BioScrip, Inc. — Q2 2013 Form 10-Q
Entity note: The supplied filing is for BioScrip, Inc., not Option Care Health, Inc. It reports the quarter and six months ended June 30, 2013; the financial statements are unaudited.
Business context and reporting period
BioScrip described itself as a national provider of home infusion and other home healthcare services, with Infusion Services, Home Health Services, and PBM Services segments. After selling its traditional and specialty pharmacy mail operations and community retail pharmacies to Walgreens in 2012, the company focused growth on infusion and home health. Its 2013 results include acquisitions of HomeChoice (February) and InfuScience (acquired in 2012); the planned CarePoint acquisition had not closed by June 30.
Financial performance
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Total revenue | $190.7 million | $155.9 million | $389.8 million | $311.5 million |
| Gross profit / margin | $65.0 million / 34.1% | $53.0 million / 34.0% | $128.2 million / 32.9% | $106.6 million / 34.2% |
| Loss from continuing operations, net | $8.3 million | $4.3 million | $15.8 million | $6.3 million |
| Net income (loss) | $(8.9) million | $71.8 million | $(17.0) million | $69.1 million |
| Diluted earnings (loss) per share | $(0.14) | $1.29 | $(0.28) | $1.25 |
| Consolidated Adjusted EBITDA (non-GAAP) | $12.1 million | $9.0 million | $23.6 million | $17.4 million |
Revenue drivers: Infusion revenue rose to $156.2 million in Q2 from $111.0 million, reflecting organic volume growth and acquisitions; Home Health revenue increased to $18.2 million from $16.9 million. PBM revenue fell to $16.3 million from $28.1 million, mainly after termination of a low-margin client contract and lower discount-card revenue. For the first half, infusion revenue was $310.5 million, Home Health $36.2 million, and PBM $43.1 million.
Margins and costs: Q2 gross margin was broadly stable year over year, while first-half margin declined to 32.9% from 34.2%, which management attributed to a greater mix of lower-margin infusion revenue. SG&A was $56.0 million in Q2 and $108.8 million for the first half. Acquisition and integration expense rose to $3.5 million in Q2 and $8.1 million in the first half; the first-half total included a $2.3 million settlement related to merger and acquisition activities. Higher amortization and stock-based compensation also weighed on GAAP results.
Cash flow and liquidity: For the first half, cash used by continuing operating activities was $20.8 million, versus $42.8 million provided in the prior-year period; total operating cash use was $22.1 million, versus $21.6 million provided. Management cited increased receivables and payment timing, partly offset by lower inventory. Investing cash use was $77.5 million, including $72.9 million for HomeChoice, partly offset by $8.5 million proceeds from sale of an affiliate investment. Financing provided $119.1 million, including $118.6 million net proceeds from a primary stock offering. Cash was $81.6 million and working capital $175.0 million at June 30.
Debt: At June 30, long-term debt was $225.5 million, principally $225.0 million of 10.25% senior unsecured notes; there were no borrowings under the existing revolving facility. After quarter-end, on July 31, the company entered into new first-lien facilities totaling up to $475 million: a $75 million revolver, $250 million term loan, and $150 million delayed-draw term loan. These facilities bear floating interest at Eurodollar plus 5.25% or base rate plus 4.25%, are secured by substantially all company and subsidiary assets, and include leverage-related covenants. The company also repurchased/tendered and arranged redemption of its notes using term-loan proceeds.
Material changes versus the prior comparable period
- Revenue grew, primarily from infusion growth and acquired businesses; PBM revenue contracted following a client termination and lower discount-card revenue.
- First-half gross margin fell 1.3 percentage points, while continuing-operations losses increased. Consolidated Adjusted EBITDA rose, but is a company-defined non-GAAP measure.
- Prior-year net income included a $101.6 million pretax gain on the Walgreens asset sale. Accordingly, prior-year reported net income is not a comparable measure of ongoing performance.
- The company issued 10.4 million primary shares in April for $118.6 million net proceeds; shares outstanding increased materially. It used $21.0 million to repay revolver borrowings.
- HomeChoice added scale but had a reported $0.9 million loss from continuing operations from acquisition through June 30, including acquisition-related costs. Goodwill increased to $415.3 million from $350.8 million.
Outlook, commentary, risks, and unusual items
- No specific company-wide revenue or earnings guidance was provided. Management said cash from operations, the stock offering, and anticipated refinancing were expected to cover working capital, planned IT investment, interest, and other needs for at least the next 12 months, based on historical levels.
- CarePoint was expected to close in Q3 2013 for an estimated $213 million, subject to working-capital adjustment and a possible additional $10 million contingent payment. The company expected to fund it with cash and debt. Completion and successful integration were not assured.
- Management cited reimbursement pressure and regulatory uncertainty. Approximately 27% of Q2 and 25% of first-half revenue came directly from Medicare, Medicaid, or other government payors. Medicare sequestration reduced reimbursement overall by 2% beginning April 1, 2013; a proposed 2014 home-health rule would reduce payments by 1.5%, if adopted as proposed.
- Risks include acquisition integration and unanticipated liabilities, increased leverage and debt-covenant compliance, reimbursement cuts, competitive bidding for certain medical equipment, customer and payor concentration, contract renewals, and healthcare regulation. One payor represented about 20% of revenue in both Q2 and the first half of 2013; Immune Globulin products represented 18%.
- Management anticipated further restructuring and warned of possible additional charges, including severance, facility costs, and temporary redundant expenses. A $2.1 million receivable related to the sale of an unconsolidated affiliate was recorded at June 30; $1.1 million of sale proceeds remained in escrow pending possible working-capital adjustments.
- The company reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter. It disclosed an ongoing $3.5 million damages claim by Alexander Infusion, which it said it intended to defend; the filing also notes substantial potential consequences from regulatory investigations or noncompliance.
Important facts for investors to verify
- Confirm the issuer: this filing is BioScrip, Inc.; verify whether it is the intended company and whether the request concerns a later Option Care Health filing.
- Check completion, final purchase price, financing, and integration performance for CarePoint, and compare realized synergies with the company’s expectations.
- Monitor operating cash conversion, receivables and collections, and whether liquidity remains adequate after acquisitions, debt refinancing, and capital spending.
- Review the new debt balance, interest expense, leverage and covenant headroom, and the impact of floating rates and secured borrowing.
- Assess whether infusion growth offsets lower PBM revenue and the decline in first-half gross margin; distinguish GAAP results from management’s non-GAAP Adjusted EBITDA.
- Track reimbursement and competitive-bidding changes, customer concentration, contingent acquisition payments, and the resolution of material legal or regulatory matters.