BrightSpring Health Services(US:BTSG)2024-03-06 22:11PART I Business BrightSpring Health Services is a leading US home and community-based healthcare platform, serving over 400,000 complex patients daily across two integrated segments - BrightSpring is a leading home and community-based healthcare services platform serving over 400,000 patients daily across all 50 states, focusing on complex Senior and Specialty populations26 - The company's integrated model combines pharmacy services (medication therapy management, infusion) and provider services (home health, hospice, rehab) to address multiple patient needs and reduce overall healthcare costs2829 Segment Revenue and EBITDA (FY 2023) | Segment | Revenue (in millions) | % of Total Revenue | Segment EBITDA (in millions) | % of Total Segment EBITDA | | :--- | :--- | :--- | :--- | :--- | | Pharmacy Solutions | $6,522.5 | 73.9% | $371.0 | 54.7% | | Provider Services | $2,303.7 | 26.1% | $306.8 | 45.3% | Key Financial Performance (2021-2023) | Metric | 2021 | 2023 | | :--- | :--- | :--- | | Revenue | $6,698.1 million | $8,826.2 million | | Net Income (Loss) | $51.2 million | $(156.8) million | | Adjusted EBITDA | $493.1 million | $537.8 million | Our Platform The platform operates through Pharmacy Solutions and Provider Services segments across all 50 states, leveraging integrated care enablers for value-based models - The company operates through two reportable segments: Pharmacy Solutions and Provider Services, with a presence in all 50 states and co-location of services in 40 states68 - The integrated care model is built on three enablers: home-based primary care, a transitional care management program (CCRx), and a clinical care coordination hub69 - Pharmacy Solutions filled over 37 million prescriptions in 2023 from over 180 pharmacies, serving approximately 6,000 customer locations and over 350,000 patients70 - Provider Services delivers clinical and supportive care to over 34,000 Senior and Specialty patients, with Home Health Care census and rehab hours served growing approximately 10% from December 2022 to December 202379 Our Growth Strategy The growth strategy focuses on organic expansion, leveraging the integrated platform for value-based care, and strategic M&A, including at least 20 new locations annually - The company plans to drive organic growth through market penetration, favorable demographic trends, de novo expansions (targeting at least 20 new locations per year), and a stable reimbursement environment110111114115 - A key strategy is to leverage complementary services and care management enablers (home-based primary care, CCRx, clinical hub) to increase integrated and value-based care contracts with payors116117118 - The company will continue to execute strategic and accretive M&A, leveraging its experience as a proven consolidator in fragmented markets. Since 2018, it has completed 59 acquisitions123125 Regulation The company operates under extensive federal and state healthcare regulations, including Anti-Kickback, Stark Law, False Claims Act, and HIPAA, with non-compliance risking severe penalties - The company is subject to the federal Anti-Kickback Statute, which prohibits offering or receiving remuneration to induce referrals for services paid by federal healthcare programs. Violations can lead to criminal penalties, fines up to $100,000 per kickback, and exclusion from Medicare/Medicaid161162 - The Stark Law prohibits physicians from referring Medicare or Medicaid patients to entities for designated health services if they have a financial relationship with the entity. It is a strict liability statute, and violations can result in denial of payment, refunds, and civil penalties up to $27,750 per service166167 - The False Claims Act imposes liability for knowingly submitting false claims to the government. Penalties range from $13,508 to $27,081 per false claim, plus up to three times the government's damages171172 - The company must comply with HIPAA, which governs the privacy and security of Protected Health Information (PHI). Violations can result in significant civil or criminal penalties, and the company must notify affected individuals of data breaches186188189 Risk Factors The company faces substantial business, regulatory, and financial risks, including intense competition, reimbursement changes, compliance issues, and high indebtedness Risks Related to Our Business Business risks include intense competition, reliance on Medicare/Medicaid reimbursement, labor shortages, IT system failures, and cybersecurity threats, impacting operations and profitability - The company operates in a highly competitive industry and faces pressure on pricing, market share, and patient retention from competitors who may have greater resources or established local relationships210211 - A substantial portion of revenue is derived from Medicare and Medicaid, making the business highly sensitive to changes in government reimbursement rates, payment methodologies, and program funding216 - The business relies on the continual recruitment and retention of qualified personnel, such as nurses and pharmacists. Labor shortages and increasing wage requirements could adversely impact operations and profitability246248 - Cybersecurity breaches and data loss pose a significant risk, potentially compromising sensitive patient information, leading to liability, litigation, and reputational damage. A ransomware attack in March 2023 resulted in a breach of over 6 million individuals' information277279 Risks Related to Our Regulatory Framework Regulatory risks stem from complex federal and state healthcare laws, including Anti-Kickback, Stark Law, False Claims Act, and HIPAA, with non-compliance leading to severe penalties and operational impact - The business is subject to extensive federal and state regulations, and failure to comply can result in severe sanctions, including termination from Medicare/Medicaid programs, loss of licenses, and civil or criminal penalties305306 - Key fraud and abuse laws, including the Anti-Kickback Statute and Stark Law, create risks related to relationships with physicians and other referral sources. Violations can lead to significant liability under the False Claims Act309310 - State Certificate of Need (CON) laws may restrict the ability to expand into new markets or add services, thereby limiting growth opportunities313314 - The company is subject to governmental audits and investigations (e.g., RAC, TPE, UPIC programs) which can result in demands for refunds of alleged overpayments and other sanctions331333 Risks Related to Our Indebtedness High indebtedness of approximately $3.4 billion as of December 31, 2023, poses significant financial risk, consuming cash flow, imposing restrictive covenants, and exposing the company to variable interest rate fluctuations - As of December 31, 2023, the company had approximately $3.4 billion in total debt, requiring a substantial portion of cash flow for debt service payments24337 - Debt agreements contain restrictive covenants that limit the company's ability to incur more debt, sell assets, make investments, and pay dividends, potentially hindering operational flexibility and growth348350 - Borrowings under the First and Second Lien Facilities are at variable interest rates, exposing the company to risk from rising interest rates, which could significantly increase debt service obligations352 Cybersecurity Cybersecurity risks are managed through an ERM program overseen by the Board and CDTO, incorporating technical safeguards, employee training, and third-party expertise - Cybersecurity is managed through an Enterprise Risk Management (ERM) approach with oversight from the Board of Directors and the Audit Committee386392 - The program is led by the Chief Digital & Technology Officer (CDTO) and includes technical safeguards, employee training, and engagement with third-party cybersecurity experts for evaluation and support389390393 - As of the report date, the company is not aware of any cybersecurity incidents that have materially affected or are reasonably likely to materially affect its business, strategy, or financial condition391 Legal Proceedings The company is involved in various legal proceedings, notably agreeing to settle the Marc Silver v. PharMerica case for an estimated $115.0 million in November 2023 - In November 2023, the company agreed to settle the Marc Silver v. PharMerica case, which alleged violations of the False Claims Act and Anti-Kickback Statute398399 - The estimated financial impact of the settlement is $115.0 million, which was accrued in 2023. The settlement is pending approval from the Department of Justice and the District Court399 PART II Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2023, revenue grew 14.3% to $8.8 billion, but a net loss of $156.8 million resulted from higher costs and interest, while Adjusted EBITDA increased 2.9% to $537.8 million Results of Operations In 2023, total revenues increased 14.3% to $8.83 billion, but operating income decreased 21.6% to $147.2 million, leading to a net loss of $156.8 million due to higher costs and interest Consolidated Results of Operations (2023 vs. 2022) | Metric (in millions) | 2023 | 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $8,826.2 | $7,720.6 | 14.3% | | Gross Profit | $1,433.8 | $1,354.2 | 5.9% | | Operating Income | $147.2 | $187.8 | (21.6)% | | Interest Expense, net | $324.6 | $233.6 | 39.0% | | Net Loss | $(156.8) | $(54.2) | n.m. | | Adjusted EBITDA | $537.8 | $522.5 | 2.9% | - The 14.3% increase in SG&A expenses in 2023 was primarily driven by a $118.5 million increase in legal costs, mainly related to the Silver settlement486 - Net interest expense increased by $91.0 million (39.0%) in 2023 due to higher variable interest rates on outstanding debt488 Segment Results of Operations Pharmacy Solutions revenue grew 23.9% to $6.52 billion with 7.7% EBITDA growth, while Provider Services revenue increased 5.6% to $2.30 billion with 6.2% EBITDA growth Pharmacy Solutions Segment Performance (2023 vs. 2022) | Metric (in millions) | 2023 | 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | $6,522.5 | $5,264.4 | 23.9% | | Gross Profit | $681.7 | $629.0 | 8.4% | | Segment EBITDA | $371.0 | $344.5 | 7.7% | Provider Services Segment Performance (2023 vs. 2022) | Metric (in millions) | 2023 | 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | $2,303.7 | $2,181.5 | 5.6% | | Gross Profit | $752.1 | $689.5 | 9.1% | | Segment EBITDA | $306.8 | $288.8 | 6.2% | Liquidity and Capital Resources Total liquidity increased to $431.5 million by December 31, 2023, with net cash from operations at $210.8 million, and IPO proceeds used to significantly reduce $3.4 billion in debt Total Liquidity | (in thousands) | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Revolving Credit & LC Facility Availability | $418,389 | $241,300 | | End of period cash balance | $13,071 | $13,628 | | Total Liquidity, end of period | $431,460 | $254,928 | Cash Flow Summary | (in thousands) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $210,783 | $(4,653) | $270,165 | | Net cash (used in) from investing activities | $(134,433) | $45,356 | $(1,190,652) | | Net cash (used in) from financing activities | $(76,907) | $(73,810) | $705,217 | - Total debt outstanding was $3.41 billion as of December 31, 2023. Subsequent to year-end, IPO proceeds were used to repay all Second Lien debt, all Revolver borrowings, and $343.3 million of the First Lien facility556563570 Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2021-2023, including Balance Sheets, Statements of Operations, and Cash Flows, with accompanying notes Consolidated Balance Sheets As of December 31, 2023, total assets were $5.53 billion, with total liabilities at $4.92 billion, and shareholders' equity decreased to $584.7 million due to the net loss Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $1,456,641 | $1,344,256 | | Goodwill | $2,608,412 | $2,576,081 | | Total Assets | $5,532,721 | $5,441,138 | | Total Current Liabilities | $1,248,437 | $932,508 | | Long-term debt, net | $3,331,941 | $3,364,302 | | Total Liabilities | $4,920,172 | $4,657,056 | | Total Shareholders' Equity | $584,740 | $754,776 | Consolidated Statements of Operations In FY2023, total revenues reached $8.83 billion, but operating income declined to $147.2 million, resulting in a net loss of $156.8 million after $324.6 million in net interest expense Consolidated Statement of Operations (in thousands) | Line Item | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total revenues | $8,826,175 | $7,720,560 | $6,698,082 | | Gross profit | $1,433,794 | $1,354,244 | $1,248,211 | | Operating income | $147,180 | $187,830 | $234,184 | | Net (loss) income | $(156,835) | $(54,219) | $51,262 | | (Loss) earnings per share - diluted | $(1.31) | $(0.46) | $0.41 | PART III Directors, Executive Officers and Corporate Governance This section outlines the company's leadership, including CEO Jon Rousseau, its "controlled company" status under Nasdaq rules, and the structure of its Board committees - The company's executive team is led by Jon Rousseau, Chairman, President, and CEO, and Jim Mattingly, Executive Vice President and CFO824825826 - The company is a "controlled company" under Nasdaq rules because KKR Stockholder and Walgreen Stockholder collectively own more than 50% of the voting power, allowing it to be exempt from certain governance requirements like having a majority-independent board841 - The Board of Directors has three standing committees: Audit, Compensation, and Quality & Compliance and Governance843 Executive Compensation Executive compensation for 2023 included base salaries, performance-based cash incentives, and equity awards, with the company transitioning to new public company compensation practices post-IPO 2023 Named Executive Officer Compensation Summary | Name | Title | 2023 Total Compensation ($) | | :--- | :--- | :--- | | Jon Rousseau | President and CEO | 18,348,831 | | Jim Mattingly | EVP and CFO | 908,957 | | Steven Reed | CLO and Corp. Secretary | 761,659 | | Bob Barnes | President, Community Living | 744,696 | | Jennifer Yowler | President, PharMerica | 733,956 | - The annual cash incentive program (BHS STIC) for 2023 was based on a balanced scorecard of performance goals, including EBITDA, quality, people, efficiency, and growth metrics871873 - In November 2023, the Board approved the cancellation of 628,108 vested stock options held by CEO Jon Rousseau in exchange for a cash payment of $10 million, and simultaneously granted him 628,108 new time-vesting stock options897 - In connection with the IPO, the company adopted a new 2024 Equity Incentive Plan and granted approximately $63.3 million in new equity awards to management and employees463906907 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of March 1, 2024, KKR Stockholder and Walgreen Stockholder are major beneficial owners with 47.5% and 20.4% respectively, controlling a majority of voting power Beneficial Ownership (as of March 1, 2024) | Beneficial Owner | % Shares Beneficially Owned | | :--- | :--- | | KKR Stockholder | 47.5% | | Walgreen Stockholder | 20.4% | | Jon Rousseau (CEO) | 1.6% | | All Directors and Executive Officers as a group | 2.5% | Certain Relationships and Related Transactions, and Director Independence The company engages in significant related party transactions with KKR and Walgreen Stockholder affiliates, including advisory fees, inventory purchases, and financing activities - A Monitoring Agreement with KKR and Walgreens required an annual advisory fee (1% of Consolidated EBITDA), which was $5.6 million in 2023. This agreement terminated upon the IPO, triggering a $22.7 million termination fee973974 - The company purchases significant volumes of pharmaceutical inventory through agreements with affiliates of Walgreen Stockholder. In 2023, purchases under these agreements totaled approximately $1.6 billion977978 - KKR Capital Markets, an affiliate of KKR, acted as an underwriter for the IPO and received $7.4 million in underwriting discounts and commissions. It also received fees for prior financing transactions805975976 Principal Accountant Fees and Services In FY2023, KPMG LLP billed the company a total of $3.23 million for services, including $2.95 million for audit fees, all pre-approved by the audit committee Accountant Fees (Fiscal Years 2023 & 2022) | Fee Category | 2023 | 2022 | | :--- | :--- | :--- | | Audit Fees | $2,953,000 | $2,217,500 | | Audit-Related Fees | $50,000 | $40,000 | | Tax Fees | $222,000 | $726,003 | | All Other Fees | $3,650 | $3,650 | | Total Fees | $3,228,650 | $2,987,153 | PART IV Exhibits and Financial Statement Schedules This section lists financial statements from Item 8 and provides a comprehensive index of all exhibits filed, including corporate governance and debt agreements - This section provides an index of all exhibits filed with the Form 10-K, including the Second Amended and Restated Certificate of Incorporation, debt agreements, material contracts like the Stockholders' Agreement, and various employment agreements995996997