Business Context and Reporting Period
The supplied filing is BioScrip, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2010; the filing does not identify Option Care Health as the registrant. BioScrip provides pharmacy, infusion and home-health services. Results include Critical Homecare Solutions Holdings, Inc. (CHS) from March 26, 2010, so comparisons with 2009 are not fully like-for-like.
BioScrip acquired CHS on March 25, 2010, expanding its home-infusion and home-health footprint. The company reported two segments: Infusion/Home Health Services and Pharmacy Services.
Financial Results and Position
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $412.0 | $328.7 | $747.1 | $654.5 |
| Gross profit / margin | $73.5 / 17.8% | $38.4 / 11.7% | $112.4 / 15.1% | $74.4 / 11.4% |
| Operating income | $13.5 | $5.2 | $7.2 | $9.5 |
| Net income (loss) | $3.1 | $4.4 | $(4.0) | $7.7 |
| Diluted earnings (loss) per share | $0.06 | $0.11 | $(0.09) | $0.20 |
| Adjusted EBITDA, non-GAAP | $18.4 | $7.0 | $21.1 | $13.2 |
- Revenue increased 25% in Q2 and 14% in the first half. CHS contributed $64.8 million of Q2 revenue and $69.8 million for the six-month period.
- Q2 gross-margin improvement was attributed primarily to CHS. For the first half, higher gross profit was outweighed below the operating-income line by increased SG&A, bad debt, acquisition costs, amortization and interest.
- Pharmacy Services revenue was $305.4 million in Q2, up 4.5%; Infusion/Home Health revenue was $106.7 million, up 193%, including CHS. Excluding acquired businesses, infusion revenue rose 15.1% in Q2. Segment Adjusted EBITDA before corporate overhead was $13.9 million for Infusion/Home Health and $12.4 million for Pharmacy Services in Q2.
- Q2 net income declined year over year despite higher operating income, primarily alongside a substantial increase in interest expense. The first half shifted from profit to loss.
Cash Flow, Debt and Liquidity
- First-half operating cash flow was a use of $20.8 million, versus $21.3 million provided in 2009. Investing cash use was $96.8 million, primarily for CHS; financing provided $152.1 million. Cash at June 30 was $34.6 million.
- Working capital was $184.0 million, compared with $91.1 million at December 31, 2009. The company reported no revolver borrowings at June 30.
- Balance-sheet debt was $315.9 million long-term plus $3.0 million current. The company also had $225 million of 10.25% senior unsecured notes due October 2015 and a secured term loan and revolving facility. The revolver had a stated maximum of $50 million, subject to a borrowing base.
- The secured facility is guaranteed by subsidiaries and secured by company assets; it includes leverage and fixed-charge coverage covenants. The notes are unsecured and effectively junior to secured debt. BioScrip stated it was in compliance with secured-facility covenants at June 30.
- Management said cash on hand, revolver availability and expected operating cash flow should fund anticipated needs for at least the next 12 months. This is management’s assessment, not a guarantee.
Material Changes, Outlook and Risks
- CHS acquisition financing materially increased debt and interest costs. First-half net interest expense was $11.4 million, versus $1.0 million a year earlier. Integration and acquisition expenses were $6.1 million for the first half; the filing also identifies $3.0 million of expected integration-related capital expenditures and $5.0 million of integration-related expenses during the first 12 months after the merger.
- Management cited new contracts, patient growth and drug inflation as contributors to Pharmacy Services growth, and new infusion contracts as a contributor to legacy infusion growth. It discussed expected cross-selling and synergies from CHS, but provided no quantified earnings or revenue guidance.
- Receivables included a remaining unreserved $2.1 million balance related to the terminated CMS Competitive Acquisition Program contract; management said collection efforts continued and reserves were adequate. First-half bad debt expense included a $1.5 million provision increase related to that contract.
- Key risks include CHS integration and realizing anticipated synergies, high indebtedness and debt service, covenant compliance, variable rates, reimbursement and regulatory changes, contract losses, competition and pressure on pricing or margins, and recruiting and retaining nurses and other caregivers. The company cited a 1% rate increase as potentially adding approximately $1.0 million to annual interest expense.
- The company disclosed pending litigation and government information requests; it said it was not a target or potential subject of those investigations. A Northland Pharmacy seller asserted an earn-out claim of at least $5.64 million, which BioScrip disputed. Other disclosed matters included a $2.5 million claim by Alexander Infusion and product-liability litigation seeking unspecified damages.
- On July 29, 2010, after quarter-end, BioScrip acquired certain DS Pharmacy assets for $10.9 million, subject to adjustments, with part of the price payable into escrow over the following 12 months. CHS purchase-price allocations remained provisional and subject to measurement-period adjustments.
Important Facts for Investors to Verify
- Confirm the registrant and filing identity: this source identifies BioScrip, Inc., although the request names Option Care Health.
- Assess post-acquisition cash generation, working-capital needs, debt service, revolver availability and covenant headroom; first-half operating cash flow was negative.
- Track CHS integration costs, the realization and timing of projected synergies, and whether acquired operations sustain the reported gross-margin improvement.
- Review receivable quality and collections, including the CMS CAP balance, and monitor the provisional CHS purchase accounting and subsequent DS Pharmacy acquisition.
- Evaluate the exposure from debt covenants, variable interest rates, customer concentration (one pharmacy network agreement represented approximately 13% of first-half revenue), and disclosed legal matters.