Filing summary
Entity note: The supplied 10-Q is for BioScrip, Inc., not Option Care Health, Inc. It covers the quarter and nine months ended September 30, 2011; financial statement amounts are in millions unless noted.
Business context and reporting period
BioScrip provided pharmacy and home health services through two segments: Infusion/Home Health Services and Pharmacy Services. The company reported 110 locations across 29 states and the District of Columbia. Results are unaudited and should be read alongside its 2010 Form 10-K.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $454.0 | $441.2 | $1,334.7 | $1,188.3 |
| Gross profit | $77.1 | $75.4 | $230.5 | $187.8 |
| Gross margin | 17.0% | 17.1% | 17.3% | 15.8% |
| Operating income | $7.9 | $12.2 | $22.9 | $19.4 |
| Net income (loss) | $0.5 | $2.0 | $1.2 | ($2.1) |
| Diluted EPS | $0.01 | $0.04 | $0.02 | ($0.04) |
| Consolidated Adjusted EBITDA* | $19.0 | $18.1 | $53.7 | $39.2 |
- Q3 revenue increased 2.9%; nine-month revenue increased 12.3%. Q3 Pharmacy Services growth was partly offset by lower Infusion/Home Health revenue. Nine-month growth included the CHS acquisition, completed in March 2010, as well as Pharmacy Services growth.
- Q3 gross margin edged down as lower IVIG and anti-infective volumes and a less favorable therapy mix offset growth in discount card programs. Nine-month margin improved, which management attributed to CHS and discount card growth and a focus on higher-margin revenue sources.
- Q3 SG&A rose to $60.7 million from $56.0 million, including higher broker fees associated with discount card programs; nine-month SG&A was $176.8 million versus $147.0 million. Restructuring savings partly offset these costs.
- Net interest expense was $7.1 million in Q3 and $21.5 million year to date. Lower Q3 expense reflected lower average debt and more favorable credit-facility terms; year-to-date expense increased due to a full nine months of acquisition-related debt interest.
*Non-GAAP measure defined by the company; it excludes specified items, including restructuring and legal settlement expenses.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $39.5 million, compared with $5.9 million in 2010. The filing attributes the improvement partly to lower inventory following pharmacy purchasing-process improvements; receivables increased by $19.1 million.
- Investing cash outflow was $7.0 million, versus $104.2 million in 2010, when the company acquired CHS. Financing cash outflow was $32.6 million. Cash and cash equivalents were reported as zero at September 30, 2011.
- Working capital was $59.6 million, versus $50.1 million at December 31, 2010. Total debt obligations were $278.9 million: $225.0 million of 10.25% senior unsecured notes, $49.9 million outstanding on the revolving facility, and $4.0 million of capital leases. Current debt was $52.0 million.
- The $150.0 million revolving facility matures March 25, 2015; the notes mature October 1, 2015. BioScrip reported compliance with debt covenants and stated it expected cash from operations and facility availability to cover anticipated needs for at least 12 months.
Material changes, outlook, and risks
- The strategic assessment and restructuring plan produced $8.6 million of expense in the first nine months and $4.4 million of accrued restructuring liabilities at quarter-end. Management anticipated additional restructuring expense in the remainder of 2011 and expected the full effect of salary and benefit reductions in 2012.
- A $4.8 million legal settlement expense was recorded in the first half. An agreement in principle with the government to resolve a qui tam matter remained subject to definitive documents and court approval; additional relator and counsel claims and the OIG’s interests remained to be resolved. The related $4.8 million liability was accrued.
- Management cited reimbursement pressure from government payors. The 2011 Medicare home-health rate reduction lowered annual segment revenue and gross profit by about $1.9 million; the 2012 rule was preliminarily expected to reduce them by a further $1.8 million annually. TennCare’s 2011 reduction had an estimated $0.9 million annual impact, with another proposed reduction of similar size for 2012. California Medicaid rate changes and New York reductions were still being assessed.
- About 23% of nine-month revenue came directly from Medicare, Medicaid, or other government-sponsored programs. The filing also identifies potential federal spending cuts, changing regulation, reimbursement delays or reductions, contract losses, competition, pharmacy-system conversion risks, and leverage/covenant requirements.
- No formal earnings guidance was provided. Management said contracted managed-care relationships were increasing patient volumes, while acknowledging lower reimbursement on some contracts could pressure margins. It also expected ongoing government reimbursement pressure.
- A separate $2.5 million claim by Alexander Infusion remained disputed; the company said it intended to defend the case and had recorded no liability because a loss was not considered probable.
Important facts for investors to verify
- Confirm the issuer: this filing identifies BioScrip, Inc., rather than Option Care Health, Inc.
- Track cash conversion and working capital, especially receivables growth and whether inventory reductions recur.
- Review debt-facility availability, required minimum balances, covenant compliance, and the company’s ability to service its substantial debt.
- Monitor the final government settlement documents, court approval, and resolution of remaining relator, counsel, and OIG matters.
- Assess actual impacts of Medicare and state Medicaid rate changes, managed-care contract economics, and restructuring costs and savings.