BioScrip, Inc. — Form 10-Q Summary
Entity clarification: The supplied filing is for BioScrip, Inc., not Option Care Health, Inc. It covers the quarter ended March 31, 2014; financial amounts below are in U.S. dollars unless stated otherwise.
Business context and reporting period
BioScrip reported two continuing segments: Infusion Services and PBM Services. On March 31, 2014, it completed the sale of substantially all of its Home Health Services business to LHC Group for approximately $59.5 million in cash. Prior-period results were reclassified to present Home Health as discontinued operations.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $239.6 million | $181.1 million |
| Gross profit / margin | $65.1 million / 27.2% | $56.0 million / 30.9% |
| Loss from continuing operations, before tax | $21.9 million | $8.7 million |
| Loss from continuing operations, after tax | $25.4 million | $8.4 million |
| Net loss | $25.3 million ($0.37 per diluted share) | $8.1 million ($0.14 per diluted share) |
| Net cash used in operating activities | $26.0 million | $12.8 million |
| Consolidated Adjusted EBITDA | $9.1 million | $10.2 million |
Revenue rose 32.3%, driven principally by Infusion Services acquisitions and organic growth. Infusion revenue increased 43.4% to $221.4 million; PBM revenue fell 31.9% to $18.2 million. Gross profit increased in dollars but margin contracted, partly because of the lower share of PBM revenue. Infusion segment Adjusted EBITDA increased to $14.9 million from $11.9 million, while PBM segment Adjusted EBITDA declined to $1.7 million from $6.2 million.
Q1 expenses included $6.6 million of bad debt expense, $6.5 million of acquisition and integration expense, $4.6 million of restructuring and other expense, and $10.5 million of net interest expense. The company recorded $3.5 million of income tax expense despite a pretax loss, primarily reflecting a $10.6 million increase in deferred-tax valuation allowances.
At March 31, cash was $9.3 million, total debt was $418.7 million, and working capital was $123.8 million. The company reported $418.2 million of long-term debt, including $195.1 million of 8.875% senior notes due 2021 and $222.8 million of term loans; no revolving-credit borrowings were outstanding. Operating cash use from continuing operations was $24.5 million, with receivables increasing $22.9 million. Investing cash flow included $56.6 million of net proceeds from the Home Health sale. Management stated that operating cash generation and available revolver borrowings were expected to cover anticipated needs for at least the next 12 months, based on historical levels.
Material changes versus the prior period
- Revenue growth largely reflected the CarePoint and HomeChoice acquisitions as well as organic Infusion growth; CarePoint contributed $40.0 million of Q1 revenue.
- Interest expense increased $4.0 million year over year, primarily due to higher debt associated with the CarePoint acquisition.
- Receivables and collection concerns worsened: the allowance for doubtful accounts was $23.7 million at quarter-end, versus $17.8 million at year-end 2013. Management cited acquisition integration disruption, lower-than-expected collections on acquired receivables, and patient cost-sharing pressures.
- In February, BioScrip issued $200 million of 8.875% notes due 2021 and used proceeds, together with Home Health sale proceeds, to repay revolving and term-loan debt.
- Home Health was sold for approximately $59.5 million; the estimated pretax gain was approximately $1.0 million before transaction costs.
Outlook, risks, contingencies, and controls
No specific revenue or earnings guidance was provided. Management said it intended to focus investment and growth initiatives on Infusion Services and continued to consider acquisitions, joint ventures, and other strategic alternatives. It also cautioned that additional restructuring and related charges could affect future results.
Key risks include high indebtedness, compliance with debt covenants, reimbursement and regulatory changes, acquisition integration, collection performance, and customer or supplier concentration. UnitedHealthcare represented approximately 23% of Q1 revenue; Immune Globulin therapies represented 18%. A third-party processor had not paid approximately $6.8 million owed to BioScrip, plus approximately $2.1 million associated with a divested affiliate; no reserve had been recorded.
The company had accrued $15.0 million for settlements related to legacy Exjade distribution claims, payable in installments plus interest; it reported $12.7 million remaining in accrued settlement-related costs at quarter-end. The settlement did not preclude potential administrative actions. A consolidated securities class action remained pending, and the company said it could not predict the outcome or reasonably estimate a loss range. A separate long-running contract suit was settled in April 2014 for $325,000, offset against receivables.
Management reported that disclosure controls were not effective at March 31, 2014 because a material weakness concerning accounts-receivable reserves and timely bad-debt recognition remained. A separate weakness involving contingent-consideration calculations had been remediated. Management said additional procedures were performed and believed the financial statements fairly presented the periods reported.
Important facts for investors to verify
- Whether receivables are collectible and bad-debt reserves adequately reflect collection trends; the related control weakness remained open.
- Cash conversion, working-capital needs, and the status of the $8.9 million CarePoint contingent-consideration estimate and other acquisition earnouts.
- Debt-covenant headroom, refinancing capacity, and the effect of the 8.875% notes and secured credit-facility rates on future interest costs.
- Recovery prospects for the processor receivables and whether any reserve or impairment becomes necessary.
- Progress and financial impact of the Home Health sale, acquisition integration, restructuring, and pending securities litigation.