Option Care Health, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Option Care Health provides infusion therapy and related healthcare services. Its August 2019 merger with BioScrip materially expanded the business; 2019 comparative results include BioScrip only from the merger date and are therefore not directly comparable.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $705.4 million | $476.5 million |
| Gross profit / margin | $158.0 million / 22.4% | $98.2 million / 20.6% |
| Operating income / margin | $8.6 million / 1.2% | $5.4 million / 1.1% |
| Net loss | $19.9 million; $0.11 per share | $3.7 million; $0.03 per share |
| Net cash from operations | $18.4 million | $9.1 million |
| Capital expenditures | $5.4 million | $5.4 million |
Revenue increased 48.0%, principally reflecting $193.7 million of additional revenue following the merger and growth in the company’s therapy portfolio. Gross margin improved primarily due to therapy mix. Operating expenses rose 61.0%, largely due to the merger, including acquired-asset depreciation and intangible amortization. Interest expense increased to $28.1 million from $11.0 million, primarily because of merger-related debt; this was the principal driver of the higher net loss.
Cash, debt and liquidity
- Cash was $77.2 million at quarter-end, up from $67.1 million at December 31, 2019. Operating cash flow benefited from working-capital efficiencies and the timing of vendor payments; inventory increased $23.3 million.
- Debt principal was $1.335 billion; its net carrying value was $1.286 billion. The first-lien term loan carried a 5.49% rate and second-lien notes a 10.49% rate at March 31, 2020. The ABL facility had no borrowings and $140.4 million of net availability.
- Management stated cash balances and expected operating cash flows should cover operating requirements for at least the next 12 months. Quarterly term-loan principal payments began in March 2020.
- Interest-rate swaps generated a $16.6 million after-tax other comprehensive loss in the quarter. The company reported $24.1 million of derivative liabilities and expected to reclassify $18.0 million of interest-rate costs from accumulated other comprehensive loss against interest expense over the next 12 months.
Outlook, commentary and risks
- No specific earnings or revenue guidance was provided. Management remained confident in achieving at least $60 million in net merger cost synergies, but said it could not assess how the pandemic might affect their timing.
- Management reported no material COVID-19 financial impact in Q1 overall, but described effects beginning in March: variable referrals from hospitals and specialty practices, staffing constraints and higher labor costs, and higher-cost, more difficult procurement of personal protective equipment. Adequate supply levels had been maintained to date; cash collections had not materially decelerated.
- The company said the pandemic could affect referrals, staffing, supply availability and costs, business continuity, and access to capital. It could not forecast the pandemic’s duration or ultimate financial impact.
- The company maintains a full valuation allowance against nearly all U.S. federal and state deferred tax assets. It reported a $1.0 million tax expense despite a pretax loss.
- Legal proceedings, audits and investigations arise in the ordinary course. Management did not expect pending matters, after reserves and indemnification, to materially affect the balance sheet, while noting that unanticipated outcomes could affect results or cash flows.
Most important facts for investors to verify
- How much of revenue growth and margin improvement is sustainable organic performance versus merger contribution and therapy mix.
- Progress toward the $60 million synergy target, related costs, and any pandemic-related delays.
- COVID-19 effects on referral volumes, labor and supply costs, and the availability of pharmaceuticals and protective equipment.
- Debt service capacity, interest expense, refinancing needs, and continued access to the $140.4 million of revolver availability.
- Final merger purchase-accounting estimates and the resolution of the escrowed shares related to expired Home Solutions restricted stock.