BioScrip, Inc. Form 10-Q Summary
Entity note: The supplied filing is for BioScrip, Inc., not Option Care Health, Inc. It covers the quarter and nine months ended September 30, 2010; financial amounts below are in millions unless noted.
Business context and reporting period
BioScrip provides pharmacy, infusion, home health and related services. Its reporting segments were reorganized following the March 25, 2010 acquisition of Critical Homecare Solutions Holdings (CHS): Infusion/Home Health Services and Pharmacy Services. The July 29 acquisition of DS Pharmacy expanded online pharmacy operations. Results include CHS from March 26 and DS Pharmacy from July 29, limiting direct comparability with 2009.
Key financial results
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $441.2 | $333.5 | $1,188.3 | $988.0 |
| Gross profit (margin) | $75.4 (17.1%) | $41.5 (12.4%) | $187.8 (15.8%) | $115.9 (11.7%) |
| Operating income | $12.2 | $6.7 | $19.4 | $16.1 |
| Net income (loss) | $2.0 | $5.7 | ($2.1) | $13.4 |
| Diluted EPS | $0.04 | $0.14 | ($0.04) | $0.34 |
| Consolidated Adjusted EBITDA | $18.1 | $8.9 | $39.2 | $22.1 |
Q3 revenue rose 32.3%; nine-month revenue rose 20.3%. CHS contributed $68.0 million of Q3 revenue and $137.8 million for the nine-month period. Excluding CHS, Infusion/Home Health revenue increased 19.0% in Q3 and 17.8% for the nine months. Pharmacy Services revenue rose 11.0% in Q3 and 4.9% year to date. Gross margin improvement was attributed mainly to CHS and purchasing synergies; reimbursement reductions and competitive conditions partly offset the improvement.
Operating cash flow was $5.9 million for the nine months, versus $14.0 million in 2009. Investing cash outflow was $105.2 million, primarily for acquisitions; financing provided $150.3 million. Ending cash was $51.0 million. Working capital was $180.7 million, compared with $91.1 million at December 31, 2009. Capital expenditures were $6.7 million.
At September 30, total debt was $318.6 million: $225.0 million of 10.25% senior unsecured notes due October 2015, $93.4 million under the secured facility, and $0.2 million of capital leases. Current debt was $3.9 million. The notes' estimated fair value was $228.2 million. The company reported compliance with secured-facility covenants. Approximately $89.6 million of long-term debt and $3.8 million of short-term debt bore variable rates; a 1% rate increase was estimated to raise annual interest expense by about $0.93 million.
Changes, outlook and risks
- Higher gross profit was outweighed at the bottom line by sharply higher interest expense following acquisition financing: $8.1 million in Q3 and $19.5 million for the nine months, versus $0.4 million and $1.5 million, respectively, in 2009.
- Management expected cash, revolver availability and operating cash generation to fund anticipated needs for at least 12 months. It anticipated approximately $3.0 million of integration-related capital expenditures and $5.0 million of integration-related expenses during the first 12 months after the CHS merger.
- Following revised discount-card broker agreements, management expected Q4 broker fees to increase $1.9 million alongside $1.6 million of additional revenue versus the prior quarter. If expected growth materialized, quarterly fees could be $3–$5 million above the prior year; management expected the operating-income impact to turn positive versus the prior year from Q2 2011 onward.
- Management expected bad-debt expense to be about 1.0% of revenue for the remainder of 2010. It cited $1.6 million of unreserved net receivables from the terminated CMS Competitive Acquisition Program (CAP) contract and said collection efforts continued.
- Risks include integration execution and realization of synergies, substantial leverage and restrictive covenants, reimbursement cuts, contract losses, competition and margin pressure, staffing shortages, and pharmacy-system conversion challenges. A major pharmacy network agreement represented about 12% of nine-month revenue.
- Legal matters include government subpoenas and information requests, a disputed Northland Pharmacy earn-out claim of at least $5.64 million, a $2.5 million claim relating to an uncompleted acquisition, and an appealed case in which BioScrip had obtained summary judgment. Management could not predict outcomes of the proceedings.
- Management reported disclosure controls were effective. CHS was excluded from management's planned year-end 2010 internal-control assessment while integration continued. CHS purchase-price allocations remained provisional.
Most important facts to verify
- Confirm the issuer identity: this filing names BioScrip, Inc., despite the Option Care Health request metadata.
- Assess whether acquired-business growth, purchasing synergies and expected integration benefits are sustainable, and compare reported results with pro forma results.
- Review debt service capacity, revolver availability, covenant headroom and refinancing risk, especially given negative nine-month net income and lower operating cash flow.
- Track receivable aging, bad-debt trends and recovery of CAP balances, as well as reimbursement changes and concentration in major customer relationships.
- Monitor the outcome of disclosed litigation and government inquiries, and any revisions to provisional acquisition valuations or DS Pharmacy earn-out estimates.