Business context and reporting period
BioScrip, Inc. filed this Form 10-Q for the quarter ended September 30, 2018. The company operated a single Infusion Services segment, with nearly 70 U.S. service locations, providing infusion therapy in home and alternate-site settings. This summary reflects the BioScrip filing; the supplied filing does not identify Option Care Health as the registrant.
Financial performance and position
Amounts are in millions of dollars, except per-share data and margins.
- Third quarter 2018: Revenue was $181.0 million, down 8.9% year over year. Gross profit was $65.9 million and gross margin was 36.4%, versus 33.5% a year earlier. Net loss was $8.2 million; loss per common share was $0.09.
- Nine months ended September 30, 2018: Revenue was $525.3 million, down 17.2%. Gross profit was $180.9 million and gross margin was 34.4%, versus 31.4%. Net loss was $36.3 million; loss per common share was $0.35.
- Adjusted EBITDA: Management-reported Consolidated Adjusted EBITDA was $16.4 million for the quarter and $33.5 million for the nine-month period, compared with $13.1 million and $27.8 million, respectively, in 2017. This is a non-GAAP measure.
- Cash flow: Nine-month cash used in operating activities from continuing operations was $20.1 million, versus $3.3 million used in 2017. Total operating cash used, including discontinued operations, was $20.2 million. Capital expenditures were $9.4 million. Cash and restricted cash totaled $23.3 million at September 30, including $18.9 million of unrestricted cash.
- Liquidity and working capital: Working capital was $75.9 million, down from $81.5 million at December 31, 2017. Management attributed pressure on cash to slower collections and higher accounts receivable.
- Debt: Total debt, net of discounts and financing costs, was $498.8 million, versus $480.6 million at year-end 2017. The company had $198.8 million of first-lien notes, $103.6 million of second-lien notes, and $197.9 million of 2021 notes. Second-lien principal increased in part because $3.8 million of interest was capitalized during the period. Interest expense was $15.0 million for the quarter and $42.2 million for the nine months.
Material changes versus the prior comparable period
- Revenue declined primarily due to the company’s strategic focus on core therapy mix, the UnitedHealthcare contract transition effective September 30, 2017, and lower patient volumes in certain product lines. First-quarter branch closures due to winter weather also affected the nine-month comparison.
- Effective January 1, 2018, the company adopted ASC Topic 606 using the modified retrospective method. Expected uncollectible amounts are now reflected as reductions to revenue rather than bad-debt expense. The adoption reduced 2018 revenue by $5.7 million for the quarter and $16.5 million for the nine months; prior periods were not restated, limiting direct comparability.
- Gross margin improved by 2.9 percentage points for the quarter and 3.0 points for the nine months, reflecting a greater mix of higher-margin core therapies and lower prescription-drug costs, partly offset by ASC 606’s revenue presentation.
- Interest expense rose, which management attributed primarily to higher variable rates and changes in the debt structure. General and administrative expense increased, while restructuring and integration costs decreased.
- Operating cash flow weakened as accounts receivable increased; management cited temporarily slower collections. Accounts receivable was $113.6 million at September 30, compared with $85.5 million net at year-end, when a $37.9 million doubtful-account allowance was reported.
Outlook, commentary, risks and unusual items
- Outlook: No quantified earnings or revenue guidance was provided. Management expected fourth-quarter cash to remain consistent with or increase from September 30 levels, citing anticipated higher profitability, lower strategic inventory purchases, and improved collections. Management said cash on hand and operating cash flow were expected to cover anticipated working capital, scheduled interest, and other needs for at least 12 months, but noted that failure to execute its plans could require additional or alternative liquidity.
- Debt and liquidity risks: The notes are substantially secured, carry variable-rate exposure in the first- and second-lien facilities, and include covenants and default provisions. Management cited the high debt burden and ability to meet covenants and debt payments as important risks. Scheduled quarterly principal payments on the Notes Facilities begin September 30, 2019.
- Controls: Management concluded disclosure controls were not effective at September 30, 2018 because remediation of a previously identified material weakness in internal control over financial reporting was incomplete. Remediation included strengthening risk assessment, spreadsheet validation, suspense-account reconciliation, inventory and fixed-asset controls, and fixed-asset disposal accounting.
- Contingencies and regulation: A commercial payor alleged a contract breach in a December 2017 letter; no proceeding had been filed, the company said it believed the claim lacked merit, and it could not estimate a possible loss. The filing also discusses healthcare reimbursement, regulatory, audit, and compliance risks. Management said pending matters were not expected to materially affect financial position or liquidity, while acknowledging an adverse outcome could materially affect results or cash flows in a period.
- Other items: The company recorded a $1.6 million quarterly expense from remeasuring warrant liabilities, primarily due to an increase in its stock price. Preferred-stock dividends were $2.9 million for the quarter and $8.3 million for the nine months. The filing also corrected immaterial prior-period errors, predominantly involving suspense and clearing accounts.
Important facts for investors to verify
- Whether accounts-receivable growth and slower collections reverse, and how they affect operating cash flow and unrestricted cash.
- Debt balances, variable interest costs, covenant compliance, and the company’s ability to refinance or meet its obligations.
- Whether fourth-quarter cash expectations and the stated 12-month liquidity outlook are achieved.
- The effect of ASC 606 on revenue trends and the comparability of reported periods, alongside underlying therapy mix and volumes.
- Progress in remediating the material weakness and whether disclosure and financial-reporting controls become effective.
- Developments in the commercial-payor claim, reimbursement changes, and other regulatory or audit exposures.