Option Care Health, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The company provides infusion therapy and related services through a national network. BioScrip has been included in consolidated results since its August 6, 2019 merger with Option Care, making prior-period comparisons materially affected by the partial-period inclusion of BioScrip.
Financial performance
- Q3 revenue: $781.6 million, up 26.9% year over year; management attributed growth to the merger and organic therapy growth. Revenue from commercial payers was $644.4 million and government payers $127.4 million.
- Q3 profitability: Gross profit was $174.2 million, with a 22.3% gross margin versus 22.4%. Operating income was $34.6 million versus an $11.7 million operating loss; net income was $1.7 million versus a $42.8 million net loss. Diluted EPS was $0.01 versus a $0.26 loss.
- Nine-month results: Revenue was $2.228 billion, up 40.2%; gross profit was $498.5 million and gross margin 22.4% versus 21.2%. Operating income was $66.4 million versus an operating loss of $14.6 million; net loss narrowed to $25.9 million from $60.1 million. Diluted loss per share was $0.14 versus $0.40.
- Expenses and interest: Q3 SG&A declined 7.8% to $123.0 million, partly because the 2019 quarter included $21.2 million of merger-related transaction and integration costs. Nine-month SG&A increased 19.4% to $377.2 million, but declined as a share of revenue. Nine-month interest expense rose to $84.1 million from $44.1 million, reflecting merger-related debt.
- Cash flow: Nine-month operating cash flow was $101.7 million versus $16.6 million. Management attributed the increase primarily to working-capital efficiencies and timing of vendor payments. Capital expenditures were $12.9 million. Cash increased by $73.0 million to $140.0 million.
- Liquidity and debt: At September 30, cash was $140.0 million, current assets $676.5 million, and current liabilities $433.2 million. Debt principal was $1.213 billion (carrying value, net of discounts and fees, $1.172 billion). The company had no ABL borrowings and $140.4 million of availability after letters of credit; in October it increased the facility and reported net availability of $165.4 million.
Material changes and notable items
- Q3 revenue growth reflects the full-quarter contribution of BioScrip in 2020 versus its inclusion only from August 6 in 2019; reported growth is therefore not a like-for-like organic comparison.
- The company issued 10.0 million new shares in a public offering, receiving $118.9 million net, and used the proceeds plus cash on hand to prepay $125.0 million of second-lien notes. It recorded an $8.3 million debt-extinguishment loss, including a $2.5 million prepayment penalty.
- The company elected to pay $7.5 million of second-lien interest in kind in August, adding it to principal and incurring an additional 1% interest charge for the period. It discontinued hedge accounting on a related swap and reclassified $3.7 million to interest expense.
- Management said it had achieved its stated goal of at least $60 million in net merger cost synergies and expected to exceed it. Integration efforts continue.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management said cash balances and expected operating cash flows should cover operating requirements and planned capital expenditures for at least the next 12 months, while longer-term plans may require additional financing.
- COVID-19 reduced new acute and chronic patient referrals, while transfers from hospitals and outpatient settings supported revenue. Q3 acute revenue was flat year over year and chronic revenue grew in the mid-teens. Staffing constraints, overtime and contract labor, and higher PPE costs pressured operations. The company said it had maintained adequate supplies and cash collections, but could not forecast the pandemic’s duration or ultimate financial impact.
- Risks include referral variability, labor and supply disruptions, remote-work and cybersecurity risks, reimbursement estimates and regulation, and reliance on concentrated suppliers. Three vendors accounted for about 71% of pharmaceutical and medical-supply purchases in Q3; the largest payer accounted for about 16% of Q3 revenue.
- The company is involved in ordinary-course legal proceedings and government inquiries. It said pending matters were not expected to materially affect its balance sheet, but noted that adverse judgments, fines or settlements could affect results or cash flows. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- How much of revenue and margin growth is organic versus attributable to the merger, and whether chronic growth and acute referrals persist.
- Whether the reported $101.7 million operating cash flow is sustainable given its stated working-capital and vendor-payment timing drivers.
- Progress on merger synergies and the effect of COVID-related labor and PPE costs on gross margins.
- Debt repayment capacity, future interest costs, and the impact of payment-in-kind interest and variable-rate exposure.
- Whether the pandemic, payer concentration, supplier concentration, or legal and reimbursement matters materially change operating results or liquidity.