Option Care Health, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The company provides infusion therapy and related healthcare services through a national network and reports one operating segment.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $891.9 million | $781.6 million | $2,511.4 million | $2,227.9 million |
| Gross profit / margin | $203.0 million / 22.8% | $174.2 million / 22.3% | $567.4 million / 22.6% | $498.5 million / 22.4% |
| Operating income / margin | $52.9 million / 5.9% | $34.6 million / 4.4% | $130.1 million / 5.2% | $66.4 million / 3.0% |
| Net income (loss) | $35.5 million | $1.7 million | $64.4 million | $(25.9) million |
| Diluted earnings (loss) per share | $0.20 | $0.01 | $0.36 | $(0.14) |
- Quarterly revenue rose 14.1%; nine-month revenue rose 12.7%. Management attributed growth to organic therapy growth, with Q3 acute revenue up at a mid-single-digit rate and chronic revenue up in the mid-teens year over year.
- Gross margin improved modestly, which management attributed to a mix shift toward higher-profit therapies. SG&A increased in dollars but declined as a share of revenue, to 15.1% in Q3 and 15.5% for nine months, from 15.7% and 16.9%, respectively.
- Interest expense declined to $16.0 million in Q3 and $52.7 million for nine months, versus $24.6 million and $84.1 million in the comparable periods. The January 2021 refinancing and lower debt costs contributed. Nine-month other expense included a $12.4 million debt-extinguishment loss.
Cash, liquidity and debt
- Cash and cash equivalents were $200.9 million at September 30, 2021, versus $99.3 million at December 31, 2020. Current assets were $811.2 million and current liabilities $485.7 million.
- Nine-month operating cash flow was $143.3 million, compared with $101.7 million a year earlier. Investing used $30.6 million, including the BioCure asset acquisition; financing used $11.1 million. Cash increased $101.6 million during the period.
- Debt principal was $1.157 billion, all first-lien term loan; its carrying value net of discount and financing costs was $1.130 billion. The loan’s September 30 interest rate was 3.83%. No ABL borrowings were outstanding; net revolving availability was $165.4 million after letters of credit.
- In January, the company issued incremental first-lien debt and repaid its remaining $245.8 million of second-lien notes, reducing the first-lien rate from LIBOR plus 4.25% to LIBOR plus 3.75%. Management said cash and expected operating cash flow should cover operating needs and planned capital expenditures for at least 12 months.
Material changes, outlook and risks
- Subsequent events: On October 1, 2021, the company acquired Infinity Infusion Nursing for $50 million cash. In October, it refinanced $600 million of first-lien borrowings, extending that facility’s maturity to 2028, and issued $500 million of unsecured senior notes due 2029. The transactions used $69.9 million of cash and included a $300 million, five-year interest-rate cap.
- COVID-19 and operations: Pandemic-related referral disruption continued to affect acute and chronic referrals, although transfers from hospitals and outpatient settings supported revenue. The company cited clinical labor and staffing inefficiencies, partly offset by integration savings. It reported no material deceleration in cash collections and adequate supplies as of quarter-end; the duration and ultimate financial effect of the pandemic remained uncertain.
- Concentration and operating risks: The largest payer represented approximately 16% of Q3 and nine-month revenue. Three vendors supplied approximately 65% of pharmaceutical and medical-supply purchases. Management noted potential near-term changes in government reimbursement estimates and possible disruption if suppliers change.
- Tax and legal matters: The company maintained a $97.3 million valuation allowance against most U.S. federal and state deferred tax assets; federal NOL utilization may be limited by Section 382. It described routine legal proceedings and government inquiries, believed pending matters would not materially affect its balance sheet after reserves and indemnification, but noted adverse rulings or settlements could affect results or cash flows.
- Guidance: The filing provides no specific numerical earnings or revenue guidance. It says the pandemic’s duration and financial impact cannot be confidently forecast. Management’s liquidity statement is based on current operations and planned capital expenditures.
- Other notable items: The company corrected prior payer-category revenue classifications, moving amounts from government to commercial payers; it said the errors were immaterial and had no effect on total revenue, earnings, balance sheets or cash flows. HC I completed secondary share sales and retained approximately 21.1% ownership; the filing identifies Madison Dearborn Partners’ influence as a governance risk.
Important facts for investors to verify
- Whether organic growth, improved therapy mix and integration savings persist, particularly amid staffing constraints and uncertain pandemic effects.
- Post-October refinancing terms, resulting interest expense and leverage, and the effect of the Infinity acquisition on cash, operations and returns.
- Cash conversion and working-capital trends, including higher accounts receivable and inventories, and continued access to the revolving facility.
- Exposure to the largest payer and concentrated suppliers, and the potential impact of reimbursement changes or supply disruptions.
- Future tax-asset realizability and NOL limitations, as well as any material developments in legal or governmental matters.