Option Care Health, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. The company provides infusion therapy and related services in patients’ homes and other nonhospital settings.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $980.8 million | $860.3 million | $1,896.6 million | $1,619.5 million |
| Gross profit / margin | $216.9 million / 22.1% | $199.0 million / 23.1% | $417.8 million / 22.0% | $364.4 million / 22.5% |
| Operating income / margin | $59.1 million / 6.0% | $48.1 million / 5.6% | $111.3 million / 5.9% | $77.2 million / 4.8% |
| Net income | $33.9 million | $31.8 million | $64.2 million | $29.0 million |
| Diluted EPS | $0.19 | $0.18 | $0.35 | $0.16 |
Revenue rose 14.0% in Q2 and 17.1% for the first half. Management attributed growth primarily to organic therapy growth: chronic revenue increased in the mid-teens for Q2 and low-twenties for the first half; acute revenue grew at a slower pace. Acquisitions contributed approximately 2% of revenue growth. Gross margin declined year over year as the mix shifted toward lower-margin chronic therapies and inflation and higher fuel costs weighed on margins. SG&A increased in dollars, mainly from acquired staff and inflation, but fell as a share of revenue to 14.5% from 15.6% in Q2 and 15.7% for the first half.
Six-month operating cash flow was $137.0 million, versus $92.0 million; investing cash use was $70.0 million, versus $25.7 million, including the SPNN acquisition and capital spending. Financing provided $17.6 million, including warrant exercise proceeds. Cash increased by $84.6 million to $204.0 million. The operating cash flow improvement reflected higher net income, lower interest expense, vendor-payment timing and deferred taxes, partly offset by working-capital movements, including higher inventory and receivables.
Financial position and liquidity
At June 30, 2022, total assets were $2.986 billion and stockholders’ equity was $1.285 billion. Principal debt was $1.097 billion (carrying value, net of discounts and financing costs, was $1.065 billion); cash was $204.0 million. The company had $168.3 million of net borrowing availability under its $175 million ABL facility, after letters of credit. It reported that cash on hand and expected operating cash flows should cover operating requirements for at least the next 12 months, based on current operations and planned capital expenditures.
The $597 million First Lien Term Loan had a 3.81% rate at quarter-end and matures in 2028; the $500 million Senior Notes bear 4.375% interest and mature in 2029. A $300 million, five-year interest-rate cap partially offsets variable-rate exposure. Term-loan rates rose from 3.25% at year-end 2021. The ABL facility matures in 2026.
Material changes, outlook and risks
- For the first half, net income increased 121.7%; the comparison benefited from lower interest expense following the October 2021 refinancing and the absence of the prior-year $12.4 million debt-extinguishment loss. The effective tax rate rose to 27.8% from 6.5%, principally because a prior full valuation allowance against tax benefits was largely reversed in late 2021; a $13.0 million allowance remains against certain state NOLs.
- In April 2022, the company acquired Specialty Pharmacy Nursing Network for $59.9 million net of cash acquired. Its preliminary allocation included $33.7 million of goodwill. The filing describes goodwill as related to expected operational efficiencies and a broader clinical platform.
- Management provided no specific earnings or revenue guidance in this filing. It said it continues to evaluate acquisitions, which may require capital beyond current availability, and expects existing liquidity and operating cash flows to meet requirements for at least 12 months.
- Management said the duration and ultimate financial impact of COVID-19 remain uncertain. It cited past disruption to referrals, staffing, pricing and procurement, while reporting adequate supply levels as of June 30, 2022. Inflation and fuel costs also pressured gross margin.
- Concentration and operating risks include the largest payer contributing approximately 15% of revenue, four vendors supplying 72% of pharmaceutical and medical purchases in Q2, and complex reimbursement estimates. The company reported ordinary-course legal matters and investigations; it did not expect pending matters, after reserves and indemnification, to materially affect the balance sheet, but noted outcomes and costs remain uncertain.
Important facts for investors to verify
- Whether chronic-therapy growth can continue without further erosion in gross margin from mix, inflation and fuel costs.
- How operating cash flow develops as inventory, receivables, payables and vendor-payment timing fluctuate.
- Exposure to variable interest rates, given the term loan’s rising rate, and the extent of protection provided by the interest-rate cap.
- Whether the SPNN acquisition and other acquisitions deliver expected growth and efficiencies, and whether further deals require additional financing.
- How tax expense normalizes and whether the remaining state NOL valuation allowance or reimbursement estimates change.
- Whether payer and supplier concentration, staffing and procurement conditions, COVID-related disruption, or legal proceedings materially affect results or cash flows.