Option Care Health, Inc. — Q1 2021 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2021, compared with Q1 2020. Option Care Health provides infusion therapy and related services in patients’ homes and other nonhospital settings. It reports one operating segment.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Net revenue | $759.2 million | $705.4 million | Up 7.6% |
| Gross profit / margin | $165.5 million / 21.8% | $158.0 million / 22.4% | Profit up 4.7%; margin down 0.6 percentage points |
| Operating income | $29.1 million | $8.6 million | Improved as operating expenses declined |
| Net loss | $2.9 million | $19.9 million | Loss narrowed; Q1 2021 includes $12.4 million debt-extinguishment loss |
| Loss per share | $0.02 | $0.11 | Basic and diluted |
| Operating cash flow | $18.4 million | $18.4 million | Essentially unchanged |
| Cash and cash equivalents | $109.4 million at March 31 | $99.3 million at December 31, 2020 | Quarter-end cash increased $10.1 million |
Cost of revenue rose 8.5%, faster than revenue, and gross margin fell as the therapy mix shifted toward lower-margin chronic therapies. SG&A declined 7.1% to $120.0 million, which management attributed to merger integration savings and spending reductions; depreciation and amortization expense fell 18.7% to $16.3 million.
Debt and liquidity: The company had $1.163 billion of term-loan principal outstanding at quarter-end, with a net carrying amount of $1.133 billion. It refinanced in January: issuing incremental first-lien debt, reducing the rate on outstanding first-lien term debt from LIBOR plus 4.25% to LIBOR plus 3.75%, and repaying the $245.8 million second-lien notes. The first-lien rate was 3.86% at March 31; the loan matures August 2026. The company reported no ABL borrowings and $165.4 million of net availability under its revolving facility. Management said cash and expected operating cash flows should cover operating requirements and planned capital expenditures for at least 12 months.
Material changes and management commentary
- Revenue growth was primarily organic. Commercial-payer revenue was $611.4 million versus $606.0 million; government-payer revenue was $134.9 million versus $86.3 million.
- Management reported flat acute revenue year over year and low-double-digit growth in chronic revenue. Pandemic-related referral weakness continued, partly offset by transfers of patients from hospital and outpatient settings to home care.
- Clinical labor and staffing challenges continued to create cost inefficiencies. Management said integration initiatives helped offset pandemic impacts and that it had not experienced material deceleration in cash collections.
- On April 7, 2021, after quarter-end, the company acquired certain BioCure, LLC assets for $18.5 million, primarily referral sources and inventory.
Outlook, risks, and unusual items
- No specific revenue, earnings, or cash-flow guidance was provided. Management said it could not confidently forecast the duration or ultimate financial impact of COVID-19.
- Q1 other expense included a $12.4 million loss on extinguishment of debt related to the refinancing. Net interest expense declined to $19.5 million from $28.1 million.
- The company had a full valuation allowance against nearly all U.S. federal and state deferred tax assets; Q1 tax expense was $1.3 million despite a pretax loss.
- Revenue concentration increased at the largest payer, which represented approximately 16% of Q1 revenue versus 13% a year earlier. Three vendors supplied approximately 67% of pharmaceutical and medical-supply purchases.
- Management cited uncertainty around government reimbursement rules, supplier concentration, staffing, pandemic effects, and legal proceedings. It said pending legal matters were not expected to materially affect the balance sheet, subject to uncertainty and potentially significant adverse outcomes.
- The company reported no material changes to previously disclosed risk factors or market-risk exposure, and no off-balance-sheet arrangements. Disclosure controls were deemed effective as of March 31, 2021.
Important facts for investors to verify
- Whether revenue growth and operating-expense savings persist, and whether the lower gross margin stabilizes or recovers.
- How patient referrals, staffing costs, and care-setting shifts evolve as pandemic conditions change.
- Debt-service costs and exposure to variable rates, including the effect of interest-rate swaps and their scheduled run-off.
- The sustainability of cash generation and available borrowing capacity, particularly alongside acquisition plans.
- Developments in payer concentration, government reimbursement estimates, supplier availability, tax attributes, and disclosed legal matters.