Option Care Health, Inc. annual report, FY2017

Filing identity and reporting period

Important: The supplied document is BioScrip, Inc.’s Form 10-K for the fiscal year ended December 31, 2017—not a filing in the name of Option Care Health, Inc. Confirm the issuer before relying on this summary. Unless otherwise noted, amounts are in U.S. dollars.

Business context and financial results

BioScrip operated as a national home and alternate-site infusion services provider, with one reportable segment, 66 service locations in 27 states, and approximately 1,000 payor relationships. The results below compare fiscal 2017 with fiscal 2016.

Fourth-quarter 2017 revenue was $182.6 million, gross profit was $70.2 million, net loss was $2.0 million, and basic and diluted loss per share was $0.04. The filing does not provide quarterly cash flow figures.

Liquidity, debt, and capital structure

• At year-end, cash and cash equivalents were $39.5 million, restricted cash was $5.0 million, and working capital was $82.6 million, compared with $43.2 million of working capital in 2016.
• Total debt was $480.6 million, up from $451.9 million. The balance included $200 million of first-lien secured notes, $100 million of initial second-lien secured notes, $200 million face value of 8.875% senior notes due 2021, and capital leases. The second-lien facility also had up to $10 million of delayed-draw capacity.
• The first- and second-lien notes generally mature August 2020, with maturity extending to June 2022 if the 2021 notes are refinanced before August 2020. First-lien amortization begins in 2019. The secured notes carry floating rates; management estimated a 1-percentage-point rate increase would add about $3.0 million to annual interest expense.
• Interest expense rose to $52.1 million from $37.6 million; cash interest paid was $45.4 million. Year-end stockholders’ deficit was $84.8 million.
• Management expected cash, operating cash flow, and available delayed-draw borrowing to cover anticipated needs for at least 12 months from the filing. This is management’s outlook, not a guarantee.

Material changes versus the prior year

• Revenue fell $118.4 million, or 13%, primarily due to the UnitedHealthcare contract transition effective September 30, 2017, Medicare reimbursement reductions under the Cures Act, the strategic focus on core therapies, and the prior exit from the Hepatitis C market; Home Solutions acquisition revenue partly offset the decline.
• Gross profit increased 3% and margin rose to 32.9%, which management attributed to a better mix of higher-margin core therapies and supply-chain improvements, partly offset by revenue and contract-transition effects.
• Adjusted EBITDA increased to $45.0 million, while GAAP net loss widened. Higher interest expense and a $13.5 million debt-extinguishment loss contributed to the increased loss.
• Operating cash flow from continuing operations improved by $41.1 million to positive $5.6 million. Receivables declined to $85.5 million from $109.1 million; the allowance for doubtful accounts was $37.9 million, or 30.7% of gross receivables.
• UnitedHealthcare accounted for 18% of 2017 revenue, down from 24% in 2016. Government payors directly accounted for 16% of revenue; Medicare accounted for 7%.

Outlook, risks, contingencies, and unusual items

• Reimbursement and contracts: Management said the Cures Act had a material negative effect on revenue and profitability. A temporary Medicare Part B home-infusion services payment was scheduled to begin in 2019, followed by the Cures Act services payment in 2021. Medicaid rate cuts, payor contract losses or repricing, and further reimbursement changes could pressure results.
• Leverage and liquidity: Debt covenants restrict actions and substantial debt service needs could constrain operations or financing. Management stated that additional liquidity might be required if strategic plans are not executed successfully; refinancing and other funding options were not assured.
• Internal controls: Management concluded internal control over financial reporting and disclosure controls were ineffective at December 31, 2017 because of material weaknesses involving risk assessment and monitoring, spreadsheets, suspense-account transactions, inventory counts, and fixed assets. KPMG issued an adverse opinion on internal-control effectiveness, while giving an unqualified opinion on the financial statements. Management described remediation steps; their effectiveness remained to be demonstrated.
• Accounting and tax: The company corrected prior-period errors it assessed as immaterial. The 2017 income-tax benefit was $4.1 million and included significant effects from valuation-allowance and tax-rate adjustments. The company reported federal NOL carryforwards of approximately $410.3 million, subject to limitations.
• Legal matters: BioScrip paid $5.8 million in August 2017 to settle the Walgreens non-compete dispute. A commercial payor alleged a contract breach in December 2017; no proceeding had been filed, and the company could not estimate a possible loss. The derivative suit dismissal was affirmed in November 2017.
• Other items: No goodwill impairment was recorded in 2017; goodwill was $367.2 million. The 2017 warrants were recorded as a liability at a fair value of $20.5 million, with a $3.6 million fair-value charge. Preferred-stock dividends and warrants may dilute common shareholders. No cash dividends on common stock were anticipated.

Most important facts for investors to verify

• Confirm the filing issuer and whether it is relevant to the requested company; the document identifies BioScrip, Inc.
• Review the terms, covenants, floating rates, maturity dates, and refinancing requirements of the secured notes and 2021 notes.
• Assess whether cash generation and available borrowing can support operations and debt service, particularly given the 2020 maturities.
• Track revenue and margins after the UnitedHealthcare transition and the continuing effects of Medicare and Medicaid reimbursement changes.
• Monitor remediation of the material weaknesses and any subsequent auditor assessment or financial-statement corrections.
• Check developments in the commercial payor dispute, Medicare transition payments, and potential dilution from preferred stock and warrants.