergy realization.

The decrease in depreciation and amortization was attributable to a reduction in capital expenditures, due to more efficient capital expenditures given investments in prior years and the completion of Merger integration activities during the year ended December 31, 2020. There was also a decrease in amortization expense attributed to certain intangible assets whose useful life expired partway through 2021.

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Other Income (Expense)

The decrease in interest expense was attributable to the debt refinancing of the First Lien Term Loan and prepayment of the Second Lien Notes in January 2021. In addition, the decrease is attributable to the debt refinancing of the First Lien Term Loan and issuance of Senior Notes in October 2021. See Note 11, Indebtedness, of the consolidated financial statements.

The increase in equity of joint ventures was primarily attributable to organic growth and improved profitability in the Company’s two joint ventures.

The increase in other, net relates to the loss on extinguishment of debt of $13.4 million incurred in conjunction with the January 2021 and October 2021 debt refinancings. See Note 11, Indebtedness, of the consolidated financial statements for more information.

Income Tax (Benefit) Expense

The Company’s tax benefit for the year ended December 31, 2021 is comprised of a change in deferred tax assets and liabilities, state tax liabilities, and the release of valuation allowance, resulting in a negative effective tax rate of 20.1%. The Company’s tax expense for year ended December 31, 2020 is comprised of a deferred tax benefit offset by a change in valuation allowance, a change in deferred tax assets and liabilities, and state tax liabilities. This resulted in an effective tax rate of negative 54.0% for the year ended December 31, 2020. These effective tax rates differ from the Company’s 21% federal statutory rate primarily due to changes in the valuation allowance, certain state and local taxes and non-deductible costs.

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Net Income (Loss) and Other Comprehensive Income (Loss)

The change in net income (loss) was primarily attributable to contribution margin from additional revenue related to the factors described in the above sections, and the release of the Company’s valuation allowance as referenced in the Income Tax (Benefit) Expense section above.

The change in unrealized gains (losses) on cash flow hedges, net of income taxes, primarily related to the increase in fair value on the $925.0 million notional swap as the swap expired in August 2021.

The change in net comprehensive income (loss) was the result of the change in net income (loss), described above, further increased by the impact of the fair value of the interest rate swap.

Liquidity and Capital Resources

For the years ended December 31, 2021 and 2020, the Company’s primary sources of liquidity were cash on hand of $119.4 million and $99.3 million, respectively, as well as borrowings under its credit facilities, described further below. During the year ended December 31, 2021 and 2020, the Company’s positive cash flows from operations have enabled investments in pharmacy and information technology infrastructure to support growth and create additional capacity in the future, as well as pursue acquisitions.

The Company’s primary uses of cash include supporting our ongoing business activities, investment in capital expenditures in both facilities and technology, and the pursuit of acquisitions. 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 the 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. In addition to these ongoing investing and financing activities, during the year ended December 31, 2021, the Company entered into debt refinancing transactions further described below under Credit Facilities.

Our business strategy includes the deployment of capital to pursue acquisitions that complement our 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 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.

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 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 balances and expected cash flows generated from operations will be sufficient to meet our operating requirements for at least the next 12 months. We may require additional borrowings under our credit facilities and alternative forms of financings or investments to achieve our longer-term strategic plans.

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Credit Facilities

In January 2021, the Company entered into an amendment on the First Lien Term Loan (the “First Lien Credit Agreement Amendment”). The First Lien Credit Agreement Amendment resulted in an additional $250.0 million of incremental First Lien Term Loan indebtedness being issued and reduced the interest rate on all outstanding First Lien Term Loan indebtedness from LIBOR plus 4.25% to LIBOR plus 3.75%. The proceeds of the $250.0 million incremental First Lien Term Loan indebtedness were used to prepay the remaining $245.8 million outstanding balance of the Second Lien Notes. Following the First Lien Credit Agreement Amendment, the First Lien Term Loan was repayable in quarterly installments, beginning in March 2021, of $2.9 million plus interest, with a final payment of all remaining outstanding principal due on August 6, 2026.

In October 2021, the Company refinanced its $1,157.0 million outstanding existing First Lien Term Loan due 2026. The Company amended the existing First Lien Term Loan, to provide $600 million of refinanced borrowings (the “First Lien Term Loan Facility”). The refinancing changed the interest rate from LIBOR plus 3.75% to, at the Company’s option, 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 (as such term is defined in the First Lien Term Loan Agreement) and (ii) a base rate determined in accordance with the New First Lien Term Loan Agreement, plus 1.75% for Base Rate Loans (as such term is defined in the First Lien Term Loan Agreement). The First Lien Term Loan Facility is repayable in quarterly installments of $1.5 million plus interest and extended its maturity to October 27, 2028. In conjunction with the refinancing, the Company also issued $500.0 million in aggregate principal of unsecured senior notes (“Senior Notes”). The Senior Notes bear interest at a rate of 4.375% per annum payable semi-annually in arrears on October 31 and April 30 of each year, commencing April 30, 2022. The Senior Notes mature on October 31, 2029. In October 2021, the Company also entered into an agreement to amend its existing asset-based lending revolving credit facility (“ABL Facility”). The ABL Facility bears interest at a rate equal to, at the Borrowers’ 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) LIBOR (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 ABL Facility matures on October 27, 2026.

Interest payments over the course of long-term debt obligations total an estimated $300.9 million based on final maturity dates of the Company’s credit facilities. Interest payments are calculated based on the LIBOR rate as of December 31, 2021. Actual payments are based on changes in LIBOR and exclude the interest rate derivative agreement the Company entered into in connection with the debt refinancing in October 2021.

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Cash Flows

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

The following table presents selected data from Option Care Health’s consolidated statements of cash flows for the years ended December 31, 2021 and 2020:

Cash Flows from Operating Activities

The increase in cash provided by operating activities for the year ended December 31, 2021 was primarily due to higher net income, and decrease in interest expense due to the January and October 2021 debt refinancings as compared to the prior year.

Cash Flows from Investing Activities

The increase in cash flows used in investing activities is primarily due to acquisitions made in the year ended December 31, 2021, which are described in Note 3, Business Acquisitions, of the consolidated financial statements.

Cash Flows from Financing Activities

The increase in cash flows used in financing activities is related to the January and October refinancing activities in the current year. The prior year cash used in financing activities consisted of the $174.0 million prepayment of the Second Lien Notes, which was partially offset by $118.9 million of proceeds from the issuance of common stock, as well as principal payments on the First Lien Term Loan.

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Critical Accounting Estimates

The Company prepares its consolidated financial statements in accordance with United States generally accepted accounting principles (“GAAP”), which requires the Company to make estimates and assumptions. The Company evaluates its estimates and judgments on an ongoing basis. Estimates and judgments 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 judgments 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.

The following discussion is not intended to be a comprehensive list of all the accounting policies, estimates or judgments made in the preparation of our financial statements. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 2, Summary of Significant Accounting Policies, within the notes to the consolidated financial statements included in Item 8 of this Annual Report.

Revenue Recognition and Accounts Receivable

Net revenue is reported at the net realizable value amount that reflects the consideration the Company expects to receive in exchange for providing services. Revenues are from commercial payers, government payers, and patients for goods and services provided and are based on a gross price based on payer contracts, fee schedules, or other arrangements less any implicit price concessions.

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.

The Company assesses the expected consideration to be received at the time of patient acceptance based on the verification of the patient’s insurance coverage, historical information with the patient, similar patients, or the payer. Performance obligations are determined based on the nature of the services provided by the Company. The majority of the Company’s performance obligations are to provide infusion services to deliver medicine, nutrients, or fluids directly into the body.

The Company provides a variety of infusion-related therapies to patients, which frequently include multiple deliverables of pharmaceutical drugs and related nursing services. After applying the criteria from ASC 606, the Company concluded that multiple performance obligations exist in its contracts with its customers. Revenue is allocated to each performance obligation based on relative standalone price, determined based on reimbursement rates established in the third-party payer contracts. Pharmaceutical drug revenue is recognized at the time the pharmaceutical drug is delivered to the patient, and nursing revenue is recognized on the date of service.

The Company’s accounts receivable is reported at the net realizable value amount that reflects the consideration the Company expects to receive in exchange for providing services, which is inclusive of adjustments for price concessions. The majority of accounts receivable are due from private insurance carriers and governmental health care programs, such as Medicare and Medicaid.

Price concessions may result from patient hardships, patient uncollectible accounts sent to collection agencies, lack of recovery due to not receiving prior authorization, differing interpretations of covered therapies in payer contracts, different pricing methodologies, or various other reasons.

Included in accounts receivable are earned but unbilled gross receivables. Delays ranging from one day up to several weeks between the date of service and billing can occur due to delays in obtaining certain required payer-specific documentation from internal and external sources.

After applying the criteria from ASC 606, an allowance for doubtful accounts is established only as a result of an adverse change in the payers’ ability to pay outstanding billings. The Company did not have an allowance for doubtful accounts as of December 31, 2021 or 2020. The Company recorded an allowance for implicit price concessions based on its historical experience of additional revenue being recorded or revenue being written off when amounts received are greater than or less than the originally estimated net realizable value. The detailed assessments included, among other factors, (i) current over/under payments which had not yet been applied to an account, (ii) historical contractual adjustments, and (iii) an estimate for

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contractual adjustments expected to be realized in the future. Contractual allowance estimates are adjusted to actual amounts as cash is received and claims are settled.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. The Company tests goodwill for impairment annually, or more frequently whenever events or circumstances indicate impairment may exist. Goodwill is stated at cost less accumulated impairment losses. The Company completes its goodwill impairment test annually in the fourth quarter.

Circumstances that could trigger an interim impairment test include: a significant adverse change in the business climate or legal factors; an adverse action or assessment by a regulator; unanticipated competition; the loss of key personnel; a change in reporting units; the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed of; and the results of testing for recoverability of a significant asset group within a reporting unit.

A qualitative impairment analysis was performed in the fourth quarter of 2021, 2020 and 2019 to assess whether it is more likely than not that the fair value of the Company’s reporting unit is less than its carrying value. The Company assessed relevant events and circumstances including macroeconomic conditions, industry and market considerations, overall financial performance, entity-specific events, and changes in the Company’s stock price. The Company determined that there was no goodwill impairment in 2021, 2020, or 2019.

The determination of fair value and the allocation of that value to individual assets and liabilities within the reporting unit requires the Company to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, the selection of appropriate peer group companies; control premiums appropriate for acquisitions in the industries in which the Company competes; the discount rate; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization, and capital expenditures. Actual financial results could differ from those estimates due to inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting unit, the amount of the goodwill impairment charge, or both.

Business Acquisitions

The Company accounts for business acquisitions in accordance with ASC Topic 805 (“ASC 805”), Business Combinations, with assets and liabilities being recorded at their acquisition date fair values and goodwill being calculated as the purchase price in excess of the net identifiable assets. The application of ASC 805 requires management to make estimates and assumptions when determining the acquisition date fair values of acquired assets and assumed liabilities. Management’s estimates and assumptions include, but are not limited to, the future cash flows an asset is expected to generate and the weighted-average cost of capital. See Note 3, Business Acquisitions, for further discussion of business acquisitions.

Income Taxes

The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are reported for book-tax basis differences and are measured based on currently enacted tax laws using rates expected to apply to taxable income in the years in which the differences are expected to reverse. The effect of a change in tax rate on deferred taxes is recognized in income tax expense in the period that includes the enactment date of the change.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. The Company considers the scheduled reversal of deferred tax liabilities, including the effect in available carryback and carryforward periods, projected taxable income and tax-planning strategies, in making this assessment. Changes in projected future earnings could affect the recorded valuation allowance in the future. The Company also considers known or expected limitations on its ability to utilize its deferred tax assets in the future, such as limitations provided for under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). On a quarterly basis, the Company evaluates all positive and negative evidence in determining if the valuation allowance is fairly stated.

The Company recognizes income tax positions that are more likely than not to be sustained on their technical merits. The Company measures recognized income tax positions at the maximum benefit that is more likely than not, based on cumulative probability, realizable upon final settlement of the position. Interest and penalties related to unrecognized tax benefits are reported in income tax expense.

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