Option Care Health, Inc. quarterly report, Q2 FY2016

Business context and reporting period

This is BioScrip, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The request identifies Option Care Health, but the supplied filing is for BioScrip; the figures below are for BioScrip. The company operated a single Infusion Services segment, with 68 service locations in 28 states. Its PBM business, sold in 2015, is presented as discontinued operations.

Financial results and liquidity

For the first half, cash used in operating activities was $21.6M, including $15.7M from continuing operations and $5.9M from discontinued operations. Investing activities used $4.3M; financing activities provided $61.8M. Cash was $51.4M at June 30, versus $15.6M at year-end. Working capital was $97.4M, up from $30.9M. Total debt was $399.5M, including $9.4M current; the company reported $70.4M of revolving-credit borrowing capacity after letters of credit, with some capacity subject to an alternate leverage test. Term-loan rates were approximately 6.50%, revolving-credit rates approximately 7.75%, and the 2021 Notes carry an 8.875% coupon.

Material changes versus prior comparable periods

• Revenue fell 5.8% in Q2 and 4.1% for the first half, primarily because of lower patient volumes in lower-margin chronic business.
• Gross profit dollars declined modestly, but gross margin improved by 2 percentage points in Q2 and 1 point for the first half.
• Bad-debt expense fell to $4.3M in Q2 from $15.2M and to $11.9M for the first half from $23.5M. Management attributed the improvement to collections and, for the half-year, a $2.3M allowance-estimate benefit.
• The much smaller 2016 net loss versus 2015 chiefly reflects the absence of the prior-year $238.0M goodwill impairment. Adjusted EBITDA improved, which management attributed to restructuring, lower corporate overhead, and focus on core infusion services.
• June’s $83.3M net common-stock offering proceeds strengthened cash and supported repayment of revolving borrowings. Common shares issued increased substantially; 113.9M shares were outstanding on August 5, 2016.

Outlook, commentary, risks and unusual items

• BioScrip expected the Home Solutions acquisition to close in Q3 2016, subject to stockholder approval of a charter amendment and other closing conditions. Consideration included $67.5M cash, 3.75M common shares, and up to approximately 7.1M contingent shares tied to stock-price or change-of-control thresholds. The company expected to fund the cash payment with cash and revolver borrowings.
• The filing said operating cash and available revolver capacity were expected to cover working capital, scheduled debt service, IT investment, and other needs for at least 12 months. This is management’s expectation, not a guarantee.
• For the proposed acquisition, the company estimated $14M–$17M in synergies, approximately $5.5M in implementation costs, and a 12–18-month realization period. These estimates are subject to integration and execution risk.
• BioScrip was not awarded Round 2 Recompete Medicare contracts effective July 1, 2016. Management did not expect the impact to be material, but acknowledged revenue could decline in affected areas.
• Key risks include high debt and covenant compliance, reimbursement and regulatory changes, payor concentration (UnitedHealthcare was about 25% of first-half revenue), acquisition closing/integration and dilution, and litigation. The Walgreens contract dispute remained in alternative dispute resolution; the securities class action settlement received final approval and was dismissed with prejudice. The company said it could not estimate a loss range for certain pending litigation.
• Series C preferred stock held by PIPE investors had a $71.3M liquidation preference and an 11.5% annual non-cash dividend rate, subject to reduction based on EBITDA thresholds. Failure to obtain required authorized-share approval could create redemption exposure; the filing also warned that insufficient share reservations could cause equity-linked securities to be reclassified as liabilities.

Important facts for investors to verify

• Confirm the issuer and security being analyzed: the provided 2016 filing is BioScrip, not an Option Care Health-branded filing.
• Check whether the Home Solutions transaction closed, its final funding and share issuance, and whether projected synergies were realized.
• Review subsequent revenue, chronic-therapy volumes, gross margins, collections, and bad-debt allowance assumptions.
• Verify revolver availability, covenant headroom, debt service capacity, and the effects of future borrowing for the acquisition.
• Track charter-amendment/share-reservation approval, preferred-stock terms, potential dilution, and any resulting accounting reclassification.
• Assess Medicare bidding and other reimbursement changes, payor concentration, and the status and potential cost of unresolved legal matters.