Option Care Health, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Option Care Health provides infusion therapy and related healthcare services through a U.S. network of 97 full-service pharmacies and 64 infusion suites, operating as one infusion-services segment. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1,020.9 | $891.9 | $2,917.5 | $2,511.4 |
| Gross profit / margin | $218.0 / 21.4% | $203.0 / 22.8% | $635.8 / 21.8% | $567.4 / 22.6% |
| Operating income / margin | $60.7 / 5.9% | $52.9 / 5.9% | $172.0 / 5.9% | $130.1 / 5.2% |
| Net income | $38.8 | $35.5 | $103.0 | $64.4 |
| Diluted EPS | $0.21 | $0.20 | $0.57 | $0.36 |
| Net interest expense | $14.0 | $16.0 | $39.0 | $52.7 |
For the nine months, operating cash flow was $224.1 million, investing cash outflow $104.4 million, and financing cash inflow $16.4 million. Cash increased $136.0 million to $255.5 million. Capital expenditures were $17.1 million and acquisitions, net of cash acquired, were $87.3 million.
At September 30, cash was $255.5 million; current assets were $952.0 million and current liabilities $586.8 million. Principal debt outstanding was $1.096 billion, comprising a $595.5 million variable-rate term loan and $500 million of 4.375% Senior Notes. Net debt, calculated as principal debt less cash, was approximately $840 million. The ABL facility had $168.3 million of net availability. The term loan’s stated rate was 5.27%; a $300 million interest-rate cap partially hedges variable-rate exposure.
Material changes and drivers
- Q3 revenue increased 14.5% year over year; nine-month revenue increased 16.2%. Management attributed growth mainly to organic therapy growth, with chronic revenue up in the mid-teens in Q3 and high-teens for the nine-month period. Acute growth was mid-single-digit and reflected competitive shifts that increased patient-service volume. Acquisitions contributed approximately 2% of revenue growth.
- Gross margin declined 1.4 percentage points in Q3 and 0.8 points for the nine-month period. Management cited inflation in labor, transportation and medical supplies. SG&A increased in dollars but declined as a share of revenue, reflecting revenue growth outpacing expense growth.
- Nine-month net income rose 59.9%, supported by revenue growth, lower interest expense after the October 2021 refinancing, and the prior-year debt-extinguishment loss not recurring. Q3 other income included $3.9 million of one-time income related to a legacy acquisition. The effective tax rate rose to 25.5% in Q3 and 26.9% year to date, versus 8.0% and 7.3%, respectively, in 2021, mainly because the prior-year tax valuation allowance had been largely reversed in late 2021.
- Acquisitions included Specialty Pharmacy Nursing Network ($59.9 million net of acquired cash) and Rochester Home Infusion ($27.4 million net of acquired cash). The company also classified respiratory-therapy and durable-medical-equipment assets as held for sale; it entered a sale agreement in October and expected closing in Q4 2022.
Outlook, risks and contingencies
No specific revenue, earnings or margin guidance is provided in the filing. Management stated that existing cash and expected operating cash flows should meet operating requirements over the next 12 months and beyond, while noting that additional financing may be needed for longer-term plans or acquisitions.
Management described ongoing pandemic-related uncertainty, including referral variability, staffing challenges, inflation and periodic difficulty obtaining protective equipment, supplies and key drugs; it could not forecast the duration or ultimate financial impact. Supplier concentration was significant: four vendors accounted for approximately 74% of pharmaceutical and medical-supply purchases in Q3 2022. The largest payer represented approximately 14% of Q3 revenue; government programs accounted for about 12%. Legal proceedings, government audits and inquiries are part of the ordinary course of business; management did not expect pending matters, after reserves and indemnification, to materially affect the balance sheet, but noted that adverse outcomes could affect earnings or cash flows. The filing reported no material change to the risk factors in the 2021 Form 10-K.
Most important facts for investors to verify
- Whether revenue growth can be sustained while recovering the year-over-year gross-margin decline amid labor, transportation and supply-cost pressures.
- How much operating cash flow reflects sustainable earnings versus timing of vendor payments, inventory, accruals and deferred taxes.
- Variable-rate debt exposure, the impact of rate changes, and the extent to which the interest-rate cap offsets term-loan interest costs.
- Integration and returns from recent acquisitions, and completion and financial effect of the planned respiratory/DME asset sale.
- Reimbursement estimates, payer and supplier concentration, and any developments in legal, regulatory or government-program matters.