Option Care Health, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. The company provides infusion therapy and related services through 132 locations. The August 6, 2019 BioScrip merger materially changed the company; BioScrip results are consolidated only from the merger date, so reported comparisons are not fully like-for-like.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $615.9 million | $493.9 million | $1,589.6 million | $1,434.1 million |
| Gross profit | $137.8 million | $108.2 million | $337.4 million | $311.2 million |
| Gross margin | 22.4% | 21.9% | 21.2% | 21.7% |
| Operating income (loss) | $(11.7) million | $12.8 million | $(14.6) million | $24.7 million |
| Net income (loss) | $(42.8) million | $1.8 million | $(60.1) million | $(9.4) million |
| Operating cash flow | Not separately stated | Not separately stated | $16.6 million | $12.2 million |
Q3 revenue rose 24.7%, primarily reflecting $119.1 million of post-merger BioScrip revenue, alongside organic growth. Nine-month revenue increased 10.8%, including the merger contribution and growth in the therapy portfolio. Management attributed Q3 gross-margin improvement to therapy mix; nine-month margin declined due to mix.
Operating costs increased substantially. Management cited Q3 transaction and integration expenses of $21.2 million and nine-month expenses of $38.8 million. The company also reported $19.3 million of acquisition transaction costs for the nine-month period; these figures describe different expense groupings in the filing. Higher interest, acquired-asset depreciation and amortization, transaction and integration costs, and debt-extinguishment costs contributed to losses.
Financial position, debt, and liquidity
- At September 30, cash was $52.8 million; current assets were $545.2 million and current liabilities were $319.7 million.
- Debt principal totaled $1.325 billion: $925 million first-lien term loan and $400 million second-lien notes. Net debt carrying value was $1.266 billion. The company had no ABL borrowings and reported $140.4 million of net ABL availability after letters of credit.
- First-lien interest was 6.61% and second-lien interest was 10.89% at quarter-end. The company elected to pay the first quarterly second-lien interest payment in kind, adding it to principal. The loans are floating-rate; swaps were in place. Management estimated a 100-basis-point rate change would alter annual interest expense by $0.1 million, based on debt and swaps at quarter-end.
- Nine-month cash flow: operating activities provided $16.6 million; investing activities used $712.7 million, largely for the $700.2 million merger cash outflow and $13.2 million of capital expenditure; financing activities provided $712.5 million, primarily reflecting new debt proceeds and related repayments and costs. Cash increased $16.4 million from year-end.
- Management believed existing cash and expected operating cash flows would cover operating requirements for at least 12 months; longer-term plans may require additional borrowing or other financing.
Merger, outlook, and notable matters
- The merger was accounted for as an acquisition with Option Care the accounting acquirer. Preliminary net consideration, after acquired cash, was $1.087 billion; preliminary goodwill recorded was $786.9 million. Valuations and purchase-price allocation remained subject to change during the measurement period.
- Management identified potential synergies from corporate and administrative streamlining, network and facility optimization, and procurement savings. The filing provides no quantified synergy target or formal earnings guidance.
- Pro forma results assuming BioScrip was included from January 1, 2018 showed Q3 revenue of $690.4 million and net loss of $18.7 million in 2019, versus revenue of $674.9 million and net loss of $7.9 million in 2018. Pro forma figures are estimates, not actual historical results.
- Medicare Part B’s temporary home-infusion transition benefit runs from 2019 through 2020; management said its limited professional-services coverage and payment only for days when a nurse is present continue to weigh on the business.
- The company recorded a full valuation allowance against nearly all U.S. federal and state deferred tax assets following the merger, limiting recognition of post-merger tax benefits. It also corrected an immaterial prior-period error by reducing goodwill and other noncurrent liabilities by $6.5 million, with no income or cash-flow impact.
- Legal proceedings, payer audits, reimbursement estimates, supplier concentration, integration execution, and substantial floating-rate debt are among the risks discussed. Management said pending legal matters were not expected to materially affect the balance sheet, while acknowledging unanticipated outcomes could affect results or cash flows.
- Disclosure controls were judged effective at September 30, 2019. Merger-related changes to internal financial reporting controls were still being designed and integrated.
Key facts for investors to verify
- How much merger-driven revenue and expense is recurring, and whether reported comparisons reflect organic growth after accounting for the partial-quarter consolidation.
- Progress, timing, and realized value of integration and synergy plans, and whether integration costs continue at elevated levels.
- Cash generation, receivables collection, working-capital needs, and capacity to service $1.325 billion of debt as scheduled.
- Debt pricing, interest-rate hedges, payment-in-kind interest accrual, and covenant or refinancing risks.
- Medicare and other payer reimbursement changes, payer concentration, and reliance on three suppliers for 69% of Q3 pharmaceutical and supply purchases.
- Final merger purchase accounting, goodwill recoverability, and the effect of the deferred-tax valuation allowance.